Ball Corp (BALL) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation's fourth quarter earnings conference call.

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

Afterwards, we'll conduct a question and answer session.

At that time, if you have a question, please press the one, follow by the four, on your telephone.

As a reminder, this conference is being recorded Thursday, January 26, 2006.

If at any time during the conference you need to reach an operator, please press the star, followed by the 0.

I'd now like to turn the conference over to Dave Hoover, CEO.

Please go ahead, sir.

Thanks very much and good morning everyone.

This is Ball Corporation's conference call regarding our Company's fourth quarter 2005 results and our full-year 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 may cause the results or outcomes to differ are in the Company's 10-Q filed on November 9, 2005 and in other Company SEC filings as well as Company news releases.

If you don't already have the earnings release, it is 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 for the call today are Ray Seabrook, our Senior Vice President and Chief Financial Officer, John Friedery, Senior Vice President and Chief Operating Officer for our North American Packaging business, and John Hayes who is running Ball Packaging Europe.

In 2005, Ball Corporation's GAAP results for the year were $2.38 per diluted share versus $2.60 per diluted share for 2004.

On a comparable basis, excluding business consolidation and debt refinancing costs in both years, our diluted earnings per share grew actually from $2.52 to $2.62 per share.

We said 2005 would be a transition year as we began a program to invest in our best performing businesses to set the table for future growth. e made a lot of progress and I'm excited about 2006, and the growth opportunities in front of us and I'll say more about that in a few minutes.

But first Ray's going to provide us with some detail on our numbers and then John Friedery and John Hayes will make their comments about our packaging operations.

Ray?

Thanks, Dave.

Diluted earnings per share, as Dave said, for the year before debt refinancing and business consolidation action was up by $0.10 compared to last year, a 4% improvement but well short of our long-term goal of a 10 to 15% improvement annually over time.

As Dave said, early in 2005, we stated with the transition year as we commenced a three-year major capital spending program in beverage cans and aerospace.

We foresee better performance in 2006 as we start to commission some of those capital projects to production and worldwide beverage can volumes increase from 2005 levels.

Year-over-year fourth quarter and full-year EBIT was lower in 2005, primarily due to a one-year volume loss in North American beverage cans, price cost compression in all packaging sectors, most notably in food cans, and business consolidation actions.

Those EBIT reductions were somewhat offset by lower SG&A spending and higher aerospace earnings.

Moving to the bottom line, lower interest costs, higher equity earnings, a lower effective tax rate, and the sizable stock buyback program accounted for the Company's higher comparable earnings per share performance in the fourth quarter and full-year.

Our lower tax rate reflects a net tax benefit recorded as a result of the repatriation of $488 million of forward earnings and capital under the American Jobs Creation Act.

This action was completed in the fourth quarter and lowered the 2005 effective tax rate.

The debt rebalancing completed on the repatriation will help to maintain a lower tax rate for several more years, and we forecast a 2006 full-year tax rate at around 30%.

In the fourth quarter, we completed the refinancing of our senior secured credit facilities, and the redemption of 7 3/4% senior notes that were due in 2006.

These actions will reduce future year's interest expense and result in a total 2005 pre-tax interest charge of 19.3 million.

We estimate 2006 interest expense before debt refinancing costs will be lowered by approximately $12 million.

Turning to the operations.

Aerospace had an excellent fourth quarter and full year with operating margins returning to historical levels and even higher. 2006 should be another excellent year for aerospace.

Operating earnings will be lower due to higher non-cash pension costs that are currently not billable under certain customer contracts.

In North America, fourth quarter packaging volumes were flat or up in all product areas, with the exception of food cans.

Operating earnings were lower due primarily to higher energy and indirect material costs.

Our food can operations were also negatively impacted by raw material cost increases, not passed through to customers.

In addition, an increase in LIFO inventory reserves were approximately $5 million in the fourth quarter, and over $17 million for the full year reduced 2005 operating earnings.

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

Operating earnings are slightly down compared to last year, primarily due to price cost compression.

A lower fourth quarter euro exchange rate negatively impacted operating earnings by approximately $2 million in the quarter.

2003 cash flow was stronger than anticipated and came in at around $267 million, even after $292 million of capital spending.

We used this free cash flow and the small increase in net debt to repurchase more than $350 million of our stock.

The 2005 stock buyback will obviously be accretive to our 2006 earnings per share.

The balance sheet remains strong with year-over-year net debt increasing less than 5%, taking into account our elevated capital spending and share buyback programs, the rolling fourth quarter EBIT to interest ratio is at 4.8 times, and the total debt to EBITDA was down to 2.4 times.

As we look at 2006, the new stock option expense accounting rules are forecasting reduced earnings per share by approximately $0.03 per share.

Consolidated 2006 pension expense should be in the $75 million range, a $12 million increase from 2005 levels. 2006 free cash flow levels are forecasted in the $250 million range, with capital spending again around the $300 million level. 2006 is a second year of a three-year major capital spending program, and after completion, capital spending is expected to return to lower, more historical levels.

During acquisition opportunities, we expect 2006 share buyback to be around $150 million, and a slight reduction in net debt levels.

Now I'll hand it to John Friedery to review North American packaging operations.

Thank you, Ray.

As you know, there are three primary paths to good performance in our packaging operations.

They are volume, execution and innovation.

While we experienced lower volumes last year in some of our businesses, we did make good progress on the other fronts even in the face of a rapidly rising cost environment.

More on that in a little bit.

We're continuing that progress in 2006 and do expect volumes in our beverage can business to return to the levels we saw in 2004.

Our metal beverage container operations saw lower volumes in the core 12-ounce business in 2005, as we've discussed.

The folks in that business did a nice job with back filling by managing costs and we did see good growth in the custom can markets.

