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Ball Corp. (NYSE:BLL)

Q3 2009 Earnings Call

October 29, 2009 11:00 AM ET

Executives

R. David Hoover - Chairman, President and Chief Executive Officer

Raymond J. Seabrook - Executive Vice President and Chief Financial Officer

John A. Hayes - Executive Vice President Chief Operating Officer

Analysts

George L. Staphos - Banc of America Securities - Merrill Lynch

Joseph A. Naya - UBS Investment Research

Ghansham Panjabi - Robert W. Baird

Claudia Shank Hueston - J.P. Morgan Securities

Mark Wilde - Deutsche Bank Securities

Chip Dillon - Credit Suisse

Alton Stump - Longbow Research

Christopher Manuel - KeyBanc Capital Markets

Rick Skidmore - Goldman Sachs

Al Kabili - Macquarie Capital

Peter Ruschmeier - Barclays Capital

Andrew Feinman - Iridian Asset Management

Timothy Burns - Cranial Capital

Operator

Ladies and Gentlemen, thank you for standing by. Welcome to the Third Quarter 2009 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterward we will conduct a question and answer session.

(operator instructions). As a reminder this conference is being recorded, Thursday October 29th 2009. A rebroadcast of today's conference will be available beginning today at 11:00 AM Eastern Standard Time till November 5th. To access the rebroadcast please dial 800-633-8284 and enter reservation number 214-387-27. I would now like to turn the conference over to Mr. Dave Hoover, CEO. Please go ahead.

R. David Hoover

Thank you Sarah. This is Ball Corporation's conference call regarding the company's strong third quarter 2009 results. And with me today on the call are Ray Seabrook, Executive Vice President and Chief Financial Officer and John Hayes, Executive Vice President and Chief Operating Officer.

Before I begin I would like to remind everyone that the information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that maybe expressed or implied. Some factors that could cause results or outcomes to differ are in the company's SEC filings as well as in company news releases.

And if you don't already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found on our website.

While our improved results in the quarter which Ray is going to talk about here in a moment were driven largely by the impact of cost rationalization activities we took during the last year, 18 months. Our focus on cost management during the economic downturn is also paying off. Our plants are running exceptionally well and we continue to focus on ways to reduce cost to be more efficient.

Earlier this month, we successfully completed the acquisition of four metal beverage packaging manufacturing plants from Anheuser-Busch InBev. The integration of those facilities is well under way and we are finding the new plants to be as good or better than we saw during due diligence. Their addition to our worldwide beverage can business will provide meaningful for benefits to our entire system.

Now I'll talk about our outlook in a few minutes. But next Ray will review the quarter from the financial perspective and than John will discuss our operating performance. Ray.

Raymond J. Seabrook

Thanks Dave. Comparable diluted earnings per share for the quarter was $1.24 and to the first nine months were at $3.21, up 10% the quarter and up to the first nine months compared to last year.

Turning to the operation, third quarter year-over-year sales volume remain soft in the North America, and beverage can sales are relatively flat in China and Europe. A lower euro exchange rate and decreased aluminum prices also contributed to lower sales dollars in the quarter and year-to-date compared to a year ago.

Despite lower third quarter sales and higher operating costs, higher corporate costs, comparable operating earnings and margins were up in the quarter due to improved earnings in our North American metal businesses in China.

Third quarter North American metal packaging profitability was improved by lower fixed cost due previously announced plant closing, lower employee and energy cost and better pricing. Corporate costs were higher mainly due to mark-to-market accounting on company's stock and has deferred compensation account.

As Dave mentioned on October the 1st, we completed the acquisition of four metal beverage plants from Anheuser-Busch InBev. Interest expense was increased by approximately $5 million in the quarter as result of the acquisition finance timing. And we expect net earnings from the newly acquired plants to be flat or only slightly positive in the fourth quarter because it of its quickest accounting adjustment and plan integration expenses.

We anticipate full year capital spending will be reduced to around $200 million in 2009 and full year free cash flow to be at least $375 million. Free cash flow will not increase notably above 275 million this year, due to increased working capital levels in some businesses.

We plan to focus on paying down debt after the recent acquisitions and expect free cash flow in 2010 to be significantly greater than in 2009. With that I'll turn it over to John.

John A. Hayes

Thanks Ray. Let me talk first about the acquisition and then provide some color on our operational performance.

I will prophase my comments by referring to our remarks in the second quarter. We said our focus was on cost management and balancing supply and demand. We wanted strong assets in the right places to serve our customer base and we wanted to be flexible in this dynamic market place and ready for when growth returned, while we operated profitably in this economic environment.

Our results are showing fruits of those efforts. And now with the acquisition, we have some additional loss that's on the table that will make our system even better. The

The AB InBev acquisition fits nicely into our strategic plan of growing our global beverage can business. After making a required fourth quarter inventory valuation adjustments that Ray alluded to, we will quickly see the benefit of those plants early in 2010.

We are absolutely focused on best practice between the new Ball plants and our legacy plants. The sharing of practices is a two way street; the successful system plant concept we implemented during both the Anheuser-Busch InBev acquisitions is in place today. We fully intend to steal shamelessly from each other in order to enhance Ball's low cost manufacture status in beverage can making.

