Ball Corp (BALL) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, Thursday, October 27TH, 2005.

I would now like to turn the conference over to Dave Hoover, Chairman, President and CEO of Ball Corporation.

Please go ahead, sir.

Thanks very much; good morning, everybody.

This is Ball Corporation's conference call regarding the Company's third quarter 2005 results.

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 or outcomes to differ are in the Company's 10Q, filed on August 9, 2005 and in other Company SEC filings as well as Company news releases.

And if you don't already have our earnings release, it's available on our website at ball.com.

Information regarding the use of non-GAAP financial measures may also be found on our website.

Joining me today on the call are Ray Seabrook, Ball's Senior Vice President and Chief Financial Officer, John Friedery, Senior VP and Chief Operating Officer of our North American packaging businesses and Hanno Fiedler, Chairman and Chief Executive Officer of Ball Packaging Europe.

In the third quarter, our GAAP results were $0.73 per diluted share versus $0.90 per diluted share in the third quarter of 2004. "X" items as explained in note two in our earnings release, third quarter non-GAAP results were $0.85 per diluted share versus $0.86 per diluted share a year ago.

Generally, we're very pleased with the quarter, especially given the higher energy, freight and materials costs that we've been dealing with.

As have many.

I will say more about our outlook in a few minutes.

First, Ray will provide some detail on our numbers, followed by John and Hanno and their comments on the Packaging Operations.

Ray?

Thanks, Dave.

For the first nine months of the year, diluted earnings per share before debt refinancing and business consolidation costs were up by $0.05 compared to last year.

EBIT for the nine months is lower year-over-year due primarily to lower operating earnings in North American packaging and identifiable business consolidation costs, offset somewhat by lower SG&A costs.

Lower interest costs, a lower effective tax rate and an elevated stock buyback program have also contributed to the Company's higher comparable earnings per share performance to the first nine months.

Our lower tax rate for the quarter reflects a net tax benefit recorded as a result of the repatriation of foreign earnings under the American jobs creation act.

We now anticipate that our full-year effective tax rate will be around 29% with fourth quarter rates similar to the third quarter effective tax rate.

We commenced three major initiatives in the third quarter, first was a project to significantly upgrade and streamline our North American beverage canned and manufacturing capabilities.

Over time, this major capital project will result in significant productivity improvements and reduce manufacturing costs.

An accounting charge of 19.3 million, 11.7 million after tax was recorded to write off of obsolete equipment, spare parts and provide for employment termination costs associated with this activity.

Second, we commenced the refinancing of our senior secured credit facilities and the redemption of our 7.75% senior notes due in 2006, which will result in a sizeable reduction in next year's interest expense.

Third, we approved the repatriation of approximately 515 million in foreign earnings and capital that will keep our effective tax rate at a lower level for seven more years.

Turning to operations, aerospace had an excellent third quarter with operating earnings up over 30%.

Earnings through nine months were higher than a year ago, including a $3.8 million first quarter equity investment write-off in our aerospace division.

In North America, third quarter packaging volumes are up in all product areas but operating earnings were lower due primarily to higher energy and indirect material costs.

Food cans were also negatively impacted in the quarter by price cost compression, primarily a result of raw material cost increases.

In addition to those cost increases, lower year-to-date beverage can volumes, an increase in the life of inventory reserve of almost $13 million have impacted operating earnings through the first nine months.

Internationally, packaging volumes are ahead of last year in the quarter and year-to-date in both Europe and China.

Operating earnings are slightly down compared to last year due -- due again to price cost compression.

We have repurchased more than 310 million of our stocks through the third quarter and we now anticipate that our next -- our net stock buyback for the year will be at least 350 million.

When our stock trades at attractive prices, we will continue to be, when permitted, aggressive buyers of our stock as we constantly rebalance our capital structure.

As we stated in the beginning of the year, we didn't plan on much of a debt paydown this year as we had significantly deleveraged our balance sheet over the past several years.

Overall net debt should be 5 to 8% higher at the end of the year than it was last year, primarily due to the larger 2005 stock buyback program.

This modest debt increase will not shift our capital structure from desired levels and our credit quality remains strong.

At the end of the third quarter, the rolling fourth quarter debt-to-interest-coverage ration was at 4.9 times, and the total debt to EBITDA was at 2.5 times.

Now I will hand it to John Friedery to review the North American Packaging Operations.

Thank you, Ray.

Let me start by saying that during the first nine months of this year, while I am not satisfied with our financial results in the North American packaging segment, I'm pleased with how our Packaging Operations have responded.

I'm sure we will have our share of challenges in 2006, but based on programs in place and being developed and the efforts of our employees, I am optimistic about our chances next year for growing our packaging business and improving performance.

