Ardagh Group S.A.
Q3 2018 Earnings Call Transcript

Published: 27 Oct 2018

[Operator:]

Hello, and welcome to the Ardagh Third Quarter 2018 Results. [Operator Instructions]. Please note, this call is being recorded. Today, I am pleased to present Paul Coulson. Please begin your meeting.

[Paul Coulson:]

Welcome, everyone, to the Ardagh third quarter results call, which follows the publication earlier today of our results for the third quarter in 2018. I'm joined on the call today by David Matthews, our CFO; and John Sheehan, our Corporate Development and Investor Relations Director. Just before I make my opening remarks, I would point out that the information provided during this call will contain forward-looking statements. Forward-looking statements reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of risks and uncertainties, including those set forth in the company's SEC filings, such as the company's latest Annual Report on Form 20-F as well as in the company's news releases. Our third quarter earnings release, financial report and related materials can be accessed at ardaghgroup.com. Information regarding descriptions of our segment reporting and the use of non-GAAP financial measures may also be found in the Notes section of today's earnings release. Today's release also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share. This disclaimer is only a summary of the company's statutory forward-looking statements disclaimer, which is included in our filings with the SEC. So turning to the results on a group basis, first of all. As in previous earnings calls, my comments on volume and mix are exclusive of the effect of IFRS 15, which reduced third quarter revenue and adjusted EBITDA by $21 million and $3 million, respectively. In the year-to-date, its impact was negligible. So third quarter, our group revenue increased by 3% to $2.39 billion, primarily reflecting volume/mix growth of 1% and the pass-through of higher input costs. Currency translation effects were minimal in the quarter. Group volume and mix for the third quarter comprised a 2% increase in Metal Packaging, partially offset by a reduction of 3% in glass Packaging. Highlights for the quarter included volume/mix growth of 5% in Metal Packaging Americas, with strong progress in both North America and Brazil; global Beverage Can volume/mix growth of 4%, led by 6% growth in the Americas; continued growth in glass container volume and mix in Europe of low single digits; and completion of the Beverage Can integration according to plan. The operating environment continued to pose headwinds during the quarter with high levels of input cost inflation. Freight and logistics costs also remained elevated with an approximately $10 million impact in the quarter and a year-to-date effect on adjusted EBITDA of the order of USD 45 million. Finally, tariff-related uncertainty prevailed throughout the quarter. Against this backdrop, third quarter adjusted EBITDA of $400 million was 9% lower than the same period in 2017. Further strong growth was reported in Metal Americas during the quarter, with all parts of that business performing very well. Glass Packaging Europe delivered another strong performance in Glass Packaging, offset by lower activity in the engineering section. These gains were offset by lower adjusted EBITDA in Glass Packaging North America where we continued to restructure the business in response to a challenging market environment and by the impact of a weaker-than-expected food harvest in Metal Packaging in Europe. Adjusted EPS was $0.52 for the quarter, a decrease of 9% compared with the same period last year's actual exchange rate. And we declared a quarterly dividend of USD 0.14 per share to be paid on 30 November, 2018. So if I turn to each division in greater detail, in Metal Packaging, third quarter revenues increased by 6% to $1.54 billion compared to the same period last year, with growth of 14% in Metal Packaging Americas and 1% in Metal Packaging Europe. Revenue growth reflected a volume/mix increase of 2% as well as the pass-through of increased input costs. Metal Packaging Americas volume/mix increased by 5% with strong growth in both North America and South America, while Metal Packaging Europe volume/mix increased in Europe by 1% compared to the same period last year. The division reported EBITDA of $230 million, and this is a decrease of 10%. And before the IFRS 15 effect, it was 9% lower than the same period in 2017. In Metal Packaging Americas, adjusted EBITDA for the quarter increased by 7% to $79 million compared to the same period last year despite the continued headwinds of higher freight and logistic costs and the uncertainty following the introduction of the steel and aluminum tariffs in the U.S. Adjusted EBITDA in Metal Packaging Europe was $151 million, and this was a decrease of 15% compared with the same period last year. This decline was partly attributable to the much weaker-than-expected food harvest where extreme weather patterns negatively impacted yields and resulted in some increased costs. It also reflected the absence this year of a previously noted pension curtailment credit of approximately $10 million, which arose in the third quarter of 2017. Glass Packaging reported third quarter revenues of $853 million, a reduction of 1% at actual and constant exchange rates compared with the same period in 2017. This reflected revenue growth of 1% in Glass Packaging Europe, offset by a reduction of 3% in Glass Packaging North America. Third quarter volume/mix in Glass Packaging decreased by 3% compared to the same period last year. In Europe, container volume growth mix of 1% was achieved despite the weak food harvest. Third quarter Glass Packaging North America volume/mix declined by 5% compared to the same period last year, with growth in the wine end market more than offset by weakness in beer and food. Adjusted EBITDA for the Glass division in the quarter was $170 million, a reduction of 8% at actual exchange rates and 7% at constant exchange rates compared with last year. In Glass Packaging Europe, EBITDA of $103 million was in line with the same period last year at constant exchange rates. This represented another strong results even despite softer engineering activity and the weak harvest, which I have referred to. Our capacity for the remainder of this year and indeed for next year is fully sold, and market conditions remain good. Glass Packaging North America EBITDA decreased by 16% to $67 million, chiefly reflecting lower volume/mix as well as increased freight costs and the costs of scheduled production downtime. During the period, the U.S. glass market continued to be impacted by imports from China and Mexico. The imposition of a tax - a tariff, sorry, of 10% on Chinese glass container