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Ball Corp. (NYSE:BLL)

Q4 FY07 Earnings Call

January 24, 2008, 10.00 AM ET

Executives

R. David Hoover - Chairman of the Board, President, and CEO

Raymond J. Seabrook - EVP and CFO

John A. Hayes - EVP and COO

Analysts

George Staphos - Banc America Securities

Ghansham Panjabi - Wachovia Securities

Claudia Hueston - J.P. Morgan

Christopher Manuel - KeyBanc Capital Markets

Alton Stump - Longbow Research

Richard Skidmore - Goldman Sachs

Andrew Feinman - Iridian Asset Management

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the Ball Corporation Fourth Quarter 2007 Earnings Conference Call. During this presentation, all participants are in a listen-only mode. Afterwards we will conduct a question and answer session. [Operator Instructions]. As a reminder, this conference is recorded on Thursday, January 24th, 2008.

It's my pleasure to turn the conference over to Dave Hoover, Chief Executive Officer at Ball Corporation. Please go ahead, sir.

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

Thanks, Pam, and good morning, everyone. This is Ball Corporation's conference call regarding the company's fourth quarter and full-year 2007 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company's second quarter 10-Q and in other company SEC filings as well as company news releases. And if you don't already have our earnings release, it is available on our website at ball.com. Further information regarding the use of non-GAAP financial measures may also be found on our website.

So, with me today on today's call are Ray Seabrook, Executive Vice President and Chief Financial Officer, and John Hayes, Executive Vice President, Chief Operating Officer, Ball Corporation. Yesterday we announced John Hayes' promotion in a news release. John did an excellent job running our European business and we look forward to having him as Chief Operating Officer for all of our businesses. Bringing John here was the first of several steps which together strengthened our overall management team. Mike Herdman, who has been President of our Metal Beverage Packaging Americas business is now head of our European beverage can business. Mike has extensive experience in the beverage can industry and the European market. John Friedery is taking on responsibility for both our Americas and Asian beverage can operations. John came up through our North American beverage can business and he knows it inside and out. The end result is an excellent management team with people in positions where their experience and skills can best help us.

Now turning back to 2007 results, on a comparable basis our diluted earnings per share were $3.50 in 2007, up 21% from our previous record of $2.90 in 2006. This came despite a difficult fourth-quarter comparison. While we are generally pleased with our results, we are taking steps that we believe will lead to further improvement in 2008. I will talk more about that later. But first Ray will discuss our financial performance and the John Hayes is going to make few comments. Ray?

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

Thanks, Dave. Overall, the fourth quarter numbers came in pretty much as expected. North American beverage can fourth quarter earnings were lower than last year due to non-recurring inventory gains earned in 2006. Aerospace quarterly earnings were lower primarily due to unabsorbed labor and higher proposal cost in the quarter. Corporate costs were down in the quarter also due to lower employee cost. That being said, both North American beverage cans and aerospace produced record earnings for the full year. Comparable diluted earnings per share of $0.60 was the company's second best ever for the fourth quarter.

Full year comparable diluted earnings per share of $3.50 is up $0.60 compared to last year, and that is better than our long-term goal of 10% to 15% improvement annually over time. Higher margins in North America beverage cans and strong sales volumes in aerospace and international beverage cans resulted in record full-year earnings for all of those businesses. Continued strong sales growth in Europe and China, including growth in custom can volumes Europe and the strength of the euro were the primary factors in higher international beverage can earnings in the quarter. The higher euro added $0.02 per diluted share in the quarter and $0.11 for the full year compared to last year. Comparable fourth quarter and full year operating results in the food and household segments were flat with last year and we believe we have hit the bottom in this business. We are assertively pursuing price in this marketplace and are implementing numerous cost reduction initiatives. We expect considerable earnings improvement in this segment in 2008, but will still be along way from being finished.

On our third quarter conference call, we announced the plant rationalization plan to address some of the performance issues in this segment. We've closed two aerosol plants and exited the decorative tinplate can business, and that resulted in a fourth quarter after charge of $27 million that was recorded to reduce this action. Once completed, this capacity reduction will result in the elimination of ten manufacturing lines and yield annualize cost savings in excess of $15 million. The cash cost of these actions are expected to be offset by proceeds on asset dispositions and tax recoveries. We are not satisfied with the results in either the food and household or plastic segments and anticipate further actions which could include more capacity reductions or additional value creating measures.