As I said earlier, we do expect volumes in this business in 2006 to return to 2004 levels.

Our conversion last year of a 12-ounce beverage can line in our Golden, Colorado, plant to a high-speed 24-ounce line is a success.

That line is working flawlessly.

In fact, you might have seen it up close if you caught the January 4 episode about containers on the show "Modern Marvels" on the History Channel.

That was the Golden plant they visited in that show.

If you were watching that instead of the Texas USC game, you truly are a history channel junkie or a packaging industry nut.

If you missed it, not to worry though.

The show will be rebroadcast several times through the spring.

The line conversion to custom cans in our Monticello, Indiana, plant is essentially complete as of last week.

It is up and running commercial cans as we speak.

This is part of our emphasis on growing the custom side of our packaging business.

That's where the growth is, and we continue to provide for capacity there with line conversions to ensure availability of the widest variety of cans for our beverage customers.

In 2005, we commenced our multiyear project to modernize and consolidate our beverage end making capabilities as well.

We informed employees at our Reedsville, North Carolina, plant of our intention to discontinue end making operation there is in 2006, as we move towards making more ends at fewer facilities, using a more automated process.

This project continues to move along nicely.

Equipment installations are on time and start-ups are progressing satisfactorily.

We also introduced in the U.S. during the fall the fresh can, developed by Ball Packaging Europe, as part of a vitamin and mineral supplement drink.

Fresh can uses an airtight, liquid type capsule called the wedge, which keeps sensitive ingredients dry and fresh until the consumer opens the can.

This allows those ingredients to maintain maximum effectiveness.

Moving to our plastics operations.

Our Heat-Tek PET business continues to grow.

We started supplying our Heat-Tek bottles to a major customer last year and are significantly ramping up that volume this year as part of a multi-year supply contract.

This fits with our win with the winners strategy.

For the year, we saw PET volumes grow in line with general industry trends.

While our PET operations in general continue to face a tough market with narrow margins, we're approaching critical mass in this business.

Our operations are maturing and continue to get better and stronger.

In addition, nearly all the of the investment we've made in PET lately has been in the higher margin custom side, and that will remain our focus.

Our growth is targeted to the custom segments of the market where we are participating in the strong demand for Heat-Tek and barrier packaging.

This is in keeping with our stated strategy of improving our plastics performance through increased penetration of the higher value-added segments of the plastic bottle markets.

In our metal food business, steep price increases in steel over the past two years, combined with rapid increases in the cost of coatings, energy, freight and other inputs have hit hard.

You might recall that Ball metal food container operations had an unusually strong first quarter in 2005, due in large part to pre-buying by our customers before a steel price increase.

That significantly affected our food results for the rest of last year.

During 2005, we also elected not to pursue some food can business where we felt we couldn't earn a fair return and as a result, closed a plant near Montreal in the third quarter.

We still have work to do in this business to get performance where we want it to be and have initiated several programs to improve results.

In China, our sales volumes and revenues increased in 2005.

The business consolidation activities we began there several years ago are now complete and we are much better sized and positioned to compete in the China market.

The can market there continues to grow and we expect to make incremental investments in our existing facilities to ensure our ability to participate in that market growth.

Our joint venture operations in Brazil had a very good year in 2005 as well.

We foresee continued growth in the demand for beverage cans in Brazil and as in China, we are undertaking [inaudible] to increase our production capacity through enhancements to our existing operations there.

Looking at all of our North American Packaging Operations, raw materials and energy costs across the segment, had a major negative impact on the bottom line.

Rising raw material costs make all packaging more expensive.

We are working to push through cost recoveries for all inputs, but it will be a huge curve.

It is all subject to the end consumers willingness to pay.

The consumer still hasn't seen much of the affect of these cost increases, at least in our industry.

Raw material and energy price increases have largely been absorbed by the supply chain, but the meat is getting very close to the bone.

And Hurricanes Katrina and Rita show just how fragile the supply chain is.

There isn't much cushion in the chain to serve as a buffer.

Being efficient does have a potentially negative side effect when it comes to absorbing big hits.

None of this should come as a surprise.

We said at least as early as April of last year, the environment had changed.

After ten years or so of fairly stable cost inputs, we face significant cost increases in energy, freight, coatings and chemicals, not to mention basic raw materials of steel, aluminum, and resin.

It is different than it has been in the recent years and less predictable but everyone is learning how to work in this new environment.

At the same time, custom cans and Heat-Tek bottles are providing us with growth opportunities as we make the containers that our customers want.

We continue to improve our asset base and cost structure in our core packaging operations.

We are putting the pieces in place to grow the businesses and improve performance starting this year.

With that I'll turn it over to John Hayes to talk about Europe.

Thanks, John.

Volumes in the fourth quarter continued a healthy pattern for both Ball Europe and the overall industry.

Overall volume in 2005 for Europe in general grew approximately 5% year-on-year, driven in particular by continued strong eastern European growth.

We have participated in this with our presence in Poland, and our new facility located in Serbia, which began in the third quarter and continues to make improvements.

We remain optimistic about the prospects for this region, in particular, but for Europe in general going into 2006, especially with the World Cup soccer tournament being hosted by Germany in June and July this year, and reintroduction of the can into Germany which I will speak further about in a moment.

Going into 2006, the BPE management is focused on several areas.

But the greatest emphasis is on the price cost compression that faces us here in Europe as well.

Over the past 12 to 24 months, our input costs increased dramatically, whether it be steel, aluminum, energy, freight, or coatings, lacquers and inks.

During this time, we took the strategic decision to shelter our customers as much as we could from these cost pressures, focusing instead on rigid cost controls and the reduction of consumption in our input materials.

However, we can't continue to absorb such increases on our own.