As Dave mentioned earlier, rising costs have negatively impacted Ball in 2005.

Just in the areas of energy, freight and coatings, costs through three quarters in our North American packaging segment have been more than $35 million higher in 2005 than in 2004.

In addition, higher steel prices have hurt results in our metal food can operations as compared to last year.

For a 10-year period or so starting in the early 1990s, we had a cost environment for energy, raw materials and ODMs, other direct materials, that was fairly predictable.

The past two years have turned that on its ear and we are managing our way through this new environment, which we hope will settle down somewhat in 2006.

To help bring results back to acceptable levels, we are looking at both the revenue and cost sides of the equation in all of our businesses.

On the revenue line adjustment mechanisms blink to annual, consumer price indices will provide us with price increases as those mechanisms take effect.

In addition, we are asking for energy and freight surcharges from our customers to counter the unprecedented increases we have seen in those categories in the wake of the devastating Gulf Coast hurricanes.

As you would expect, we are also taking numerous actions within our operations to reduce costs and improve results.

In the third quarter, we completed the shut down of the [Vayderfay] food can manufacturing plant near Montreal.

We also commenced a project to convert a beverage can manufacturing line in our Monticello, Indiana plant from the production of standard 12-ounce cans to the production of specialty cans as demand for these containers continues to grow.

Besides these large scale actions, we are continually developing and implementing a myriad of small, more local programs to control costs.

We make over 45 billion containers a year in our plants in North America and a penny here and there can quickly add up.

These programs are a part of daily life in our plants.

In today's environment, our focus is obviously on improving material usage yields, maintaining the demand side of the energy equation and optimizing our shipping movements to minimize freight costs.

Elsewhere, work is progressing on a project to upgrade our manufacturing processes for aluminum beverage can ends as Ray mentioned earlier.

We talked a little about that project last quarter.

We have installed the first production module of this multiyear project and the start-up is progressing smoothly.

The second and third modules are in the installation phase at this time.

The modules in this project utilize new equipment, which is 40% more productive than the equipment it is replacing, along with automating a lot of manual activities in the end-making process.

The net result is that we will be making the same number of ends in less space and with fewer people.

In addition to the investments in our beverage can business, part of the capital we are deploying is to expand our capability to manufacture heat set P.E.T. bottles for hot-filled beverages.

The hot-fill category is expanding and we are participating in the growth of this segment in it the drinks market as our heat tech bottles have been well-received by our customers.

This investment is in keeping with our strategy of improving our P.E.T. business through increased penetration of the higher value-added segments of the plastic bottle markets.

In Brazil, our volumes continue to grow in line with the overall market.

We have expanded our warehouse facilities and added another decorator in order to ensure our ability to continue to grow with our customers in this important can market.

Finally, our operations in China turned in a solid quarter.

Sales were solidly higher than a year ago in the quarter and year-to-date.

We have been able to improve the efficiency of all of our plants in China this year and that has enabled us to keep up with the increased demand.

We expect demand for the beverage can to continue to grow nicely in China in the coming years as both multinational and Chinese beer and beverage companies expand their markets.

The strong economy there and the long buildup to the 2008 Olympic games should support that growth.

To summarize, we have a lot of challenges and a lot of opportunities in our packaging businesses; raw materials and energy costs remain unpredictable, but many of the costs will be passed through.

Custom cans and heat-tech bottles are providing us with growth opportunities in North America and we continue to improve our asset base and cost structure in our core businesses.

This year, we are investing capital and a lot of just plain hard work in our operations, putting the pieces in place to grow the businesses and improve performance starting in 2006.

I'd like to turn it over to Hanno Fiedler now.

Thank you, John.

During the third quarter, we experienced some of the same energy and material pressures in Europe that our North American packaging segment experienced.

In addition in Western Europe, we had unseasonable cool, wet weather, particularly in northern France, Germany, Belgium and the Netherlands, which adversely affected sales.

Despite this, we continued to experience good volume growth within our business, particularly due to the continued strong sales in Eastern Europe.

Our new [inaudible] in Serbia and Belgrade was officially dedicated near the end of the quarter and is already nearly sold out.

And was constructed in a very quick 10 months and was made large enough to accommodate a second can production line and an end manufacturing module for future growth.

During its construction with unfavorable shipping patterns as we brought on additional customers.

As we continue to qualify our global customers for local supply out of this state-of-the-art plant, they will now be served more efficiently by this location.

And we remain optimistic about the prospects for this region.

Going into 2006, Ball Packaging Europe's management is focused on several areas.

The first area is pricing and cost; over the past 12 to 24 months, our input costs have increased dramatically.

During 2005, we took the strategic decision to shelter our customers as much as we could from these pressures.

However, we are at a point where we cannot continue to absorb such increases.

