Ball Corp (BALL) 2003 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Ball Corporation Q3 earnings conference all.

During the call listeners will be -- callers will in a listen only mode.

Afterwards, we will conduct a question and answer session.

If you have a question at that time, please press the one, followed by the 4 on your touch tone telephone.

As a reminder, this conference is being recorded, October 28th, 2003.

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

Please go ahead.

Thanks, Leanne.

Good morning, everyone.

This is Ball Corporation's conference call regarding the third quarter 2003 results.

Joining me is Ray Seabrook, Ball's Chief Financial Officer who will comment on financial performance.

And Leon Midgett, our COO of Packaging who will talk about your packaging operations.

First, the information provided during this morning's 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 to differ are set forth in the 10Q filed on October 1th, 2003 and other SEC filings as well.

If you don't already have our earnings release it is veil on our website at ball dot-com.

Information regarding the use of non-GAAP financial measures is also found on our web side.

Ball Corporation reported this morning third quarter earnings attributable to common shareholders of $68.8 million or $1.21 per diluted share on sales of 1.36 billion dollars, compared to $50 million or 87 cents per diluted share on sales of 1.04 billion dollars in the same period a year ago.

The 2003 results include a previously announced aftertax charge of $9.9 million, or 17 cents per diluted share for early debt extinguishment, offset somewhat by a gain of $2.2 million after tax or 4 cents per diluted share primarily related to the completion of the China capacity consolidation we began back in 2001.

Without the debt extinguishment charge and the China capacity consolidation gain, was net earnings for the quarter were $76.5 million or 1.34 cent per diluted share.

I will have more on say about our performance and our thoughts and performance of the fourth quarter later.

Now I would ask Ray Seabrook to go over the numbers.

Ray?

Thanks, Dave.

Our business continues to perform as expected with earnings per diluted share up 54% over last year.

The majority of this earnings improvement is driven by the acquisition of Ball Europe in December of last year and the 21% year to date improvement in the aerospace operating profits.

The third quarter operating margins exceeded 10%, up 1% from last year and as we said in previous calls, we expect full year 2003 operating margins to be higher than last year in the 1% range.

Third quarter and year to date operating and packaging profits were lower than last year due to poor performance in the food can and plastic bottle lines which Leon will use discuss in a main.

Our operating earnings in Europe are better than expected despite the loss of 1.8 billion cans so far due to the effects of German deposit.

Selling, general and administration expenses were at 4.5% of sales for the quarter and year to date, up 50 basis points from the prior year.

This increase is due to higher selling and administrative costs in Europe, higher pension expenses and increased employee benefit costs in the U.S.

Also, the U.S. pension plans asset return assumptions has been reduced to 8.5% from the 9% rate used last year.

The consolidated European tax rate tended to be lower again in the third quarter due to lower profits in Germany caused by the German deposit situation.

We now estimate our 2003 consolidated tax rate will be slightly lower than 32%.

Interest costs will be higher in the third quarter as pretax debt extinguishing costs of $15.2 million were charged to earnings, resulting, as Dave mentioned, in a 17 cent aftertax reduction to earnings per share.

We resubordinated 8 and a quarter of notes due in 2008 with 6.5% debt due in 2012.

Debt maturities were extended at lower interest rates and we believe that will add approximately $8 million in aftertax cash flow to the company.

Finally, interest costs in future years will be approximately 5 cents per diluted share lower as a result of this financing.

Turning to cash flow, the majority of the $200 million increase in working capital in the first nine months is expected to reverse in the fourth quarter.

Our latest estimate of full year 2003 cash flow has improved and we now expect free cash flow, excluding the tax payment related to the Ball Europe acquisition, to exceed $275 million.

Also, full year capital spending should be in the $150 million range, down from our earlier estimates.

We remain committed to deleveraging the balance sheet, and despite the increase in the Euro, we hope to better our 2003 year end net debt target of $1.675 billion.

A final word on credit quality, with continued earnings growth and debt reduction we anticipate having the company's credit rating back to pre Ball Europe ratings at that end of next year.

On that, I will hand the call to Leon to review the packaging operations.

As you have seen from our news release and as Ray has mentioned our North American packaging operations experienced a somewhat softer third quarter than we had hoped.

Those issues included, in no particular order, power outages in the Northeast, challenging weather in the Northwest and Northeast.

Hurricane Isabel, which cost our Virginia plant four or five days in sales.

And a tornado in Florida which flattened a filling plant of one of our Tacha Can plant's customers.

All told, the tornado cost us about 45 million cans.

The power outage cost 20 million units.

That 65 million unit accounts for about half of the North American's shortfall to third quarter of 2002 of 129 million units.

Sales volume on a quarter to quarter comparison basis were off 8/10ths of a percent.

Cool damp weather cost us some additional business and one of our Canadian plant workers were on strike for three weeks.

That's another 15 million cans we would ordinarily sell.

I guess its a long way around the belt, but I think excluding the labor strive and the wild weather, we would have been even with the third quarter of 2002 and with year to date 2002 volumes.

Nevertheless, Ball continues to show financial results well ahead of last year's.

In recent calls, I have discussed our innovation in custom can sales.