Now in August we named Michael Hranicka, Chief Operating Officer of North American metal beverage packaging operations. We wanted Michael in place to guide the inauguration of the new plants. His disciplined systematic approach and his focus on getting close to our customers of selling the term. And Michael in his team are off to a great start. This follows our announcement earlier this year naming Gerrit Heske, Head of Ball's European business. These moves demonstrate our focus on talent management and we fell very good about the leadership team we are putting in the place for the future.

Now turning to the Operations: Profitability for the quarter in our metal beverage packaging Americas and Asia segment was up noticeably versus last year. As Ray mentioned, a blend of cost savings, price, mix and exceptional plant performance contributed to the segment's improved performance.

Overall industry volumes in the U.S. were down approximately 1% in the third quarter with beer volumes almost flat and CSP down a little over 1%. Our volumes had beer being up and CSP being down for the quarter, and overall we were down relative to the market. However, we remain focused on balancing the value versus volume equation in this business. We have having some conversations regarding current CSP negotiations.

We are executing on costs optimization plans and we have added four low costs well run plans in our biggest business that will help us drive further improvements. In China, volumes were flat in the quarter and profit performance was improved due to price and lower cost inputs.

While Europe's volumes were relatively flat in the third quarter. To insure that supply was matched with demand curtailments of selective lines occurred in the quarter and we remain committed through short term and long term measures to balance our supply with the realities of market demand.

To that end we have decided for the time being to postpone to start up the Lublin, Poland plant subject to further market developments in the region.

We continue to believe that Central Europe will be an area of growth once the economy recovers. Turning to our food and household division year-over-year segment EBIT performance improved. The vegetable pack started late but was very strong in almost every region and ended just a couple of weeks ago.

The strong pact, affective supply chain management and continued cost savings related to prior plant closings, offset low single digit volume declines in food and high single digit volume declines in aerosol containers. Plastic package in America has reported a decline in EBIT in the quarter.

Unlike our other packaging businesses, volume did not improve quarter-to-quarter. Custom foods and beverage containers volume gains were not enough the offset the double digit volume declines in CSP and sports drink categories.

We closed on the sale of our plastic pail business near Atlanta to BWAY on October 23 for $32 million. We acquired this product line in 2006 with the acquisition of U.S. can and it wasn't a strategic focus for Ball.

Now turning to aerospace; the successful launch of the WorldView-2 remote sensing satellite earlier this month highlighted some of the unique capabilities of this business. In fact, we were able to view the first images just 11 days after launch which is truly world class and highlights our unique capabilities.

We said earlier this year that the second half would be challenging for the aerospace segment. Year-over-year EBIT performance declined slightly in the quarter while backlogs held fairly constant at $563 millions. We continue to have proposals in the pipeline. We often describe this segment as being lumpy and right now we are in the same part of the lumps.

But we know our capabilities and we are optimistic about our prospects for new business. Additionally, across all of our businesses, we are making progress in our sustainability efforts, whether its is reducing energy use, water or waste, our focus is on driving additional economic value for the company. We are leveraging innovation platforms as well, like the reclosable beverage can end, the Alumi-Tek bottle and PET wine bottles, all of which have sustainability advantages.

And of course we continue to work with our customers on increasing the recycling rates of our products and benefiting from that increase, both economically as well as environmentally. In summary, operating performance in our packaging segments is very good and improving.

Our cost rationalization programs are bearing fruit and we will continue to focus on balancing our supply with our demand. We anticipate taking additional down time in the fourth quarter as market conditions want to position our business for 2010 and beyond.

Our people are focused on the right things and we are all excited about the opportunities that are ahead of us. Dave.

R. David Hoover

Thank you John and thanks Ray. This was another good quarter, a stronger quarter in some ways than we anticipated. We are seeing improved results in North American beverage can segment. Our plans across the board are running very well and we have an acquisition in our largest segment to provide an additional catalyst.

We certainly expect to have a better fourth quarter then we did last year. And we are optimistic about 2010 particularly if the economy improves. And with that Sarah, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (operator instructions). And our first question comes from the line George Staphos with Merrill Lynch. Please proceed with your question.

George Staphos - Banc of America Securities - Merrill Lynch

Thanks. Hi guys, good morning.

R. David Hoover

Good morning.

George Staphos - Banc of America Securities - Merrill Lynch

First question or two is around the balance sheet. It looked like receivables were up fairly substantially in the quarter, I am guessing that's largely due to the impact of Metal Container Corp or were there some others to consider. Similarly was there any excess inventory that you took into the fourth quarter on aluminum or steel and might that have cost you any margin in third quarter?

Raymond Seabrook

Joe, this is Ray. Let me... yeah, the balance sheet is a little confusing. Let me see how they healthy are. You remember that we closed on our acquisition financing around August 20th I believe by the end of their acquisition that closed October the 1st.

We had around 40 days, sitting with $700 million and so what we did was, reduced, if you want to... we reduced about $90 to reduce revolving debt that we could pay out easily. $250 million, we used to reduce our AR securitization program. So AR securitization program at the end of June if you will, it was $277 million and at the end of September it was zero.

And so we used that money to take that out and the rest, you can see on the balance sheet that's cash. But if you look at the cash-flow statement, the best way to look at it, just add $227 million for the third quarter, changing working capital and add 250 million for the nine months, than you are going to get the numbers that look more understandable.

Its really has got to do with the AR securitization program.

George Staphos - Banc of America Securities - Merrill Lynch

Okay, I got that.