We're in the process of discussing with our customers selective price increases that make sense to these cost burdens.

Second, we and others in the beverage industry continue to work in earnest on the reintroduction of one way packaging into the German market during the first half of 2006.

Various cross-functional teams of participants from all the major stakeholders, on which Ball Europe has played a significant role, continue to make progress toward this eventuality.

Retailers have begun to order reverse vending machines for installation and much work is being done to make this a success.

We remain optimistic long-term about the success of the beverage can in this environment due to its favorable economics and efficiencies for the beverage fillers.

Lastly, we continue to focus on our innovation efforts.

This quarter in the U.S.

Ball commercially introduced the Wedge, which was developed by BTE in Europe with a food ingredients partner.

This product, which allows vitamins and other sensitive ingredients to remain separate from the liquid until opening of the beverage can is experiencing strong interest from our customers.

In addition, we continue to broaden the sales of our rapidly-growing 33 centiliter sleek can and later this quarter will be introducing a 25 centiliter sleek can for our beer and CSD customers.

The people in our Bonn Technical Center have been working hard over the past several years on the initiatives and I am pleased to see the fruits of their labors being widely accepted in the marketplace.

In summary, while we still have work to do, I am pleased with the progress we have made and continue to look forward to further developments at Ball Packaging Europe.

Before I turn over to Dave, I would like to express my feelings at the end of my term as Chairman of Ball Packaging Europe and would like to make clear that I'm very proud to have worked with so many fine, intelligent people over the years: First in Europe and now with my North American colleagues.

David, it has been a privilege to meet our European operations and I firmly believe that they're in very good hands going forward.

Well, thank you, Hanno.

Hanno and I have discussed his participating in this call for the most of the last three years and we had a -- an understanding that until we had tangible, good things to report about the German deposit legislation we wouldn't do that.

So, I'm really glad that he's here today.

We first met in Chicago back in 1996, soon after he joined the packaging industry, after a long and successful career with TRW.

And I've really enjoyed working with you, Hanno, over the years.

Though you are retiring as head of Ball Packaging Europe, you will remain on Ball's board and will share the supervisory board of our European business.

So, we will continue to work together and I'm happy about that.

You've been an important part of this management team since you came on board and I want to thank you for all you've done for Ball and I expect that you will continue to do.

I do agree that Ball Packaging Europe is in excellent hands with John Hayes.

John and Ball Europe have many opportunities on the near horizon and I really look forward to working with John in his new role, as well.

Well, turning to -- turning to the aerospace business, our aerospace and technology segment had really an excellent quarter.

You know, it began with a successful launch of the Deep Impact mission on July 4.

And the business has really experienced tremendous growth over the last five years.

This quarter, as Ray mentioned, not only did we see continued growth, but also margin improvement, which was a good thing.

We're a little concerned as we look into the future because of all the government spending for everything from wars to hurricanes and so forth and what that might do to put pressure on some of the budgets that we depend on in civil and DOD work for the government.

But at this point in time, the backlog is healthy at $768 million; we think that this will be another record year and we continue to believe the long-term outlook for this business is very positive.

Turning to the outlook for the entire Company for the remainer of 2005, our third quarter results keep us on track to have a second half 2005 results be comparable to our record performance in the second half of 2005.

Last year in the second half, we made GAAP earnings of $1.40 and actually $1.31 per diluted share, excluding business consolidation and debt refinancing costs.

We feel that being able to -- to be in the neighborhood of that number would be a considerable accomplished and what you've heard described by some as a transition year for Ball and under the difficult circumstances with some costs increasing as you just heard our folks talk about.

During 2005, we've invested in our best-performing businesses in order to remain competitive in our industries while delivering the highest quality products to our customers.

We believe that initial returns on those investments expected added volumes and anticipated improvements in the German deposit situation and other factors indicate that 2006 performance should be improved.

And with that, operator, I guess we're ready for questions.

Thank you. [ OPERATOR INSTRUCTIONS ] Our first question comes from the line of George Staphos of Banc of America Securities.

Please proceed with your question.

Thanks, operator.

Hi, guys, good morning.

Congratulations, Hanno, too, on your retirement.

I guess first question I had -- I jumped on the call a little bit late.

Did you discuss at all what benefits you expect to get from the end-making productivity project?

At this juncture are you prepared to share those details?

Hi, George, this is John.

Hi, John.

We did speak to the fact that what we're doing is -- it's a multiyear project.

We've got the first module up and running.

Modules two and three are in installation and will be starting up early next year.

Right.

Did you hear that?

Yes, I did.

Did you share with the dollar level of profitability you might be able to get from the project at this juncture?

No, I think we commented last quarter that we expected it to have returns in excess of our cost to capital and -- I think Ray said the 10 to 15% range.