To that end, while we continue to focus on cost reductions, we have and will continue to discuss with our customers selective cost recoveries due to these cost burdens as we cannot continue to bear the brunt alone.

Another area of focus for us and others in the beverage industry during 2006 is the reintroduction of one-way packaging into the German market.

Over the past year or so, much planning and work has been done by various constituents to implement a return system for one-way packaging.

Cross functional teams of participants from all of the major stakeholders of which BPE has played a significant role, continue to make good progress towards a one-way return system.

Retailers have begun to order reverse vending machines for all packaging types.

I believe we are now at the point of no return with all stakeholders recognizing that a return system will be implemented.

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

Lastly, we continue to focus on our innovation efforts.

Our sleek can, which was introduced in 2004, has made good strides, penetrating new and existing markets and we expect further growth in this packaging in 2006.

During the fourth quarter, we introduced a 25 and 30 CL sleek can for beer and CSD customers to complement our 33 CL container we have been selling.

These new packages are targeted at segments of the beverage market where the can historically has not been a large part of the packaging mix.

In addition, we continue to explore other new product development areas, and you should expect that this will continue to be an area of focus for us in the coming years.

So in summary, while we have many challenges facing us, we remain focused on serving our customers, and participating in this growth region of the beverage container industry and continue to look forward to further development at Ball Packaging Europe.

Dave?

Thanks, guys for those comments.

Ball's Aerospace and Technology segment turned in a record-breaking year in terms of sales and operating earnings.

Margins in this segment improved in 2005 as our aerospace business continued to grow.

We ended the year with a record backlog of $761 million, and won several important contracts during the year.

We expect expansion of our facilities, we began expansion of our facilities rather in order to meet demand for our products and services. 2006 marks the 50th anniversary of our aerospace business.

And our history has been to build on past success in order to expand our future market presence.

I expect we'll continue to do so this year.

Turning to our outlook, we're pleased with our results in a very challenging 2005.

We navigated through a number of issues, while also making significant process in our three-year capital improvement program.

We're working hard to digest cost increases and working to improve performance.

As you may recall, we had a strong first quarter in 2005.

For one thing, our results benefited from favorable currency exchange rates.

In the first quarter of this year, it looks like we're going to be hurt by foreign exchange in the first quarter of this year.

In addition, we had an unusually strong first quarter in metal food cans as was talked about earlier as customers pre-bought in advance of announced price increases.

We face greater price cost compression in 2006.

And for those reasons, we expect earnings per share in the first quarter could be flat to down compared to '05.

Overall in 2006, however, we expect improvement more in line with our stated goal of increasing earnings 10 to 15% over time.

We expect volumes in our North American beverage can operation to return to 2004 levels and for growth and demand for our specially cans to continue.

Our plastic container operations will attempt to build on its best year, and our metal food can operations are in a challenging environment.

We're working on numerous projects as John Friedery said to improve the results there.

We expect another strong year in aerospace and technology segment, though as Ray mentioned, operating earnings could decline there due to pension costs increasing that we aren't able to recover this year.

Strong demand continues for our capabilities and we see opportunities to sustained growth in the defense, remote sensing and space exploration in particular.

So we're excited about 2006.

Our capabilities are better aligned with our growth opportunities, which is largely the result of a lot of hard work last year.

That work continues and we'll stay focused on improving performance.

So with that Operator, I think we're ready for questions.

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

Please proceed.

Thanks.

Hi, guys good morning.

Good morning.

A couple of questions around the packaging business first.

Can you give us some flavor for the volume change that you saw fourth quarter versus fourth quarter in your key packing business?

I think you said Europe was up 5%.

If you mentioned the others, I missed it, if you could relay that again.

And then secondly, John Friedery, could you comment at all on what programs you may have underway in food cans, aside from the closure of Montreal, to improve performance in food cans?

And then I had a follow-up.

Okay.

I'll talk about North American volumes.

Beverage volumes in the fourth quarter were essentially flat year-to-date.

We were down a little over 2%.

I think the general industry was down a little over 1% for the full-year.

And we were up -- that was -- the decline was a little less than what we were tracking earlier in the year when we were down more than that 2%.

In food cans, we were, for the full-year we were down around 1%.

I haven't seen the industry numbers yet there.

But in the fourth quarter, because we had, again, a strong fourth quarter 2004 because of pre-buying in addition to the first quarter 2005, our fourth quarter was down around 15% year-over-year.

1-5, John?

1-5.

Plastics, we were up around 10% in the quarter and 10% for the year.

George, this is John, with respect to Europe, I said for the full year, Europe the industry in general was up about 5%.

For the full-year, we were up a little bit more than that because, as I mentioned, we participate in Eastern Europe.

Just to give you a sense, in Eastern Europe alone, which includes countries such as Poland, Hungary, the Czech Republic, volumes for the year were up in excess of 15% in that region and actually even higher than that in the fourth quarter.

We participated in the strong growth of the market in the fourth quarter.

But, John, that was a year-on-year number, not a quarter over --?

That was a full-year number, I should say, not a quarterly number, correct?

That's correct.

And on food can productivity?

Yes.

Your questions on there.

It's a combination of a variety of things.

As I said, there's several programs.

One, we're going to look very hard at our whole cost base and make sure that we're focused and targeted and that we've got the right assets employed in the right places.

We're also looking at making sure and being very aggressive at taking working capital out of the business in the form of inventories.

A lot of work in process.

So lean-type processes looking at -- or ordering and working much more closely with customers and looking at reducing some of the work in process that we have there.

And lastly would be working directly with customers to try to just take costs out of the entire chain, customers and suppliers to take costs out of the entire chain.

Things that we have done on a normal basis, but being much more rigorous and much more focused on putting teams in place, specifically tasked to go after what we see as some opportunities there, George.

Okay.

