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Crown Holdings, Inc. (NYSE:CCK)

Q4 2009 Earnings Call Transcript

February 2, 2010 9:15 am ET

Executives

Timothy Donahue – EVP and CFO

John Conway – Chairman, President and CEO

Analysts

Peter Ruschmeier – Barclays Capital

Chip Dillon – Credit Suisse

Alton Stump – Longbow Research

Chris Manuel – Keybanc

Ghansham Panjabi – Robert W. Baird

Claudia Hueston – J.P. Morgan

Tim Thein – Citigroup

George Staphos – Banc of America Merrill Lynch

Mark Wilde – Deutsche Bank

Joseph Naya – UBS

Al Kabili – Macquarie

Richard Skidmore – Goldman, Sachs

Dan Khoshaba – KSA Capital

Operator

Good morning and welcome to Crown Holdings full year and fourth quarter 2009 earnings conference call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded.

I would now like to turn the call over to Mr. Timothy Donahue, Executive Vice President and Chief Financial Officer. Mr. Donahue, you may begin.

Timothy Donahue

Thank you, Jane; and good morning to everybody. Welcome to Crown Holdings’ fourth quarter and full year 2009 conference call.

With me on the call today is John Conway, our Chairman and Chief Executive Officer; and Tom Kelly, Senior Vice President of Finance.

Before we begin, I would like to point out that on this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including comments in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Form 10-K for 2008 and in subsequent filings.

A reconciliation from US GAAP to non-GAAP earnings can be found in our earnings release and if you do not already have the earnings release, it is available on the company's website at crowncork.com. You will also find a reconciliation from net income to EBITDA, credit ratio computations, and supplemental cash flow data on the company's website.

You will see that this morning, we corrected a transposition of two numbers on page seven of the new release. In the fourth quarter segment income for European Beverage should read 43, not 30; and for European Food should read 30, not 43.

I will first review the quarter and full-year performance, provide some initial 2010 guidance, and then I am going to hand the call over to John for his comments.

Firstly, as we look back on 2009, I think we can say the company had another solid operating year. Despite challenging global economic conditions, the company reported adjusted earnings of $0.27 in the fourth quarter and $2.01 for the year; increases of 23% and 15% respectively over the prior year. Free cash flow was very strong at $612 million and was considerably higher than the prior year and well ahead of our expectations. Our fourth-quarter operating performance was better than expected and more than offset a higher tax rate, higher incentive costs, higher pension expense, and difficult comps from the very strong fourth-quarter of 2008 sales volume levels.

For the year, the company in total, and each of its major business lines achieved higher segment income and margin levels than the prior year, even with headwinds from pension and currency translation. Segment income improved to 10.2% of net sales or 50 basis points above 2008 levels. Net sales in the fourth-quarter increased a bit more than 2% as the impact of currency translation offset the pass-through of lower aluminum costs and the 2008 fourth-quarter pre-buy, which occurred in our Food and Aerosol Can businesses.

For the year, sales were up slightly when excluding currency translation. Volumes were firm in the quarter, and for the year in our Americas Beverage segment. Income benefited from better productivity, cost reductions, and the continuing growth of our business in Brazil. In North American Food, volumes were stronger than expected, and although not quite back to the fourth-quarter of 2008 pre-buy levels, they were essentially level to the fourth quarter of 2007. Earlier than expected savings from the plant closures we announced in the third quarter and greater efficiencies throughout our North American system combined with appropriate price cost recovery helped drive income improvement in the quarter.

European Beverage sales were up 6% in the quarter, due to currency translation, which offset the pass-through of lower aluminum costs. Overall, volumes were strong with improved European shipments offsetting Middle Eastern volumes, which were off from record levels in Q4 2008. As a reference, Middle East warnings in the fourth quarter of 2008 had increased 20% over 2007 Q4 levels. In Food Europe, trends continue to improve throughout the business. However, volumes were down from the very strong Q4 2008 pre-buy levels, which impacted comparable income in the quarter. Overall, we had a really good food can campaign in 2009, and when adjusted for currency, segment income in Food was up 11% for the full year over 2008.

Cash flow at $612 million was well ahead of our earlier expectations. The outperformance was the result of strong underlying operating performance, higher net earnings, an aggressive campaign to reduce year-end working capital, and lower-than-expected tax payments. As many of you know, we are and have been focused on cash flow generation, and as such, we do not run year-end inventory levels ahead solely to gain the benefits of cost absorption.

As a result of the strong cash flow, the company paid down more than $550 million of total debt during 2009, resulting in a significant improvement in credit quality. Net debt at year end 2009 declined to $2.3 billion or 2.3 times adjusted EBITDA. Interest expense also fell sharply during the year, down $55 million, with our interest coverage ratio improving to 4.1 times from 3.4 times at the end of 2008.

Based on current interest rates and our current capital structure, we expect interest expense of approximately $200 million in 2010. In addition to the company's improved credit quality, liquidity at January 1, 2010, remains strong at more than $1 billion. Pension expense is currently expected to be $10 million lower in 2010, and pension funding is currently anticipated to be similar to 2009 levels. Taxes paid will increase by approximately $10 million in 2010. The effective tax rate is currently expected to increase to more than 27% in 2010 from 24% in 2009, as a result of the reversal of the French valuation allowance in Q3 2009. Our current guidance assumes an exchange rate of $1.40 to the Euro and $1.58 to the Pound Sterling.

Looking ahead to 2010, the company expects volume growth and a continued focus on cost-reduction and productivity improvements, coupled with lower interest expense to offset the higher 2010 effective tax rate and the benefit of 2009 inventory gains realized in the first half of last year. As a result, the company currently estimates full-year 2010 earnings per diluted share to be in the range of $2.10 to $2.30, and for the first quarter of 2010 to be between $0.20 and $0.30.