I think we say that's where we're headed with this.

And at this juncture, would it be safe to say that it's been a third of the incremental CapEx this year in terms of investment spending?

Yes.

At least.

At least.

Fair enough.

Now, second question -- profits in China.

How do they look through the first nine months and -- in the quarter?

And here, I'm just looking for up, down, sideways, any kind of color you can give us on that.

George, this is Ray.

We're about even with last year.

Last year was a significant jump year for China.

China was up significantly last year.

The business continued to perform very well.

As far as profitability goes, we're about even with last year.

Volumes are up, but again, as all of it is across -- across the globe, really, they're getting hit with some price cost compression, as well.

So, maybe profits have faded --

I wouldn't say faded, they're about equal to last year.

But I mean over the course of the year, is third quarter less of a -- are you underwater so to speak versus year ago in the third quarter?

No, I wouldn't say that.

Okay.

Okay.

Third question -- [inaudible] utilization in North America Bev for 2006, can you give us a rough idea of what it will look like, assuming we don't have snow in July or -- you know, you have a normal year?

You're saying our utilization?

Yes, you know, should we be in the low to mid-90s next year, John, in beverage can North America, given the things that you've done to lock up some business -- and, again, assuming normal weather?

I'd expect with normal weather patterns that utilization in North America will be mid-90s.

Okay.

Great.

And I guess the last question I had -- and I will turn it over to everybody -- Dave, when we look at the guidance, you know, you're basically assuming a -- a flat to slightly up fourth quarter, if you do the arithmetic.

Having said that, obviously, the precision in your business, the operating leverage being what it is, it would be hard -- from where I sit -- for you to make that statement, unless you had pretty good confidence in those numbers. "A," is that a correct assessment?

And "B," where do you have the most momentum in your business right now going into the fourth quarter?

George, you've accused me of giving guidance! [ laughter ] It's shocking!

You know, we're finishing this year -- I don't think I'd point to any particular part of the business as having momentum, but volumes have been reasonably good, maybe a little better here in North America than most of the business.

You know, the food can business kind of slows down here in the fourth quarter, as you understand, in a seasonal way, as do all the businesses, but I think we're anticipating maybe a little stronger finish that way.

Europe won't -- we don't really see that because, you know, it is even more seasonal.

I just think it's what John Friedery was talking about, that we're working hard and trying to take advantage of every opportunity we have to cut costs.

Working on passing through costs where we can.

And generally the business is okay.

Aerospace is a bright light, I think.

They're going to finish solid for the year.

We still don't know, you know, it's -- we have two more months to go.

But we were trying with all the things that we've been doing --- the refinancing and everything else, to put a line aside on what we think we did last year and that if we keep performing like we are, we should be in that neighborhood again this year, which would be a [expletive] of an accomplishment, I think.

Clearly.

But congratulations on the quarter, guys.

Good luck in the quarter.

Our next question comes from the line of Ghansham Panjabi of Wachovia Securities.

Hey, guys.

How are you doing?

Hanno, I can't believe you're leaving just as the German market is coming back.

See what I have done for you?

Dave, just to clarify on the earnings outlook, are you referring to the $1.40 or the $1.31.

The $1.31.

Okay.

And last time around you mentioned that you secured additional volumes in North America beverage cans for '06.

Do you still feel that your overall North American can volumes will be up next year in light of one of your competitors announcing a sizeable share increase also?

Yes, we still feel we will be looking at volumes in '06 comparable to our '04 volumes.

Okay.

And were there any milestone payments in aerospace in the quarter?

Not anything --- not anything that's unusual that I'm aware of.

I think they just have been performing well.

Okay.

Good luck during the quarter.

Our next question comes from the line of Chris Manuel of Key Bank National Management.

Please proceed with your question.

Good morning, gentlemen.

Good morning.

Can you run us through where some of the volume numbers shook out in the quarter for the different Bev can, food can, P.E.T., et cetera?

Sure, I will speak to North America.

North American beverage in the quarter was up year-over-year versus '04, a little bit over 1%.

Food was up about 1.5%.

And P.E.T. was up about 7%.

And, Hanno, do you have anything for Europe?

Yes, we're generally on an upward trend as far as volumes are concerned.

For the third quarter, our volumes have increased by something like 9.5%.

And for the first nine months, close to 7%.

Okay.

Next question I had concerns some of the extra costs you're going to occur in this year, particularly with regards to freight codings, et cetera.

And then additional costs you've had to, you know, move cans around, both from North America to Europe, et cetera.

What do you think you will be able to recover next year -- so, of that 35 million of extra costs, with normal price increases that you put through at the end of the year, is your anticipation that you will be able to offset most or all of the costs?

And can you talk a little bit about what the pricing environment might be like in that respect?