Turning to taxes, our full year tax rate of 30% on comparable earnings were slightly higher than last year's rate of 29%, due to primarily earnings mix. Our initial estimates for the full year 2008 effective tax rate is in the 33% range.

Turning to the full year free cash flow, even with some year-end build up in food and house hold inventory level, 2007 adjusted free cash flow of $440 million was better than expected primarily due to lower capital spending in the fourth quarter. As discussed on previous calls, we made a $45 million, $27 million after-tax incremental pension plan payment in the fourth quarter, mainly to fund our North American pension plan obligations to 95% level or higher. This incremental after-tax payment is effectively debt pay down and has been treated as such in our free cash flow computation.

Full year 2008 free cash flow is still a bit of a moving target due to capital spending and year-end 2008 working capital levels not being fully locked in as we speak. Notable 2008 free cash flow reductions from 2007 levels will be higher capital expenditures, higher cash taxes and a one time after-tax payment of $42 million related to a customer settlement reached in the third quarter of 2007. These 2008 free cash flow reductions will be partially offset by lower working capital levels at the end of 2008. 2008 capital spending will exceed $300 million. We have a number of good growth opportunities in front of us. Approximately 75% of the capital spending would be in our world wide beverage can business and more than 50% of the spending will be for new top line growth projects, primarily in Europe. Cost reduction and maintenance capital spending is forecast at 60% of depreciation expense.

The credit profile of the company remains strong with net debt at the end of 2007 at $2.2 billion. The 2007 rolling four quarters adjusted EBIT-to-interest coverage is at 4.3 times and net debt-to-adjusted EBITDA is at 2.4 times. The solid credit profile and continued strong free cash flow will allow for an increase in our stock buyback program to around $300 million for 2008, including accelerated stock buyback announced in December. We expect our 2008 credit ratios to be unchanged to slightly better as we get to the end of 2008.

With that, I'll turn it over to John Hayes.

John A. Hayes - Executive Vice President and Chief Operating Officer

Thanks, Ray. I'm obviously excited about this new opportunity and I'm honored to be given the responsibility of Chief Operating Officer of Ball Corporation. Over the past three or four years, it’s been gratifying to play a role in the success we've had in Europe. I'm proud of what our team there has accomplished, making money and having some fun along the way. I look forward to working more closely with Dave, Ray and the rest of Ball's senior management at the corporate level as well as our individual operating units throughout the world.

This morning's earnings release announced Ball's plan to build a metal beverage can plant in Lublin, Poland. The Polish can market continues to experience significant growth, up more than 30% in 2007. We sell significantly more cans in the Polish market than we produce locally, particularly on the beer side of our business. While our existing plants in Hermsdorf, Germany, and Radomsko, Poland, serve us well for Western Poland and Central and Southern Poland respectively, the Lublin plant will provide us with good geographic coverage in Eastern Poland and position us to serve even better our customers there as well those in countries further to the East: Ukraine, Belarus some of the Baltic states and even the Western part of Russia.

It's important to note that 2007 was a milestone year for the overall European Beverage can market, which for the first time overall volumes exceeded 50 billion units. Equally important, the overall market grew by nearly 10%, representing volume growth of nearly 5 billion cans in hands. I know that several investors and analysts have inquired about our views of the overall supply demand situation in Europe. I can assure you that this is a critical issue for us in our growth plan and we believe strongly that the continued growth expected in the European marketplace will more than compensate the additional capacity coming on stream.

I'm confident that the totality of our European business is in good hands under Mike Herdman's leadership and the leadership of others at Ball in Europe. Similarly, we are also fortunate to be able to draw on John Friederys experience and skills to add to a strong North American Beverage Can management team. We have high expectations for both of them in their new roles. My focus is to improve the growth and operational performance, the execution across all of our businesses and I'm eager to dive in deeply into this immediately in order to meet our goals and objectives as a company.

With that I'll turn it over to Dave.

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

Thanks, John, and thank you, Ray, for your comments. Our aerospace and technology segment is coming off a remarkable record year that will be difficult to duplicate. Still, we expect strong results in 2008. Last year, if you recall, we enjoyed an exceptionally strong first quarter in aerospace and in the metal beverage Americas segment. This year, we expect them to be a little lower, but we're also working hard throughout the rest of the company where operations are expected to perform better, and that will partially offset we believe a challenging first quarter.