For 2010, we currently project free cash flow of $500 million, after capital expenditures of $205 million. When combined with our 2009 performance, projected free cash flow is over $1 billion in this two-year period. This excludes any potential impact from transitioning to the new accounting rules related to Accounts Receivable securitization. Our current CapEx estimate of $205 million is up $25 million from the 2009 levels, and reflects the many growth opportunities we continue to see, which John will now speak to.

John Conway

Thank you, Tim, and good morning. Tim has done a thorough job of briefing you regarding our various businesses during the fourth quarter of 2009 and for the full year. We had another strong year. Profit performance was excellent, and free cash generation was superb. At the same time, we expanded our capacity around the world in multiple major capital projects and paid down a significant amount of debt. As we look ahead to 2010 and subsequent years, I truly believe the company has never been in better shape and we will go from strength to strength in the years ahead.

We thought it would be well to say a few words to frame and summarize the opportunities the company sees in 2010 and beyond.

First, regarding our consumer packaging businesses in the markets of North America and Western Europe, we see continuing steady growth that will produce solid profit improvement and excellent free cash generation. Our asset base is in great shape. We believe that our people are second to none, and our research and development capabilities continue to provide us with competitive advantage. Our market shares in all of our product lines are significant, and provide us with competitive scale of operations. We are a major buyer of all the raw materials that we use. Our geographic coverage is good. All in all, we have a very strong business in North America and Western Europe that we are confident will perform well in 2010 and the years ahead.

Also, very significantly, we have leading metal packaging businesses in virtually every promising emerging market economy, which has a significant and growing middle-class, possessed of sufficient disposable income to enjoy the benefits that our packaging provides. These businesses have now grown to a substantial size, and will continue to grow at rates significantly higher than the North American and Western European businesses. The result is an expanding base of profitable businesses that are generating new growth opportunities at an accelerating pace.

To remind you, we have leading metal packaging positions, principally in beverage, but also include aerosol and metal-vac enclosures in China and Southeast Asia, Mexico, Brazil and Colombia, Eastern Europe, North Africa, and the Middle East. These markets were affected in 2009 with the global economic slowdown. However, positive growth still occurred, but at a reduced rate. In 2010, GDP growth rates and increases in consumer disposable income are trending up, and the fundamental strategic idea at Crown, which is to grow at least as rapidly as these markets or faster, continues to be in our view, a very exciting value-creating proposition for many years into the future.

We have been present in most of the emerging markets that I mentioned for many, many years, often as long as 30 years. We have extremely well-positioned plants, which today are large and low-cost. Our management and our workforces are drawn from the countries in which we do business, and we are fortunate to have hired and retained outstanding talent. The experience that we have in emerging markets, the size and quality of our human and physical asset base, and the tremendous customer relationships give us, we believe, an outstanding platform for growth now and into the future.

So in summary, Crown is exceptionally well-positioned to perform well in consumer packaging, both in mature markets and emerging markets. Our balance sheet is now strong, free cash generation is powerful, operating margins are among best in class, and in particular, our spending controls and capital utilization we believe lead our industry. The result is that we are fully capable of taking advantage of the many growth opportunities that we see and we are seeing an increasing number.

So with that, operator Jane, you can open the call to questions please.

Question-and-Answer Session

Operator

(Operator instructions).

Our first question comes from Peter Ruschmeier, Barclays Capital. Your line is open.

Peter Ruschmeier – Barclays Capital

Thank you, and good morning and congratulations on a strong 2009.

John Conway

Good morning, Peter.

Peter Ruschmeier – Barclays Capital

I was hoping you could help to quantify the benefit that you may have realized in 2009 in the form of inventory holding gains.

Tim Donahue

Well, Pete, I think that is a number we haven’t disclosed or quantified all year, and it is not a number that we prefer to quantify for obvious reasons. Obviously, there was a benefit. You may be able to see the benefit in Q1 and Q2 in Food Can businesses in Europe and North America, but certainly, as we described in our prepared remarks, we fully believe we can overcome those inventory gains going forward.

Peter Ruschmeier – Barclays Capital

Okay, so it is a modest headwind as we think about 2010 and a little more difficult comps related to that, but something that you think you can overcome.

Tim Donahue

Yes.

Peter Ruschmeier – Barclays Capital

Okay, that is fair. And Tim, do you have any securitized receivables? What was the balance at the end of the year?

Tim Donahue

You should be able to see that in the news release. So I think on page two or three of the news release, we actually give you the Accounts Receivables securitization, it was, page three, $232 million at the end of the year, which was down slightly from the end of the prior year.

Peter Ruschmeier – Barclays Capital

Okay, and just lastly, in light of your forecast of $1 billion of free cash flow over a two-year period, you know, I will be curious, John or Tim, how you think about priorities for free cash flow, in particular, can you comment on how you think about dividends, buy backs, internal growth versus acquisitions; presumably, you think about all of them, but can you help us with an update and your thoughts there?

Tim Donahue

Yes, we obviously continue to review the best uses for our cash and we are aware that that may include some form of return to shareholders, as John described. We believe we have many attractive investment opportunities that could be organic or otherwise. We would like to take our net leverage below two times and that certainly is well-achievable by the end of 2010. I think based on the guidance we have already given you, if we did nothing but apply all of the free cash flow to net debt, we would be below 1.8 times by the end of 2010. So I think there is some scope for some of the other items that you have mentioned here.

Peter Ruschmeier – Barclays Capital

Very good. Thanks very much, guys.

Operator

Our next question comes from Chip Dillon, Credit Suisse. Your line is open.