Raymond Seabrook

...million dollars ahead on free cash flow. We didn't, to my knowledge we didn't carry any extra inventory into the fourth quarter. John, do you want to answer that?

John Hayes

No. That's correct Ray, we did not.

George Staphos - Banc of America Securities - Merrill Lynch

Was there any charge related to inventory in the third quarter?

Raymond Seabrook

No inventory charge of any kind in the third quarter.

George Staphos - Banc of America Securities - Merrill Lynch

Okay guys, I will turn it over.

Operator

Our next question comes from the line of Joseph A. Naya with UBS. Please proceed with your question.

Joseph Naya - UBS Investment Research

Good morning guys.

R. David Hoover

Good morning.

Joseph Naya - UBS Investment Research

I was just curious in the Metal Beverage American, Asia obviously is a very strong quarter. Could you provide additional color as to kind of what the big moving parts were maybe the magnitude what you saw on the quarter?

R. David Hoover

Well, I will start it John, and why don't you chime in to. We, as I mentioned in the opening comments, we have been due to recession in the business, closing plants and doing other things, and we are beginning to see real positive results from that, the cost savings that we were talking about and so on. So that came to the forefront, so as Ray had said, no negative metal in the quarter, and we are running very, very well. Will you amplify that John?

John Hayes

Yeah. Its exactly what we said at the second quarter where we expected going through, we would see the cost savings as Dave mentioned and you hit on the lack of inventory and the exceptional performance of our plants.

Joseph Naya - UBS Investment Research

In terms of maybe the benefit from restructuring, you gave an idea of what that was in the quarter?

R. David Hoover

Its always difficult to break this out little bit. But if you with recall on our first quarter conference call, we laid our very clearly our expectations over the next 12 months and we're delivering on what we committed that we would.

Joseph Naya - UBS Investment Research

All right, thanks a lot.

Operator

Our next question comes form the line of Ghansham Panjabi with Robert W. Baird. Please proceed with your question.

Ghansham Panjabi - Robert W. Baird

Hey guys, good morning.

R. David Hoover

Good morning.

Ghansham Panjabi - Robert W. Baird

Could you give us an idea of what specially can volumes did during the quarter, not just in North America but Europe as well.

R. David Hoover

I can give you qualitatively; I don't think I have the specific information, but lets start with Europe. We mentioned in our earnings release that we continue like we have in the first half of the year a mix issue and what that effectively means as people have traded down from 50 centiliter that to 33 centiliter. That trend is continued, although it's updated a little bit, and it has to do with region by region, market by market.

So, there is nothing new in the third quarter relative to what was happening in the first and second quarters. In North America, in the first half of the year we did see some slow down on that business. I think it has started to come back a little bit, in fact what we're seeing as we go forward as many of our customers are very much focused on differentiation and I would expect that you should see a wide variety of different sizes and different formats as we go into 2010 related to specially cans.

Ghansham Panjabi - Robert W. Baird

Okay. And remember. Sorry, go ahead. And just remembering that from last year when you delayed the plant in India, they've just given what's happened in the world in terms of the economy sort of improving your cost emerging markets, are there any plans to revisit that?

John Hayes

Nothing at this time is the best way to say, but we have plans in place for every region around the world. And as Dave liked to say the mode of an opportunity and that's what we are focused on, and make sure that for example; even in the Polish plant, yes we actually have seen improvement in Eastern Europe for example, in third quarter Poland was up slightly in terms of can volumes but not enough to start a new plant.

Ghansham Panjabi - Robert W. Baird

And John just finally back to specialty volumes. Are you supporting the re-part of the producer, for the Coke slim can that's being offered.

John Hayes

Yes we are.

Ghansham Panjabi - Robert W. Baird

Okay, great. Thank you.

Operator

Our next question comes from the line Claudia Hueston with J.P. Morgan. Please proceed with your question.

Claudia Shank Hueston - J.P. Morgan Securities

Thanks very much, good morning.

R. David Hoover

Good morning.

Claudia Shank Hueston - J.P. Morgan Securities

I just had two questions, one I was hoping if you just comment a little bit on volume trends over the course of the quarter, particularly in the pastics business in Asia there is sort of flattish today, did itchange it all over the course of the quarter and then if there is any sort of notable change in any of the other segments in terms of volume trends, that will be great?

R. David Hoover

Okay. Well the PET, to be honest; we had expected to see improved volumes in the PET side of the business that did not materialize. Although our food and specialty side of that business was up mid single-digits. I think the issue really has to do with just less share of stomach for all products.

If you look across all the various non-alcoholic product lines which PET plays a part, everything effectively is down. And so I do think that people are just drinking less packaged soda, less packaged water, less packaged soft sports drinks etcetera.

In terms of just trends that we saw in other businesses, nothing out of the ordinary that we haven't mentioned before. On the beverage can side, the promotional activity really didn't give us this much of a boost as were hoping for although what I would tell you is the can, as a sheer package mix on it has been improving. And so CSP was down, it was down less than overall CSP.

And the beer continues to hold up reasonably well. And then we've talked about the terrific food pack that we had and that went into, even into October. So I don't think there's anything unusual there.

Claudia Shank Hueston - J.P. Morgan Securities

Okay. That's really helpful color. Thank you. And then just real quick, just on your corporate expense. Could you just tell us how we should think about that going forward?

R. David Hoover

You want to comment on that Ray.