We would certainly hope we could recover, you know, all that we can is what I'd probably tell you.

It's hard to say -- we've closed the gap -- if you look at our North American results, we've closed that gap.

We were $35 million worth of increased costs in '05 just in the three categories I mentioned and yet we're not down that much on the earnings line for the North American segment.

So, we've worked very hard in the plants and continue to work very hard.

You know, we would hope to be able to -- through a combination of cost recoveries out in the marketplace and taking steps to mitigate costs in our operations, be able to close all of that gap if we could. [ overlapping speakers ]

--- this year for freight, can you -- had you gone out and requested those?

How have those been received?

Can you give us more color there?

Well, we've gone out -- we are out talking with our customers about the -- the unprecedented, as I said, rise in freight and energy, which aren't directly related.

Freight is up because of energy, obviously, but it's also up because of shortages of trucks.

Trucks were short in certain lanes, certain parts of the country, even prior to the hurricane and then it got real tight and very interesting during our pack season in the food business because of the movements of relief supplies down in the Gulf Coast.

So, we've been out talking.

We've got letters out.

We're in talking to all of our customers about, getting recoveries in those areas.

Okay, thank you.

Thank you.

Our next question comes from the line of Amanda Tepper of JPMorgan.

Please proceed with your question.

Good morning and Hanno, bon voyage.

I'm sure you will be doing your part to increase German beverage can consumption.

Thank you for your compliment.

Okay.

On the North American beverage can volumes for next year, I'm a little concerned that volumes are moving around and wondering whether pricing discipline is breaking down a little bit.

Last quarter you said you would want some new volumes for next year and recently Rexin just came out and said they want some new volumes in what is pretty much a flat market.

So, can you comment on what you're seeing as overall price discipline?

And also where you think market capacity will be next year?

If you're at 95%, where will the market be net of Crown's closed plant that they pretty much announced last week?

Well, on the market capacity -- maybe I misinterpreted the question.

I think the overall market will still be in the mid-90s and I think we're going to be maybe just a little bit north of that in terms of our utilization.

And as far as what's happening -- we recovered some volume, we took a step back this year and we recovered some volume, but I don't think we're seeing -- certainly we wake up everyday in these businesses, all of these businesses, and worry about price and worry about what's going to happen and whether we can recover a cost in a rising cost environment.

But, you know, we manage it hard.

We look, we take costs out.

We take capacity out.

You know, we're -- if you look at it, this year alone we're taking out a couple lines of 12-ounce capacity ourselves with the Golden start-up at the beginning of the year on 24-ounce and this conversion in Monticello that I mentioned earlier.

So, you know, we continue to be optimistic about what 2006 looks like for ourselves.

Okay.

And can you comment at all on the acquisition pipeline in general given your strong cash flow situation?

And specifically on the potential Ross star deal in Russia that's been written about in the press?

I was surprised to read that we had bought that because I wasn't aware of it.

But, you know, you don't know everything that's going on, I guess, in the business.

So -- that was a joke, Amanda.

I know, I'm laughing!

We can't and won't comment anything that we might do pendingwise or otherwise.

You know, we look all the time.

There is a lot of money -- private equity money and other money chasing transactions at what we perceive to be pretty high valuations and we're disciplined buyers, but we continue to work at it and we're looking at a lot of things all the time and just as soon as we make a deal, if we do, we will tell you.

Okay.

And then in Brazil, you said you're growing at the pace of the market.

How fast is that market growing at this point?

You know, it's -- it's kind of hard to tell.

We don't have quite the view, but our estimate is that the market is growing at a little better than 5% annually down there.

Okay.

And my last question, you mentioned steel is hurting your metal food can results.

I thought that was all passed through.

Is that not the case?

Or were you talking more about margins than dollar profits?

We're talking about margin compression, but also -- steel, the food can industry, the food can business, has been a very competitive marketplace and we've been out working hard to get all of the additional costs that hit us with the steel increases along with all the other increases with mixed results.

Okay.

Thank you very much.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Edings Thilbault of Morgan Stanley.

Please proceed with your question.

Thanks very much and good morning, gentlemen.

Hi.

You know, Ray, can you talk about are or even Hanno, some of the deltas between just the volume growth that Hanno was talking about in Europe and the revenue growth, particularly in the third quarter.

Is that mostly FX or are there some mix shifts going on there --- issues, as well?

Well, basically Hanno gave you the volume, so, you could see that -- no, the FX is -- we're fairly flat.

I think in the third quarter we might be down a little bit when you think about the euro versus the dollar.

In other words, the year-over-year comparisons: Pretty flat.

In fact, this year, the third quarter could be a little lower than last year's third quarter.

Fundamentally, as Hanno said, third quarter volumes were up, you know, significantly and year-to-date we're up in volumes significantly and, you know, we've -- we've had some price cost compression in Europe as well as North America.

