Ball Corp (BALL) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Balls Corporation third quarter earnings release conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question and answer session.

At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Thursday, October 24, 2002.

I would now like to turn the conference over to Mr. Dave Hoover, Chairman President and Chief Executive Officer, please go ahead.

Thanks [Idée].

Good morning everyone.

This is Ball Corporation's conference call regarding the company's third quarter 2002 results.

With me on today's call is Ray Seabrook, our Chief Financial Officer.

Earlier in the week we were near planning for the management of the combined backup operations.

Leon Midgett, our Chief Operation Officer, Packaging is not on the call this morning as he is still in Europe working.

Ray and I will be continuing for Leon today.

Before we begin, we need to say that the information provided during the morning's call will contain forward-looking statements.

Actual results our outcomes may differ materially from those that may be expressed or implied.

Some factors that could cause the results or outcomes to differ are set forth in the company's 10-Q filed on August 14, 2002 and in other company SEC filings as well as in the news release we issued this morning, which if you don't have it yet is available at www.ball.com.

As you can see from the release, Ball continues to perform and we are on track for a very good year.

The company recorded third quarter earnings of $50 million or $0.87 per diluted share on sales of $1.039 billion dollars.

For the first nine months of 2002, Balls results were earnings of $127.4 million or $2.21 per diluted share on sales of $2.949 billion dollars.

I will now turn it over to Ray Seabrook, our CFO, to talk about the financials.

I will comment on performance in our packaging and aerospace businesses after that and conclude with outlook for the balance of 2002 and then we will answer your questions.

Ray?

Thanks Dave.

Our business continued to perform well.

Our third quarter earnings per share were up nearly 43% from the last year, $0.03 per share up and this increase is due to the elimination of goodwill amortization and on a comparable basis, the year over year quarter's earnings per share improvement still exceeds 37%.

The continuing strength of our operations is allowing us to reinvest in our business for future earnings growth.

We still see full year capital spending in the $150-$160 million range with approximately $75 million year over year capital spending increase invested in the [fruit can] plastic bottle product lines.

Despite the increase in capital spending, we still foresee full year free cash flow of around $200 million and net debt at year-end in the $910 million range.

Packaging end margins were up 10% for the quarter with our product lines recording double digit percentage operating earnings gains from the prior year except [fruit cans].

Third quarter [fruit can] operating earnings were down from a year ago.

The aerospace business continues on pace for a record sales and earnings year.

As discussed in the first and second quarter conference calls, the increase in the selling and administrative costs relates to replacement costs for the company's program that expired at the end of 2001, higher employee incentives, and increased medical benefit costs.

Also, in the third quarter we made a decision to reduce our US Pension Plan Active Return functions to a long-term write off of 9%.

This change will result in higher pension costs for the full year of $3.7 million of which $1.9 million was reported in the third quarter.

We target selling and administrative costs at 3.5-4% of sales, so we would be at the top end of that range this year.

Net earnings for the full year is up nicely for the quarter and year to date on pre-joint venture operating results in China, Thailand, and the US offset by lower quarterly and year over year results in Brazil through the Brazilian currency devaluation, which cost us approximately $0.03 per share in the quarter.

Interest cost continued this quarter and are on a pace to finish year in the $73 million range, a reduction of 17% from the prior year.

Turning to cash on the balance sheet, in the third quarter, we paid off all of our remaining equipment and building leases for approximately $33 million due to our strong cash flow.

Also in the quarter we brought our minority partners interest in China for approximately $8 million.

Receivables and inventories are well below last years level as we continued to strengthen our balance sheet.

During the fourth quarter, receivables will be significantly reduced from third quarter levels and inventories are forecasted to increase just slightly.

Product quality remains excellent and rolling four quarters, the interest coverage ratio was up 3.9 times and the EBITDA interest coverage is up 5.8 times.

Before I hand it back to Dave to review the packaging operations, a few comments on the spot ball transaction.

We have had Ball finance people in Germany from the date of the purchase announcement and we continue to rely what we see for the remainder of 2002 and 2003.

We continue to believe Balls earnings per share will be at least a 15% accretion as a result of this transaction in 2003.

Now, I will turn it back to Dave.

Thanks Ray.

In our packaging business, metal beverage and PET, are having very good years.

Metal food is having a good year, but it could be better and I will talk about that in a moment.

In metal beverage, Ball's shipments year to date are up nearly 1% to about 200 million units in a flat market, due primarily to the quarters business.

Third quarters shipments were up 2.8% versus the third quarter of 2001.

Almost every metal beverage plant is running capacity for the year, although we will still schedule normal maintenance and holiday downtime in the fourth quarter.

We continue to reduce spoilage for cans.

In Brazil, as Ray said, devaluation of the local currency has slowed what appeared to be the beginning of a modest recovery in the market.

The currency devalued 35% during the third quarter, so our two Brazilian plants took a hit in the currency exchange.

The plants actually had good operating results due in large part to cost control.

In China, we continue to be profitable despite a small third quarter volume decrease, pricing is decent, and has even improved in some cases and of course we continue to reduce spending through restructuring.

Benefits from some of those changes are still in the pipeline as the administrative costs as would, in various governmental agencies can be slow.

In metal food, we were slowed by below average salmon catch.

It was 37% below last year's catch and last year was not a great year.

Also the combination of wet weather in some places including a couple of hurricanes in September and dry weather in others negatively affected the food pack.

These are not new factors as you might expect.

We have been adjusting accordingly.

The Milwaukee plant expenses are coming along nicely more than 75% of the structural steel is in place as well as many other pieces of the project.