Raymond Seabrook

Yeah, as I said. The main thing in this quarter is that the positive up... the biggest side in mark-to-market and on the stock price. So, if stock fell in deferred accounts which fair amount of it is, its mark-to-market and the beverage put to our P&L. So, year-to-date, we probably had $6 million of that, we also had an increase in IC side. But, if the stock price is up a lot, that number moves and if it goes down, actually we put a credit through believe or not, but that's how generally accepted accounting principles work.

Claudia Shank Hueston - J.P. Morgan Securities

Okay. Thanks.

Operator

Our next question comes from the line of Mark Wilde with Deutsche Bank. Please proceed with your question.

Mark Wilde - Deutsche Bank Securities

Good morning.

R. David Hoover

Good morning.

Mark Wilde - Deutsche Bank Securities

I wondered if you can give us some sense with the Brazilian plant coming up here a little bit later in the quarter. What sort of the benefit or drag we might see from that over the next couple of quarters?

R. David Hoover

Yeah. The first line is actually, we saw pictures yesterday as running some cans as oppose to start production mid November. And really we expected it to be additive from the good going.

Mark Wilde - Deutsche Bank Securities

Okay. And then...

R. David Hoover

While the plant is sold out, so.

Mark Wilde - Deutsche Bank Securities

Okay. And could you just give us a little color on this CSP negotiations that you mentioned and in what point you might have some clarity on what that does or doesn't do for you?

John Hayes

It was, this is John. As I said in my opening remarks that we have been making good progress, I think everything is on track and I think it would be remise to say anything more than that at this time.

Mark Wilde - Deutsche Bank Securities

Okay. All right, very good. Thanks.

Operator

Our next question comes from the line of Chip Dillon. Please proceed with your question.

Chip Dillon - Credit Suisse

Yes, good morning. Ray I know back in July you had mentioned that you saw about 50 million incremental free cash flow from the acquisitions of the InBev plants, a little less than that in the first full year and of course you had the early close.

Could you just update us on that, is that where you still see the numbers., I guess I will just also tack onto that for all of you guys. Do you see the potential given the, ease of closing this deal for maybe another can plant or to, to be available to be purchased, do you think that's a possibility.

Raymond Seabrook

No, it’s with the free cash flow. As I said, we were little disappointed this year, the fact that we had businesses and we are going to put some working capital in those businesses and that's a temporary phenomenon. So, if you look at our 375 this year, I think we are still thinking that, that number is 50 million on an on going basis for this prior plant. A little bit less in the first year because we have some things to do.

But fundamentally is we expect to get that working capital out next year. So when you kind of do the math you are going to see that we expect to have significantly very strong next year in free cash flow. As far as additional plants, I will turn that over to Dave, and who knows.

R. David Hoover

I thought maybe you were going to answer that Ray. All right. I don't think we would speculate on that. Certainly, we make no bones about the fact that we were trying to grow our global beverage can business and we are delighted actually to have these plants part of Ball Corporation, they are running very well we will see what the future holds. So, actually a little dance around your answer.

Chip Dillon - Credit Suisse

Okay. And just shifting gears just quickly. We have seen in the last six months, PepsiCo buy their beverage plants, sorry their bottling plants. And have you noticed any difference in their sort of attitude or plans in the future toward pushing volume vis-à-vis price? In other words, could that be a positive or maybe a concern of yours?

R. David Hoover

Well, specifically with respect to the cuts you mentioned, no. I do think and they've publicly stated, this is one of the reason, they are committed to CSP and that's one of the reasons why they're acquiring these two bottlers, and they want to move things to market quicker, that's what they said.

When you just take a step back and look what's going on the CSP volumes are down across the border, irrespective of what range you are talking about. We do know that they are very much focused on getting that right, it has had headwinds depending on what customer you are talking about in terms of some of their hedged material, whether its high fructose corn syrup, whether it's aluminum, things like that.

As those things start to come off, I think they are very much focused on reinvesting in their business to make sure that they are not losing any share gains and making share that they are maximizing best value versus volume equation.

I had mentioned earlier that they are looking at a variety of new formats and other things like that. I think you should expect that that's going toe increase as we move forward.

Chip Dillon - Credit Suisse

Thank you.

Operator

Our next question comes from the line of Alton Stump with Longbow Research. Please proceed with your question.

Alton Stump - Longbow Research

Yes, thank you. Good morning.

R. David Hoover

Good morning.

Alton Stump - Longbow Research

I was curious, if you could maybe give a bit more color, if I missed it earlier I apologize. But looking at your overall volume situation in Europe. Have you seen any recovery in Eastern Europe today and if so do you think that we could see that recovery as we had into early next year?

R. David Hoover

Well, good question. There has been a slight growth in certain parts of Eastern Europe. But as I mentioned earlier, not enough to give us confidence to start up a new Lublin plant. Just to give you example in Poland, in the third quarter it was up mid single digit, the Czech Republic was up a few percent, these where markets that have been in decline up until the third quarter. So, I think this bottoming out if you want to think that.

The question is as you move forward in 2010 what kind of trajectory do we expect that. We have talked about the world cup being in the same time zone at least of Europe next year which should be helpful, because it's a very big promotional event for beer customers. We expect some improvement, just to be honest, I think many of our customers are putting plans in place right now in terms of the pricing their promotions, their volumes and it's a bit too early to say anything, although I do believe that worst is behind us.