I believe I have mentioned a lot of interest in 8 ounce squat cans.

That interest continues and we think we will sell quite a few more of those cans next year.

We have also reached an agreement with one of our customers to start supplying another new can next year that we're both excited about.

Both Ball and our customer.

We continue to focus on product innovation and are happy to see results beginning to develop from that effort.

Our PET industry has suffered some of the same issues as the metal beverage issues.

The impact is greater in the PET organization as their geographic dispersion is not as great as in metal beverage..

Their plants in New Jersey, New York, and Wisconsin have all felt the impact of weather.

That's 60% our PET producing location.

We hope that this weather pattern won't repeat in a 2004, but we aren't waiting to see.

We announced last week we are restructuring capacity in our Watertown, Wisconsin facility, relocating some business to our Aims, Iowa plant and reducing personnel in Watertown.

Even though sales in PET are less than planned, volumes are still up some 6.5% over last year.

This business continues to exhibit good growth opportunity for us.

Food business has had a difficult year in 2003 for reasons that we have discussed on previous calls.

I will run through them again, give you a status update.

In order of the significance as to what has impacted this year, I would list pricing, our new Milwaukee line, and weather.

As to pricing, I feel it has probably hit a bottom and will likely improve going forward.

In Milwaukee you are aware that we have had difficulties bringing that line up to speed.

We have seen a dramatic improvement in the last few weeks that I believe will continue onto next year.

All the equipment changes required for that line will be implemented in December as the pressure to produce for immediate customer need is reduced.

We have a new operating management group in that facility approaching the line with fresh ideas and they are having a significant impact.

That line is an absolute thoroughbred that's going to run like one and I have got no doubt about that.

It will be a nice shot in the arm for food next year.

As for weather, the pack was slow in the Midwest as a result of damp and cool weather, although the volumes were up 7.4% over the third quarter of '02 and up about a point and a half year to date.

Internationally, we continue to perform well, China rebounded nicely post S.A.R.S. and compares quite favorably to last year.

In Europe, in spite of the German deposit implementation, we are earning as much as or more than our model indicated we needed to adjust the acquisition.

Management was there last week in Europe and I continue to be thorough impressed by the focus the hard work and the talent in that organization.

When the German deposit leash we have on that group's productivity is taken off, and that will happen eventually, I am convinced their results will be outstanding.

They aren't waiting with their fingers crossed either, for that to happen, though.

They have developed alternative strategies applicable to different event , something that is indicative of all that planning and strategic thinking is ball packaging Europe's announced intention to close the UK facility.

They are not waiting, they are active, and inspite of the German situation, are performing extremely well.

Certainly volumes are down in Germany and in the Netherlands as well as some cans that would have been sold from there are now coming out of Germany.

UK and France are performing well versus the prior year, as is Poland.

At this time last year I had a belief that our results in 2003 would be spectacular.

Since then, the world has changed, pricing, weather, government intervention of combined in 2003 to reduce our results from spectacular to what I would call really good.

Maybe up 45% on operating earnings is spectacular, but I wish it would have been better.

While you never know how events will unfold, I feel good again today about our prospects for 2004.

We are fixing those areas we can fix, we are doing what we can to positively influence the German outcome and I believe we are poised for another very good year in 2004.

I will give it back now to Dave.

Thanks, Leon.

And thank you, Ray.

I have a few comments about our aerospace and technologies business and then we will take your questions.

Our aerospace segment had third quarter sales of $125.2 million in earnings of $10.6 million compared to the same period last year, $127.5 million in sales and earnings of $9.6 million.

Backlog is going to be at record levels, we are convinced at year end this year.

At the end of September, we learned that our customer, Digital Globe, in which we also have an equity interest in Digital Globe, that is, Digital Globe went the next view program from the national imagery and mapping industry.

We will provide the state-of-the-art spacecraft and camera for that program.

This is a strategic contract for us and further valid it's our leadership in the remote sensing market.

So the aerospace business is doing quite well and continues to look good into the future.

In terms of thinking about the outlook for the company, in our news release today we essentially reiterated what we said on September 17th when we had a news release announcing the redemption of our senior subordinated notes.

That is that before any charges or gains, we expect earnings per share in the second half of 2003 to exceed the 1.84 per share that we reported in the first half.

And excluding the charges and gains that have occurred, that still continues to be the case.

Further, the second half actually may be better than the first half even if we do include the charge and the gain.

So as to 2004, we think that we have a lot of upside.

We have announced plans as Leon mentioned to close a plant in the UK.

That will help capacity utilization there as we work around the German deposit issue.

We are going to further improve operating efficiencies in PET by trimming operating in Watertown, Wisconsin and putting better facilities in our Aims, Iowa plant.

And as I just mentioned, aerospace just won a nice contract.

There is more in the pipeline there.

We will easily end the year with record backlog in aerospace.

I am thinking this may be the last call we will have to mention our Milwaukee food can line at least in a negative way.

So there are many positives on the horizon including some positive indicators on the pricing front.

I guess with that, operator, I think we are ready to take your 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.

One moment, please, for the first question.

Our first question comes from the line of George Staphos with Bank of America Securities.

Please go ahead.

Thanks.

Hey guys, good morning.