I am impressed with the progress there.

As Ray said, in this second quarter call this expansion requires capital and so far this year it has reduced taxing segment earnings by approximately $600,000.

We expect that number to be about $2 million by year-end.

We have a lot of excited people looking forward to that state of the art two-piece line turning on early next year.

The fourth quarter is typically when our food operations bring in a lot of cash as customers ramp down after the busy season and turn to settling accounts.

We expect that to be the case again this year and we expect a huge positive cash flow from food in the fourth quarter.

In PET, shipments continue to be strong.

Water remains a big part of our growth.

Year to date our water shipments are up 40% versus the same period in 2001.

Industry water shipments were up about 20% I understand.

In [CSD] our shipments to date are up 30% with Wis-Pak and almost 10% without Wis-Pak.

Inventories during the quarter reached very low levels as we expected they might.

We hope to be able to address that during the fourth quarter.

We added a total of 4 lines during the year to the PET business including 2 at our Ames, Iowa plant, which we believe is the best PET plant in the world.

Switching over to aerospace, our aerospace and technology segment reported record sales and very good earnings for the quarter.

Operating earnings were $9.6 million on sales of $127.5 million compared to operating earnings of $9.2 million on sales of $116.7 million a year ago.

Aerospace started the year fast out of the gate and we had expected a slightly slower pace during the second half, but that has not happened yet.

That is due primarily to continue contract wins in civil space and elsewhere into the increased need for the kinds of things in the defense area that we do very well.

In September we announced Ball Aerospace has been selected as part of team to build NASAs James Webb space telescope formally known as the next generations space telescope.

Ball is responsible for the telescopes sophisticated mirror system designed to operate in the infrared and to study emissions from objects that form from the universe that is just beginning.

I could give some interesting technically details here, but the point is it is a big win for us and our teammates on the contract and it involves a technology that we believe will provide us additional opportunities going forward.

We believe our aerospace business is headed for a record year as Ray said in both sales and earnings as well as in backlog.

We expect year-end backlog to be above $525 million.

So there is plenty of work in the pipeline there.

Looking ahead for the whole company, we have one quarter left in 2002.

I believe we are on track for a very strong year and for our company's performance.

Really nothing has changed too much from what we told you we expect three months ago except that the third quarter is behind us and it was right on target.

There is a lot of excitement over the smash bock announcement and acquisition.

It has raised the activity level around here another notch.

We are making valuable use of this time available to us between the announcement and the acquisition and the closing.

There are many things we can accomplish in what other otherwise could be considered dead time.

We still expect closing to be late this year or early next year.

I said earlier this year during our earnings conference call that I have never been more optimistic about the strength our company and our ability to pursue growth opportunities what we believe they made sense for our shareholders.

Our agreement to acquire Smash bock is one of those very good opportunities.

If anything by optimism is even higher today than earlier this year.

We are feeling very good and excited and ready to keep the year rolling.

With that [Idée] I think we are ready for questions.

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.

If you are using a speakerphone, please put your handset before entering your request.

One moment please for the first question.

George Staphos with Salomon Smith Barney please go ahead.

Thanks operator.

Hi, guys and good morning.

A couple of questions Dave first in terms of some of the costs that might have hit you in the third quarter and I know this type of question is always a little bit dangerous because no quarter ever goes perfectly and planned, but if you add up the food can line startup, you mentioned in your press release that you shut a facility in plastics towards the end of the quarter and what did those take away from your EBITDA line in third quarter just for comparative purposes?

Well I think we said the food startup cost around $600,000 and there really was not much associated with the closure of the plastics plant.

We anticipated that when we bought it we had a change in the pension rate, which cost us close to $2 million and there are other things like we say that are on the negative side.

I think everybody's healthcare costs are up versus a year ago.

That was a bit of a hit.

Then we had the currency down in Brazil, but if you look just at the operating earnings in the mainlines of business, they are up considerably and I think up is much or more than most people thought they would be.

What we told you back in June or July where we thought the second half would be similar to the first half, we are now saying that everything is going to be better and we feel we are right on the target.

We had a board meeting in Chicago yesterday and Ray Seabrook was briefing the board.

So, here is what we said in July and here is what it is now and they are either equal to or greater than all those statements.

So, we are feeling real good about the performance.

Sure and pretty much you would hit my model on P&L.

Beverage can revenues looked a little bit stronger than we have been modeling ... where volumes a little bit better than you expect in the third quarter to beverage can business?

No the volumes were up 2.8% year over year and the third quarter was a little more weather friendly I think and there were some promotions and also we began finally out of New York supplying a few more cans to Coors, but generally they were perking up towards the middle to end, you know, July 4 was good, Labor Day was good, and so we are glad to see that there is maybe a little strength in that market.

Okay, two last questions and then I will turn it over to the other guys.

Ray the pension adjustment ... why does that begin to run through the accruals now?

Would that be a factor for 2003 and should we just simply double your six-month total, which is 3.8 or 3.9 for the 2003 impact and then what did Brazil cost you?

Thanks.

George you do accounting prospectively, so when you make the decision that is when you account for.

So, we made the decision to reduce the assumptions in third quarter and that is what we accounted for.

So the total year impact was $3.7 million of which we booked half in the third quarter and the other half will get booked in the fourth.

Our pension expense for this year for 2002 should be around $10 million.

That should be the total pension expense for the company.

Okay, so the [delta] for 2003 versus 2002 would be basically increased ... the second half pickup and multiplied by two?

Yeah ...

Actually just take this one-half and take another half of that ...

Yeah exactly.