And then even in Western Europe, we saw some good this quarter in France, in the UK, it was offset a little bit by Belgium and Southern Europe that kept the overall market relatively flat. But we are seeing some signs of some recovery in certain parts of Europe.

Alton Stump - Longbow Research

Okay, great. That's all I had. Thank you.

Alton Stump - Longbow Research

Thanks.

Operator

Our next question comes from the line of Chris Manuel with KeyBanc Capital Markets. Please proceed with your question.

Christopher Manuel - KeyBanc Capital Markets

Good morning gentlemen and congratulations on a very good third quarter.

R. David Hoover

Thank you.

Christopher Manuel - KeyBanc Capital Markets

Couple of questions for you. First is, Ray if you could please expand on what the working... maybe just a little more color on what the working capital was that took a little more here through the end of the year. I heard what you said earlier about the adjustment in the accounts receivable lines, but I was thinking that would have probably come off or a balanced off by the end for anyway, was there something else?

Raymond Seabrook

Well, what happens is, when you make that adjustment to the line, it goes through changes in the working cap. So as I said before, Chris The other thing we could have done, we could bought 700 million and put pretty much the 700 million in cash and what we did was with the better use of the money to pay down the AR program, so that's why your balance sheet and cash flow looks a little strange.

If you take that affect out of there what you will find is year-to-date with $200 market ahead on free cash flow compared to where we were last year. And so the way to think about that is, that basically increases the receivable line by $250 million.

Basically that line, that was a better return for our money than to leave the money in cash, it’s that simple. So year-to-date I believe on an apple-to-apples basis we are $200 million ahead on free cash flow from where were last year.

Christopher Manuel - KeyBanc Capital Markets

Okay. No, that's right. I just didn't understand if it was just due to the... what you did with receivables if there was anything additional.

Raymond Seabrook

Well, as a matter of fact as we say in today we are already into that line. We probably closed on the acquisition and that line is back in place. So we consider that is new lines that's back in use. So it just happened to be, if moving to the end of the quarter it's a little confusing.

But as I said, if you add $277 million to new increase in changes in working capital in the quarter and add 250 for further date, you are going to get comparative numbers.

Christopher Manuel - KeyBanc Capital Markets

Okay. Thank you. And then the second question I had was, you had the Metal Container assets now about, 29 days or so in counting. Any thoughts early in this first month is, surprises favorable things you've seen, maybe unfavorable things you've seen. Just some early thoughts on how you're feeling at this point.

R. David Hoover

I think as I said in the opening, we find them to be as good or better than we thought and we did significant due diligence. These are excellent facilities and the people there are great and I've been communicating for last 2-3 days with some of the Plant Mangers, I want to go see their plants, and they seem delighted too.

These are very large, very productive, very low cost plants and they are working really very well. I think, John, you might comment on the factor sharing and other things that we are doing and what we are beginning to see.

John Hayes

Yeah. Its, to amplify on Dave's point, one of the facilities that we acquired, not a week after we had acquired it had an all time daily production record of over 9 million cans produced in the day. That is truly world class, we had a bunch of people led by Michael Hranicka who go out from literally hour one after the acquisition, go to all four of the plants, spend some time with the people really get the people engage and lay out what we mean by best practice sharing.

And as I said in my opening comments it truly is a two way street. This is a first class operation like ours. We do some things a little differently and now we need to identify whether its an how you move metal through the system, how you call off various things, how you plan the warehousing all that. There is best practice sharing and we truly are going to steal shamelessly from both of them as we go forward and its most importantly is to get the engagement of the people as one team focused on these are not former AB InBev plant, they are new Ball plants.

Christopher Manuel - KeyBanc Capital Markets

Perfect. Thank you gentlemen.

Operator

Our next question comes from the line of Richard Skidmore with Goldman Sachs. Please proceed with your question.

Rick Skidmore - Goldman Sachs

Thank you. Good morning. Just a couple of areas of discussion here. First; wanted to talk about the Americas beverage for a minute and the sequential improvements second to third quarter. I know you mentioned there was three areas of cost, sales, price and mix.

And if we look back at the second quarter call, it seems like the cost saves probably around and about 10 million a quarter. And you had something like a 10 million inventory gain. Is the rest just price or is there some improvement out of China that you've had?

Raymond Seabrook

Let me take that. Roughly basically, as matter in the second quarter we still had some inventory losses on loan, they weren't huge but we had some loan losses again in the second quarter. When we were at the third quarter, as John alluded to is that, approximately $12 million of that improvement is related to the plant closing talks that both John and Dave talked before.

A lot of the other improvements in North America, it's a lower energy cost, lower labor and benefit cost. In China; we had improvement as well for primarily volume was up just a little bit. They were pretty flat, but they are up just a little bit. We had some currency gains in the China and we had again, the plants that are working very well in China.

Offsetting all that, leaving that, we had fact $4 million loss due to lower volumes.

Rick Skidmore - Goldman Sachs

Okay great. That's helpful. Thank you. And then just shifting to the plastic side of the business with the sale of the plastics plant to BWAY, did that reflect any change overall and the overall strategy for the plastics business. And could we expect that you would start to see some of the cost saving initiatives that you have taken in plastics, show up in a quarter, in the next couple of quarters?

R. David Hoover

The plant that we sold made large plastic buckets, think of it that way, for things like cool chemicals and so forth. So it was not a fit with anything that we do. So, the fact that we sold that plant, it was kind of also within our plastic business, any way it actually came to us as part of the U.S. Can acquisition.