Guys, my follow on and then I'll turn it over to the rest of the listeners.

When I hear you go through the outlook for '06 and the many challenges you navigated in '05, first of all, you had a good year.

You did a good job managing these things.

From my vantage point, having covered you for awhile, you seem almost apologetic about talking about the the need to go get pricing.

I mean everyone can see that steel costs are going to be up again, aluminum's going to be up, resin's up.

Yes, you have to work effectively with your customers and you have over the years in taking costs out of the supply chain.

But what's the matter with going out and getting pricing, or are you in the process of doing that as well?

Thanks.

Well, we're not apologizing.

We're not just nice people, George.

I've always thought that, Dave.

You can -- just because you talk the loudest, doesn't mean you're more correct than anybody else.

We've got to get relief every place we can find it.

We do have initiatives currently in a variety of places in our business to look for help from our customers, whether it's trying to take costs out, as John said, or to get price relief.

We also have contractually the ability to collect a number of our contracts cost pass through around price indices, for example.

But when the run-up in the stuff we use is going up faster than most indices, you don't get it all right away.

So we're working on that.

You know, all around the world we're out there trying to get increases where they're warranted.

We're having some success at that.

Are you incentivizing people to go get pricing maybe even more effectively than in past years this year?

You mean with the threat of being fired or --?

You guys are nice guys so I'm sure it wouldn't be that.

But just in general?

Our incentive plans in this Company work very, very well, George.

They work based on how much -- how good the return is on the assets.

Most people in this Company aren't getting nearly as large of an incentive compensation check as they normally do.

That is a very good incentive.

When you don't make as much money, your incentive to go fix things.

We don't really have to do a lot of cheerleading or pointing out to people what it is we have to do.

We'll keep driving and improving the business.

The basic commentary is the truth and that is that we're seeing costs for many of the inputs that we use increase at higher rates.

Many of the raw materials that you mentioned are basically past due for us, as you know, anyway.

That isn't where we're having our problem primarily, except to some extent in our food can business, where some of those and also to some extent in Europe.

Okay.

Thanks, Dave.

I'll be back.

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

Please proceed.

Hi, guys, good morning.

Good morning.

It looks like the major aluminum converters are trying to phase out the aluminum band pricing over the next couple years.

How should we think about as it relates to your own pricing strategy with your major customers?

Are you still going to pass through the cost of aluminum as you have historically or should we expect something else there?

Absolutely.

We're going to be doing that.

And, you know, they've -- I think there's been some public pronouncements and obviously discussion about this from the aluminum companies as they look -- as we look at the next rounds of negotiations into the future.

And they're plowing the ground a little bit for the future.

We're doing exactly the same thing with our customers.

Okay.

And in terms of your beverage can and manufacturing realignment.

Have you seen any meaningful savings since then?

We're just -- we've got one -- I believe there's a total of eight modules in the project over a three-year period.

We've got one up and running.

Yes, we're seeing -- that's right on track with what our expectations were.

And the other ones will be up later in this quarter.

The next two will be up later in this quarter.

Okay.

Thanks.

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

Please proceed.

Good morning.

Good morning.

My first question is on the German outlook.

Are you close to going into production?

Do you have orders yet?

What's your visibility on how you think these volumes may come back and what would the timing be?

As I think most people know, the law states that as of May 1, the deposit system should be in place.

What I would say is that the industry is making good progress.

Not just the beverage can industry, but the beverage industry is making good progress to make that a reality.

The biggest question going forward is the can and one-way packaging in Germany have not been on the market for three years now.

So believe it or not, there are consumers that are 14 years old that don't remember what a one-way container looks like.

So that combined with -- it's going to take some time for the reverse vending machines to get into place.

We don't expect it to jump very strongly immediately.

However, that's why I said longer term we fully expect that there's a trend toward one-way packaging in Europe generally, but in Germany as well.

And so I wish I had a crystal ball and could tell you exactly what volumes will look like but our conversations with our customers are very -- I would describe as very constructive and they are looking forward to the one-way packages coming back.

Do you have any orders, John?

Just one. [ Laughter ]

Thank you, Dave.

I appreciate that assist.

Okay.

And can you talk about the working capital swing in Q4 was very strong.

Was some of this-- was any of this resin related?

It this sustainable or is some of this going to swing back in Q1?

Hi, Amanda, it's Ray

Hi, Ray.

If you go back and look at the history, you'll see it's always very strong in the fourth quarter.

I mean, our food can business I think alone flows -- it's working capital changes like $150 million alone in our food can business.

From my standpoint, it was certainly nothing out of the realm of what we sort of expected.

I think it was a little stronger than anticipated because a couple of customers paid us a little bit before they thought they were going to.

I think that helped a little bit.

On the other hand, we had a large customer that paid us in early January.

That will show up in next year's cash flow.

I would tell you that nothing out of the usual.

Okay.

Can you talk a little on the M&A outlook in general, given that you are going to be focused on pricing in the meantime, strategically, does this change where there might be opportunities for you?

Do you also see any change in the price outlook?

In other words, will there will be assets out there that you could actually buy under your EVA guidelines that would be positive?

Because I know prices have been high over the last couple of years.

Do you have any ideas?

I was hoping you could share some.

We look, Amanda, at this all the time.

We have people who, including myself, who are very concerned with trying to as we've said add to our Company.

We've been successful in doing that.

We've created a lot of value with the acquisition activity over the last, 6, 7 years in the Company.

Yes, we continue to look.

You know, I think the -- I think the market, we're not typically doing really well in auctions.

And so some things that are sold that way, there have been some that we thought were selling at prices that, if they're not a real good fit with us, why would you want to pay that much and try to get a return.

On the other hand, I think there have been some things in the space that we might have been interested in which were put up for sale and haven't been sold, which apparently means that the seller wanted more than the buyers were willing to play.