So, it should be another 1.9 in the fourth quarter.

And as Dave said, we still expect second half earnings to be better than first half.

You know for 2003, which is part of what you asked Ray there will be another increase ...

Was that your earlier question George on 2003?

Yeah.

In other words, you would just take 3.8 a net and another 3.8 to what you already had this year or would that be more than that?

No it will be more than that because that will happen and the other thing that also happens as a result of us not making ... as a result of stock market, you know, we haven't made 9% and we have to amortize that to our earnings in 2003.

So, our pension expense in 2003 would be probably double to where it was in 2002?

Okay and Brazil?

Brazil is $0.03 for the quarter.

Okay, thanks guys.

The next question will come from the line of Dan Khoshaba of Deutsche Bank.

Please go ahead.

Hi, good morning guys.

Morning Dan.

A couple of questions ... first of all when do you anticipate that the new plants with expansion in Milwaukee will be complete?

It is scheduled to start operating early next year.

Actually, you know, the project itself is running ahead of schedule a bit in terms of ... it is pretty impressive and all the things are getting done.

So, I would say that certainly during the first quarter and hopefully early in the first quarter, we will be making cans there Dan.

Okay and David is it a phase of the ... this is [rock glass] business ... is that correct?

Yeah, indirectly we are actually going to make the cans for [Ross] in [Finley].

We are putting changed parts on that steel line to make that size because they are really close to Columbus, Ohio and then we will back fill what we are not able to sell out of [Finley] from the Milwaukee site.

So, we are not really adding net new capacity in the industry, but it is the Ross lab that we are supplying.

Is this the kind of business and kind of expansion that you know should enable you to kind of turn this thing on and get going or is there going to be some technical pipe issues ...

I mean in other words will this business contribute to revenue and earnings next year?

That's the plan.

We don't anticipate.

A lot of issues we have been making, you know, the same kinds of steel cans there in [Finley] and we have got...

In fact I was there in May and they broke ground and we already had two excellent people from [Finley] up in Milwaukee.

We have got lots of experience folks sharing back and forth and some of us a couple of weeks ago were in [Finley] and Columbus with the [Ross] people touring there and our plant and I am really pleased with the way the guys and gals are getting after this.

So, I am optimistic that this thing is going to work when it gets turned on.

And Dave I don't know if you have disclosed this or not.

But if you can, this ballpark... is this incrementally what $40 or $50 million of new business?

In terms of dollars I think next year it should be between 600 and 800 million cans and then it should grow after that up to may be 1.06 billion within a few years.

Do you guys buy the steel here, right?

Right.

By talking I am trying to figure that out.

You said secondly that your beverage cans shipments I thought were below last year in China?

Little bit not largely.

We through our consolidation efforts over there ... there were two plants that made some beverage cans are just not operating fully.

So, a little of that could be related to that, but the market is not particularly real best in terms of volumes there right now.

The beer part is showing some growth and if there is long-term hope over there, I think it is that there will be further consolidation of the beer business.

I did see there is bushes up and they are staking and of course we have got a can making joint venture with Jim Karl and we supply and that volume grows year after year and it is up again next year, but we are just pleased with the job that Al Slasher who is our long time controller is doing over there and the plants are running well and as we say the pricing environment seems pretty good.

So, it is quite a turnaround from last year to this in that business.

Okay and lastly Ray if I heard you correctly, it sounds like pension expense next year incrementally is going to cost you about $15 million?

It is about $15-20 million, not incrementally ...

Not incrementally?

Not incrementally.

That is kind of the number.

If it is $10 million this year it is $20 million next year.

Okay, so incrementally it may be $10 million?

Right, maybe yeah.

Okay, all right.

Thank you.

The next question will come from the line of [Eddie Plabo] with Morgan Stanley.

Please go ahead with your question.

Good morning gentleman.

Just a quick question on the pricing outlook.

I know you guys were a pricing leader last year and I want to get your take on particularly on Europe ... what the smash bock folks are telling you about the opportunities for increasing pricing in Europe and whether or not you still consider yourself limited here in the States by your existing contracts with some of the pull-through on these contracts?

I don't know that I would describe us as a leader in pricing, although we were certainly supportive of it last year and we will be getting additional incremental pricing in this year and next year and I think even in the year after that.

On those contracts, which we renegotiated last year we expect to see some expansion in the price.

When you refer to our limitation by long-term contracts, of course, those contracts all provide for adjustments based on various factors including price indices and so on ... so all in all we expect to see a benefit in pricing in the US.

In terms of Europe, we were just there.

We attended a meeting with smash bock management on Monday and Tuesday and a lot of our guys are still over there.

I am not aware that anyone has announced increases in Europe.

There have been some things that I have read and other people have said about it, but I am not aware of that.

The business will perform very, very well and we are expecting it to be nicely accreted for us and to do well.

We are not seeing anything to be concerned about in terms of what our expectations are versus what we expect we are going to be able to do, if anything is better.

Great and then on the North American beverage can business you reported volume shipments up 1% for the year, which is ahead of the overall market ...

I and just wondering if you can provide some color on how much of that may be coming from incremental volumes from quarters and how much of it may be share gains.

I don't think there are much share gains.

It is mostly Coors and there are a couple of other circumstances where we were selling more specialty cans, we were selling into certain locations that just happened to be up some, so in terms of the year to date, I think we are thinking that we have not gained or lost any share.

We have picked up some business because of the Coors situation and a couple of other situations.

Great and then finally I think one of the things that the market has been a little bit concerned about has been perhaps some insider selling the company ...