I think the organizational changes that we've just made really position us to get the most out of our businesses. John Hayes has been working at Ball now for more than nine years, but he and I have actually worked together for more than 15 years. The first six of those or so were back in the 90s when he was a banker and I was CFO at Ball. We made substantial and significant change in the company during those years and it really changed the game around our company. And he was heavily involved in the acquisition of our European business and he and I together basically worked that. So, I've got great confidence in his abilities and I know him. And I know his character and I know his energy level and I know he's going to do a wonderful job for the company. Our Board carefully considered this. We spend time, energy and effort on succession time around here. We actually do it; we don't just write about it. And I had the pleasure really of meeting one on one with each director last summer, through the... through 2007 to consider what should we do in this regard. And we're all delighted and we have great expectations.

One of our investors I think asked Ann Scott yesterday if I was sick and there are probably a lot of different opinions about that, but I don't think I am, and I'm not planning to do anything but continue working here and trying to build Ball. I am, as I said earlier delighted with John Hayes' new role, and I think with Mike and John Friedery in their roles, we're going to make some noise. As we said in 2007, while we believe achieving last year's first quarter results would be difficult, I believe we have the opportunity to exceed the full year earnings of 2007 this year. We have hit the ground running this month. I'm very excited about this year and what we can accomplish.

And with that, Pam, I think we're ready for questions.

Question and Answer

Operator

Thank you, sir. Ladies and gentlemen, we'll now proceed to the question-and-answer session. [Operator Instructions]. I'm pleased to state that our first question comes from the line of George Staphos, Banc of America Securities. Please go ahead, sir.

George Staphos - Banc of America Securities

Thanks. Hi, everyone. Good morning. I guess just to start, congratulations to you John, John and Mike n their new roles and good luck in the upcoming years. The first question I had maybe for John, John what do you think you and the team will be able to do most quickly in terms of improving the performance in the business that have been struggling a bit over the last several years? Food and household and PET obliviously have restructuring program, what else could you fill in around that program that you haven't already discussed, that you could discuss and around the businesses in general. Thanks.

John A. Hayes - Executive Vice President and Chief Operating Officer

Let me start with food and household products. I think we've a very clear line of sight of what needs to be done. We need to be looking at pricing, we need to be looking at product mix, we need to be looking at our cost, and we need to be looking at purchasing, and we have a specific plans focused on all four of those activities. And if we're able to execute successfully on that, it's going to take a little bit of time, but we feel confident that we are going to be able to significantly improve the performance of that business. On the PET side, we all know it's been difficult over the years. We have a very large a customer, we have contract negotiations ongoing with them and we have to get price. And that's the near-term objective on that. Once we get through these contract negotiations, we'll have a much better sense of where we stand and from there we'll be looking at various things to make sure that we're in the short and long term maximizing the opportunity for Ball.

George Staphos - Banc of America Securities

John, on the contract negotiations, those could be included in one way or another sometime this year but they also could extend into '09 from what I recall. I got from a press release which I'm not sure necessarily you put out, what else should we be looking for in terms of you reaching that milepost with those contract negotiations?

John A. Hayes - Executive Vice President and Chief Operating Officer

Well, I think we have quarterly earnings calls and I think, it’s over generally just providing an update on where we stand relative to that. But, it’s… we have contracts coming up for renewal all the time in all of our businesses. So, I don't think we would expect to have any special press release.

George Staphos - Banc of America Securities

Well, I understand, that is why I asked the question. So, when do you think these larger contracts should be addressed, one way or another? Is it an ’08 event?

John A. Hayes - Executive Vice President and Chief Operating Officer

I think it is an ’08 event, yes.

George Staphos - Banc of America Securities

Okay. All right. And one quick one for Ray and I will turn it over. Ray, if I heard you right, you said the leverage ratios should be relatively unchanged or improved as we look out to 2008. You also mentioned, in total the company hopes earnings per share anyway to be in line or better than the 2007 level realizing that share repurchase is going to play a little bit of a role there. Do you expect that you will be able to pay down any debt in terms of improving those leverage ratios or is it truly just the earnings and EBITDA growing that will allow for those ratios to come lower?