So, that's really -- I guess I was thinking some of it had to do with the shift between steel and alumium and just sort of a revenue shift there, but you're also seeing some costs and perhaps just following up, can you talk about sort of the overall -- not the overall, but the more micro volume environment in Europe, where the growth is coming from and just east/west, et cetera.

Yes, basically the mix between steel and aluminum in 2005 is not tremendously different from what we did have in 2004.

The question which we are going to have to answer -- what are we going to do in the future?

But certainly we would like to follow all strategy of a dual metal strategy.

The impact -- or the reason for the development is, of course, driven mainly in Europe by the better demand in Eastern Europe, Southeast Europe.

We have this open question mark and this open question what is finally going to happen in Germany?

We are seeing lots of good news in our daily contacts with the retailers and other parties in the packaging stream.

We can state that the industry is clearly on the path to see the value of one-way packaging and the advantages and costs and logistics and if this continues the way we do things, regardless of the outcome of statewide elections or national elections, we think that one-way packaging is going to be coming back big time and then there's also going to be much more demand for -- for our beverage canned products.

And this has been going to result certainly in less transport costs because we don't have to ship cans around Europe and all of that to come to a fine utilization of our facilities.

But the trend is certainly we have more growth in the east.

More growth in the southeast than we do have in 2005 in the middle of Europe.

So, this -- I guess I would have thought some of this may have been driven by at least a little bit of a rebound from -- from Germany.

You're saying mostly it's not.

Is that accurate?

In 2005 it's certainly not a rebound in Germany yet.

In 2006, it may be a different story.

But in 2005, the major factor was certainly the strong demand in what I did describe as eastern and southeastern Europe.

Got it.

Thank you.

And maybe a question for John.

You already answered the question on your expectations for volumes in Ball's North American beverage business for 2006.

But is that more a question of where you expect your share to be with primary customers rather than obviously a projection of perhaps what your primary customers may be able to sell?

In other words are you expecting the beer volumes to bounce back?

Or just expecting your share to bounce back at your major customers?

I think our -- our expectations are based on reasonable assumptions for what consumption by our customers is going to be.

Not on any big bounce back of any kind.

It's -- it's kind of a reasonable, sober look at what we think, based on trends, et cetera, what we think the demand is going to be in '06.

Okay.

And then one final one for -- for Ray.

Do you have a target for -- for debt reduction in -- by year-end -- or better said, should we expect further debt reduction -- [ overlapping speakers ]

The debt will increase somewhere between 5 and 8%.

And that's because we're going to at least buy $350 million of our stock back.

Got it.

Sorry, I jumped on a little late.

I apologize for that.

Well, thanks very much.

Good luck in the quarter.

Thank you.

Thank you.

Our next question comes in the line of Chris Manuel of Key Bank Capital Management.

Please proceed with your question.

I just wanted to actually follow up on some comments Hanno made there.

Now that you have the extra plant, the Belgrade plant up and running, what do -- you indicated in the press release that that's pretty much sold out.

Where do you think your capacity utilization will be in Europe now?

I think it's heading towards our old numbers and this is in the mid-90s.

You know, we had this big reduction in 2003 and 2004 and we are steadily moving back to all the output levels and the utilization is excellent when you can reach roughly 95% and this is what we are foreseeing.

And a second follow-up question relating to the extra freight costs and extra costs for the year.

My understanding was you had been shipping some cans from North America to Europe to meet some demand and then through various geographies here and in North America.

How much of the extra, you know, 35 million that you anticipate -- or that you had through nine months is due to those types of activities versus just an increase in the cost?

In other words, I guess what I'm trying to get at is, what, potentially, just by having your realignments done in both continents, will go away next year on its own?

Chris, I don't have that number specifically broken out.

But I'd say it's a small portion of that number.

There should be, based on the in fact we're kind of realigned our manufacturing capacities for custom containers that we -- that the European slim line is up and running -- trim line is up and running in Aus, will mitigate some of those additional costs.

But it will be a small -- it's a small portion of that overall $35 million number.

Okay.

Thank you.

[ OPERATOR INSTRUCTIONS ] Our next question comes from the line of Alton Stump of Longbow Research.

Please proceed with your question.

Thanks.

Hi, guys.

Good morning.

I have one quick question for Hanno first off.

You know, I want to get an idea of looking at next year for Germany, how soon do you think we can see the entire German market come back to where it was before the deposit lull was put on or do you think it's probably not ever going to get back to that point?

You know, we are suddenly not able to give you exact numbers because it's still like looking into a crystal ball.