I was just wondering if you want to take the opportunity and clear the air on that subject as well?

Clear the air ...

I don't know I ...

I think you know all the time that we were in the process of discussing with Alliance Capital Partners the acquisition of Smash bock no one here was able to of course trade.

Our stock has done very well over the last two or three years and has been doing well this year.

I think at some point in time as my wife likes to say, you know, if you don't turn some of this into cash you cannot do anything with it ... in my own case what I did was related to the fact that I am 57-year-old and I have no intent to retire now, but I think that diversifying a small part of my holdings in Balls is a smart thing to do.

We still as a management group own a lot more stock today than we did a couple of years ago and I think that you will continue to see our management not only own, but probably increase our holdings in our company.

We are quite optimistic I think and the other thing I thought a lot about, particularly in this environment is when do you make a decision to do this and I had no information that was not in the market and I have very, very positive feelings about the future of the company and the likely direction of our stock price.

So, it seemed to be a time where why would anybody be concerned and I think that is probably enough said, but if people have any other questions, I would be happy to answer them.

We are certainly not hiding it.

I think I got published in the Denver Post and on Bloomberg and I don't think it is a big deal, compared to some of the things you read about in newspapers.

So, that is the story.

Great and thank you for giving us that extra perspective.

I will talk to you guys later.

So long.

The next question will come from the line of Joel Tiss of Lehman Brothers.

Please go ahead.

Hi guys, how are you doing?

Fine.

Can you give us why were the receivables down so much?

Are you selling more receivables or is it from operations?

Well, a little bit of both.

Remember in the second quarter ... you are talking about year over year, right Joel compared to where we were last year?

Yes.

Okay, remember in the second quarter I had said that we had propped up accounts receivable securitization program from like $120 million to $150 or $155 million.

That is still there and that will come over in the fourth quarter.

So, about $35 million of that visible reduction is the accounts receivable program.

It is higher and the estimate is it is really just operations.

Okay and then on your return on planned asset assumption ... how come you only took them down to 9%?

What would you like us take it down to?

We looked around and I could tell you we reckoned those are long-term assumptions right so, if we looked at the 25 year return on planned assets in Ball Corporation, it sounds like 11.5%.

So, I could quite easily make the argument we don't need to come down at all.

However, you know we want to make sure that we certainly don't overstate anything in this environment and we make sure we are more conservative.

We have looked at what the company's assumptions are and when we talk of long-term rate, it would be related to this is and now we think 9% is enough to take them down.

If the market continues to be really bad and does not do better we will take them down some more, but when we you look at our 25-year return we are at 11.5%.

So 9% seems like a reasonable thing for us to do.

Okay, yeah I am not trying to beat up on here ...

I just wanted to know what the rationale was.

All right that was it.

All right and any chance to raise prices in PET?

I suppose there is always a chance for everything.

I am not aware of anything in particular that is going on in that regard, but we would be supportive of that, I am sure, but at the same time our PET business has improved a lot year over year and we think we will again improve next year even without price increases.

So, that is a good thing too.

Okay and lastly can you just give us a little sense of what you guys are thinking about in terms of volumes through your different businesses for 2003?

Well lets see.

In the beverage business, I think, we should see again a bit of growth.

We will have a full year of the sales to Coors.

We have got volume that will be coming on stream for a new district customer down in Tucson, AZ.

That is another ...

I don't know maybe 700 or 800 million cans.

So, incrementally next year, we could be up a billion or more cans.

You have got the Milwaukee line in food.

We installed four new machines in plastic this year and for the most part most of those machines become operational until halfway during the year, so you have got that all being taken up next year.

So, pretty much ...

I would say in pretty much all of our packing segment we expect an increase in volume.

More than this year?

Yeah.

So, 2-3% if I guess in that range ... that would be in the ballpark.

It probably would not be that.

It will be more than that in PET.

On food it will be more than that because the cans that we sell and make are now about 5.5 billion or maybe 6 and I think it is around that.

So, if we could do another 600 million next year, you know, that would be 10% in food in terms of volume.

In terms of PET, we were up 40 year to date, but I don't think we will be up 40 again next year, but I think it will be well into the double digits and beverage can will be probably closer to that number you were talking about.

So it is a billion cans on what we sell.

That would be may be 3%.

Okay, thank you very much.

The next question will come from the line of [John Tamalgo] with Prudential.

Please go ahead.

It is really impressive how many discretionary investments are underway in so many parts of the business ... could you describe which product line markets you view as more attractive ... the plastic bottle, the aluminum beverage can, the steel food can, and the relative returns on investment you expect from the projects in your three existing lines versus the acquisition in Europe?

I am going to take this Dave for a second and then I will pass it to you, but one thing about our company for a long time is that our incentive plans are highly structured the returns that these businesses make.

So someone asked earlier about Milwaukee food can line and the investments in PET ... is that the management team along with the corporate team gets together and looks at these investments and I think if they are in excess of our cost of capital we don't make them and if they don't turn out in excess of our cost of capital everybody's incentive plan goes down.

So, these things are all highly structured and when businesses bring up investments they are usually quite a bit above their cost of capital, otherwise we don't make the investments.

We just have had very good opportunities in pretty much most of our businesses to invest money that we think is going to earn a return quite nicely in excess of our cost of capital.

So, we would expect our earnings to go up next year based on the fact that we are making these investments and we expect them to make returns.

Dave?

I think that in that line [John], we obviously are having some opportunity in each one of the businesses.

So again we look project by project.

I think in the fruit can business there is not a lot of organic growth going on nor is there any in the beverage can business.