imports from late September, with a scheduled increase to 25% in January 2019, was a welcome first step in moving to a more level playing field. And there are early signs that these tariffs are starting to have positive impact for U.S. glass producers. In parallel, we have continued to focus on a broad range of internal initiatives to improve our competitive position in American glass, and these involve adapting our footprint to best match current and projected market conditions while seeking to target benefits from increased automation, continuous training and greater labor flexibility. Much activity has been underway in the quarter, and we have now decided that the furnace at our Ruston, Louisiana, plant, which we suspended in July 2018, will now be permanently closed. And Ruston will continue with its second furnace to serve a predominantly local and regional customer base with a more cost-effective freight configuration. Secondly, our investment to redeploy beer capacity to serve better-performing end markets, such as wine and spirits, enables us to avoid the scheduled rebuilding of one furnace at our Seattle plant. This furnace will now be permanently closed at the end of this year. The remaining three furnaces at Seattle will continue to operate as normal. These footprint - these latest footprint adjustments are intended to underpin the medium- and long-term prospects of our North American Glass business. We previously highlighted how the North American glass industry, including Ardagh, needs to address its labor cost if it is to sustain long-term competitiveness and justify continued investment. This reflects the striking differential in all-in labor costs between North America and other markets, including Europe. We want to work with our colleagues in the coming quarters to ensure that we secure a competitive and sustainable footprint from which we can move forward. Over the past decade, in our European Glass business, we've seen the benefits of capacity rightsizing and enhanced flexibility, backed up by investment in our asset base. Improved competitiveness has supported a stable footprint and high-quality skilled jobs despite considerable economic volatility in that region over the past decade. We're now seeking to do the same in Glass North America. And whilst it's been a challenging year, we will continue to identify and implement additional measures to restore Glass America to appropriate levels of profitability. If I could make some remarks on the environment and sustainability. One of the most notable features of recent months has been the greatly increased consumer focus on packaging and on its impact on the environment. Coverage and awareness of this issue has grown exponentially in our main markets in Europe as well as in parts of United States. Consumers, led by millennials and aided by social media, have rapidly moved the debate from the periphery to the mainstream, prompting the implementation of multiple local, city, state and national initiatives to minimize the impact of plastic waste on the environment. In mid-2018, this culminated in the European Commission's proposals for a directive to induce - to reduce marine litter by addressing the 10 most common single-use plastic items found on Europe's beaches. The policy has been given added urgency as emerging markets, beginning with China and recently followed by others, refuse to accept waste exports from other countries. We believe that this focus will cause brand owners to reassess their packaging requirements and to migrate to the most sustainable options, regardless of when legislation becomes effective. Ardagh, as a provider of infinitely recyclable metal and glass packaging solutions, is ideally placed to work with customers to meet their requirements on an accelerated basis. And as you probably know, our substrates include the following attractions in metal packaging, regional packaging recycling rates in Europe of 73% for aluminum and 78% for steel, with equivalent rates of 64% and 71% in the United States and 98% for aluminum cans in Brazil. In Glass Packaging, we use over 70% of cullet recycled material that is in our production process across Europe. And although U.S. cullet currently lags this level, we continue to target opportunities to grow high-quality cullet streams. This environmental focus is not new to us in Ardagh. In conjunction with our customers, we have, for many years, led initiatives to reduce material content and also energy usage. This has involved downgauging of metal where we're currently rolling out our lighter and less carbon-intensive beverage can. While in Glass Packaging, we have long led the way in lightweighting containers. And our research and development facilities in Europe and North America, including at our higher glass engineering subsidiary, have consistently identified opportunities for products and process improvements, reducing the environment footprint of our products. It has been achieved at the same time as enhancing functionality and design attributes, as evident by the multiple awards granted to our metal and glass packaging products. The momentum around sustainable packaging in recent quarters has led to an increased level of engagement from our customers seeking to assess alternative forms of packaging, and we expect this trend to gain further traction going forward. Brief comment on our capital structure. During the quarter, we repaid 450 - $440 million, rather, 6% senior notes, which were due in 2021. Following this, our next debt maturity arises in September 2022. And over 90% of our debt is at fixed rates. And the currency mix of our debt closely matches the currency mix of our EBITDA. If I turn to the full year outlook, third quarter performance lagged our expectations, principally due to the impact of a much weaker-than-expected harvest in Europe. And looking to the full year, as we've outlined, we continue to work on a range of initiatives to improve our footprints and competitiveness in Glass North America. And these initiatives will represent a drag on near time - near-term financial performance before the benefits begin to be seen during 2019. But because of these two factors, we now expect EBITDA for the fourth quarter of 2018 to be in the range of $310 million to $335 million compared with $336 million in the fourth quarter of last year. This would result in a full year EBITDA out turn of between $1.45 billion and $1.475 billion. As we enter the final quarter of 2018, we remain focused on optimizing our overall business performance, improving performance at Glass North America and on establishing a strong platform on which to build on in 2019 and over the medium-term. So having made those initial remarks, we'll be delighted to answer any questions which you may have.