Chip Dillon – Credit Suisse

Yes, good morning. You know, just on that last question, so I understood you Tim, you are saying that given that you will get below that two times EBITDA number, or that debt number, which is fantastic compared to where you were just a few years ago, could we actually see you take actions this year on a return of value to shareholders, or is that more of a 2011 event?

Tim Donahue

I think what we have, Chip, is a high-class problem. We have cash; we have a balance sheet that as John mentioned, is very strong. And we have a lot of opportunities and obviously, we want to continue to exploit the regions that we are well-positioned in and continue to grow, as John mentioned, at least as fast as those markets. There could be acquisition opportunities; we always look at those opportunities. Certainly, we are looking at them more keenly now than ever before. However, we will remain disciplined as relates to price and the quality of the asset. In the absence of attractive growth opportunities, there is a possibility we could move on that front, as you mentioned, sometime this year.

Chip Dillon – Credit Suisse

Thank you. And also, when you look at your CapEx budget, you know, I know that you all have either recently completed or are about to complete a couple of plants in Vietnam, I think one was acquired. I think you are active in Eastern Europe as well as in Brazil. Could you just review where you are spending this and sort of where maybe your net debt capacity would be. And then lastly, would European Food Can tend to be on the higher half of the list of where there could be acquisition opportunities?

John Conway

Yes, Chip, maybe it would be worthwhile to give you a quick reminder of what we would regard as significant capacity-expanding projects in 2009 and then I will discuss what we see in 2010. I think all of these have been announced, maybe at one or two have not.

You will recall that we built a major new beverage can plant in Slovakia. You know, look at the map and you will see we are right in the heart of Eastern Europe, we think extremely well positioned to reach up into Poland, but in the other directions as well, Hungary and so on. And that came on stream in terms of first production in December. If anything, we are ahead of schedule, going very, very well. We expanded end capacity in Dubai in 2009. We began our new beverage can plant in Brazil in the north, Estancia is our plant there. We began making cans in March 2009, so we are going to see a full contribution in 2010. But the plant came up exceedingly, exceedingly well; we have been really pleased with it. Again, ahead of schedule, under budget, we have expanded beverage ends in Brazil as well in combination with that and we will probably need to do it again.

Vietnam, we announced we bought a beverage can plant from a good customer, who decided he would prefer to focus on his own business and not can making. This is the so-called Dong Nai plant and we have begun commercial can making there as well, which we began in December, but we are coming up the learning curve and coming up nicely. So we are very pleased with that.

So that gives you a sense of why we are so enthusiastic about emerging markets. You can see that the capacity expansions will range across all of our divisions, Americas, Europe, and Asia.

Looking into 2010, things that we have announced, we are doubling the size of our beverage can plant in Thailand, and that project is underway. We are making a significant capacity addition in our Food Can business in Thailand, focused on Food, but it will have a knock-on effect now we are going to be able to do some other things with fruits and vegetables as well. So, good business, strong business growing for us.

We have decided, and we haven't announced this, but we have decided we will be announcing it probably reasonably shortly; we are going to double the size of our plant in Dong Nai. We need more capacity and so we will be putting a second line in, and that project is underway. So that is going – we will have another two line can plant in Vietnam, which is going to be great, generally a lot of cash, a lot of profits we think for the company. We are going to be making a major ends expansion in Vietnam. We need to do it to keep up with the growth in the market. We have announced, as you know, a new can plant in (inaudible), southwest of Shanghai. That is still underway. We have purchased the land, that project is going ahead.

In the south, we announced we are putting a new beverage can plant in the south of Brazil. And we have bought land, we have broken ground, we have leveled the site, the site work has begun. We hope to have that plant in operation first quarter of 2011.

So I have given to you a sense of the breadth of our activity, I could go on into 2011, because I have got a list here of the 2011, but of course we are still selecting the best of the projects that we see for 2011. So we have got a lot of ways to go we think in terms of capacity additions, expansions in our emerging markets businesses.

You asked about Europe. We have talked before about our view that there is opportunity for further expansion, or rather consolidation in the Food Can business in Europe. We are the market leader there, we have done exceptionally well with the business. We are very pleased with it. It is growing in Eastern Europe, it is growing in Southern Europe, a little setback in 2009 of course, but it doesn't change our mind that it is a good solid business that we have a strong interest in.

So we are looking at things, but we are going to be very, very careful about anything we might do. We are demanding solid returns, not speculative returns. And part of the reason is, as I think as you all know better than I, we have got a lot of very good uses for our cash. We just described the emerging markets opportunities, we are well aware of what paying down debt does in terms of earnings, and of course share buybacks, something this company is very, very familiar with in its history and why they are beneficial to the shareholder. So we are going to be very careful about doing anything in Europe. It is going to have to be very, very good returns and we think sellers are becoming a little more reasonable and motivated in the light of what is going on around the world.

Chip Dillon – Credit Suisse

Got it. Thank you for that rundown. That was terrific.

John Conway

You are welcome.

Operator

Our next question comes from Alton Stump, Longbow Research. Your line is open.

Alton Stump – Longbow Research

Okay, thank you. Good morning.

John Conway

Good morning, Al.

Alton Stump – Longbow Research

You know, I just wanted to ask, first off, looking at the European Food Can business from a pricing perspective, any commentary on how the first of your negotiations have gone so far, whether you are getting a full pass-through or not, and if so, if there might be some additional net pricing potential power there like there was last year?

John Conway

The discussions with our customers we think have gone quite well. We are – we think so far successfully handling the cost issues with regard to food. We don't think we are going to see adverse effects as a consequence. So we are pretty pleased. They have been a little slower this year than in the past, because the steel negotiations have been slower in the past. We have been resisting increases really in North America and in Western Europe. We are hopeful that we are going to come out of our steel price negotiations at essentially no increase, no decrease, probably, but the negotiations continue. But so far in terms of pricing, with food cans, both in Europe and in North America, I think things are proceeding fairly for us and fairly for our customers.