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

We have looked at our capital structure, we always do that, as you know when we've taken a strong look at our capital structure, we think we are above where we want to be. So we think the improvement comes from the improvement in EBIT and EBITDA. We are not looking for a lot of debt pay down this year. Remember, some of that depends on the euro. If the euro loses a little bit of its strength then we are going to get some debt pay downs, if we still got $600 million of debt denominated in euros. So, I am not looking for a lot of debt pay down in 2008. We are going to use the money and we are going to go buyback our stock.

George Staphos - Banc of America Securities

But that suggests that you will get free cash flow, even after the settlement payment of $300 million, is that right?

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

We are looking to have free cash flow around the same amount as our stock buyback, give or take.

George Staphos - Banc of America Securities

Okay. Thanks. That's excellent. Turn it over.

Operator

Thank you, sir. Continuing on, our next question comes from the line of Ghansham Panjabi of Wachovia Securities. Please go ahead, sir.

Ghansham Panjabi - Wachovia Securities

Hey, guys. Good morning.

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

Good morning.

Ghansham Panjabi - Wachovia Securities

Congrats to everyone and more importantly Dave, I am glad you are feeling okay.

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

Thanks a lot, Ghansham.

Ghansham Panjabi - Wachovia Securities

On the European beverage can side, I was hoping you could give us a breakdown of volumes and I guess I am a little bit surprised because margins seem to have tracked quite a bit lower than last year. Could you just give us some color on that please?

John A. Hayes - Executive Vice President and Chief Operating Officer

Yes, actually the fourth quarter started of slow. Remember in the third quarter, I talked about a horrible summer and it was catching up. I think overall though it did finish strong. The overall market was up about 10% and we were right in that range as well. I think on a margin basis, I wouldn't read into that too much. Similar to what we did in North America, we took some maintenance, because remember we have been running flat out for about 18 months or 20 months after the fire and we need to prepare for what we think is going to be a very strong 2008.

We have the European Cup coming, we have the Olympics hopefully we will have a more normalized summer. And all the trends we see in growth in the European marketplace continue. And so we took a little bit of downtime in terms of maintenance over the Christmas holiday so we didn't have to pay additional labor to run it and that's what partially looked at lower margins, but again, I wouldn't worry in that going forward.

Ghansham Panjabi - Wachovia Securities

Just to clarify, the 10% was the fourth quarter year-over-year or was it the full-year '07 number for volume?

John A. Hayes - Executive Vice President and Chief Operating Officer

So, that was outlook, a good point, it was both. The fourth quarter finished just above 10% and the full year was just under 10%.

Ghansham Panjabi - Wachovia Securities

Okay. And just in terms of Americas bev, looking at the margins for Q3 and Q4, is there any reason to expect significant improvement beyond those levels in 2008 because the reason I am asking is the first half of '07, obviously benefited significantly from some of the aluminum impact.

John A. Hayes - Executive Vice President and Chief Operating Officer

Yeah, I think that, what I was trying to say and what Ray was trying to say is that we did have that benefit in the first quarter of '07 and what our game plan is to offset part but probably not all of that, but if you look at what we recorded last year, I think we were up in EBIT $100 million.

A chunk of that was in these areas that I mentioned including some metal games and Aerospace having an exceptionally strong first quarter so on and so if you integrate two years here technically we were up 21%, last year that's enough. We don't have to be up this year to hit our long term bottom end goal, but what we're trying to convey is it's really early in the year but we've got a good shot we think of having a full year better than last year. And from all factors including stock buy and improvement in performance so it looks pretty good in here from where we are.

Ghansham Panjabi - Wachovia Securities

Okay. Great thanks so much.

Operator

Thank you sir, continuing on our next question comes on the line of Claudia Hueston of J.P. Morgan. Please go ahead ma'am your line is open.

Claudia Hueston - J.P. Morgan

Hi thanks very much good morning.

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

Good morning.

Claudia Hueston - J.P. Morgan

I was hoping you could just talk a little bit about the Aerospace business, there was a little bit of down shift in the margins in that business in the fourth quarter, just wondered sort of what was going on there and then how we should think about them going forward into 2008 obviously was that a really good year in that business?