[Operator:]

[Operator Instructions]. The first question comes from the line of Anthony Pettinari from Citi.

[Randy Toth:]

This is actually Randy Toth sitting in for Anthony. I guess, first question, can you just quantify the size of the furnace closures in Louisiana and Seattle, and then the potential savings from those closures on an annual basis? And then following those closures, do you feel that the NA glass market is in balance?

[Paul Coulson:]

Well, I think that the situation on footprint is that we would expect that between Milford and the two closures that we've mentioned today that the reduction in our capacity is of the order of 170,000 tons, which is approximately 7% of our capacity before those closures. Clearly, we believe that, that's what's required to rightsize our capacity for the market. We've also - as part of that exercise, we've reduced our overall beer capacity by 20%. And we believe that this represents the right way forward. And production will be moved between different sites to optimize the new footprint going forward.

[David Matthews:]

Just on the sort of financial impacts of that. We're taking a noncash impairment charge of around $10 million. The cash costs of these closures are actually fairly small. The ongoing savings are reasonably modest, but the big ongoing save is - saving is the fact that we don't have to rebuild the furnace in Seattle, that would save between $20 million and $30 million.

[Randy Toth:]

Okay, that's helpful. And then just moving on to sort of North American bev. Competitors have announced four plant closures in 2018, and you guys continue to run out from a sold-out position. Has that impacted customer discussions on pricing as we look into 2019? And can you remind us quickly what percentage of North American bev can contracts turnover in a typical year?