Alton Stump – Longbow Research

Great. And then just one quick follow-up to that business on the volume front; obviously, it was a difficult 2009. Any color or can you say in confidence that we will see volumes grow in 2010, in European Food I mean?

John Conway

Yes, European Food, I mean, we had a very – and Tim mentioned that we had a very large 2008 pre-buy in advance of very high price increases, because the European steel companies were extremely aggressive in terms of prices. We went from 2008 into 2009. So the fourth quarter comp obviously is not particularly good. But, we are seeing a bounce back in all of the markets, food markets that is, and so we are anticipating we will definitely have a better volume year in 2010 than 2009, possibly not quite back to 2007 levels, it may take us a frankly another year to get back to those levels; but clearly, a definite bounce back.

Alton Stump – Longbow Research

Okay, great. That is all I had. Thanks, guys.

Operator

We have a question from Chris Manuel, Keybanc. Your line is open.

Chris Manuel – Keybanc

Good morning, gentlemen; and congratulations on a very good 2009. Couple of questions. Tim, first, a housekeeping one. I missed what your free cash flow guidance was for 2010.

Tim Donahue

$500 million dollars.

Chris Manuel – Keybanc

$500 million, okay. Can you talk for a moment, 2009, it looks like a $612 million number. What drove the massive amount of upside versus what your guidance was just a few months ago?

Tim Donahue

You know, as you could tell throughout the year, I think we raised free cash flow guidance a number of times throughout the year. So we knew we were performing better than we had initially hoped for at the beginning of the year. Obviously, the steel price decrease in July helped reduce some of the amount of cash that is held up in working capital from the large increase at January 1, but the two biggest upsides were tax payments were a little bit lower, about $20 million lower than we had anticipated and more importantly, whereas when we began the year, we thought working capital would be a significant use of cash, it turned out to be a significant source of cash, owing to really quite a fine effort by most of the managers across most of our business. As you can see from the cash flow statement, the working capital was the source of about $65 million and throughout the year, when we began the year, we probably thought that number might be – might have approached a use of cash of a similar number and slowly worked its way down and only as we got later in the fourth quarter, did we realize what the potential or the power was to reduce that number.

Chris Manuel – Keybanc

Okay, that is helpful. And given your numbers, it looks like 2010 is going to be another outstanding year too. John, a quick question on where you stand with emerging markets; you went through a lot of detail there. Given all the new capacity coming online and I am assuming many of those plants will be at a pretty good utilization rate out of the gate, could you give us a sense of where you finished 2009 with respect to percentage of revenue from these developing markets and very you might end 2010?

John Conway

Tim will give you a shot at that, and always keep in mind that it always confuses me that currency and raw material factors is always effective. So year on year comparisons are a little tough, but we don’t have those. Tim will take a stab at it.

Tim Donahue

I don’t have it in front of me, but it will be somewhere between 25% and 30%, Chris. As John mentioned, the dollar was certainly stronger in 2009 and 2008, so that has the impact of reducing overseas sales and specifically emerging-market sales in reported terms, but certainly not in volumes. And then, by and large, I don't want to say all, but by and large, the emerging markets businesses we have are aluminum beverage cans and aluminum was lower in 2009 than in 2008 and tin plate was higher in 2009 than 2008, so you have a little bit of a mix that tin plate sales are inflated versus 2008 and vice versa for aluminum. But I think that as we go forward, certainly over the past couple of years the number in emerging markets has accelerated from 18% to 22% to 25% and I think we can quickly see our way to 30% here in the near term.

Chris Manuel – Keybanc

Okay, that is helpful. And the last question I have is as you look at opportunities to redeploy cash, you mentioned internal growth opportunities; so adding more capacity in many of those reasons you indicated. It sounds like on the more on the acquisition side, are looking at growing the business via consolidation. If that is more into developing or more into – I shouldn't say developing, more to established regions versus developing regions. Is that a fair way to look at it?

John Conway

Well, not really, Chris. I mean, we are looking at acquisition opportunities in emerging markets also. In some cases, our market shares are so large and our presence is so large, it becomes a little bit difficult in some of the emerging markets to make acquisitions, but we are talking to a number of people as we speak in the emerging markets about opportunities and they are interested in perhaps selling. So we are looking all over and we have got a really excellent feel for what is going on in the emerging markets as well as the developed markets. Our people are doing a wonderful, not just staying very, very close to the customers and their plans and their growth aspirations, but also staying very, very close to talking to our competitors about the opportunities, particularly for some of these family-owned companies perhaps to cash out.

Chris Manuel – Keybanc

Okay, that is helpful. I will jump back in the queue. Thanks, guys.

Operator

We have a question from Ghansham Panjabi, Robert W. Baird. Your line is open.

Ghansham Panjabi – Robert W. Baird

Hey, guys. Good morning. Last quarterly call, you commented on some weakness in the Middle East and it sounds like things have stabilized there. Is there any reason that gives you incremental thoughts as you look out to 2010, maybe a little bit of uncertainty in Eastern Europe, et cetera. Can you just give us some color on that please?

John Conway

We think the Middle East volume declines have stabilized. We talked about them with regard to the third quarter and here again in the fourth quarter and we talked with you about what some of the problems were. But the volume down trends have stabilized, we are now expecting a rebound in the Middle East. We think the first and second quarters, the comps are going to be tough, because we had a tremendous second quarter, as you know, in the Middle East in 2009. But by the third and fourth quarters, our view is, we are going to be back on a solid upswing and so we feel very, very positive about that business. Ghansham, if you just take a look at the demographics, the proportion of people that are under 30 years old and the tremendous wealth generation simply resulting from raw materials, if nothing else and there are other things going on as well. We are still very, very bullish on the Middle East, the Gulf in particular.