So, in those two we have got to be very careful too in selecting investments to be sure that we don't do something that causes a market situation to get worse for everything else that we sell.

So, we are mindful of that.

So, we do have these opportunities.

There are self-makers and with the changing technology, you know, food can purchasers are wanting more of the two-piece cans and so this was kind of a beneficial thing in that regard and we may be substituting some of these new two-piece cans for three-piece overtime.

So, it is a good situation.

You asked something about smash bock and I am sorry, but I didn't catch that part of your question.

I wanted your guidance as to which of the internal adjustments for smash bock acquisition was highest perspective returns?

Were there smash bock or the ...

If you could rank the projects as to which ones are the better ones?

Well, you know our expectation for smash bock over the next say two to five years are that it is also going to get into a position to earn a return solidly in excess of our cost of capital.

So, it is much larger of course.

You know it is a major investment of $900 million or so.

So, these incremental things that we are doing here in the States are quite low-risk we believe because in typical case they are involved with long-term agreements and we know exactly where the products are going to go.

At the same time in Europe there is growth.

We at our meeting this week among the things that occurred and I addressed their management and told them exactly what they expected and it was around what they represented to us they could do and that includes volume growth, which is expected to continue in Europe at 3-5%.

So, hopefully they have been doing better than that over the last few years.

Of course, they bought a couple of plants, but I guess their character is different.

We would also then expect to find opportunity perhaps to continue to invest in the European business scene, but again as Ray said anything that we spend money for, we have got to be as certain as anyone can be that we can make this return.

As management, we have had times in our history where we thought that we knew we were doing and didn't so experience is a wonderful teacher and I think that hopefully we are very mindful of the fact that the kind of businesses and the market place that we operate in, you know, we have just got to be very, very careful.

If you make mistakes then there is no growth.

It takes a long time to get over it.

So, we wont be doing that unless we see that we will try not to do that.

Dave I apologize for my own lack of familiarity ... when you bought Reynolds about four years ago, you had a large existing US business to synergize hand in glove with Reynolds and here in Europe you don't have obviously as much large critical mass ... could you describe the synergy and execution tactics in the smash bock acquisition as opposed to the ... since its character is so different than your last big deal?

Right, well first of all we have said and I will repeat here that the character of the two is quite different, although they happen to make the same products.

We don't find a business in Europe that needs a lot of fixing and we don't find a business in Europe where we have opportunities to consolidate and close factories as we did here and take lots of people out.

At the same time, it is a business that in the midst of improving itself and we understood well the actions that are being taken and the potential upside in that business and it is being well managed.

So, we did a lot of due diligence and we are on track there.

The second thing that was fundamentally important about acquiring the business was that we did not count a lot on synergies of the kind that we have with Reynolds and we paid a price that we believe will permit us to achieve as we talked about and as Ray said returns solidly above our cost of capital.

But interestingly, as we were meeting with the folks this week you know we are increasingly believing that the kinds of things that will relate to net improvements to our company that you could put in the category of synergies may include things that are fairly obvious like purchasing synergies where we are buying more of something we would intend to hopefully reduce the cost to everybody.

But in terms of benchmarking and sharing best practices, in fact, Ian Drisses, who is the president of the beverage can operations over there I think used the term in a publication that we need to shamelessly steal all the good ideas that we can find.

Those folks are very, very good at two-piece deal in can technology.

When you pick up a steel can and an aluminum beverage can over there, it is hard to tell the difference really.

It is that well made and we of course think we do beverage can manufacturing pretty well.

We each have strengths in the R&D area that we will be able to gain from.

So, I would say that while have an advertised discount of synergy or net benefit to the two companies either in terms of making the decision to buy the business or publicly we are formulating plans right now where we think we are going to be able to take costs out and it could be significant.

Okay, thank you.

The next question will come from the line of Jacquie Boland with Merrill Lynch.

Please go ahead with your question.

Hi, thanks guys.

I wanted to ask you a few questions.

Can you talk first a little bit about your profitability in PET for the quarter?

Ray do you want to...?

Compared to last year's, PET almost doubled.

Almost double for profitability?

Yes.

And what is your timeline is getting it to where you want to get it?

Has that changed?

As you know Jacquie what we have been doing is ...

PET is the only business probably we still have that is earning its cost of capital.

As you know, we have been investing ... we continue to invest in the business, but only in existing locations.

So, what we find is the other gentleman asked a question about returns ... we find that our returns are very good by investing in existing locations because there is no more fixed cost and it allows us to get our cost down and make more money.

So, those investments make a lot of sense to us.

It is tough business.

We are going to continue to do what we are doing and then when we get everything full that needs to be full we will assess where we are it, this is what I will tell you, and whether we can it remains to be seen.

We think we have started at it, but it is not crystal clear.

I think we have got a program in place here that goes out over at least the next three years, I mean, the next two now because three years ago or a year ago when we did our three-year projections we had ideas about how to make this go from A to B and at the end of that timeframe we were getting real close in terms of that cost of capital earning and we like it a whole lot better this year than the last year.

That is for sure.

Okay great.

On your SG&A side, it was up a fair bit, probably I am just trying to split out, I guess, Brazil was in there costing about $0.03 and pensions would be about $0.02 ... those would all be in SG&A as well?

Well, remember Jacquie Brazil is [pause] so Brazil is in equity earnings of affiliates ... that is what Brazil is and what really causes G&A to go up is as I said before that, you know, we had a program a year before and we supplemented that with a match to the 401-K plan.

Those costs are up in our G&A, which makes it go up.

Of course, you see there is no preference dividend which went away, so some of those costs are up in G&A.