So, hopefully the BWAY folks will be able to add to what they do to have a nice business, it just did not fit with us. So, I wouldn't assume that, that has any impact on the rest of our plastic business. John you want to comment on the that cost savings.

John Hayes

Yes. The cost benefits from the closed plant really only had a very small impact in the third quarter. Largely because Baldwin's Village finally was the largest facility ran actually into the third quarter, ran until the end of August.

So we expect to begin the flow these cost savings to flow through in the fourth quarter and then really hit hard in 2010 relative to the full amount of cost benefits realized from those closings.

Rick Skidmore - Goldman Sachs

Okay. And then maybe just one last one on the plastic side of things. Is it really just a volume issue in the plastics business or is there something out structurally that's a bigger challenge for you there?

John Hayes

Right now its really just the volume, volume issue.

Rick Skidmore - Goldman Sachs

Thank you. Great, thank you.

Operator

Our next question comes from line of Al Kabili with Macquarie. Please proceed with your question.

Al Kabili - Macquarie Capital

All right, good morning. Thanks. Just wanted to I guess follow up on the cost save. I think you guys were targeting 80 million of total cost savings over 2009 and 2010. And as we are in October and as you total this all up, kind of where are you tracking this year and what's incremental next year relative to the $80 million goal that you had?

R. David Hoover

Well, I don't know. I shouldn't say that. I think there were probably, these things all happen at different points in time. So I think we were still looking to get at the end of the second quarter with another 50 or more and we got some of that.

We will still be getting some benefits as we go into next year. I would say at least halfway through the year as everything adversaries and we get out of there. It gets increasingly difficult as time passes through, find every dollar and say that it adds up to 80. But what you will see is, despite either this quarter in improve results, Ray just mentioned we had 12 million of that in the third quarter. So...

John Hayes

Yes. And you really have go plant by plant. I mean if you think about the eight facilities we have closed and we talked about this on I believe in the first quarter. We had three facilities in North America and metal beverage, it was can't... we said we really wouldn't get much of the benefit until 2010 because we were shipping out of pattern to fulfill customer contracts.

We came to see that we really didn't start getting benefit until the second half of the year and we are clearly seeing at the numbers, and also the same with Puerto Rico, although that's not all that big.

On the food and household products side of the business; this year we are getting a full year benefit of that and if I remember correctly its in the range of $15 million and then on the two plastic plants as I just alluded to, we really aren't getting much of anything, certainly we haven't got much yet and we will get a little in the fourth quarter but then we will really get the run rate in 2010.

Al Kabili - Macquarie Capital

Okay, all right. Okay. I just wanted to make sure, I mean I am kind of coming out if 20 million incremental cost stays next year, but just wanted to check that against kind of where you are tracking. Okay. On the, I guess switching over to the aerospace business, can you talk a little more about the pipeline, potential project pipeline there? And do you see potentially that you could grow your backlog again next year?

R. David Hoover

Yeah, I think that's a possibility. Here John mentioned in his remarks, the fact that the backlog sort of stabilized in the quarter. And really they are performing better than we thought they might through the first nine months and I think they will all year, this year.

We haven't had the... had to have the reduction in forces that we might have anticipated and so on because of wining some business as we go along. The thing that's somewhat heartening and you don't know until you win or loose. But we have been bidding on a number of programs lately and we are optimistic that we are going to start winning some of those.

So we can't declare victory, but at least my feel on this business is its beginning to turn a little bit. I don’t know, John?

John Hayes

Completely agreed as Dave said, that we are seeing a lot more deal flow if you would like to call it that and just on probabilistic point of view, when we are seeing more of that we have more opportunity in so, as you said its all on the count. But I think the tone and tender of the market place in which we compete is much more constructive today than it was six months ago.

Al Kabili - Macquarie Capital

Okay. Thank you.

R. David Hoover

Thank you.

Operator

Our next question comes from line of Peter Ruschmeier with Barclays Capital. Please proceed with your question.

Peter Ruschmeier - Barclays Capital

Thanks. Good morning.

R. David Hoover

Good morning.

Peter Ruschmeier - Barclays Capital

Couple of questions. In metal food business, I'm curious that you mentioned that the food pack is continued a little bit into October I'm curious on, if you could characterize this season how much the how much the food pack is slipping over to the fourth quarter or how much was captured in the third quarter?

John Hayes

Well, as Dave just mentioned in Colorado at least not much, because we have about two feet of sewer underground. But it was an above average pack, point one. Some of it did carry over until the fourth quarter, point two. Not tremendously so, but I think the first frost happened about the 9th or so of October which really ends the other couple of days after that, but it really ends that.

But that is usually trying to shoot you can get to the first week of October that's usually pretty good, we got little bit pass that which is a little better. And so overall I think we should, we did get some benefits in the third quarter that will continue slightly into the fourth quarter

Peter Ruschmeier - Barclays Capital

Okay, that's helpful. Now I know previously there was some discussion that consumers may have been shopping their pantries. I am curious as you look at the supply chain out there, presumably its kind of hard to hide a lot of cans out there. But what's your assessment as to the supply chain and whether there is been a depletion of cans through the pipeline including consumers?

John Hayes

I think not only on the food can side but whether it's all sold or whether its PET we talked about earlier, there has people that are just buying last things. It gets to year-over-year comparisons in the trajectory of those trends. We believe generally speaking probably the worst is behind us in terms of that.