Eastern Europe, everything was down, Food, Aerosols, Beverage et cetera, but medium term, long term, we have a lot of confidence in Eastern Europe. So again, we are forecasting a rebound. You have been reading the same thing I have, which is a number of Eastern European economies, Poland and others, have done remarkably well for this credit crisis and pretty much everything we need is for positive GDP growth in Eastern Europe in 2010 and beyond. So we feel pretty positive about these markets.

Ghansham Panjabi – Robert W. Baird

Okay, and just you know, looking at what you have accomplished over the last five years, okay, you have paid down over $1 billion of debt, you have pre-funded the pension plan, you have divested non-core assets, and you have clearly benefitted for the growth investments in the emerging markets, and each of your major businesses is now generating close to record operating margin. So as you look out over the next five years, do you still feel there is room for incremental margin expansion, or is the operating income going to be more fully driven by volume growth? How should we think about those two? Thanks.

John Conway

Well, I don't know. This is the famous normalized margins question. And if I took a look over the last 10 years in the can business, and if you asked the same question of our peers in various companies, I don't know who thinks they know what they normalized margin is, we certainly don't. So I think, personally, I always think there is an opportunity for margin expansion, particularly in level packaging, where now the business is such that the capital increments to do things efficiently are quite large. The opportunity for new entrants to come into the business is there, but it is not very likely. So our customers have been consolidating, our suppliers have consolidated dramatically in steel and aluminum over the years. The industry itself is consolidated. So I always think there is an opportunity for improvement, if there is good price-cost discipline and people are trying to make money. So I think we can always do well there.

On the growth side, you know the story. We still think that mature markets are going to grow population growth or a little bit better. In Europe, we have got the benefits of package substitution still going on. We still have the benefits of drinking and driving laws being enforced more dramatically; by the way, this is something that is going on in Brazil as we speak. We still have the issue of the smoking ban, causing people to stay home and have social gatherings at home more than out and that is a good positive force, and this is all just in the mature markets. And then the emerging market is a whole other thing. So I say both things we believe are going to be opportunities for improvement.

Ghansham Panjabi – Robert W. Baird

Okay, thank you.

Operator

Our next question comes from Claudia Hueston, J. P. Morgan. Your line is open.

Claudia Hueston – J.P. Morgan

Thanks very much. Good morning. I just wanted to follow up on your comments earlier on working capital and just wondered what you were assuming headed into 2010 for working capital?

Tim Donahue

In the $500 million in free cash flow guidance that we provided, we had assumed working capital is flat year over year.

Claudia Hueston – J.P. Morgan

Okay, perfect, thank you. And then just on margins on the North American Food Can business were better than I had expected and I know, Tim, you mentioned that some of the cost savings from your plant closures were coming through a little earlier. I was just wondering if there was anything else that drove the margin strength there and then how much more cost savings should we still expect to sort of roll in in 2010?

Tim Donahue

So as we described in Q3, we closed two plants in Q3 and if you recall, at the end of 2008, we had also closed two can plants. So there is a number of rationalization plans to streamline the industrial base across North American Food. I think that is in large part what we have as well as volumes were for us certainly better in Q4 than perhaps the market. I think our volume decline in Q4 was probably less than half of what the market decline was. So we had a pretty strong volume performance.

As I said, in the prepared remarks, our volume in Q4 was level to Q4 2007, which is the first time we can say that this year, given the destocking and the other issues we had. And then lastly, you know we have taken a business over the last several years and we have tried to be extremely disciplined with respect to price cost and I think we have now pricing levels in the business which are more appropriate, given the amount of risk and investment we have.

John Conway

Yes, if I could just add a little something to what Tim said, I think we really have a little jewel, not even so little anymore, a jewel in our Food Can business now in North America and one of the reasons is, as he mentioned with the restructuring, we have been able to load the plants that we are currently operating far more effectively than we did in the past and in addition, the plants that we currently have are truly very low cost in the context of North America. They are running exceptionally well, we have been very, very fortunate. We have got an outstanding management team and have had in food for a number of years. Efficiencies, material utilization, spoilage control, et cetera; has just been improving year on year. So we really have an exceptionally good group of plants, a great fleet, and that gives us a lot of strength.

Claudia Hueston – J.P. Morgan

Okay, thank you very much.

Operator

Your next question comes from Tim Thein, Citigroup. Your line is open.

Tim Thein – Citigroup

Thanks, good morning. A question, Tim, on the price costs, specifically in Europe Beverage. Can you kind of segment that in terms of Western Europe versus the Middle East as you look into 2010? That has certainly been a big contributor here in the last couple of years in terms of the margin improvement and your comments about the Middle East, I believe that is a region that has attracted some capital in the last couple of years and a new capacity. So I am just curious in terms of what you see with regards to your outlook for 2010 on the price costs balance in that segment. And then maybe you can give us for the company as a whole and what your guidance in terms of EBIT for 2010 assumes. Thanks.

John Conway

Well, I will take a crack at price cost and Tim can handle whatever he wants to regarding EBIT for the company.

We are seeing a little bit of compression price cost in Western Europe and in the Middle East. Not surprising, really, to me anyway, with demand having trended off a little bit from previous growth rates. And so we are seeing some of that, but I wouldn't say it is extreme, it doesn't worry us and I think we are going to come out of it just fine. The capacity additions that you have mentioned in the Middle East are pretty much confined to the area in Western Saudi Arabia around Jeddah and a lot of it has to do with the market in that immediate area, and these tend to be one-owner, one-plant operations.