John A. Hayes - Executive Vice President and Chief Operating Officer

Yes, two or three things in the fourth quarter, one we adjust rates to reality or to the actuals after the government's fiscal year starts or at the conclusion of it in September. So in the fourth quarter that contributed to some of the decline. Technically that was a part of that. The other part is these programs run at different rates when you're doing them in the fourth quarter just slowed down a little bit. We also had higher than normal un-reimbursed bidden proposal cost that we took in the fourth quarter. So those were the things that occurred. The… by the way congratulations on [inaudible] becoming...

Claudia Hueston - J.P. Morgan

Thanks very much.

John A. Hayes - Executive Vice President and Chief Operating Officer

[inaudible] and I did read your piece and you used the words that you’ve heard us used that the business is somewhat lumpy. We get large programs that run at different rates and we are sort of been in that mode. We've just completed reviewing our business plans with our Board yesterday, and as we lookout over the next few years we see substantial opportunity in this part of our business but we, as I alluded to earlier I think this year of '08 might be a little softer than last year so that's where we are.

Claudia Hueston - J.P. Morgan

Okay. That's really helpful and then I may be missed it but did you give any guidance around pension for 2008, sorry if I missed it.

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

You're talking about P&L or you talking about cash.

Claudia Hueston - J.P. Morgan

Both I'd like actually.

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

P&L will be slightly lower because obviously we got our pension plans funded up so that [inaudible] P&L charge, let's say that'll be... the P&L pension expense will be $5 million or $6 million lower and the cash excluding the one-time payment will also be probably $6 million or $7 million lower.

Claudia Hueston - J.P. Morgan

Okay. That's great thank you.

Operator

Thank you. Continuing on our next question comes from the line of Chris Manuel and he's from KeyBanc Capital Markets. Please go ahead sir.

Christopher Manuel - KeyBanc Capital Markets

Good morning gentlemen.

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

Good morning.

Christopher Manuel - KeyBanc Capital Markets

First let me, echo early response David we are excited to hear that you are not sick.

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

I never going to get over that one I can tell.

Christopher Manuel - KeyBanc Capital Markets

I'm glad to hear that and congratulations on your promotions.

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

Thank you.

Christopher Manuel - KeyBanc Capital Markets

A couple of questions for you, first when we think about the extra capacity that is coming on in Europe, John Hayes I know you mentioned that the growth will be more than there to offset extra capacity and it looks like even for this year the markets will be extremely tight, has there been any pre-selling of that extra capacity coming online or anything of that nature that might impact yours or the industry's ability to get some sizeable net price increases this year in relation to the fact that the market is still so, so tight for '08?

John A. Hayes - Executive Vice President and Chief Operating Officer

No. This is a sure answer. We have seen obviously when I'll speak only on behalf of all [ph] but when we go out there we know very cleverly with our customers and working for our customers but there is no pre-buying ahead and so we had plans in place to get recover our cost through price increases and net price increases in 2008 and again our sales shop has done a very good job of meeting the targets we set for ourselves.

Christopher Manuel - KeyBanc Capital Markets

Okay, very good. So, I'm going to go back to a question that I know nobody likes but when we think about 2008 versus 2007 and normalized or your long-term goal being 10% to 15% improvement and we kind of think through the pluses and minuses '07 going in to '08 you’ve got pluses of again a very tight market potentially some upside in Europe. You've got I think you just mentioned earlier some lower pension expense. You talked about pretty exclusively some improvements in plast… in metal food and aerosol. What would be some of the puts and takes that might help or prohibit you from in fact being able to do a normalized 10% to 15% year looking in to '08?

John A. Hayes - Executive Vice President and Chief Operating Officer

Well, we said... what we said here Chris is that the first quarter and we have been saying this for a year the fourth quarter of last year and the first quarter of this year are going to be tough comps and we still feel that way but we also implying that we think we got a real shot at exceeding last year's earnings per share. So, for the full year of '08, which would mean that we would overcome sort of one-time good guys by some amount and it's the 24 of January and you've heard me say that before, so it is early days but what we have been discussing the last couple of days here at with our board and so forth would indicate that we think we can do that. So that's where you find us.

Christopher Manuel - KeyBanc Capital Markets

Okay. Thank you very much.

Operator

Thank you sir. Continuing on our next question comes from the line of Alton Stump, Longbow… I believe it’s Longbow Research. I apologize for that sir.

Alton Stump - Longbow Research

Yes it's right. Thank you. Good morning guys.

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

Hi, good morning.