I think that might be a good trend.

But we don't do 50 a year.

We do one or two every so often so we look alive and we don't do many.

Okay.

Thanks.

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

Please proceed.

Thanks very much.

I'd like to focus on the issue of cost because it's so front and center for you guys next year.

Can you talk about -- how much detail can you shed on how in general your contracts are structured for some of these non-pass-through items.

Do you have some sort of cost of living adjustments that you expect to catch up on?

Are they CPI based?

Are they PPI based?

How much for your contracts do you anticipate -- are actually open for this year, and therefore you'd be better positioned to get full pass-through?

We're -- from a contract position, we're in pretty good shape.

We're well contracted in most of our businesses in terms of open contracts.

We have in those contracts -- I'm speaking for North America here -- the ability to, in some cases, pass through costs based on an adjustment that looks at an index, whether it's a PPI or an intermediate materials index or a CPI.

There are a lot of variations depending on what the customer is comfortable with and what mechanisms they want to go with.

There are other contracts that just are indexed off of others or there are discussions that go on.

In some cases, with our smaller customers, particularly on the custom can side, we're in an annual basis.

In the food group as well, an annual basis of contract discussion and negotiation.

That would be more of a normal, if you would, historical contract discussion with good rationale laid out.

Here's what's happening with costs and this is what we need.

Okay.

And those -- and in Europe I think it's mostly an annual contract discussion, is that right, John?

Well, there's no one contract that's a boilerplate and we have one year contracts and we have multi-year contracts.

You know, I think our situation in Europe is very similar to what John described.

You have contracts across the board.

We are just facing an environment where the costs are going up at a rate much higher than some of these indices are.

That's the truth of the matter.

So as I said in my comments, we've been trying to protect our customers from that.

It's gotten to the point where we longer can do so.

Okay.

And on the contracts both in the U.S., northern Europe that do have some of these escalators.

Most of -- are most of them annual or are others kicking in every couple months, or do they kick in more regularly than that?

In other words, are you looking at a significant step-up, or some step-up in pricing from the annual pass-throughs?

Most of them are annual.

Yes.

Okay.

Depending on when the contract -- what the contract term looks like, it depends on when it hits.

okay.

Great.

Not all January 1.

They're varied.

Okay.

And, John, just on Europe as well.

You mentioned the World Cup.

Can you quantify what impact that might have on World Cup, particularly with it being in Europe?

It sounds like you think it might be a meaningful number, 1%, 2% for can consumption in Europe in every fourth year?

To be honest, I don't have a specific figure.

If you go back and look at the facts, though, you do see a bump.

You can't isolate it because it depends on the weather.

It depends on who's in the finals.

The U.K. versus Germany final is very different that if it is a Brazil versus Mexico final, for example.

So it really -- what we have seen in the past because of promotional activities by our customers which we continue to expect going into 2006, we do expect that that combined with some good weather could give us some tail wind.

Okay.

Of course, that's no reason to cheer against the U.S.

Absolutely not.

I noticed you left them out of the example.

Can't imagine it has too much of an impact on the U.S. unfortunately.

Just thinking about that international business in general, you've seen great growth from a small base and international Asia versus international Europe.

Does have that an impact on margins, Ray?

Are your margins comparable in the rest of the international business as they are in Europe?

Well, as you know, volume has an impact on margins.

We've heard John talk about that he expects volume up.

You've heard about John Friedery talks about volume up in North American.

Volume has an impact on margin, as well as price costs.

You know, we said that we expect next year's volumes to be up nicely over this year.

That helps on the positive side.

That helps the margin.

Right.

Now I'm just thinking at that international business, you've had nice growth overseas.

There are structural margin differences between markets.

You know, over the next 2, 3, years as that non-European business grows faster, presumably, do you anticipate that will have any impact on the percentage margin?

Are you speaking of China and Brazil for us?

Yes.

For example?

Exactly.

The problem is they're not that large.

So as compared to the total Company, they're not swinging that much.

But we're doing well in those markets.

But maybe to further give you an answer, obviously our percentage margins are down this year from what they were last year.

We think that's probably a low point.

We expect those to start moving up.

And don't forget the margin in our business is affected by the value of the primary raw materials that we use.

Right.

You know, as aluminum rises and as people digest that, it could look like we're making lower margins, but we're making more money.

That's possible.

Great.

And then one final housekeeping question, Ray.

On pension expense, do you have an outlook for 2006?

Yes.

I think I said it.

We expect pension expense in 2006 to be $12 million higher than it was in 2005.

$12 million.

Great.

Thanks very much.

Yes.

Our next question comes from the line of Christopher Manuel from KeyBanc Capital Markets.

Please proceed.

Hello?

Hello.

Actually, this is Steven Weisler, Lexor Group.

Couple of questions regarding raw materials.

What would you say for the remainder of '06 is the major risk for raw materials?

What would you say also is the degree that you have in vertical integration versus outsource manufacturing?

Could you repeat your question?

What would you say for the remainder of this year is the major risk moving forward for the raw materials?

When you look at raw materials, I think last year for a little while with the hurricanes, there was a concern about disruptions of supply on the resin side.

And energy cost spikes have driven up the cost as well as we believe a significant speculative impact to the price of aluminum for sure.

And it's traded on the LME.

I guess this year the issue would be, is there further speculative bubble, if you want to call it in that area or are there any supply shocks due to large disaster-type situations.

But if you look out specifically at resin, I think there's capacity coming onstream in the future that says we should be okay.

So those would be, I guess, the concerns when you look at the raw material side.

In your second question was on outsourcing?

What does that do to vertical integration versus outsourcing manufacturing?

How do you --?

For us?

Today?

Today we don't outsource.