So we feel we are going to compete very, very effectively with them. Remember that most of our customers in the region are either major multinational beverage companies or large regional beverage companies. So there is a lot of reason for them to want to supply and buy from major companies that have operations throughout the area and are very reliable in terms of quality and service. So I think we are going to come out of that just fine. And Tim can talk to the broader and deeper aspects perhaps of performance for 2010.

Tim Donahue

Yes, Tim, I think we have given as much guidance as we want to give. I think we were fairly elaborate in the guidance we have given and we want to try to stay away from too much discussion about what our prices are going to be for various products in various regions in 2010 or even in 2010 as it relates to 2009. Obviously, there is a number of moving parts. We have several product lines across several geographies and even within those geographies, there are different geographies as you mentioned, even Europe to the Middle East. But I don't think we want to get too much more into pricing.

Tim Thein – Citigroup

Okay, all right, fair enough. And just real quick, in Europe Food, two of the significant competitors there have announced their intention anyway to go public. Did you see any change in the competitive landscape with regards to pricing and maybe an approach towards volume or the balance between the two as a result of this?

John Conway

No, so far, really very little and we are all familiar with the kind of bias that you might tend to see in companies that are trying to tee themselves up, but no, they have been pretty sensible; and generally speaking, we welcome this. It is nice to have them out there publishing financials and out of the hands of private equity to some degree. So I think it is going to be very positive.

Tim Thein – Citigroup

All right. Thanks a lot.

Operator

Our next question comes from George Staphos, Banc of America Merrill Lynch. Your line is open.

George Staphos – Banc of America Merrill Lynch

Thanks. Hi, everyone. Good morning. Congratulations on the year’s closing and good luck in 2010. I guess the first question I had, guys, when we look at the conclusion that the majority of the year was tax crunched, you can now realize in future operations before their expiration. You know, within the business, what was the change in a longer-term view? Do you view or do your accounts view the Beverage Can business as potentially longer term more profitable than it had previously been or if you can help us parse what the change in credit was; what the implication on it that would be great.

Tim Donahue

Sure. I think as we look out over the next five to 15 years, and that is the period of which we are talking about here, whether or not we can fully recover the NOLs and the credits. We certainly gain an increasing amount of confidence in the profitability of the company, not only as the business is operating much better, and then very specifically, as we continue to pay down debt, and we reduce that fixed cost element of interest expense in the United States, it accretes all to the bottom line in the United States and largely what you are seeing here is the benefit of deleveraging.

George Staphos – Banc of America Merrill Lynch

Okay, that is helpful, Tim.

Tim Donahue

But I don't want to – obviously you can tell from our prepared remarks and John's prepared remarks, we still have – we believe considerable upside in the mature markets, which obviously the US would be one.

George Staphos – Banc of America Merrill Lynch

Okay, we will expect to that, too. Within minority interest, it obviously dropped in the fourth quarter. My guess is that was largely related to the Middle East, but could you refresh my memory in terms of what that variance was, and related I think to Tim’s question from before and Ghansham’s, you know, given that there has been perhaps some price compression in Eastern Europe, would you still nonetheless expect EBIT dollar growth in Europe and the Middle East in beverage cans for 2010?

Tim Donahue

So I think the answer to your second question is at this time, yes. The answer to your first question, very strong results in Southeast Asia and Brazil offset a touch by the Middle East.

George Staphos – Banc of America Merrill Lynch

Okay, thanks for that. And just lastly, would you happen to have any of the volume trend data from the fourth quarter for your major businesses? If you had mentioned it earlier, guys, I had missed it. Thanks. Good luck on the quarter.

Tim Donahue

I have it here. You will find this so interesting. So in US Beverages, we were down about 1% in the quarter, which is a little bit better. I think the CMI data was down 1.5%, we were down 1.25% and I think overall for the year, the market was down a little more than 1%. We were largely flat. In Europe, it looks like we were down a couple of percent, which is really up 1% to 1.5% in Europe and down about 3% in Middle East. Asia, volumes were flat in the quarter in Asia and up 3% for the year. What else do we have? Food cans, here we go. So I think in US food cans, I think CMI data you would have seen had US food cans down about 10.1%, we were down about 5% in the quarter and about 6% for the year.

George Staphos – Banc of America Merrill Lynch

And Food Europe?

Tim Donahue

I am sorry. Food Europe down double-digits in the quarter, about 13% to 14% and as John mentioned, we had – you remember last year, George, the exceptional selling season we had at the end of the year last year, the pre-buy and we are down about 13%, 14% and for the year, down just over 10%.

George Staphos – Banc of America Merrill Lynch

Okay. And maybe last one, guys and I will turn it over. Expenses surely doesn't look to be trending from a cash standpoint any worse than prior years. Yet the chart and the obligation went up. So what in the longer-term data are you saying that leads to the incremental accrual? Thanks again.

Tim Donahue

Okay, as you know, every year, at the end of the year, we actually engage an independent third party to review the demographics, claim filings and settlements surrounding the liability and we adjust the reserve accordingly. Just to remind you, our reserve is a provision for 10 years, and it is not discounted. The claim filings, as you could see in the release, declined in 2009 versus 2010 and as we pointed out in the release, we expect payments to be similar to that of the last several years. But all in all, the change in the reserve that you note when you review it from the perspective of a ten-year reserve has only been adjusted by $2 million to $3 million per year. So incrementally, not very much on a per-year basis.

George Staphos – Banc of America Merrill Lynch

So no underlying change or trend that we should watch?

Tim Donahue

No.

George Staphos – Banc of America Merrill Lynch

Okay. Thanks again, guys.

Operator

Our next question comes from Mark Wilde, Deutsche Bank. Your line is open.