The question is, will people start consuming back to their old habits? And that's a question only for the people that own crystal balls. But we feel reasonably good where we sit right now, that most of it is behind us and because people still need to eat, people still need to drink and the question is are they going to be drinking tap water or CSP and are they going to be eating fresh or canned foods, and we feel just generally constructive about where we sit right now.

Peter Ruschmeier - Barclays Capital

Okay. And just lastly if I could, coming back to European can business, Eastern Europe in particularly you touched on some points of follow on getting little better. I'm curious and how you think about the market longer term that if you had double digit gains there not too many years ago. Has that market matured so that you are just never going to get back to those rates of unit can consumption or are you thinking that you are going to get back there and suggest this from our modeling standpoint, I mean what's the outlook for the level that we ultimately get back to.

John Hayes

Long term, we still believe that there is a fair amount of embedded growth in Europe generally, obviously markets are definite. But just let me give you couple statistics that helps that out. The can share of the package mix in bear and Europe is about 18% and North America is 49%. So when you think about the trends from two way packaging to one way packaging that early favors things to can particularly when they are at the 18% level. There are certain markets that are, in Europe that are over 40%, there are certain metal in the single-digit market.

But based on that fact alone you can have flat beer and the same works for CSP. But you could have flat consumption for trades of packaged mix going from two way to one way will provide some upside lift over the long-term.

Peter Ruschmeier - Barclays Capital

Okay.

R. David Hoover

I think we are seeing... as you see the rebound in oil prices, that's got to be gift for the Russian economy. I was just reading a piece this morning what Russia has got to do and some of us were there recently. But what they need to do is diversify their economy away from raw materials. They are trying very hard to do that, and with oil trading 78 bucks a barrel versus 40, that's quick shot in the arm really to the economy there, that was one place that with can quite a bit.

I think the other Eastern European countries by and large are just on a... probably into converting the cans and a lot of that was driven by the consolidation on the part of beer industry. That certainly continues and its definitely related to the state of the economy. And we saw signs today, although we are not adding job in the U.S. as much as we wanted, we currently bottomed out in the second quarter and had a 3% growth or something in gross domestic product and in the third.

So too early to think its our victory, but cycles happen and I think hopefully we will see the worst of it.

Peter Ruschmeier - Barclays Capital

Very good. Dave lastly if I could quick one for Ray. Do you have a preliminary estimate for capital spending for 10 and today you commented on a couple of the key spending projects you are working on.

Raymond Seabrook

Well, we don't have an estimate yet for 10 but we have a general feeling and you have been hearing from both David and John is that, until the demand picks up we are not going to be putting capital to work until we know we can get a return on it as you might expect.

So, as we see today I wouldn't expect full year capital to be too much different than it is year to next and that's something that's contingent. John, do you want to add anything to that?

John Hayes

I think that's generally right.

Peter Ruschmeier - Barclays Capital

Very helpful. Thank guys.

Operator

Our next question comes from the line of George Staphos. Please proceed with your question.

George Staphos - Banc of America Securities - Merrill Lynch

Thanks. Hi guys. Ray, it maybe a little bit too early to provide any more precision and the guidance on free cash flow as its substantially higher for next year. But are you in a position at this juncture to be able to bracket that at all. If not, conceptually we had 50 million for MCC as I recall, correct me if I'm wrong on that. What are the other sources of free cash flow improvement that you are expecting for next year if you wanted to stack rank them?

Raymond Seabrook

Lets just say it was flat George. A good way to think about that is, is that we said we expect to have reached 375 this year, and we are going to put in into equally worth of $70 million of the additional capital.

And, hello?

George Staphos - Banc of America Securities - Merrill Lynch

I am here, yeah.

Raymond Seabrook

And probably about $70 million of additional capital. So on a normalized basis you could add that to issues number and then add 50 to it, to get your starting point. We would not expect to increase contain additional capital going to our business next year.

R. David Hoover

The 70 is still capital rating, give me working capital.

Raymond Seabrook

Hey, we are on that working cap.

George Staphos - Banc of America Securities - Merrill Lynch

Okay. And so...

Raymond Seabrook

It said, that's a temporary increase in working capital that was we expect to see it, to be able to get out of next year.

George Staphos - Banc of America Securities - Merrill Lynch

Okay. So again to summarize we're starting with 375 plus 70, plus 50, I realize it never works out quite that mechanically. And then presumably some upside from earnings, if we have a better versus the worse global economy?

Raymond Seabrook

That's a reasonable way to look at this earnings point.

George Staphos - Banc of America Securities - Merrill Lynch

Okay, I appreciate it. The other thing I wanted turn to is, within PET, you have already done a fair amount of restructuring within the business. I think in answering one of Rick's question earlier it is not much as you expect to see from a structural standpoint in terms of improvement from here. Is there anything that you can do from a marketing standpoint to improve the performance of the business or are you just really at this juncture more or less waiting for people to look at their pocket books at the gas stations and like to buy bottled water and gatorade.

R. David Hoover

Well, I think we are doing a lot particularly on the food side and food and beverage side, non-PET. The soda and water sales, you're hear on one of the big problems right now, Its not being acquired certainly and it can be in stores and even in grocery stores the way it was.

If cans are gaining share, that's sort of the market, they're gaining that at the expense of something and some of it is that, so I mean, I think we are working hard on new product development and with some success over selling some more heat-set container, some polypropylene containers and so on.