We are manufacturers.

There's not component manufacturing.

We're integrated and pretty tight processes.

It's not a matter of manufacturing parts, shipping them hundreds of miles, and integrating them into other -- into a larger integrated package.

We don't have that.

We don't foresee that.

You mentioned on the call earlier, you have a lot of different initiatives in place regarding raw material.

Are your suppliers willing to work with you?

Do they see this as a win-win situation?

What's been their feedback?

Up and down the supply chain everybody is faced with exactly the same costs.

We're talking about them, but our suppliers are faced with them, our customers are faced with them.

Our customers are ultimately faced with consumers who are getting heating bills this winter that are cutting into the amount of money they have left to go to the grocery store.

So everybody is interested in figuring out how to make the entire supply chain more efficient.

And we've gotten it pretty darn efficient over the last 10 or 15 years.

But as with anything, when you start looking harder and when you're really motivated, things you didn't think were possible before become possible.

So I would say there's good cooperation upstream and downstream from us to look for ways to mitigate this and to keep our packages and our customers products affordable to the consumer.

Final question.

What would you say for the remainder of the year is the number one thing you'd like to accomplish?

Make more money.

That's a flip answer.

But I think, you know, we've got to -- we've got a lot going on.

I would say execute around the plans that we have.

We've got good solid plans.

And we absorbed some body blows last year with the costs going up.

Some of the disruptions in North America with the hurricanes.

And I'm really proud of our operations and all of the people who have worked very hard to get us where we are.

In my feeling, it's execute around what we've laid out for ourselves to do this year.

Thank you very much, good luck down the road.

Our next question from Mark Wilde from Deutsche Bank.

Please proceed.

Good morning.

I wondered just to come back to costs one more time.

There was some question a few months ago about where tin prices may settle out in '06.

Do you guys have any sense of that, what the increase is likely to be, particularly in Europe?

Well, I know in North America the announced increase out there by our suppliers is 6%.

That's kind of the game we're playing., we're in right now.

We're wrestling around with them.

And that's what we know at this point in time.

In Europe, the announcements have been a little bit higher than that.

It's the same situation as John mentioned.

We're working with our suppliers.

We all are very cognizant that we compete in a very -- in an industry which has a lot of competition.

We need to make sure long-term that our packages are cost effective for our customers.

I think our suppliers understand that as well.

We're trying to work with them as best we can in an environment that we haven't seen in a long time in terms of the inflation.

It would seem that the type of packaging, a rigid packaging that's seen the biggest cost-run up, has got to be anything that's tied to plastic resin.

A, do you agree with that and B, do you see much substitution taking place as a result?

We've talked about substitution before.

It's -- it's really driven by -- the substitution in this package selection by our customers is driven by the channels they're selling into and consumer demand.

I would say that there's probably been a little bit of slowdown in migration towards plastic.

We've seen in the past cans have migrated -- beverages, carbonated soft drinks have migrated to plastics from cans.

The growth has gone into the plastics.

Certainly as that resin prices have increased, I think the idea that there are further opportunities has slowed down rather significantly.

But it's not something that on a year-to-year basis our customers are making their packaging decisions that succinctly is how I'd say.

Just to add, Mark, that's not a -- if most of them have substantial investment in filling and processing and so forth, you can't really quite turn on a dime.

And the attractiveness of let's say a multilayer package for a particular drink, I don't think the cost increases is overcome the popularity.

Nobody likes any of it.

If you look around, everything is up.

To some degree.

Okay.

Last question, I had, Dave.

You talked about growth in Eastern Europe, growth in Latin America and growth in China.

Seems like a lot of businesses are starting to focus more attention on south Asia, particularly India.

I just wondered if you could talk about that briefly.

Just a little bit.

I know John Hayes was talking -- one of our directors has significant operations there.

We had a meeting just yesterday.

We were discussing that.

India, some years ago, we were on the verge of having a partner and building a can plant.

And I don't know it's probably been a decade or more ago.

Nothing much has happened.

We're not likely to go into a place and be a pioneer.

Open a can plant and wait for the beverage guys to come.

So we're assessing it.

You know, there's a lot of buzz around -- around that whole situation.

I think it's, as we were talking the other night, it's quite a different place than it was even 3 or 4 years ago.

So yes, we're interested.

We're going to get more smarter about it.

We'll want to be ready.

But we're primarily looking to our customer base and trying to understand what's going on there and the drinks industry in the country.

We have no announcements to make or anything like that at this point.

Certainly with the population, with the progress that's made there and the whole globalization situation, you know, the world is flat kind of thing, we want to understand that.

It should be a place of opportunity at some point.

Okay.

Great.

Thanks, David.

Our next question comes from Alton Stump from Longbow Research.

Please proceed.

Hi, guys.

Two quick questions.

First off, on the pricing end.

Just want to get an idea of what the competitive landscape out there is, if you're seeing any, like your competitors maybe undercut pricing at all or if it seems like they're all sort of looking at the same goal you are.

And I guess on that topic, I just want to get an idea sort of with the rate of price increase.

If you give any sort of idea how much greater it is this year, versus what we've seen in the last couple of years?

Well, I did say that the world -- I think -- I don't think anybody gets to buy natural gas or freight services any differently than we are.

So I have not seen any evidence that anybody else is out there not trying to figure out how to recover from all these cost increases.

As far as rate of increase, it's really tough to do.

I talked about it in my prepared comments that we're in a rising cost environment, costs will be passed through.

But it's very hard to predict how they're going to come through.

It's going to be a little bit lumpy and herky-jerky because we've come off of ten years where there was very little.

It has to pass through -- it's like the pig going through the python.

It has to pass through the entire chain from the raw material miners up to the -- up to the consumer.

It's going to take a little while.

Okay.

Thanks.