Mark Wilde – Deutsche Bank

Good morning. I wonder just on the 2010 guidance if it is possible to get any color on how you are thinking about volume in percentage terms in each of those businesses and whether you think across your business, whether there is restocking benefit in 2010?

John Conway

Well, let me say broadly and Tim can add to this. We are – across the company, 2010 versus 2009, we believe we are going to have unit volume rebound increases, demand improvements, part of this of course relating from better supply for us in emerging markets in every product line that we have. And some of them may be quite significant. So, we believe that we should have quite a good volume and quite a good volume year.

Unclear to me, coming to your second question, do we think the supply chain could still refresh itself? I think so, I think if we are not back to normal in our view in terms of inventories being held through the supply chain, if you regard 2007, for example, as a – or even 2008 as a normal year; but I think that is going to take a little more time. And that was what I was saying earlier. We are expecting a rebound in Food for example in North America and in Europe, but we still don't think we are going to be back to 2007 levels in 2010. So there is more to come we believe in a number of our businesses beyond 2010. Tim, you might want to add to that.

Tim Donahue

No, I think you have covered it.

Mark Wilde – Deutsche Bank

Okay. And Tim, if I could, you mentioned that you want to get leverage below two times. I wonder if you could just give us some thoughts on where you would like to see that leverage level over time, are you going to remain below two times or kind of do you have kind of a comfort range that you would want to point us to?

Tim Donahue

I think certainly under two times probably fits the scene very nicely with the leverage by some of the other highly-rated packaging credits. You do run the risk and we are well aware that the value you get from the deleveraging starts to disappear when you get too low, i.e., we can return a lot more value to the shareholders by using leverage, especially given the confidence that we have in the cash flow is that we are going to continue to generate over time. And so we will continue to review that in light of organic and other opportunities we may have for the business. And we will always look at the best use for our cash and the best return to the shareholder, whether that is to continue to delever or it is to return money to the shareholder depending on where we see the value at that time.

Mark Wilde – Deutsche Bank

Okay, fair enough.

Operator

You have a question from Joseph Naya, UBS. Your line is open.

Joseph Naya – UBS

Good morning. You guys obviously outperformed the industry, but it seems as though overall North America bev can volume was off in 2009 and at least part of that seems to be some customers perhaps focusing more on price versus volume. Do you see any kind of a change in that trend going into 2010, maybe some increased promotional activity from customers in this period, just curious what you might think on that issue?

John Conway

We think so. I mean, you know, taking a broader look, we think that our customers, particularly in soft drinks but also on the beer side, are acutely aware of unit volume issues in their businesses in 2009. So we think across the board, beer and soft drinks, we could see, will see increased promotional activity with a view towards trying to rebalance a little bit what has happened in their price volume equation. So we think there could be some benefit there.

Joseph Naya – UBS

Okay. I guess looking at the broader industry, do think there could be any opportunity consolidation we have seen in the North America can industry

John Conway

I am sorry, what are you referring to?

Joseph Naya – UBS

Just in terms of as a result of the metal container acquisition, if you think you might see some volumes shake loose and if that might present any opportunities.

John Conway

No, we really don't. I don't think the metal container proposition provides us or anybody else with any particular opportunities. So we have seen pretty much total stability close to that transaction.

Joseph Naya – UBS

Okay, thanks.

Operator

You have a question from Al Kabili, Macquarie. Your line is open.

Al Kabili – Macquarie

Yes, thanks, guys, good morning. Just had a question on inflation with energy prices up this year versus last year, you know, how much of a headwind do you think that is given some of your PPI type of escalators are backward looking and if you think productivity and cost savings can offset that, thank you.

John Conway

Yes, the energy itself, it will not be a big issue for us. I mean, we are able to head to you know gas and electricity, if we choose, and energy as a percentage of cost of goods sold is really not substantially meaningful in the absence of massive price moves. So we are okay there. And to the extent that we have longer-term contracts that are affected by PPI, we will, in our view, we are going to overcome that with productivity gains and other gains, any adverse movements there in terms of PPI versus actual cost changes. So we feel pretty good about that in North America.

Al Kabili – Macquarie

Okay. And then if you could also talk about, Tim, where the pension funded status ended up at the end of the year?

Tim Donahue

I don't actually have that in front of me. I can tell you that, as you would expect, we did very well from the standpoint of asset returns. I want to say that our asset returns on our US plant were north of 25%, 26%, but as you will notice from just general market data and some other companies perhaps you talk to, discount rates were reduced substantially year on year. I think across our plants, we have reduced discount rates anywhere from 1% to 1.5% year on year and that has an impact on liabilities. So I would imagine that our funded status is lower at the end of 2009 than it was at the end of 2008, largely due to what we describe as an artificially lower interest rate environment and that part officially increases liability, but in our view, we believe rates will ultimately rise to more appropriate levels and we will benefit from it at that time.

Al Kabili – Macquarie

Okay. And then, John or Tim, with respect to the commentary in Europe and a little bit of pricing pressure, can you give us a sense of roughly the order of magnitude how much the European business reprised in 2010 and how much could roughly re-pricing in 2011?

John Conway

Well, we haven't really talked about that. I think the thing to remember is a substantial proportion of our business is under a multi-year contract. So that has not been adversely affected. And the balance is not terribly significant. And our fellows are quite confident that the extent that we had to move a little bit in reaction to competitive pressure, we are going to recoup that with productivity cost savings. So we are going to be in pretty good shape we feel in Europe in 2010.

Al Kabili – Macquarie

Okay, thanks. And then, final question, Tim, with respect to an earlier question on volumes, can you just give us a little bit of commentary on what you are seeing in the Aerosol business and if you are seeing any kind of improvement there with a little bit better consumer? Thanks.