Alton Stump - Longbow Research

I just had a quick question to go back to the European bev can business obviously you have already discussed the fact that there were some maintenance in the last part of the fourth quarter that caused margins to be so low. And I guess just looking at that performance it looks like it's about low as it has been in several years on the margin side. Is there anything else going on there or is there anything that might be at all something that might pop up for first couple of quarters in '08?

John A. Hayes - Executive Vice President and Chief Operating Officer

We don't see that. We obviously all of our business continue to have higher costs related to that and… but nothing material happens fourth quarter that should concern any of us. As I said I think the month of October was pretty slow in terms of volume, we did pick it up in the late November and December that start picking up again and I think all of that this was just a wash out of a summer. And we took some downtime and really that is the only differences that has been occurring.

Alton Stump - Longbow Research

Okay thank you and just one other question, here in the U.S on the bev can side, just want to get may be your overall take in terms of market demand for soft drinks had a pretty difficult year this year on the can side and it looks like there was some pretty beer cost increases, you are heading in to '08. Just want to get an idea how you think the overall market demand might shake out over the next 12 to 18 months in bev cans in U.S?

John A. Hayes - Executive Vice President and Chief Operating Officer

Well, I think you should look forward, let's first quickly review 2007. The overall market was down a little over 1%, deer was up, soft drink was down. And as you go you take those and you look into going into 2008 the question is, what is going to happen. I do think and I think all of us believe that the economy will play an impact into this and it actually bodes well for the can because it is much more of a value pack in North America, both in the beer and the soft drink side. I think with recessions, people generally stay at home more, which is take-home packages, which is the can and so we haven't heard anything explicit from our customer base that says there is a meaningful change but I think that at the end of the day it will be driven by consumer demand.

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

And I would just add the specialty can business so-called are sizes other than the standard 12 ounce continue to grow at good rates. We have a large position in that market and we are about equal parts beer and soft drinks even though the market is about two-thirds soft drink and one-third beer in North America. So those are other things to keep in mind.

Alton Stump - Longbow Research

Okay, great, thanks guys.

Operator

Thank you very much. Continuing on, our next question comes from the line of Richard Skidmore of Goldman Sachs. Please go ahead sir.

Richard Skidmore - Goldman Sachs

Good morning, thank you. First question just for John Hayes with regards to Europe, can you just elaborate a little bit more on the confidence with regards to the growth in the European bev can market in 2008 and looking forward? And specifically in which region are you seeing the growth?

John A. Hayes - Executive Vice President and Chief Operating Officer

Okay. Well, we expect the growth to continue. I think 10% is a very strong growth. It was the strongest growth in Europe in a while. So we are not anticipating that. But I think over the next several years we have pretty good visibility and call it 6% to 8% growth across Europe. Obviously, you break that down and a lot of that growth is coming from Eastern Europe. Western Europe, which is much more of a core mature market was still up 4.5% however in 2007. The can... you are seeing a shift from two-way refillable bottles to the can on the beer side, you are seeing some shifts, I believe, from PET to the can. And as some of the major soft drink customers have done a very good job of executing, it has been helping us.

Southern Europe continues to grow quite nicely and then as you go even further to the east in terms of Russia, places like that on a base of 5 billion cans is growing 30% per year as well. So there is a variety of factors that are affecting this, but we see the fundamentals being pretty robust over the, at least as far we can see which is probably two to three years.

Richard Skidmore - Goldman Sachs

Okay. And would you expect that if the European economy slows down generally that it is the same phenomenon that you would expect in North America that it wouldn't impact the can market and more people would stay home and consume more cans?

John A. Hayes - Executive Vice President and Chief Operating Officer

I think the outcome would probably be the same. The reasons might be a little different because refillable bottles are take-home as well. But what people are looking for is becoming more western, becoming more convenient and at a price that isn't taking more out of their pocket. So I think all those things combined and we could talk country-by-country because it does vary so much by country, but overall a decline in the economies in Europe should not have a significant negative impact on us.

Richard Skidmore - Goldman Sachs

Okay. And anything new happening in Germany or is Germany just gradually coming back still?