Just one more follow-up on a different topic in Germany.

With the guidance of 10 to 15%, of course, longer term, I think you kind of referred, you know, in -- you hold return to that this year.

Does that include any pick-up in value from Germany with the one-way situation coming back this year?

Or is that not a factoring that in?

I'm not quite -- I didn't quite follow your 10 to 15% earnings -- earnings 10 to 15%.

We expect improvement in the German market.

As I said earlier, we -- we were having discussions with customers about getting one-way packaging in.

There will be a system in place come summertime.

The World Cup is in Germany.

The finals are in Germany, certainly.

And all of the other games during the summer months.

So we expect Germany to be up.

I wish I could tell you exactly how much to a decimal point it's going to be up.

But it depends on a variety of factors, not the least of which is how many reverse vending machines are in place, what the manual recollection system is ultimately going to do in the short-term when the reverse vending machines are not in place, how the beer industry behaves, how the soft drink industry behaves, weather and all of those various things.

But I will tell you that longer term, we expect the German market to recover.

Okay.

Thanks, guys.

Our next question comes from the line of John Wegman from Seedwell.

Please proceed.

Congratulations on good performance despite a rough market, guys.

Can you hear me?

Yes.

Thank you.

Okay.

Yes.

For reduction in sales of 12-ounce metal soft drink and beer cans.

I'm trying to grasp, what's the primary factor?

Is it consumers buying 20-inch PET bottles?

Is it a reduction in soft drink consumption?

Is it imports or what is it exactly?

The whole market is down a little bit.

What's happening is there's a couple of things but essentially what's driving it all is consumer preference.

Consumers are drinking more water, which is in PET rather than cans.

Consumers are consuming more energy drinks, which are in non-12-ounce containers.

So that's maintaining the can as a package but it's moving it away from 12-ounce.

Those are kind of the two things.

It's not imports, but it's more consumer preference and taste in the types of beverages that are being packaged in cans or other packages that are driving that change.

Okay.

Now in the segment of PET, both conventional and custom, could you give an indication of what EBITDA margins are in conventional and custom?

And would you consider that there's a price war as customers saying reduce my costs or we're switching suppliers?

No.

We won't tell you what our margins are.

I think most people say and I believe this is true, the custom margins are better than the commodity margins.

The more commodity pad.

I'm not aware of a price war.

Nope.

What's the relative price of custom versus a conventional container?

I'm just asking ballpark. 1 1/2 times, two times?

I realize there's more resin.

But, you know --

It depends.

That's not a question that's easy to answer or easy to decipher any answer from in this kind of an environment.

I didn't get your answer, sir.

He said he didn't know.

Okay.

He couldn't answer your question because, you know, you seem to want an answer and basically there are all kinds and sizes and configurations of "Custom containers" and vice versa.

Commodity containers.

So try to give you a clear answer on how much a difference is between two, when there are numerous differences, just doesn't make any sense.

Right.

The cost and the price of a custom container is typically higher than any commodity container and there's more resin in it and often more layers and more performance characteristics.

It's harder to make.

Those are the things that drive that.

I mean --

If you go to the grocery store, you can see all kinds of them out there.

Water bottles -- that a factor of three, a factor of 1 1/2?

We're not going to answer that question.

Okay.

Thank you.

Because we can't.

Our next question comes from the line of Mark Connelly from Credit Suisse.

Please proceed.

Hi.

This is actually Doyan.

I had a question about your free cash flow guidance.

The 250.

Are you expecting working capital to be a source or -- I'm just trying to understand what your assumption is there.

I think at this stage of the game, we expect it to be a slight use.

Slight use.

Okay.

Helpful.

Secondly, just going back to the timing of -- I mean just going back to the contract renegotiations in light of what might be going on with can sheet pricing on the aluminum side, just trying to understand what kind of flexibility you have with your customers.

It was pretty clear that it's not an automatic kind of thing.

It's something that you're negotiating on an ongoing bass?

Let's say tomorrow your suppliers are successful in lifting their ceiling.

How quickly can we expect you to work that through to your customers?

That's a hard question.

First of all, tomorrow they couldn't lift it.

Because we're in long-term supply contracts now.

Sure.

If and when they do that, they begin to negotiate with us for the future, we will be negotiating with our customers.

That will be typically over a period of time.

And a fairly extensive and lengthy process to arrive at a point that's satisfactory for all parties involved.

Okay.

Ray, you said that CapEx in '07 should probably come down to more historical levels in '07.

Wondering if that's going to be something around the 200 million mark?

Is that right?

No.

What I said was, remember, 2005, 2006, and 2007, that's the three-year period where capital spending will be a lot higher than normal for the reasons we've been telling everybody for awhile.

So 2008 they start to come down some.

By 2009 for sure, they'll be down to historical levels.

Okay.

Great.

Lastly, the first quarter guidance, you said earnings was going to be flat to down slightly versus last year.

I'm wondering what the last year number is in your book?

Is that the $0.51 you're comparing against?

That's the $0.51.

You're correct.

Thank you very much.

Our next question comes from the line of Andy Sinkman from Meridian Asset Management.

Please proceed.

Thank you.

Can you tell me, first of all, how much the securitized receivables were at the end of the year?

210.

What's the change year-over-year?

35 million, Andy.

Pardon me?

35 million.

It's an increase of 35?

Yes.

Okay.

And how many shares were outstanding at the end of the year?

That's a good question.

I think it's in the neighborhood of something like 101 million.

I could be a little bit off on that. 101 and change.

Okay.

The pension expense increased to 12 million.

Is that all in aerospace?

A lot of it is in aerospace.

I don't want to go into accounting.

This pension expense is a big smoothing.

This all goes back to when we had those three down years, when the market turned down in the late 90's and early -- everything a big smooth.