Good morning, George.

Ray, first question for you.

Did you mention that you -- did I hear you right that the pension assumption for return was reduced in the quarter?

If so, did that impact your third quarter at all?

We have been -- George, we have been -- we have been kind of thinking we are going reduce that for most of the year.

And, well, we officially sort of adopted it in the third quarter.

We probably have been accruing it at the 8.5% rate for most of the year.

I don't think it had too much of an impact.

Anyways, the difference between 8 and 9 and only $2.5 million.

But everything helps.

A minor impact.

But the $2 million did not fall in the third quarter.

Okay.

Leon, if I look at your press release and the performance in packaging, it seems like beverage cans, despite the weather issues had a solid operating quarter.

If that's correct could you give us more detail as far as run rates, spoilage, through put, whatever would help us get to that view.

Yeah, they have been running very well through the third quarter.

Had an excellent earnings performance in the third quarter.

We have been operating everything pretty much full tilt.

I mentioned we are working on a new can to introduce next year.

We had a line down a few weeks -- a few days, actually, later in the third quarter to start doing some work for that new can.

But other than that, spoilage -- we are shooting at numbers under 3% in can spoilage and have a lot of plants that have achieved that and better.

Half percent kind of spoilage numbers we are targeting in caps this year and production this year and hope to do better than that even next year.

So the plants are performing extremely well, and the earnings numbers bear that out.

Were the North American beverage can profits, if you could see those numbers, were they up in excess of 5% year on year obviously in tough comp, and obviously the weather wasn't a help.

Ray has that at his finger tips.

I don't think they were quite up 5%, George.

Okay.

That's -- we are talking about operating profit.

Yeah.

No, I am -- they were up just a little bit, but less than 5%.

Okay, fair enough.

Last question and I will turn it over to the other guys.

As we look out the '04, you know -- Dave you enumerated a couple of things that should help the year.

What do you see as the single -- or the two biggest drivers of earnings per share growth and improving a return on capital '04 versus '03?

I guess -- you know, first I would say -- remind you that the beer beverage can business is our largest.

It is all we do in Europe.

And it is our largest business in the U.S.

When you say what is going to be the biggest source of improvement, if you are talking about absolute dollars, you know, some of the smaller business may have a higher percentage improvement, but you know I would say that between U.S. and Europe next year, we are going to see improvement in the beer beverage can business.

Food should be up quite a bit.

You know, if Milwaukee is resolved as we believe that it will be, that will be a big help.

I might also say that the guys running our three-piece plants have been doing a really good job this year.

They have performed well ahead of standard and have helped offset some of the negative there.

But assuming that we get Milwaukee picked and you know, we don't see a bad pricing environment, which we hope is a good pricing environment going into next year, then I would expect food would be a contributor.

Also PET.

The big problem with PET has been weather-related as much as anything, plus there was some softness in pricing in that part of the business.

Dave, would it be safe to say between Germany, food and PET you might have lost 75 cents this year?

You are trying to get me to be definitive about something, and I have my general counsel present and I am not going to do that.

It is a lot of money that we could have made had the deposit, the weather, the Milwaukee -- you know, all those things fallen our way instead of against us.

It is a lot of dough.

Okay.

Thanks, guys.

Our next question comes from the line of Daniel Khoshaba of Deutsche Banc.

Leon, could you tell us roughly perhaps, what the impact of the millions of dollars of the Milwaukee canned food line was for the quarter?

I don't have it for the quarter but year to date in the 6 to $7 million range.

Correct me if I am wrong but I think we were at about $6 million I thought at the end of the second quarter.

Basically, did it have no negative impact?

No, we lost another couple million in the third quarter.

We are probably up to 7 or 8 right now.

Maybe 7 or $8 million.

A couple of million in the quarter then?

Yeah.

Let me ask you a couple more questions quickly.

How much capacity did the plant in the UK have, Leon?

What's in a billion three.

Was it running -- prior to Ball buying the Small Balk Assets was it running and ship most of the cans it had produce.

It was running.

I don't know if it was running full tilt.

But a lot of the cans were exported and the deposit law affected them.

Exported into Germany?

UK and the continent, yes.

Let me see.

You mentioned in the press release that you thought pricing in the food can business perhaps bottomed.

It is no secret I think you would agree that food can pricing is -- I guess it is at low levels and it is not very profitable to making food cans right now.

Steel prices are going up.

One of your competitors, I believe is in the marketplace right now.

I am sure you know of that, talking to customers.

I think they even put a letter out about pricing for next year.

What did you mean by food can prices bottoming out?

What are your expectations for steel costs and food can selling prices for next year?

Well, I suspect the steel costs will go up.

Profitability of the food line has been very disappointing to us this year due to pricing activity and the additional cost price pressure we are getting from the section 201 tariffs.

Costs continue to go up in that area as all of our areas do.

And we have got find a way to improve the profitability if we are going to continue to justify investment in that line and to enable us to provide the kind of quality, service, and support that our customers demand.

So, yeah, pricing is warranted, and we hopefully -- hopefully we will get some.

Yeah.

Okay.

Last question very quickly, if I could, the year-over-year decline in the quarter for beverage can shipments in Germany.

Germany.