John A. Hayes - Executive Vice President and Chief Operating Officer

Yeah, consumption within Germany… consumption within Germany grew at double-digits. I do not have the exact number, but 10% to15% in 2007. So, again, it is a step-by-step. We have talked about this marathon versus sprint in the past and it indeed is. I think 2008 I know that a lot of European customers and those in Germany are going to be doing a lot of promotions around, particularly the European Cup and to a lesser extent, the Olympics. So, it is just getting the consumer re-educated about the can that was off the shelves for a while in Germany, and I think all the signs we point to say it is going to continue to move forward.

Richard Skidmore - Goldman Sachs

Okay. And then just a quick question for Ray with regards to the $300 million in share repurchase in '08, would you expect that to be back-end loaded or can you be participating in the market currently and taking advantage of the current share price?

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

We... you may have missed it, but we in December or early January we announced an accelerated share repurchase program we put in place. I think it was the 7th of January and that was $100 million program. So on the 7th of January we purchased $100 million of the $300 million shares. So it is front-end loaded.

Richard Skidmore - Goldman Sachs

Okay. Great. Thank you.

Operator

Thank you very much. Continuing on, our next question comes from the line of Andy Feinman of Iridian Asset Management. Please go ahead, sir. Your line is open.

Andrew Feinman - Iridian Asset Management

Thanks. You know the press release here says that all five of Ball's operating units were reported to Hayes. He will report to Hoover. Who is Ray going to report to?

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

That is a good question, Andy.

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

I am not sure whom he reports to now. I think it is me, Andy but not all the time.

Andrew Feinman - Iridian Asset Management

Well, I am a big fan of them both, so.

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

They have told me they like you too, Andy.

Andrew Feinman - Iridian Asset Management

Thanks. So, the CapEx, would you care to... I mean it is going to be over $300 million, does that mean it is going to be $400 million?

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

No.

Andrew Feinman - Iridian Asset Management

I mean can you narrow that down at all?

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

The reason I didn't want to get too specific because we are going to relocate some equipments. The timing of that can change the numbers. We also... the timing can also change. We decided to do something in March versus July, you're going to get a different CapEx number, but it is not a huge secret. I mean, fundamentally it should be, give or take around $350 million, give or take and when we get to the first quarter I'll refine that number for you.

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

We also, Andy we... I think we exceeded even our estimates on last year's free cash flow $20 million to $25 million of that, Ray, is money that did not get spent last year that will get spent this year. So if you look at the two years together that is probably a good way to do it too, Andy.

Andrew Feinman - Iridian Asset Management

Okay.

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

Andy, the important part of the capital spending as I tried to indicate is that, it is all going for top line stuff. This isn't sort of cost reduction planned stuff; this is for top line stuff that has got 10% to 15% margins on it. So, it is to follow the growth that John's been talking about.

Andrew Feinman - Iridian Asset Management

All right. Okay the... can you give us an idea what depreciation and amortization will be for next year? I guess it will be up a little because, so I just as long as I'm doing CapEx.

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

Let us just see, it was like, what was it this year, it was...

Andrew Feinman - Iridian Asset Management

$281.

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

Yes, $281 million and it is going to be up about $10 million.

Andrew Feinman - Iridian Asset Management

Okay. And the... my favorite question I recall at the end of the year, can you tell me how much the securitized receivables were?

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

I just happen to have that number. Andy, I am glad you asked that. They are down by $33 million from where they were last year. Last year we finished at $203 million and this year they are at $170 million.

Andrew Feinman - Iridian Asset Management

Okay. So that... and that is flat with the third quarter, so that is good. And I guess the last question I have is, when you look at this capital spending, I mean I understand these markets are growing so you are going to make 10% to 15% margins on the growth, and… but is there anything... I mean the stock markets has been down lately, so is there anything you could buy that might be even better?

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

Well, possibly. I think we look all the time as you know, we don't often do things but we are conscious of the change in the credit markets and sometimes sellers don't understand that valuations have changed as fast as buyers.

Andrew Feinman - Iridian Asset Management

Right.

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

But I think you will see a more rational marketplace for those kinds of things. We aren't... we don't have a long shopping list but there are a few things that we continue to follow and look at that might make sense.

Andrew Feinman - Iridian Asset Management

Okay. It doesn't sound like there is anything imminent? I mean it doesn't sound like this decline in the market has necessarily brought any of these things into active mode yet anyway?

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

Yes, of course I couldn't say one way or the other, but...

Andrew Feinman - Iridian Asset Management

Yes.