Some of the pension costs, as we said, the majority of the pension costs we talked about ... the 1.9 incremental that is all in G&A.

And as Dave said in his comments, we found that in our business medical costs are going up significantly.

So, we had a pretty big increase in our medical costs.

That is the majority and of course the current is doing well, so our incentive plans are paying off and the incentive costs are up quite a bit year over year and those are the big drivers of the increase in G&A.

Yeah that is quite a change and it is from being well under the target pay outs a year ago to being well over them this year and that might be the biggest thing that will change.

I expect it is in the G&A this year.

Nevertheless, you know, that is why we are working so hard here.

So, it is kind of the self-correcting thing.

The business is little soft.

You tend not to have a incentive accrual and pay out as when it gets stronger it takes a little of the upside down, but at the same time we are up 37% versus a year ago.

So, if you don't manage to make money when you have that kind of improvement, then something is wrong.

Do you think it is a good thing?!.

Yeah, I mean it feels good.

Okay, on your stock buyback, I know you bought a little bit more back in the quarter, can you tell us what you bought the shares back at the average price and is there some still over into the fourth quarter for that?

I think I don't have the quarter number for that, but I think it is around $65 million ... is that the number we bought back year to date Ray?

I think because a lot of our share bought back happens in the very early part of the year and actually we had bought some even the year before on forward rate agreement, so I think our average number is kind of in the $40, $43-$44 dollar range.

I don't know what it is for the quarter.

I have told what it is year to date.

You know our current thinking about that would be that after the closure of smash bock we would probably scale back our annual buy of stock to maybe 25 million versus 75 million for at least a year or two and really concentrate on getting the debt down.

We want a target of being coming in investment grade credit again and I think for us ... if you think about four years ago we closed Reynolds and just over 4 years ago we put our head down and we really have been pleased with the cash flow that we generated and the ability to get debt paid down, so that when the smash bock situation comes along we can finance it and be not as leveraged as we were when we did Reynolds.

Everybody has to figure out what they want to be when they grow up and our idea would be to get back into that investment grade range so that we have got the capacity if we need to do more.

The company needs a certain amount of debt and I don't think you see us becoming AAA creditor, but that is our thinking.

So, what do you need to get back into the investment grade ... what are you trying to put in place?

We said Jacquie, I think, on the smash bock conference call that we have kind of targeted $600 million over the first three years.

I think we can pay down $600 million worth of debt that is $200 million a year.

I would tell you that sometime during that process we would ... if you look at our coverage and our ratios and everything we should be investment grade before that time.

Yeah, I think one of the attractive things about smash bock acquisition is that while we will be operating with some part of our company that did not expose to different currencies we will have geographic and market diversification and size.

And these are things that I think in our estimation should matter in terms of the credit worthiness of the company to make it a lot more positive.

So, we are real serious about running the company well.

As you can see this year, I mean, our cash flow including all the things that Ray talked about having done including taking out the leases and the amount of stock that we bought back and everything else, we are still going to have a net 200 and that is without smash bock.

We are going to be focused on that and I think we are going to see it happen.

Okay great and just a final little question on your cash flow.

I noticed the acquisition previously leased assets for $43 million, I guess, the minority partners in China was $8 million of that?

That is right Jacquie.

That's the synthetic leases.

Okay thanks.

The next question will come from the line of [Mary McGee] with UBS Warburg.

Please go ahead with your question.

Yes hi good morning.

Good morning [Mary].

I just want to make sure I understood this correctly.

The expectations you were discussing earlier by segment were strictly on a volume side, correct?

In terms of, I think, you said food cans is probably up about 600 million cans in 2003, up 10%?

Yeah.

Double digits in PET and probably in the 3% range for beverage?

Yes, I think I did say that.

Okay I just wanted to make sure on that.

And then you sort of indicated earlier that, I think I have it this way, the contracts that you have ... the contracts are going to effectively give you a bit of a price increase next year as well ... is that correct as well?

Well that is correct in a way.

What happens is we make adjustments and some of those adjustments as I say relate to price indices.

I think there is one price index that is actually even modestly down right now.

So, that might be a negative, but net, net I think that there will be an increase in the top line because of passing through adjustments in our contracts.

[Mary] it is right.

Remember we all have short memory, but remember in the first quarter what we thought on margins ... it was thought to be a lot higher and we said well we had scaled down the production the year before of our beverage cans business to take the inventories out, so of course that wont happen next year.

So all those high-cost inventories that flowed through our business in the first quarter of this year will not be the case next year.

Okay, but does the fact that it should not be any more than 1-2% overall...

In terms of pricing?

Yeah.

You know that is probably a fair estimate, yeah.

Okay and then in terms of the new web contracts in the aerospace that was a great win ...

I believe that is incremental to the tune of couple of $100 million or $200 million over the next several years ... do you have any idea of what the impact will be for 2003?

It will get started solidly.

It is just one of several things, however, and if you take a look, I guess, two years ago we had about $385 million in sales, the last year we had 420, this year we wont get to 500, but next year we will be over that and I think the year after that.

In other words, we have got stuff in our pipeline and growing.

We are up about 10% in employment.

We are up, I heard, by net 200 people this year and I think the going in number was around 2000 people.

We got to hire 350 people this year because of the additional work that we were doing.

So, that will be another 10-15% growth in employment in the business and that is what really drives us.

It is the right people doing the work.

So, that business is performing quite nicely.

I am very pleased with the job that the retailers are doing in running it.

Our existing management in civil area is super.