Let's see.

Year to date -- I don't think we have a quarter here, but year to date we are down something like 1.8 billion units.

A lot of the units.

So that's a huge hit to us.

If that thing gets fixed it is going to be a great up side.

Thank you very much, good quarter.

Thank you.

Your next question comes from the line of Mark Connelly with Credit Suisse First Boston.

I have a couple of things.

First, can you characterize what is happening in PET seasonally?

Would you say that that business is back on its normal seasonal track or are we still sort of muddling along with weather?

It appears to me that it is still not as strong as we would like to see it.

And I don't know in it is -- fits weather-related at this point or something else.

I mean, we are up, still, significantly over last year, but not as much, perhaps, as we thought we would be.

So it is not as robust as we would like to site, for whatever reason.

And secondly, do you have a sense of when we might hear more about this aerospace contract?

Yeah, Mark, it should be -- you know, by the end of the year.

What has happened is that the government has awarded the contract to Digital Globe, and we, of course, are a contractor to Digital Globe.

But the -- you know, the actual contract and the negotiation thereof between Digital Globe and the both is ongoing.

We just had a performance review with aerospace yesterday.

And coming out of that, I would expect that prior to the end of the year we will have better information or better data.

We did indicate in the release that we think this will be one of our largest contracts.

Do you have a sense of the timing, the longevity of the contract?

It is a little over two years the period of performance.

Two years.

Coming back to Germany for a second, just big picture.

What I find striking when I talk to people over there is that the consumer backlash against this change in deposit law doesn't appear to be anywhere near as vociferous as the industry backlash.

It seems like the industry is still debating whether they are going to be going forward with this.

Is that in your mind, hampering the ability to move forward and figure out what the system is going to be if you do have to live with it?

I don't know that I agree with any of what you just said.

But let's say you have made a series of assumptions.

I am not sure what your point is about the -- what industry will or won't do.

The real issue is there is no finalization of what the rule is, the rules are.

And so in the face of that, the industry was not prepared to spend a billion and a half dollars on reverse vending machines and we don't know for sure what is going to happen.

Last week, the EU informed Germany that it has got two months to sort some of this out or they plan to bring what is called an infringement action against the country.

Right, right.

And so what is -- you know, what is basically going on is that it is a fairly politicized situation.

We -- -- you know, certainly as an industry are working hard to try to discern a way forward.

And the most frustrating thing is that there is no definitized answer to this yet.

As to the public outcry, I think the situation in Germany has always been toward the refillable container.

Right.

And it is kind of a clumsy way to do it in my opinion.

I am not trying to be negative, but it really is.

We don't at this stage think that the final answer is -- has been determined, but we are heartened, you know, by such thing as the fact that the upper house wouldn't -- House of Parliament wouldn't make a decision to put a final ordinance in place, that the EU is threatening to take the action that it is.

And there seems to be a little more -- I guess, of a rational dialogue that's going on.

Meanwhile, what we have -- what we are doing and what we will be doing, as Leon mentioned in his remarks is looking at, you know, various scenarios, outcomes, and taking certain actions and planning to take others that are going put us into a better position even if the German situation doesn't change.

But the likelihood that it won't change -- and I think change for the better -- is very low.

Great.

Okay.

Thanks very much.

Our next question comes from the line of Edings Thibault of Morgan Stanley.

Go ahead with your question.

Thanks very much.

And good morning.

Quick question on the metal food can business here in North America.

Leon, you talked about volumes being up 7.5% but revenues up 10%.

Is it fair to assume that the company was able to successfully pass on costs or perhaps put better way, is that a real price increase or cost pass-through?

The answer is it is probably more of a result of the mix of cans that we sold in the third quarter, Edings.

We had an opportunity to sell a significant number of cans that had a higher price.

Is that easy open ends by any chance or is that a different mix?

No.

It is seafood product.

The Jessica Simpson effect, the chicken of the sea.

It is more of a salmon effect.

Okay.

Got it.

On Europe as well looking again at the margins there, revenues were effectively flat quarter over quarter but the company was able to see a seemingly much stronger profit quarter at least in the international packaging business as a whole.

I was wondering if you could talk about what kind of steps that the company had taken quarter over quarter to drive that kin kind of profitability.

Those folks continue to amaze me.

In spite of the fact their volumes are down over 50% in Germany, they continue to produce the kind of earnings that they do.

They have been very, very diligent in their efforts to contain costs, hold costs down, hold capital spending down.

They continue on this system of rotating downtimes in their plants and Germany, a plant might be down for three or four weeks while a sister plant runs.

The workers are sent home short pay.

Costs are partially at least made up by the government in Germany, which is helpful to us.

But all I can tell you is they are managing the heck out that have situation.

I mean, there was no silver bullet that quarter that allowed that to happen, it was just hard work.

It is just getting more used to dealing with the lower volumes in Germany and figuring out how to better run the system?

I think that's probably it.

The strength of the Euro also helps.

Oh, yeah.

Okay.

What -- can you talk about volumes in Europe, Britt large, sort of quarter over quarter?

Well, the -- first of all, we didn't own the business last year.

So there weren't any European numbers in our numbers a year ago.