[Paul Coulson:]

Well, I think we remain - performance in bev cans in North America has been strong. We remain very happy with that business. I think the outlook for pricing, as we see it, pricing improvement is positive. Mind you, it's pretty necessary because I would remind you that it's the lowest in our bev can market. It's the lowest margin area. But I think we're - we believe market conditions in that market are strong.

[David Matthews:]

And just in terms of contract, turnovers are 20%, 25% year.

[Operator:]

The next question comes from the line of Debbie Jones from Deutsche Bank.

[Kyle White:]

It's actually Kyle White filling in for Debbie. In terms of the new EBITDA guidance, it sounds like it's partly related to the European pack harvest and then also some of the initiatives that you're doing in Glass Packaging North America. Is it able to - are you guys able to quantify those two items and the reduction on EBITDA it has?

[David Matthews:]

What we can clarify is it's down a little bit from the previous guidance, and it's due to the harvest that we've - the weaker harvest we've suffered in Q3 and also due to ongoing challenges in Glass North America. But as Paul said in his opening remarks, we are taking further actions to rightsize and correct the efficiency of that business.

[Kyle White:]

Okay. And then just looking at Metal Packaging Americas, can you break down the volumes between food and beverage in that segment? And then also, is it possible to get a breakdown between, in Beverage, the U.S. market versus Brazil?

[Paul Coulson:]

Well, there was good growth in all three of the categories there, which was the Beverage North Americas business, the Beverage South America and the food and specialty in North America. In terms of size, the biggest by a distance is Beverage North America in terms of revenues. It's about 60% or getting up to 2/3. And then the other two businesses are broadly equal in size.

[Operator:]

The next question comes from the line of Roger Spitz from Bank of America.

[Roger Spitz:]

Can you speak to the timing of your plant collapsing of your comparable structure regarding picking up the ARD Fin and ARD Sec bonds with new ARD Fin bonds and upstreaming dividend coming from the [indiscernible]?

[Paul Coulson:]

Yes, I think Roger that, as you know, the earliest that, that could take place would be in the last quarter of next year. And I think we've always sort of think this is something we look out early in 2020. And obviously, it will depend on market conditions, et cetera, how we do it and when exactly we do it. And also, we've always envisioned this would be done in various steps, and it wouldn't be taken away in one go. It will be dealt partially with the refi of the holdco debt at a lower level. So it's very hard to say yet. It's more than a year away, and we haven't finalized thinking on that yet. It's premature, but it still remains a big priority for us probably in early '20.

[Roger Spitz:]

Okay. And can you give us some information in terms of the market for U.S. glass containers, the imports? Like, how much of U.S. glass container requirements are satisfied by imports? And of that, how much is from China now? Or I guess, before the imposition of the duties and from Mexico? Just to give a sense of the size here.

[Paul Coulson:]

Yes, they're roughly - it's got - grown to roughly 25% of the market. And of that 25%, roughly 1/3 comes from each in - of China and Mexico.

[Roger Spitz:]

Okay. And lastly, the - do you have an amount for the off balance sheet AR receivables facility as of September 30, please?

[David Matthews:]

It's around $400 million.

[Operator:]

The next question comes from the line of Karl Blunden from Goldman Sachs.

[Karl Blunden:]

Before, you mentioned that there was some early positive signs from the tariff - the 10% tariff taking effect recently and a potential 25% tariff. My questions on that are, can you elaborate a little bit on what you're seeing and what makes you feel like this positive momentum? And then on the back of that, when do you think that could be reflected in your pricing in terms of contract negotiations?

[Paul Coulson:]

Well, I think first of all, it's not potential 25% tariff, it's actual 25%. It goes to 25% on the 1st of January. And what we're seeing is the change in approach in supply chain in people looking to be supplied by U.S. producers to substitute out some of the imports from China. And it's early days. I mean, these are only recent. So it's hard to know exactly when that's going to impact. I think it is going to have an impact perhaps reasonably soon. But it's - that's very difficult to assess because there may have been some stockpiling ahead of the tariffs going up at the end of the year. We don't know. But we're seeing some behavior of significant - of some significant customers to switch some of their Chinese imports into domestically produced glass.