But on the other side of the coin, I think we've got to see hopefully our customers promoting and people wanted to buy of these things.

George Staphos - Banc of America Securities - Merrill Lynch

Dave, in the custom side of the house, is it down on its own or does it need the scale even if its not getting much of a return on its own from the, if you will on the commodity side of the house and PET?

R. David Hoover

Well its not a large business but, it was a separate business within Alken when we bought it so...

George Staphos - Banc of America Securities - Merrill Lynch

Right.

R. David Hoover

It is little larger now than it was than, so.

George Staphos - Banc of America Securities - Merrill Lynch

All right. Last question I will turn over. In terms of promotional activities form your customers and soft drink this year its been, seemingly from our standpoint on again, off again, on again off again. And with that, there is a back up then perhaps whatever the alternative you are telling now, minus so we have a heck of a lot of lead time into the future. But what are they telling you right now in terms of their expectations for promotional activity into 2010.

R. David Hoover

Yeah. They are telling us right now, is that they are very much focused on it, its really looking towards 2002 and they are putting together all the variety of plans, promotional activity pricing strategy, all those things in place as they go into 2010. So I think its still a work in process for them. And so our discussions with them, they need to get through the work first.

George Staphos - Banc of America Securities - Merrill Lynch

Okay. All right guys, I will turn it over. Thank you.

R. David Hoover

Thanks.

Operator

Our next question comes from the line of Andrew Feinman with Iridian Asset Management. Please proceed with your question.

Andrew Feinman - Iridian Asset Management

I have been asking you about securitized receivables, every quarter for about the last five years, but the one time when it actually would have been a quick question. You have answered it before, I got a chance to get in the queue.

John Hayes

Hey its John. I am sorry about that Andy.

Andrew Feinman - Iridian Asset Management

Since I wasn't fast enough. But so the 200 million capital spending includes Metal Container Corp, is that correct for this year?

Raymond Seabrook

Yes, that's correct.

Andrew Feinman - Iridian Asset Management

Okay. So, I think the last time we talked about, maybe on the last call it was looking it was going to be maybe 40 million or 50 million higher than that. So can you talk about what you've, what brought it down?

Raymond Seabrook

Lublin.

Andrew Feinman - Iridian Asset Management

All right, okay.

Raymond Seabrook

Now that's a biggest piece, and then of course. And we have been really careful about everywhere we are spending money, we are being very cautious as we look at this economy right now. But the big number, the big move down is Lublin.

Andrew Feinman - Iridian Asset Management

So, there's a lot of... I mean, you have the 32 million from the plastic sale, you've got, I think about another 20 million coming in the fourth quarter from winding out of your collateral deals. And you have, if I'm trying to estimate, I guess if your receivables goes back to 250 which is around where you would like to run it between now and the end of the year.

Okay. So then what would your... can you give me some kind of a bracket of what your net debt might look like at the end of the year given all those puts and takes?

Raymond Seabrook

Let me tell you that we are looking at somewhere like 250... some of that exchange rate has an impact on that too Andy. But we believe 2.4, 2 million 150 million like that, in that neighborhood.

Andrew Feinman - Iridian Asset Management

Great. Okay, that's terrific. Thank you very much.

Operator

Our next question comes from the line of Tim Burns with Cranial Capital. Please proceed with your question.

Timothy Burns - Cranial Capital

Thank you operator. Two foot of snow would equate to a school day off, I'm impressed.

R. David Hoover

Well, what would you expect Tim?

Timothy Burns - Cranial Capital

This is kind of a goofy question and I don't know if its been approached, but the InBev Pepsi merger of certain purchasing activities. I mean it doesn't include packaging at this point. I could see how you guys could benefit if it happened. I could also see how you might struggle with it. Is it something to worry about or should we just shelve it for now?

R. David Hoover

You know, worry about. Its, this is a part of a broader theme just consolidation of customer basis and so we have in one way shape or form have been focus on this for a very long time. With respect to you're specific it isn't about packaging, its about two beverage companies coming together and looking at all their interacts.

So as we sit here today we have got relationships with both of those good customers of ours and we wouldn't expect any material changes.

Timothy Burns - Cranial Capital

Great. And John, where do you think the specialty can business is as a percentage of total today and maybe where it might had go? I mean it's obviously in high gear and probably will go into a higher gear into 2010. What are your thoughts?

John Hayes

Well I think its in the low double-digits, kind of low teens call it right now. I do think, just go into a store today and compare it to what it was two years ago in the high of the economy. You were just seeing a lot of difference format changes. Whether you define it as different sizes of cans or different packages of cans, you can see 20 packs out there that you couldn't see two years ago. You see a lot more 16 out on the shelf, you see a lot in terms of juices and other things going into the smaller sizes.

You will start to see CSP going into the smaller and the larger sizes depending on the channel that they showing into. So I think this is a secular trend that isn't going away.

Timothy Burns - Cranial Capital

Thanks very much and good luck in the fourth quarter.

John Hayes

Thank you.

R. David Hoover

Thank you.

Operator

Ladies and Gentlemen (operator instructions). And there no further questions at this time. Please continue your presentation or closing remarks.

R. David Hoover

Okay. Well, Sarah thank you very much. And thanks all of you for participating in our call. We will look forward to speaking with you again in January and will continue to work hard to make Ball perform well.

Operator

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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