So when you said profits were up versus a year ago, the year ago numbers weren't in our data.

I was thinking quarter over quarter because flat revenues higher profits.

Quarter over quarter.

Yes, sequentially, I apologize.

The hot weather in Europe helped everywhere else.

The guys in England, France, Poland and Holland have -- as Leon said, have taken advantage of the stronger markets this year so we made up some of that German loss in those countries.

And you know, it is sort of how good could it have been, you know, is more the question.

I mean it is a wonderfully performing business, making well in excess of our cost to capital right ow of the box and yet it could have been a whole lot better into right.

And then --.

Right.

Then finally, is there going to be a particular charge associated with the closing of the run corn facility in the fourth quarter?

No.

That was.

We anticipated that when we bought the business.

So it was provided for in the opening balance sheet.

Okay.

Great, thanks very much, guys.

Thank you.

Our next question comes from the line of Amanda Tepper with JP Morgan.

Please go ahead.

Good morning.

Good morning.

First up on -- you mentioned your press release that you expect plastic container sales to rebound next year.

I am wondering if this is just weather-related or if you are looking for something beyond that, either new contracts, volume pickup, or perhaps you think pricing may firm because I believe pricing in general in that segment has been under pressure this year.

Pricing has been somewhat under pressure.

I would liken that to food.

I think it has probably gotten low enough that people aren't going to be out trying to take market share with price from this point.

And our major belief is that we have been really, in our business at least, Ball's business with 60% of our capacity being in an area of the country that has been impacted by weather early and often, it seems like this year, that we will return to something more normal next year and we will get back to the kind of growth rates that we had anticipated for this.

Okay.

And then why is your Cap Ex budget now coming down at this point?

What are you not spending on that you had thought you would be spending on?

In the original plan I think we had up to like $40 million Euro spending in Europe because we had a business that was -- we had some speed ups planned for Poland and and other areas that we didn't do because of the German deposit situation.

So the capital spending in Europe is way down from where it was.

And we have really -- what happened in the PET business and other businesses as the earnings haven't been as good, we have ratcheted down capital spending.

So it is mostly Europe, it sounds like.

And then just a quick catch up.

Inventory levels.

Where are you relative to plan, and especially in the U.S.?

There is good news there.

We have kind of been pounding on our two food can and plastic businesses, but that's another thing when you look at the cash flow, is both of those businesses -- the gentlemen running those businesses have been tightening down their inventory businesses so they expect to go into next year and be able to turn on all those machines and run.

We have been constantly taking out of the inventories and getting down to the absolute bear bones.

So the can and PET business will be heading into next year with very low inventories.

Beverages is about where it is supposed to be.

And so that's one of the reasons that we thought we would have sort of a buildup in working capital this year to the tune of 40 or $50 million.

And we don't think that's going to happen, so that's the other reason why the free cash flow has been called up.

And finally -- and maybe I missed it, but did you give or could you give the FX impact on revenues overall or within packaging or however you want to break it out, maybe in international?

Well the Euro -- the conversion of the Euro to the U.S. dollar has continued to strengthen throughout the year.

We have used the average rate for the P&L and the balance sheet, you know, we translate at the closing rate.

I think originally the Euro started out about 1.05 to U.S. dollars now I think at the end of the last month it was somewhere around 1.15, and I think it has strengthened somewhere from there.

So you can do the math on it.

Thanks.

You bet.

our next question comes from the line of Ghansham Panjabi with Lehman brothers.

Please go ahead.

Hi, good morning.

Good morning .

Can you give us a breakdown on the volumes for the Asian business in metal and plastics, please?

On the Asian business?

Yeah.

In China, we are -- we looked at a stronger quarter than we thought we would have.

Our actual was up something like about 10% over our planned, close to that, not quite, but close.

Okay.

So a pretty strong quarter.

A quicker rebound from S.A.R.S. than we thought we would see.

And that's a little bit better than we had last year.

Not a lot, about you a bit.

We are running full tilt in the south part of China, actually having to ship some cans into that region from Beijing.

So they are running pretty strong, especially in the south.

Do you see this as a secular shift?

Are things improving finally in that region or is it too early to classify that?

Probably too early to call, but we like the trend.

And you talked plastics, we do some HDPE bottles for the oil business in a couple of plants.

And it isn't a very large business.

It's just pretty day-to-day kind of a thing.

It is predictable.

We know what we are going to do, and we don't do much more or less than what we think we are going to do there.

Ray, what is the canning for the big swing -- what's accounting for the big swing in the --

Let me look.

Most of the big swing between last year and this year.

Most of what is in that line is deferred tax.

I am trying to think of what is in there from last year.

The $31 million you see for the three month and the 32 year to date, most of that is deferred taxes.

Mostly deferred tax?

Yeah.

And how would you look at the outlook pricing for the beverage cans business '04 versus '03?

I think I would describe our situation as one as you know that we have much of our business in long term contracts, which provide for increases related to cost increases and also by contract.

We also have still remaining certain increases that were negotiated with some customers a couple years ago when the last time prices generally increased.

We lengthened some agreements and agreed to spread price increases over multi-years, so we are still going to get some of that.