[Karl Blunden:]

Okay, got you. That's helpful. And then I was interested in your comments about substrate choices' sustainability. Obviously, that's been picking up with consumers. Interested in conversations you're having with your customers and what types of products they could switch. I guess it's a broad range, but have you sensed the same kind of sea change that we're hearing with consumers today?

[Paul Coulson:]

Well, I think it's still early days in this whole process. I suppose, what's been interesting about this whole thing is that, a year ago, if you had asked me, I would've said that I would've thought the pressure would've come on the customer base of the food and beverage guys from perhaps their shareholders on sustainability issues. But in fact, what's happened over the last year is this change or this demand for change on plastics has actually been led by the consumer, which makes it more powerful. And yes, there are clearly discussions going on with customers as to what might happen. But these things take time. I mean, it takes a long time to switch from PET to cans and to switch production lines and filling lines, et cetera, to cans or glass. But we certainly are of the view that both the substrates in which we're involved are attractive in terms of the attitudes of consumers and customers of the food and beverage companies nowadays.

[Operator:]

The next question comes from the line of Anojja Shah from BMO Capital Markets.

[Anojja Shah:]

I just wanted to get an update on those quick payback projects that you've been talking about the last couple of quarters, and if - how much contribution, if any, do you expect next year in 2019? And then just to verify, what CapEx are you using in your guidance for 2018? Because I believe that $475 million is before the extra CapEx for these projects.

[David Matthews:]

Yes, if I start off on the quick payback CapEx, this is a program that's going to run over a couple of years. And we're hoping to spend over the next couple of years about $150 million, of which about $60 million will be in the current year and the balance will be in next year. These are projects that will have the 2- to 3-year paybacks that's spread across the business. So there's no individually large projects or particularly - anything particularly risky in nature, so they got low execution risks, these projects. In terms of the contribution to EBITDA in '18, it's pretty negligible. So the contribution will start coming through in '19. With regard to the CapEx guidance for '18, excluding the short-payback CapEx, it's now around $500 million, which is down about $30 million from the previous guidance.

[Anojja Shah:]

Okay. And do you have any sense on the contribution in '19 from these, EBITDA contribution from these projects?

[David Matthews:]

I think it's probably a little early to call that, depending on which projects come on stream at which particular points within the year.

[Paul Coulson:]

Yes, we would expect the full effect to be felt in '20, obviously. The lead time in - say, in some of the warehouse and building our own warehouses comparing to renting them, there is lead time, you've got planning issues, you've got construction issues, et cetera. So it's difficult to be accurate. But the program is being rolled out, and I think that the most material benefit will flow in 2020.

[Operator:]

The next question comes from the line of John Dunigan from Barclays.

[John Dunigan:]

I first wanted to ask on the 2018 free cash flow guidance, which is now about $100 million lower from the beginning of the year. And obviously, you noted a focus on debt reduction in 4Q and into 2019. But is the - with the free cash flow coming down that much, do you still expect to delever by about 0.4x in this year and next year?

[David Matthews:]

Yes, just picking up on free cash flow, the guidance now is approximately $475 million, which is down slightly from our previous guidance of around $500 million. And I think it was a little higher earlier in the year when the EBITDA guidance was higher. So it's come down only because EBITDA guidance has come down. In terms of the current year, where do we think the year-end leverage will be? Probably around 5x. So we're 5.3x at the end of September, so we expect to be level with the seasonal unwind of working capital in Q4 down to around 5x. And then I think our longer-term prediction, as we said previously, is around 0.4 of a turn per year.

[John Dunigan:]

And you started off the year at 5.2x, correct? So that would be just a 0.2 turn reduction for the full year?

[David Matthews:]

Yes, and that's clearly being tampered by the challenges in our business in Glass North America. And clearly, we will have some spend on short payback CapEx, whereby, $60 odd million will go out this year and there'll be very little contribution from an EBITDA perspective.