We have gotten some new people including Mike Turnnet running the defense business and running our business over in the service side under Mike and then Jerry running the civil business.

The part of it that we call commercial is really limited to doing things in the commercial world that are like what we do here, but a younger man is what we like.

So I am real pleased with the way that management team has come together, the focus they have got, and I think this business is going to keep getting better.

Absolutely, I guess I was just trying to get a better understanding in general how contracts like that work in terms of ... they tend to be backend loaded when you are looking a couple of $100 million over several years ... '

No actually probably in this case if the launch of the thing is out in 2010 as planned most of our work would be done well before that because remember we are building the elements of the infrared mirror, so these things have to be done on a schedule that permit them that way.

I don't know exactly what the roll out is, but I think we will see significant dollar starting next year and probably for the next three or four years and then a scaling back.

Also, though these things tend to change as they go along and probably grow.

So, you know, that is the kind of thing, I mean, we have had people working on this kind of technology for the last 7 or 8 years in anticipation of this.

So, this is a big deal for our company to win this.

Absolutely, I caught the press releases earlier ...

I just have two small housekeeping questions, I guess, to Ray.

The securitization ... the receivables that was fully drawn ...

I think it is like 157.5 ...

I think I said 175 if I remember right.

So, it is not fully drawn.

Okay, so it is up to 175.

Yes, it is up to 175.

As I said earlier because of the production our receivables and etc, etc we would be at about $120 million range by the time we get to year-end, which is what we had last year.

Okay and then can you just give me the cash balance as well as availability in outstanding with revolver?

There is nothing outstanding on the revolver.

We went out of that pretty much for this quarter.

So, what you see as cash is cash and in our estimates we have zero outstanding in the revolver.

Okay great.

Thank you.

Okay.

If there are any additional questions, please press the 1 followed by the 4 at this time.

Your next question will come from [Andrew Fineman] with [Radiant Asset Management].

Please go ahead with your question.

Thank you can you tell me and I am sorry if I missed this, how much the cash effect of the change in the pension assumptions will be and when you will have to spend the money?

I heard what the earnings are ...

[Andy] when you spend the money it is not necessarily the relationship because you know which one goes through your P&L.

It is what we have been doing as a company.

When you look at our pension plans we have acquired and even used different ways for the funding assumption as opposed to the assumptions that goes in your accounts and we generally have been pretty aggressive in funding our plans.

If you remember last year, we took $35 million in the last quarter to make sure we did not get too far funded in our plans and it is our intention to continue to probably put around $35 million into our plants to continue to make sure they don't get too far under funded.

That number is taken care of in the free cash flow I talked about.

So, that number was in the $200 million of free cash flow.

So, does that mean if you double the expense that next year the cash also doubles?

No, no it does not.

So, what happens is as you put the money in that is what you basically have to expense over longer periods of time if you cannot earn it in your assets, so hopefully if the stock market gets good the money that you have sitting inside the asset returns kind of makes it up, which you are hoping to do, but if you get a stock market for the couple of years, it goes down under 15% then that causes you a problem.

So, that forces you to put money into the plants, which we have been doing.

Okay, does the aerospace business have any other big contracts like this that it has been working on for years that you think is particularly close on?

Well, as I mentioned [Andy] we expect the backlog to build.

At the end of last year it was around $400 million, so if that is true then we could look at it ... but I am not sure if that is correct, but if it is we will see an improvement in backlog up to $5 and a quarter.

Now, that backlog is funded.

It is not necessarily work one.

We have got additional work out over the next several years that we have won, but we only disclose the backlog as what is one hand funded.

In terms of projects and programs, we are bidding at any point in time on numerous programs.

I am being told now that the backlog last year was $431 million.

So it would be up about $100 million year over year.

Pardon me for that.

I cannot say that there is anything that would be as popular as the space telescope, but we are looking at on the defense side of the business ... we are bidding like $800 million worth of work now.

I don't know how much we will win.

On civil, it is not of that magnitude, but it is pretty good.

We have won work related to what is known as the incode program, which is the combined civil and military next set of weather satellites.

We have won two or three nice instruments there.

We have got other things that we are pursuing there.

We are certainly not opportunity-limited right now.

Okay, thank you for that and I just wanted to ask you ... you said Ray that the receivables were $175 million and you expect to it to be $120 million at the end of the year?

Is that what you said?

I don't think I said what I expect it to be at the end of the year.

What I think is if you look at last years receivable number, it would be probably $5 million or $6 million below that number.

I think it is like $170 million kind of range, if I remember right.

I am talking about the securitized receivables.

Securitization is at about $157 million now and it will be about $121 million when we get to the end of the year.

That will come under the receivables number as we get to the end of the year.

But I think year-end receivables are somewhere around $170 million.

And the last thing, when you were talking about building plants in PET ...

I remember when you know you had to ship PET across the country because you had more demand than you could handle ... so I guess I am just trying to reconcile that with, you know, you are confidant about investing into the existing plants and awaiting when those plants would be running full ...

Yeah I think the comment now, is sort of like the one last year I think we shipped a lot of bottles around and paid a lot of freight in the PET business ... that is the function of having the demand in the wrong spot of conversely make bottles in the wrong spot.

I think as a result of making some of the investments we have made this year we have sort of corrected that problem.

This has been a real difficult year for our guys as they have installed new equipment and have been faced with hand to mouth operating so we through the second and third quarter here have had to run a lot of bottles on the wrong machine ... not the wrong, but you wouldn't have chosen to do make job changes more rapidly and we have shipped bottles from time to time to keep people from running out.

So I am sure the boys and the girls are glad to see it cooling off and we are going to build a little inventory here in this quarter.