I think the -- you know, the business, to the extent that we can recover the cost impacts and gain some -- you know, some additional price as well as continuously work on, you know, the cost side of the equation, we would hope that we will see improved performance next year.

Great.

Thanks.

Good luck in the quarter.

Thank you.

Our next question comes from the line of Andrew Fineman with Aridian Asset Management.

Thanks.

You tell me how much your receivable securitizations were at the end of the quarter?

And then I have another question.

You know, sold receivables.

Andy.

It hadn't moved much.

I think we did that in the first quarter and late second quarter, and it is about $175 million.

Okay.

Now you said -- and oh, how about -- can you tell me what your actual cash taxes might be for this year and maybe for next year?

You know, I don't have that number handy.

You know, remember, we also have the situation where we have some AMT tax hung up in prepaid where we -- you know, where the government owes us some money back that we have already paid.

But needless to say with the tax planning we did when we bought Ball Europe and what we have here is the cash taxes are fairly low.

Okay.

But I don't have a number handy.

You said that you are still hoping to be below 1 billion 675 million net debt.

Correct.

Is that right?

Yes.

By the end of the year?

Yes.

That implies in the fourth quarter alone you are going to generate $4 a share free cash flow --

Remember, the food can business builds up, builds up, and then the food can business alone will flow in the neighborhood of $170 million of cash flow in the fourth quarter because people are paying us for receivables that we haven't been paid for for the other part of the year.

So the fourth quarter is a huge cash flow quarter for us always.

Did the opening balance sheet of the Small Balk acquisition provide for any other rationalizations besides the one in England that you announced?

That was it.

That's the only one provided for.

Okay and, you know, when I last talked to you guys, at your conference, the guy that runs the defense business talked about some commercialization opportunities coming out of the defense business and it was pretty exciting stuff I think he mentioned portable power supplies.

Are you any further along in being able to talk about the potential there?

I think that, you know, that the biggest commercial success we had in the quarter was this next view contract with Digital Globe and that's quite large.

The portable power supplies is technology that we understand -- we aim our developments really at the government.

At this stage of the game I don't think that this stage we are seeing a commercial market yet develop in that particular thing.

But the aerospace business is building strength and backlog and you know is doing pretty well.

The mix is still about 65/30 cost type to fixed price through three quarters.

My expectation is that next year that's going to move more in the direction of fixed price with this next view thing and you can see that the margins in the business have been improving steadily.

So they are doing a good job managing that business.

The last thing I will bug you with.

Have you given an estimate for capital spending for next year?

I don't think we have unless you have, Ray.

No, I have not.

We are getting our plans in now.

And everybody is rolling off all those numbers.

So we haven't done that yet.

You can see the -- we are prepared to admit to the more than 275 cash flow this year.

And as Ray as said before, I believe that numbers of that are what we are looking for going forward.

When we talk about that net debt number, Andy, the -- you have got to remember, there is probably a $50 million increase in the debt because we financed Europe pretty much with Euro denominated debt because we didn't want the exposure.

We have really done I think an excellent job of cash flow this year.

We are going to exceed that number even with a $50 million increase if you will in the exchange of the European denominated debt.

I agree.

The cash flow is phenomenal.

I wanted to make sure I heard you right when I said 4 bucks a share in the fourth quarter alone.

Yep.

Thank you.

Yep.

Our next question comes from the line of [Timothy Burns with Cranial Capital].

Please go ahead.

Good morning, guys.

Good morning, Tim.

Couple of questions.

First one, PET, the Watertown Wisconsin plant that was the old wood pack business you bought?

Correct.

That was kind of a small plant and having been through Aims and a massive facility, it makes sense to move it there, correct?

Makes sense to us, yes.

From a business model perspective, are you guys happy where you are?

I mean, obviously small plants with old equipment don't work anymore.

I guess we are testing whether big ones with a lot of equipment and a little labor do work?

How do you feel about it?

Are we getting closer?

Well it is not an easy business.

It is definitely commodity.

And it is a hard what I to live.

But bev can has been a hard way to live for us for a lot of years as well, and as Ray keeps reminding us, the EBITDA results of that plastic business are probably as good as if not better than our bev can business here in North America.

So it is not -- can business here in North America.

It is not anything we are throwing the towel in.

It's certainly worth the candle to hang in there.

I am not criticizing.

It's just one of those things on Sunday afternoon as I saw Chuck Casey in Forbes at one time, the money starts flowing through.

I wonder if you guys are working through that point, and I was wondering where you are, because these are big plants.

I think to Leon's point and quoting Ray there, if you look at the way we got into the business and where we are, our depreciation expense, I except is higher than that of some of the competition because we are writing the stuff off pretty quick, Tim.

We tend to look at cash returns as being the most important.

That's not to make an excuse, but within a couple of years or so you are going to see EBIT up and depreciation down in the business.

But in terms of the value that it creates as we look at it, that won't change a whole lot.

This year to be particularly tough with the combination of bad weather, the competitive pricing action that was a little weird that occurred or reasons that, you know, I guess I understand but I wish didn't exist.

I think the industry needs to consolidate further.

I think we as a participant in any of that are going the take it real easy because, you know, we like to make good returns.