One thing is very clear -- that our point of view and our planning is kind of seconded by a major German consulting [indiscernible ] who do expect that by the end of 2007, which is -- or the beginning of 2008, we should be back in Germany with beverage cans at approximately at 75 to 80% of the 2002 level.

Now, we might want to consider this a little bit too optimistic, but our plan is certainly, in this way, at the German market, is going to increase again.

This is what our contacts would tell us, both with the fillers as well as the retailers.

This is what the spirit is in the various committees I'm sitting on, where we are trying to resign this German packaging ordinance and the revending system and you also need to know that it's not only Germany.

We think that we are going to be very proactive by installing recycling systems throughout Europe and we are on the very forefront of that.

But to tell you exactly in which year or when the sun is going up in the morning in Germany is back to the good times of 2002.

This is something where I'm not brave enough to give you an exact time.

He won't tell me, either, Alton! [Laughter]

Okay, well I guess with the recent elections that went on in Germany, which, from what I understand, looks like it should be pretty favorable for this upcoming change, are you any more confident now than you were say, three to six months ago in how soon we will see volumes come back?

I guess just in '06 for example, is it looking better now than it did one to two quarters ago?

It's an interesting question and I'm certainly not giving to you my political view on this.

However, this most public grand coalition which we're going to have in Germany have so many problems to attack that no one, I think, is going to devote too much more time on redesigning the existing packaging ordinance, which was a very tough first.

And this, I think, is good news.

I think, in the end, the packaging industry is going to benefit from a clear structure, from a clear decision, is not that this deposit is something which was on the first place of our wish list, but we have learned to deal with it and we are putting all of our energy into making the system work and to establishing this system.

And this is going to be applauded, I think by the political scene.

If we would have gotten a different government there might have been more requests or new changes and this would have brought some retailers and fillers of stepping on the brakes and deciding let's wait a little bit until we do find out more news and this tendency, I do not see at all.

Everyone does believe that the coming of new government has various subjects to think about and to change and the packaging ordinance is not going to be one of them.

So that this means the parties involved in it, and this is the retailers, especially the recyclers and the fillers, and including the -- the packaging industry, does know what they have to do and everyone is doing its best to make it happen so that the system is going to be able to work as of the first of May 2006.

Okay, great.

Thanks, Hanno.

And then I just have on more real quick question for Dave.

In terms of your second half '05 guidance which is still standing at pretty much flat performance for second half of last year, looking at what the first call is taking out from their estimates, do you think that outside of the upcoming special charge we will probably see sort of a 58, 59% number that seems to be what would get to a flat performance versus the second half of last year.

Am I right on that or am I missing something?

I don't know how your math works.

If you took what we just reported and subtract that from 131, that might get you the fourth quarter number.

Okay.

It might be greater than that.

It might be less than that.

We're going to try not to have that happen.

But that's sort of the ballparkish of where it will be.

Okay.

I can't believe how clear I'm being on this, I just hate to do this!

[Laughter] All right, thanks, Dave, appreciate it, guys.

Thank you.

Our next question comes from the line of Michael Pak of Banc of America Securities.

Please proceed with your question.

Good morning.

This is Michael Pak for George Staphos.

Just a couple of quick questions, one, maybe a question more appropriate for Hanno, whether the infrastructure would be in place for the May 1 deadline in terms of the -- the recycling deposit infrastructure?

No, the answer is no.

I don't think that everything is going to be in place.

You know, you might think that for the total German market, that we might have something between 12 and 16 billion one-way containers, we're going to have to participate in the market and in the end you might need something like 70 to 80,000 reverse vending machines and I do not see them all being in place by that point in time.

So, by March -- May 1, I would say perhaps a certain portion of those reverse vending machines, especially with the larger retailers and with the nationwide retailers and others are going to be on a manual system.

But over time, this is all going to be mechanically automated.

And we do see lots of activities in that field.

Would you expect full automation by year-end '06?

I think it's going to climb gradually, whether everything is going to be in place in '06 --- it takes still some guess work.

So, I would not tell you that 100% is finalized but certainly more is going to be done by the end of the next year than in May.

So this would be my feeling.

Okay.

And my other question relates to capital spending, whether you're on track to -- or has your guidance changed in terms of 300 million for '05 this year?

Nope.

We're still on track for that number.

Okay, thank you.

Probably a little less, but that's close enough.

Okay.

Thank you.

Our next question comes from the line of Matt Butler of Deutsche Banc Securities.

Please proceed with your question.

Hey, good morning, everyone.

Good morning.

I'm asking on behalf of Mark Wilde here.

We will permit that! [Laughter]

We have heard from some of the aluminum sheet metal producers that they are unhappy with the current contracts that are in place and I wondered if you could talk a little bit about your discussions and what you expect will be the nature of those contracts as they come up for renewal?

And as they are renewed.