[John Dunigan:]

Right. And then just moving back over to the European harvest issues in the quarter. Obviously, you're not the only one to cite the weakness there, but is there any chance that Ardagh could see some of that volume recaptured in the fourth quarter? Or do you think it's completely lost?

[Paul Coulson:]

Pretty unlikely, I would say.

[Operator:]

The next question comes from the line of Brian Maguire from Goldman Sachs.

[Connor Robbins:]

This is actually Connor Robbins in for Brian Maguire. Just wanted to come back to the North America environment. You guys had mentioned high levels of cost inflation. Just wanted to get a sense of what type of freight costs you guys are seeing. It seems like maybe some of the data we had seen would indicate that it's come down a little bit, and wanted to see if you guys are seeing the same thing there.

[David Matthews:]

Yes. I think what we're seeing is levels are still very elevated, they clearly went up. But we're still seeing very elevated levels. And what we're seeing across the business is a headwind in the year of about $45 million that we can't pass on to our customers. Around $30 million of that is in our glass business, and around $15 million is in the metal business. So that's the impact we're seeing, and that, clearly, has an impact on the overall profitability and the margin percentage.

[Connor Robbins:]

Okay, got you. That's helpful. And then I just wanted to come back to how you guys are viewing the North America glass environment. As well you talked about kind of the tariffs and how those could potentially be a little more of a benefit as the 25% comes in. I just was wondering how you guys are including that into your outlook when you determine to not rebuild a furnace or take down extra capacity. And if maybe something changes with these tariffs, if that might cause you to have to take down another furnaces or something like that?

[Paul Coulson:]

Well, I think we're trying to work the best way to optimize our footprint from many points of view, operating efficiency, proper utilization of rates in the plants and also to make things as straight - logical as possible because, clearly, with the advent of much higher freight costs in recent times, that's become a big factor. And trying to manufacture - trying to sell product closer to where it's manufactured has become a very important fact of life. But I think what - the rightsizing we're doing at the moment leaves us comfortable that, that's what's right for the market. Clearly, if things change to the positive, we can adjust again. We have ways of adjusting again to make sure that it comes into line. And this is something that we've done in Europe for about 10 years now where our footprint hasn't really changed much in Europe but we've been able to flex it. So I think what it's about is getting the footprint right from a number of features. And also, obviously, as David said earlier, avoiding unnecessary rebuilds or environmental spend.

[Connor Robbins:]

Okay, got you. That's helpful. And then lastly, just one quick one on the change in the EBITDA guidance. Just wanted to see if there are any other drivers for the guidance, kind of excluding the Metal Packaging Europe impact that you guys had today. And maybe what you guys were assuming for currency impact now that the year is at the sort of the lowest level we've seen in maybe last year or so?

[David Matthews:]

Yes, I think in addition to the harvest, clearly, there's going to be continued challenges in Glass North America, and there's a little bit of FX but it's not that significant in the reduction in the guidance.

[Operator:]

The next question comes from the line of Michael Posnansky from MNG Investments.

[Michael Posnansky:]

I've got a question about the economics of glass collection for recycling in the U.S. and what that means for the sustainability argument for glass in the region, sort of whether you anticipate any changes in the economics for glass collection, which could help get cullet's volumes up?

[Paul Coulson:]

Well, Michael, I mean, the supply and the collection system with cullet in the U.S. is not as good as in Europe, and our procurement guys are constantly looking at ways of trying to improve that. And we are - we have various initiatives on which we're working on trying to improve this, and - so that we can increase the levels of utilization of cullet, which, as you know, suits us because it's less expensive in energy consumption to use cullet rather than virgin materials. So this is something which is a big focus. But it is a difficult area, but one where there's considerable room for improvement.

[Michael Posnansky:]

And what sort of time frame would you expect to see sort of any changes?

[Paul Coulson:]

I mean, different initiatives and changes have different timescales. But I will - we would hope that over a 2 to 3 year period, we would see improvement in programs, maybe three years rather than two. I think it's - but it's a difficult area, and it's not - as I say, it's not as good and as strong as in Europe where the systems are pretty good.