But I think you will see -- you have seen that as Am Corps, you know a -- acquired the Small Balk business and a couple of others in North America here.

And I think you will see more of that as the performance in the industry gets better.

We are still in the same number of big customers in that industry.

And you know, either we get to a point where we can he were a return in excess of the cost of capital or we ain't going to be in any of these businesses.

That's not a threat that we are about to do anything, but that's how we look at it.

We also are looking real hard always and recently had a session among our senior managers to understand how do we improve in each one of the businesses that we are in.

And so, you know, I think one of my colleagues here said it sounds like we are dead today.

If we do, that's a mistake.

If we do, that would be a mistake.

We are far from dad and we are damned excited about the prospects this business.

It would be great.

Can you -- would it help to add custom or is custom too far down the road?

I know your operating philosophy is high volume, commodity and just better than anybody else.

As we go forwarding one of the real critical things that we have got to do is learn from the experience that we have had, both in the Reynolds and in the European acquisition, be disciplined but be prepared to look at thing that compliment what we are doing, you know, and if we found a custom business where we thought there was good growth at a price in a we thought we could make a good return, we would certainly consider that because it is close to home and certainly close to the home of the Ball Corporation which is going to be 125 years old here in a couple of years.

I forgot about that.

Have you gotten your invitation to the party yet?

No, but I am ready, just send the jet and I will be there instantly. [Laughter] I had a question for Leon because I am pleased as punch to see these new -- I know they originally weren't named squat cans, they were named something else, but somebody vetoed them.

But the small 8 ounce cans are grabbing attention.

I was wondering, do they work from a cost standpoint for Ball and are they working for the customers?

They certainly work for us.

We are making the majority of these cans in our Kansas city facility which is primarily non-commodity sized cans.

It is a shot in the arm for that plant.

We are seeing continued growth, it looks like more next year than this.

And this year was significantly more than last.

I think a lot of this is being driven by the big box stores.

May not be our immediate customer that is driving this demand, but it is working in the big boxes.

Volume is constantly growing.

I know there is a new line being installed next year for that particular can.

So -- or a 12 ounce line is being converted to provide that can next year, not at Ball but at one of our competitors.

So it bodes well, I think for maybe some non-commoditization of this package.

Well, it is tough to price.

I mean, people aren't as able to price a 12 pack of 8 ounce as they are a 12 pack of 12 ounce.

Is the new product a as a result of similar stature?

It is a different size, something that's not in the industry today.

One that our customer would prefer we not speak a lot about.

But it is one that I am -- I am enthused.

I am glad we got this thing and I am anxious to see how it turns out.

We have got to start somewhere with this stuff and we are starting this one in our Conroe Texas plant.

We should be up and running that by probably early to mid second quarter next year.

Great.

Great.

Well, hey, maybe custom isn't working in and out PET, but it sounds like it is working in and out cans.

It is working extremely well for us in cans.

Just don't bring to the beer side of the business, we want our cans bigger.

We have bigger ones.

Thanks very much.

You bet.

Our next question comes from the line of Christopher Miller with JP Morgan, please go ahead.

Good morning.

Most of my questions have been answered.

Just wanted to follow up a little bit in terms of what you were talking about in terms of potential growth opportunities and maybe expand a little on geographic lines in terms of are there geographies where you would be liking to potentially strengthen your business or are you pretty happy with the portfolio as it stands now?

I think we would like to stand as we are now.

And that includes a relatively new place for us, Europe.

As Leon mentioned a number of us spent the last week in Europe.

We were in Poland for a good part of the time.

I think there are organic growth opportunities in central and eastern Europe for us.

We have announced our plant to build a plant in Belgrade, for example, over there.

We have had a bit of a negative due to Germany which has already been talked about.

But I think our view of the beverage can market in Europe is that it will continue to grow from this base.

So that's one place.

I think we would add business over there if we could find things that are not far afield that might not be beverage cans.

We have got a great management team.

We are very impressed with their performance.

Among the things that our company has got to do in order continue to drive value we believe is to make good acquisition.

And because of the strength of our balance sheet, because of what I would characterize as a solid management team, we are -- we get a look at things.

Your question was around geography.

You know, there are lots of places in the world and lots of people that aren't being served by the kind of packaging that we make, whether it is beer beverage or PET and so on.

Our experience in China, currently it is working pretty well.

But don't forget, only two or three years ago we had a large charge because the market took a turn from growing at 15% a year to actually shrinking a little bit in a short period of time.

What you find in places like that, like Brazil, Thailand, India is another country that would presumably be a wonderful place.

When you make the commodity package, when you are the leader and you get into these places initially, it is like the guy that builds the hotel down the street and once it has been bankrupted three times then somebody finally starts making money.

I think we have been errored in the past on the developing world strategy it is not appreciating the degree of extra return we need to go into these places because of the volatility.

But that being said, as large as we are and being a leader certainly in beer beverage we continue to look at obviously other places.

But our first focus would be to do more thing where we are solid and that would be North America and Europe right now.

And aerospace business has been a great performer for you.

I want to talk about the backlog there.

I think the last number you referenced was a backlog of $680 million.

Is that still a fair assessment of where the backlog is?

Yeah, that's actually -- you know, the contracted backlog number.