We are going to get these plants in better shape and we are optimistic as we go into next year that as Ray said that we will see a further improvement in the way we can operate or fall to the bottom line.

I see.

Okay thanks it seems like you guys are doing everything right.

Good job.

Thanks a lot [Andy].

The next question will come from the line of George Staphos with Salomon Smith Barney.

Please go ahead with your follow-up question.

Thanks operator.

I will make it quickly as it is getting late in the call. [Andy] setup my next question.

Ray in your pension expense forecast for next year, are you including the beneficial impact you get from the additional funding and separately could you even increase this funding a bit more such as you get a little bit higher return on asset for 2003 and I have a couple of follow-ups.

So the answer to the first question is, "are we including the return on the $35 million of investment"?

And the answer is yes.

Last year and we said in the fourth quarter after the problems around the world and especially after September 11, 2002 we said gee that is a good time to put this money to market because we should be able to make strong returns on it and unfortunately we were not right.

So, we are just continuing to look at making our pension plans relatively well funded.

We have tremendous cash flow in this company and our job is to make sure we put things in the right spot for the right uses.

So, again, if you look at the markets over last couple of years, it is unrealistic to think they are going to continue to go down forever.

So, put money in and keep our plans well funded seems like the right thing to do and that is kind of the decision that we made, but the answer to the other question I think was, you know, if you put more in benefit it depends on what the market does, you know, that is #1, but there is really not much more benefit from an accounting perspective.

I think our pension expense rate now will increase regardless of if we put more money in.

Okay.

I will circle back to you on that Ray because you would get some built in benefit on the income line just from your return on asset projection on the new asset base, right?

Right and that is built into the number I gave you.

You don't really know precisely who that is going to work, but remember these are long-term smooth kind of numbers.

So any one-year does not flip except right now there is a kind of a thing going on because of the fact that the market is down for two consecutive years and to our company though this is largely not a very big event.

I mean I don't want it to mean anything, but if we get $10 million more pension costs next year, we know a lot of places where you can find $10 million of improvement.

So, it is not a good thing, but if the market does begin to improve and so forth then probably some next year and certainly the year after that this thing will mitigate.

I mean our company has never had ... we weren't reporting half of income as pension income when we had a little bit of credit ...

Dave, I have no problems with you increasing your pension expenses and I totally understand where they are coming from.

So, don't worry on that ...

Good.

In terms of the outlook for 2003 at this juncture if you exclude smash bock you still expect that you would be within your 12-15% goal for earnings per share?

I know it is early guys in this year in terms of where you could give guidance, but do you think you could be in your target range without smash bock?

Yeah I think we said our range was 10-15% George.

We have not rolled off our budgets.

We have not put our things together, but right now if we look at kind of where we are each day, we still think we are in that range.

Okay and Dave last on aerospace ...

I mean $500 million would be terrific year.

At this juncture, I know it is early again, but do you have a view on how much of above $500 million you could be for 2003 in aerospace?

Yeah, I said I don't think we will make $500 million this year, but we are getting closer to it.

You know it was $420 million a year ago and we will be well above that this year we think and in fact we might be close to that after three quarters ...anyway it is still early.

We have had a very good year.

I think the year next year should be $500 million or greater and it kind of depends ... we have got programs that we expect to bid in and if we win a good share of those then we will be a little stronger and if we don't we wont, but I think the business will be growing next year and I would expect the year after that the way things are looking right now.

Okay guys a good job and good luck in the quarter.

Thanks.

The next question will come from the line of [Eddie Plabo] with Morgan Stanley.

Please go ahead with your follow-up question.

Thanks just a quick question on the aerospace margins ...

I am wondering Dave if some of the dip in the margins can be traced to what you are seeing about some of the expansions of the workforce there?

No, I think it exists mix mostly and it is what we were doing a year ago versus this year.

We are also in the business because we have been running so well at a much higher rate.

We have to hire all these people.

This might get into some technicalities here, but basically it is when people run business that you have overhead rates, G&A rates, and so on ... we have been running the projected overhead rate so we had to make a bit of an adjustment back in a little sales and income ... this is all great news if you understand how this business works and certainly for our customers as it means our costs are a little lower.

The margins were fine this quarter and we are at a level that I think on the cost reimbursable work if we make 8% or little more on that part year in and year out that is pretty much what you can expect and in some of the fixed price we have to do better on.

So we are not quite where I would like to see us yet, but we are doing okay.

Fundamentally, in contract mix is that we have some higher margin business kind of roll off the first couple of quarters ...

And some of the new backlog at that same level of the business that rolls off, I mean, there is no deterioration here even at the margin ...

No I don't think so.

I think we had some over the last period of time ... not last quarter or anything, but if you look at it a year at a time that is probably a better way to think about this business, you know, picking out a month or a quarter is not going to be very valuable in terms of trying to understand trends, but the trend in that business is to get bigger and I think to get more profitable over the next couple or three years.

That would be my best guess.

Right, and those are good numbers historically because there is no amortization of goodwill in that is that correct?

Very little ...

If you go back far enough there was just a little wee bit as Dave said, but I think over the last couple of years, it has been zero.

Okay, great.

Thank you very much.

You bet.

Mr. Hoover there are no further questions at this time, please continue with your presentation or any closing remarks you may have.

Okay great.

Thanks for your help [Idée] and thanks everyone for participating here in our third quarter conference call and we will look forward to speaking with you again in January 2003.

Ladies and gentlemen that does conclude your conference call for today.

We thank you for your participation and ask that you please disconnect your lines.