Tim Donahue

Well, certainly, we have seen improving trends in the last year in Aerosol. We started out the year, you know, it is not a very big business for us either in the United States or Europe, although it is very important to us, and we spend a lot of time managing the business and it generates a lot of cash. So as I said, it is important. But early in the year, certainly suddenly with the substantial amount of destocking occurring in the recession, volumes were off double digits, but as we came through the back half of the year, our volume decline, I think in Q4 was mid-single digits, which brought the overall volume decline for us to just north of 11%, 12%.

Al Kabili – Macquarie

Okay, thank you.

Operator

You have a question from Richard Skidmore, Goldman Sachs. Your line is open.

Richard Skidmore – Goldman Sachs

Thank you, good morning. Just to follow up on the capacity question, based on your announced projects and the timing of startups, what would you expect your global production to be up in 2010 versus 2009 and also in 2011 versus 2010 based on what you have announced so far?

John Conway

Well you know, we don’t have that here with us, but these are all major projects. So virtually every one that I mentioned involves capacity additions in the beverage side from 500 million to 800 million cans annually. But we haven't really added it up and then we would have to get into where are they on the learning curve, when are they going to start and so on and so on and so on. And so, I think we just don't have that available for you, but the purpose of the recitation was to give you a sense of the number of opportunities that we have, the number of opportunities that we have been taking advantage of and the obvious fact that as the base grows, there are more and more opportunities, though it is just directionally going very well for us.

Richard Skidmore – Goldman Sachs

And then just a follow-up on the emerging markets question. How do the margins in the emerging markets in these new facilities compare to your overall company margins and then secondly, what kind of returns are you seeing on those types of investments? Thanks.

Tim Donahue

Well, I think as you would expect, in many of these emerging markets, there is a fair amount of or there is more risk that we are taking in those markets than you would perhaps take in Western Europe or North America and for that reason, part of the return equation is that margins need to be a bit better in the early years to recoup the investment. So margins are a little better, but that takes no account the amount of risk we are taking. Returns are actually quite good on these projects. I would say that, on a cash basis, we are recovering the investment over a three to four year period, so we are pretty satisfied with that.

Richard Skidmore – Goldman, Sachs

Okay, thank you.

John Conway

And following up a little bit to what Tim said and it is one of our issues, which is when we compare our emerging markets opportunities and history and how we have done, with the consolidation opportunities that we see in the mature markets, they don't compare very well. The turnings are simply far better in the emerging markets, which isn’t to say that we are not interested in some consolidating acquisitions, because we are. But our return requirements are going to be driven by alternate uses of cash.

Richard Skidmore – Goldman, Sachs

Okay, thank you.

Operator

Our final question comes from Dan Khoshaba, KSA Capital. Your line is open.

Dan Khoshaba – KSA Capital

Good morning, John; good morning, Tim. Hey, if you were to take, you know the Middle East, South America, Asia perhaps Eastern Europe really your emerging market exposure, how much would that represent of the roughly $8 billion you guys had in global sales for 2009?

Tim Donahue

I don't have it in front of me, Dan, but it is going to be somewhere between $2 billion and $2.5 billion.

Dan Khoshaba – KSA Capital

That is it?

Tim Donahue

Yes.

Dan Khoshaba – KSA Capital

And if you were just look at it that way, I mean, are we talking two times, three times the growth rate of North America, Western Europe or how do you think about the growth opportunity in those regions?

John Conway

Well, the emerging markets can be vulnerable also. But having said that, if we look back over the last five years, we are principally talking beverage, and I would just have to estimate here a little bit, so they don’t hold me to it too much, but I would say growth rates in the emerging markets have been minimum three times mature markets and I am probably being conservative. Tim, what would you say?

Tim Donahue

You probably are being conservative, but it feels safer to say that.

John Conway

Yes.

Dan Khoshaba – KSA Capital

Okay. And it sounds like from the payback estimate that Tim gave earlier that it is probably at least two times the returns that you are getting in the mature markets.

John Conway

Yes, the great thing about building out the emerging markets business is that return on the initial capital increments is reasonably good and as you add to it, it accelerates, and of course, not only do you build out capacity in a particular factory under one roof, but then your visibility as to other regions in the country and where the customers are growing and who are the good customers et cetera also improve. So it is just a lot of – synergistic isn't the right word, but it is just a lot low from having a good strong position.

Dan Khoshaba – KSA Capital

Okay, and then lastly if I could, John, you mentioned earlier that you were seeing more opportunities in the market for acquisitions. What do you attribute that to?

John Conway

I think people are becoming more realistic about what assets work today and well, you know, on the private equity side, it is a whole re-financing issue. How are you going to get out? And then some of the private equity guys have adopted strategies that frankly you can't carry on with very long in a mature market. So if you have got a market share growth strategy or whatever you happen to have, you have found a weakness in the market, you exploit it and after three or four years, you can’t exploit it any more. So I think there is a lot of that. Family-owned companies, I think we talked about this earlier, but with the consolidation of the supply chain, aluminum and steel in our case, and then the customers and then the retailers, it is harder and harder for the small family-owned companies to do well, at least in Europe this is true, not so much here in North America. So, there is going to be a lot of opportunity (inaudible) right price.

Dan Khoshaba – KSA Capital

Right, of course. Okay, great, nice quarter, guys.

Tim Donahue

Jane, I guess you said that was the last question?

Operator

Yes, and I will turn it back over to you for closing remarks. Thank you.

Tim Donahue

Okay, thanks very much, Jane. That will conclude the call today. We will ask you to note before we depart that the first-quarter of 2010 conference call will be scheduled for Tuesday, April 20 at 9.00 Eastern Time. We thank all of you for listening and we look forward to speaking with you again in April. Bye now.

Operator

That concludes today's conference. Thank you for attending.

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