[Michael Posnansky:]

Okay. And is that just due to the sort of the geographic nature of the states versus Europe? Or are there other factors there?

[Paul Coulson:]

I think it's sort of composition of the market, geographic factors, distances, et cetera. It's any range of things, and so many different local areas where there are different collection systems, et cetera.

[Operator:]

The next question comes from the line of Ken Ijomah from GSO.

[Kenneth Ijomah:]

Just on the European metals side, I'm just trying to get a sense of whether you expect the sort of weakness to potentially continue to Q4 maybe from macro factors? Or spread a little further, harvest or revert back on track for organic growth in Europe in Q4?

[David Matthews:]

We're not expecting the negativity to continue into Q4. We're expecting a more normal Q4 for that part of the business.

[Kenneth Ijomah:]

Okay, got it. And just on energy inflation, it seems to have spiked pretty dramatically in Europe. I just wanted to confirm that's either hedged or you pass that on pretty quickly.

[David Matthews:]

Yes, to both of those.

[Kenneth Ijomah:]

Okay, got it. And then Paul, you just seemed to suggest that part of the initiatives in sort of as far as North America is getting back to being competitive there. And I could've heard this wrong, and please correct me if I did, but sort of a labor cost inflation issue. I'm just trying to understand, is this just - what do you need to do there to sort of get that down? Are your unions not playing ball? Or is there just something wider?

[Paul Coulson:]

Well, you have a number - I mean, the labor cost, the all-in labor costs in the U.S. are, in some instances, twice that of our plants in Continental Europe. So in - and even in places like Germany and Holland, right? Where people would be quite surprised to hear that in the U.S. The factors that affect that are things like health care costs are very high. You've got high rates of pay, and you've got - we don't have a flexible - as flexible arrangements with the workforce in the U.S. glass plants as we do have in Europe, and that's what has led to these costs being higher. And we are working on trying to change that. And the process of change takes time, and this is a process that took time in Europe as well. But that's what we have to do. Otherwise, it makes it much harder for certain individual plants to remain competitive. I mean, it's one thing having tariffs, but it's another having a noncompetitive cost base domestically, and that's an issue. And labor - the U.S. is - many parts U.S. are at full employment, and - so there's a number of factors at play in here.

[Operator:]

[Operator Instructions]. The next question comes from the line of Arun Viswanathan.

[Arun Viswanathan:]

Just a question on EU Metal Packaging volumes. Maybe you can just discuss North America, the strength, I guess, in your outlook. I mean, obviously, the position is sold out here, and just wondering if you expect that to continue. And what's driving it? Is it kind of moderation in some of the mega beer losses? Or some other - obviously, some other categories like water? But maybe just give us a landscape of that volume. Sorry, I missed it earlier.

[Paul Coulson:]

Yes. No, I think our outlook for that is very good. We're very happy with that. We don't see this as a short-term thing at all. We're short of - we - the capacity is very tight. It's sold out in the U.S. in the bev can area. Some of it's to do with we're less in beer than - and more in carbonated soft drinks and in waters and things like that. But no, our outlook for there is good, strong. We're very positive on this. And that is something that's been a pleasant surprise to us from when we bought the business.

[Arun Viswanathan:]

And then just as a quick follow-up, I guess, that sets you up well to capitalize and potentially some commercial opportunities next year. I guess, I just wanted to understand how that works. I mean, if there is - the extent that the contracts are with large global customers, does that make it more difficult to kind of maintain price in other regions? Or is it - the discussion kind of secluded to North America?

[Paul Coulson:]

No, I mean, it depends on the customer. Some discussions with customers take place on a global basis, some take place solely in Europe and solely in the U.S. I mean, clearly, it's stating the obvious that if your capacity is full and demand is stronger than what you can supply, you're in a better position in terms of pricing negotiations than you would be if it was the way around, but that's stating the obvious.

[Operator:]

As there are no further questions, I will return the conference back to you, Paul.

[Paul Coulson:]

Good. Well, thank you, everyone, for joining us today. And we look forward to talking to you with our Q4 and year-end results early in 2019. Thank you very much, indeed.

[Operator:]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.