John A. Hayes - Executive Vice President and Chief Operating Officer

One of the things Andy that I will say, we made some acquisitions 18 months ago or so and we need to make sure those are operating correctly. So a lot of what you are going to hear this year, particularly from me is about execution and I can make sure that we have a strong backbone because from there you can grow.

Andrew Feinman - Iridian Asset Management

All right, thank you very much.

Operator

Thank you sir. [Operator Instructions] We now have a follow-up from the line of Mr. George Staphos of Banc of America Securities. Please go ahead sir.

George Staphos - Banc of America Securities

Thanks. Hi guys, three questions. First of all with Aerospace, from the last quarter it was pretty clear there was going to be a bit of a down shift, fourth quarter until first quarter as you were, as you said I think earlier in the call not absorbing as quickly some of the fixed costs that are inherent in the business. My takeaway, perhaps incorrect though, is that '08 would be an up year. Has anything else fundamentally changed in terms of timing of the programs or is the outlook the same as it would have been a couple of quarters ago?

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

No, I think as we assessed the marketplace, we have bids outstanding on programs. One bid is going to be delayed in its award by a couple of months. That is not helpful necessarily, but I think we heard in our plan review George we have 500 active contracts in Aerospace. Many of them are fairly small but they are solid and they under gird the business. It s the... you win a $200 million job that you spend $100 million all in one year and then it tapers off and you spend $25 million for two years and then you deliver it, kind of thing. There is more of that... that ratchets around. I think you saw a nice improvement overall, full year in margins in the business.

Practically when you understand how these rates are adjusted one time a year, I think we, some of the... well, I don't want to see it that way. You are accumulating this variance and then you make an adjustment in the fourth quarter, theoretically some of that really happened in the first three quarters almost, not exactly. We did the accounting correctly but I wouldn't overdo the negative message that you see in the fourth quarter results but I would say again that temper your... I don't necessarily expect Aerospace to be up in '08 versus '07, which was just a remarkably good year. And a lot of it had to do with a large, fixed-price WorldView-2 spacecraft that we’re building for DigitalGlobe.

And by the way, the WorldView-1 that was launched in the... I think in the fourth quarter is just performing in an exceptionally fine manner. The images are great and this is an area that we have developed over the years that we are hoping gets traction, not only on the civil side but also within the DOD and the national security markets.

George Staphos - Banc of America Securities

It certainly makes sense.

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

Yes.

George Staphos - Banc of America Securities

All right. That is helpful, Dave. Now, in terms of the question on '08 and how it might progress and obviously the difficult first quarter comparison to the extent that I can try to frame this question, such as you will comment on it. This year, you did $3.50. If we assume first quarter is your only down quarter and the subsequent quarters grow more or less in line with your traditional target, which is 10% or better, it would suggest that first quarter could be down anywhere from, pick a number from $0.15 to $0.25. Is that the type of message you want us to take away? I realize I've just put words in your mouth, but help us think about the progression.

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

No, I didn't say that.

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

Anywhere near that much, George I mean it's still down, but it’s still dominant, the wheels aren’t coming off here.

George Staphos - Banc of America Securities

Oh, I understand but I went through my methodology because that is all we can go off of, but that is very helpful as well.

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

That was Ray Seabrook who answered that question.

George Staphos - Banc of America Securities

Yes, I understand. And then last, can you remind us what kind of performance threshold do you have to hit for the cliff vest restricted stock that you granted last year to actually be vested by your employees I know it’s over a couple of years, three years, but what kind of performance would you have to date?

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

We have to earn… our cost to capital are better, and of course that changes over time. Currently I think it is running a little over 6% weighted average cost to capital, but that… so that's the… we think we add value when we earn in excess of our cost to capital and we can pretty much demonstrate that historically. So that's the performance criteria that was associated with those restricted stock unit grants.

George Staphos - Banc of America Securities

Okay, thanks guys. Good luck in the quarter.

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

Thank you.

Operator

Thank you, sir. Sir, it appears that there are no further questions from our audience. We will turn it back to you Mr. Hoover to continue and for your concluding remarks. Thank you.

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

Well, thank you very much and thanks everyone for joining us today. We will look forward to speaking with you again in April. Have a good day.

Operator

Thank you, sir. Thank you. Ladies and gentlemen that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again and have a wonderful day.

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Source: Ball Corporation Q4 2007 Earnings Call Transcript
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