And, of course, the interest rates have been coming down.

You're discounting the interest rates have been coming down which makes the expense go up as well.

What I would tell you is that we're probably at the peak, and then as we move forward, I expect those numbers to maybe be the same, or a little lower next year.

Start to come back down.

This will happen.

Okay.

And then what about cash contribution for this year?

Well, I think we're thinking in our cash flow numbers, you know, you're right.

A couple of years ago we put an extra $50 million into our pension plans.

We didn't do that this year.

We put in the amount required.

And next year our thinking is we'll continue to put in the amount required.

Okay.

Which basically is a lot -- it's basically less, a lot less than 75 million.

Right.

So the 75 million is a non-cash entry.

The amount we put in is a cash amount.

It's more like in the $30 million range.

Okay.

And then the corporate expense line for this year was 32.8 versus 42.8.

Unfortunately, Dave has already given you a big indicator of that.

Everybody around here isn't making as much money.

Right.

So I guess what I'm trying to estimate is, trying to figure out how to estimate it for next year.

And, the only thing I can say is it was about 8% of your operating profit last year and only about 6 or 7% this year.

So if you have another good year in 2006, is it reasonable for me to estimate that it gets back up over 8%?

Not necessarily.

We also have things like our quality share program.

There's a number of things in there.

I would say that you should be thinking about next year in a similar vein as what it is this year.

Okay.

And the -- last question I have is if you look at the -- well, in the capital spending of 300 million, how much of that is for the PET expansion?

It's --

I was going to say 25 is what I'm going to tell you.

A little of that happened already last year.

So 20, 25.

Okay.

So if you take that 20 or 25 million and you assume that the price of PET resin stays where it is today forever, can you earn the cost of capital on that 20 to 25 million?

Actually, we're going to -- we're going to better than our cost to capital net.

I'm just trying to figure out if you're making an energy bet because I heard John --

No energy bet.

No.

We're investing in that business where we can make in excess of our cost of capital.

Otherwise, we're not investing.

Right.

But I heard you say, John, that, you know, because there's so much new capacity coming on.

You think you'll be all right in PET.

You probably will.

I'm just trying to understand if that's part of the bet.

That's a pass through for us.

That's not factored into our thoughts there, Andy.

Great.

Thank you.

Thank you.

Our next question is a follow-up from George Staphos from Banc of America Securities.

Please proceed.

Thanks.

Hi, everyone.

Just a follow-on, Dave, on pricing.

To the extent that you can comment.

Where you don't have contracts, where you don't have pass throughs, the normal ranges that you would have.

Would it would be safe to assume that you have price increases on the table now with your customers in your major businesses, so that would be food cans?

Almost universally so, yes.

Okay.

And is there any mechanism that you can trigger in your contractual business where you can, for whatever reason, look to raise margins, converting margins, raise pricing, or does that really not come into play until they renegotiate when those contracts come up for renewal?

I think what you're saying is do we have the ability to cry first majure or something like that?

What it is is -- so many of our relationships with particularly our larger customers are constant.

We're talking about all kinds of things all the time.

Sure.

And, you know, believe me.

We're letting them understand exactly how, you know, what we're facing.

We're understanding what they're facing as John said.

So, I'm optimistic.

I used the word digest cost increases in my earlier comments and I think that's what our industry is doing.

It doesn't happen overnight.

I expect that we're going to make progress during this year.

We're trying to help you talk to customers as well I guess to some degree.

Sure.

Tell them that we need some help, George.

I will.

We are right now I guess as we have this conversation.

The last question is on your outlook for growth this year.

You mentioned your longer term growth goal which is 10 to 15%.

You're obviously flat to down the first quarter given your guidance.

Do you envision that from the second quarter on in your targeted range for that for the full year, despite being flat year-on-year targeted range.

Thanks, guys.

Good luck.

Yes. [ Laughter ] Yes.

If we're going to move back toward that range or be in that range or whatever for the full year and flat in the first quarter, we got to be better than that in the other three.

So we understand that.

Okay.

Thanks, guys.

Good luck in the quarter.

Thanks.

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

Plead proceed.

Thanks.

Just a quick follow-up on use of cash.

Ray, I think there's a $100 million delta between your free cash flow estimate and your share buyback program.

Are you very comfortable with your leverage levels exist today and barring major acquisition, if you got to year end hitting your targets, do you prefer to step up the dividend or step up the share buyback or just hold onto it?

Yes.

The -- we're probably getting near the low end of our sort of optimum capital structure range.

You know, we have this range that we'd like to operate the Company in.

And we're probably getting to near the low end of that range.

So, you know, either we would step up our share buyback.

We have some reasons why we can't do that.

We have some debt that we'll have to take out in order to step that up.

We can either do that or we could raise the dividends.

Or as Dave said, we could find some things to buy that look good to us.

Those are our three options.

I guess just very quickly.

Would you take that debt out and replace it?

Or would you -- would you feel comfortable reducing it by that number?

It sounds like you don't want to reduce that at all from your current level.

Yes.

We need -- we've said all along to everybody that knows us, we have this view of what our optimum capital structure is.

We need a certain amount of debt in this Company to sort of, if you will, maximize our weighted average cost of capital since that's sort of the key hurdle mark, we've got to earn in excess of that to be successful.

We want to try to manage that in its optimum range.

As we look at our capital structure today and we look at our cash flows going forward, we're getting to the very bottom end of that range.

We have three choices, either step up the share buyback, find something good to buy, or as you say, increase the dividends.

You know, those are the three things that will put more debt on the balance sheet.

All sound good to me.

Thanks very much.

There are no further questions at this time.

I'll turn the call back to you.

Very good.

Thanks, everyone, for being with us.

We'll look forward to talking to you again in April.

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

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