There is another bigger one that we don't talk about, custom is contracts awarded and I don't want to get into that because it can be confusing.

But that's the comparable number that has grown from -- I think it was 4 hundred and something at the end of the year.

And we expect it will grow further by the end of this year.

And a last minor issue.

The question has come up, it doesn't appear you have any facilities in Southern California that would be impacted by any of the fires that we are seeing.

Just to make sure that that's out there.

None to date.

We have a plant in Chino California that makes PET battles and a can plant in Torrance and those are both continuing to run.

Great.

Thank you so much.

Our next question comes from the line of Stewart Scharf of with Standard & Poor's.

Please go ahead.

Hi.

I would just like to know if you are still looking at pension expense exceeding 23 million or if you have a figure for '04?

Actually, we have had those numbers updated.

I think the number we are looking at in the U.S. right now -- I think you are right.

I think the number we started off with was around $23 million.

That's the U.S. number.

U.S. and Canada, North America.

I think looking at that number right now as we sit here it is more like $33 million.

And that's what we have been accruing to.

And that's primarily gone down -- you know as the interest rates continue to go down, that has an impact on your pension liability and it also has an impact on the pension expense.

I think the number we are accruing to in North America is $33 million.

And the number in Europe is closer to $20 million.

Between the two numbers together, there is probably 53, $54 million of pension expense in those numbers for 2003.

Now, 2004, I think our first read -- they don't go up too much.

I think Europe is pretty flat at $20 million and I think the U.S. number is around the same number.

It is up a little bit, maybe a couple of million dollars but it doesn't move up much from that.

It will be about the same?

Yeah.

Okay, thank you.

Our next question comes from the line of George Staphos.

Please go ahead with your follow-up.

Hi guys.

It is getting late.

House keeping.

I'll make it quick.

The restructuring credit from China was that in the operating profit number or was it in corporate -- was it in corporate or packaging and operating number?

We have this line put on our statements called business consolidation costs.

Anything we do with restructuring goes in that line and anything that comes out as a result of restructuring comes back out through that line.

All the China numbers is in that business consolidation cost line, the $3.5 million you see for the three months and the $2.1 million you see for the nine months.

Okay.

And something below 32% tax rate I think you said earlier.

Is that where we should keep going forward?

We think, the way we set the taxes up for in Europe, we thought we were going to make a lot more money in Germany.

And as a result of where we made the money the effective tax rate in Germany and Europe in total is very low.

It is kind of in the 20% range.

We think that looking forward next year, we still think that probably that holds for another year.

In fact, if we start to make more money in Germany, custom we hope to be, our effective tax rate will start to move up.

If all normalized, 34 to 35% if Germany was making what it was supposed to make.

Fair enough.

Dave, you mentioned the infringement action.

What's different from yesterday from the initial announcement in September?

We talked about it in September and now they have officially done something which is -- you know, I guess it is just stronger.

I don't think that that alone is -- you know, is going to drive Germany to make a change.

I think the point is this is -- you know, for the rest of the countries in Europe, anybody who is bottling or rather canning anything can't export it into Germany and Germany is a very big market.

It flies in the face of what the intent is.

The other thing that occurred a few weeks ago is that the economic ministry had a third party study done of the impact to date of the deposit, and its cost -- at that time I think it cost the country something like 11,000 jobs, they estimated, and a lot of money.

And it has made no visible difference in litter.

So, you know, it is really an irrational situation, and one that I think we are more optimistic there is a solution to.

You had mentioned if they don't clean up the situation in two months, there is some additional action then that would be taken?

What could they do?

They would then presumably institute an infringement action.

And not being a legal expert in Europe, I don't think that that alone is going to cause, you know, a change.

But in the politics of the United Europe, and after all, the EU is -- Germany is such a large part of it.

They have got a bigger problem as France in that they are overrunning targeted deficits.

The economy in Europe is not healthy, certainly in Germany.

I think you may have seen recently that Schroeder talked about and his implemented certain restrictions on pensions.

This is a big deal in the politics.

There was a rumor that he is seriously under the gun in terms of lasting out his term.

I am just reporting what I hear.

Sure.

And so I think, you know, a solution so that we can -- if it involves a deposit in a situation of what it was like in the original act just tell us that and we will go adjust to that and move forward.

Right now, the only cans that are being sold are through this chain store, the Tobacco Land chain store.

And that's only about 10% of the volume of the country.

Everybody else is delisted.

Another outcome is that they will measure it again this year and find that it is well under the 72% and we will start selling cans again.

That's a possibility.

I would not predict that within the next week or so we will have clarity around this but I think something is likely to be more clear and will let us start working during the year of 2004.

To get much closer than that right now is really hard because you are trying to predict what politicians are going to do.

And that's hard.

Okay, guys.

Fair enough.

Good luck for the rest of the year.

Thanks.

Ladies and gentlemen, if you do have a question, please press the 1 followed by the 4 on your telephone.

It sounds like we may be done, operator.

There are no further questions at this time.

Hey, thanks everybody for participating with us.

This is far and away the best year our company has ever had and we think next year is is going to be better.

We will talk to you again in about 90 days.

Ladies and gentlemen that concludes your conference call for today.

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