And sort of what your goals are and what's maybe going to keep that from happening, if you could?

Well, I think there have been some public comments out by various aluminum suppliers that the ceilings that have been in place, kind of the structure of the industry that's been in place, the mechanisms for determining annual or six-month prices have -- are not going to be valid going forward with the rising environment that we're in.

Obviously there's contracts in place, contract discussions ongoing and we're participating in those discussions and certainly having discussions with suppliers as well as with customers about what that might mean going forward.

It's probably too early to say what form that all takes.

I might just add, you know, they're faced with the same sort of cost pressures that we've been talking about.

There is some inflation back in the economy and what you're going to see, in my opinion, at least, that works its way ultimately right through the consumer.

And so, you know, we're not happy, either.

We just talked about a $35 million hit on costs.

We didn't get it all back.

So, it isn't like because they're unhappy anything happens we will do what we always do and that's try to negotiate the best that we can, make good agreements.

By and large, the aluminum that we buy is passed through to our customers, as well.

So, they have a stake in this.

You know, we will see, but I think -- I just add that to John's answer.

Are you in touch with your own customers and talking with them about how these negotiations are going with your suppliers?

Yes, I'm sorry, maybe I didn't make myself clear.

We are in discussions with customers as well as with suppliers about this whole situation.

And obviously there will be changes that will work their way through the entire supply chain.

Okay.

Thank you.

Our next question comes from the line of Dan Khoshaba of KSA capital.

Good morning, guys.

Hi, Dan.

In terms of a pricing policy, have you talked about pushing through some price offset costs -- are these pricing initiatives likely to take the prior year form, where in the past you'd try to assess and bundle all of your increased costs and then attempt to raise price for all customers by some percent and sometimes you would stagger in subsequent years, how much pricing would go up.

Or is it likely to be customer-by-customer, a bit more spotty?

And I guess the question is if it's not the former way, why not, given the fact that that seemed to be very successful strategy in the past?

We have contracts with customers that are multiyear and contracts that are annual.

So, without getting into the specifics of various contracts, there are mechanisms in place in the multiyear to address some of these increases in the cost environment and obviously on annual-type stuff it's more of a negotiation kind of around this time of year.

So, there's a -- if I understand you correctly, there's a certain percentage of our business that -- that has clauses, that adjust at the end of the year ----- the beginning of the year, to offset increased costs in freight and energy?

That's correct, but obviously we're in an unprecedented spike that -- that I don't know who can predict whether that's going to remain, whether that's a structural shift or a short-term shift and we are outside of kind of the normal processes also in discussions about recovering those additional costs, as well.

Okay.

And are we talking primary just about the United States when we talk about these escalators in the various contracts?

And Europe is a bit different -- at least in a segment of the market that you're not in, which is food cans.

I mean the same strategy -- the same dynamics consistent in Europe for the beverage can business?

There is a fundamental difference between North America and Europe.

As you do know, we have no cost pass-through.

So, this is, in Europe, always the fun between our sales department and the purchasing departments of our customers as well as the negotiation with our supply chain management.

We have, also, multiyear agreements, which do allow certain changes even throughout the course of the contract and we have certainly put in place, not a system which is going to be used like a lawnmower for all customers, but we are going to specific customers with specific strategies but we have very good reasons because it's very clear that both on the material side, which is steel and aluminum, all of the other lacquers and other materials.

But including freight, which is nothing which we can determine.

For instance, we have kind of a new toll road system in the middle of Europe, which is going to add additional transport costs and energy is certainly one big cost driver.

So, we have lots of arguments and we have to see how we are going to be able to get out of this battle.

All right.

And last question, if I could relate it and, Hanno, perhaps you can speak to this.

Steel price expectations for 2006, in Europe.

Have your suppliers been talking about some increase, 10% increase I've heard, but what are you hearing on the steel side?

You hear a wide variety of changes on the steel price.

I have not seen any reduction yet.

Everyone seems to want more and it comes up to our ability to -- to fight and to get the best deal which -- which we can.

We have those negotiations going on for the time being.

I think by the end of the year I do think that we are going to have -- we are going to be able to have concluded all of those negotiations.

For the time being, there is some steel companies who are coming up with double-digit increases.

Others are going to be slightly less and we have to see how our good position and our existing multiyear agreements, which we do also have on the materials side, is going to help us avoid a major cost increase.

But this means tons of work during the next couple of months.

Okay.

Well thank you very much.

Appreciate it.

[ OPERATOR INSTRUCTIONS ] Mr. Hoover, there are no further questions at this time.

I will now turn the call back to you.

Please continue with your presentation or closing remarks.

Okay.

Thank you very much, operator and thanks, everyone, for being on the call with us.

We will talk to you next year.

Ladies and gentlemen, that does conclude the conference call for today.

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