Ball Corp (BALL) 2006 Q4 法說會逐字稿

Welcome to the Ball Corporation fourth-quarter 2006 earnings conference call.

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

Afterwards, we'll conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday January 25, 2007.

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

Please go ahead, sir.

Tara, thanks very much.

And good morning, everyone.

This is Ball's conference call regarding our company's 2006 fourth quarter and full-year results.

The information provided during this call will contain forward-looking statements.

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

Some factors that could cause the results or outcomes to differ are in the company's 10-Q filed on November 8, 2006, and in other company SEC filings as well as company news releases.

And if you don't have our earnings release, it's available on our web site at Ball.com.

Information regarding the use of non-GAAP financial measures can also be found on our web site.

With me on the call today are Ray Seabrook, Executive Vice President and CFO of Ball, John Friedery, Senior Vice President and Chief Operating Officer of Ball Packaging Americas and John Hayes, who is President of Ball Packaging Europe.

And making a special guest appearance today is Dave Taylor, who is President and CEO of Ball Aerospace.

Since his fortunes have turned up, we're going to let him answer some of your questions if you have them today.

I'll make a few comments about the business, followed by Ray, who will review our numbers.

And then we'll all be available for questions.

We're really pleased with our 2006 results, especially in light of the challenges we faced during the year.

And the fact that we finished the year with momentum reflects, I believe, the progress that we've made in dealing with those challenges.

We expect -- to continued improvement in our results throughout 2007.

Our beverage can plant in Hassloch, Germany which was severely damaged by fire on April 1, 2006, is being rebuilt and is scheduled to start up in the second quarter.

The new aluminum line -- can line -- in Hermsdorf, Germany is on schedule, and it's scheduled to start about that same time.

And we're sold out in Europe and the addition of new plant and new line will help us meet -- I guess the rebuilt plant and the new line will help us meet demand and grow as the market grows over there.

Our project to streamline our North American beverage can and end making -- can end making is beginning to pay dividends.

This is a significant capital project for us that you heard us talk about.

The consolidation of our end making capabilities into fewer plants with new technology that requires fewer people to operate it will make that process more efficient and cost effective.

Our plastic food R&D operations are up and running here in Colorado.

We relocated those that were associated with what we acquired last year, and that's up and running here.

It's all gone well.

Again, the outlook for Ball Aerospace continues to improve.

The WorldView 2 contract win added to our record backlog at the end of the year. 2006 industry bev can shipments were up 2.3% in the US and approximately 8% in Europe.

And in both cases, Ball was up a bit more than the industry.

I do have more to say about our outlook, and I'll do so after Ray reviews the company's financial performance.

Ray?

Thanks, Dave. 2006 finished strong.

With fourth quarter comparable diluted earnings per share at $0.65 compared to $0.52 last year.

Fourth-quarter sales volumes in all packaging segments were very strong with the exception of food cans which were flat.

Operating margins in both packaging and aerospace were much improved in the quarter.

Comparable 2006 full-year diluted earnings per share was up by 19 compared to $0.07 -- compared to -- compared to last year and a 7% improvement.

But short of our long-term goal of 10% to 15% improvement annually over time.

The second half of 2006 was much stronger than the first half.

As we discussed in the third-quarter conference call, an assessment of the LIFO inventory accounting method used in North American metal beverage and food can businesses was completed in the fourth quarter.

After careful examination and review with our auditors, we believe a change to the first-in-first-out inventory accounting method is preferable because it reflects a better matching of revenues and costs in accordance with the payment terms of our sales contracts.

Accordingly, we have made an accounting policy change to use the FIFO inventory method and have retroactively adjusted on a FIFO basis all historical numbers.

Turning to the operations, strong sales volumes in worldwide beverage cans and an improved sales contract mix in aerospace were the key factors in improved fourth-quarter operating margins.

SG&A expenses were up in the quarter due to higher professional fees and a stock-based compensation cost.

The year-over-year strength of the Euro also added $0.02 to the diluted earnings per share in the quarter, and $0.03 for the full year.

Turning to full year free cash flow -- 2006 free cash flow -- $183 million was considerably lower than the $250 million we had forecast on our third-quarter call.

We did not draw down our elevated North American raw material inventories as projected.

We paid down some of our receivable securitization program and had a couple of late payments on European receivables.

The cash outflow was offset somewhat by lower than anticipated net capital spending.

The 2006 cash flow shortfall will be made up this year as we draw down those North American raw material inventories to normal levels through the first half of the year.

As we look ahead, we expect full-year 2007 free cash flow levels to be at least $350 million on capital spending net of property insurance recoveries in the range of $250 million.

The 2007 consolidated effective tax rate is projected to be around 30%, up slightly from 2006, and look forward to a very strong first quarter as those excess raw material inventories are reduced to a normal level.

I'd like to add at the end of 2006, it was at $2.3 billion, higher than our targeted debt level, due to the cash flow timing as I discussed and a stronger Euro.

The 2006 pro forma rolling four quarter's EBITDA interest coverage is at 3.8 times and net debt to perform at EBITDA is at 2.8 times.

We plan to increase our 2007 stock buy-back program to around $175 million from the $46 million we had purchased in 2006.

And we have purchased $50 million of stocks in early January.

We also plan on reducing debt levels by more than $125 in 2007 on the strength of our free cash flow.

With that, I'll give it back to Dave.

Thank you, Ray.

In 2007 here, we will get back the manufacturing capacity as I mentioned starting in the second quarter that we lost to the fire in Germany.

We'll benefit further from our end making project, and we expect additional synergies and improved performance from our metal food and household products packaging and plastic packaging segments.

We also believe Ball Aerospace is teed up for a very good year.

We must continue to manage inflationary pressures on our costs, and we have a lot to do in all of our businesses as we -- as we rededicate ourselves to operating lean and improving performance.

I feel a whole lot better about 2007 sitting here than I did a year ago about 2006.

When I look across our company, I see real opportunities to improve results across all our segments.

And I feel good about the plan that we have in place and the people we have to carry it out.

With that, Tara, I guess 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 with your question.

Thanks, hi everyone.

Good morning.

Dave, I wasn't going to ask you this question, but you to some degree teed it up for us.

So I'm going to.

Last year, you suggested at the end of the fourth quarter on the conference call then that earnings could grow 10% to 15% in line with your longer term range.

So are you suggesting you feel comfortable with that in 2007 or just feel generally better about the outlook?

Hi, George.

I think that 10% to 15% continues to be our goal, as Ray just told you.

And last year, we didn't quite make that, but we well exceeded it during the second half.

So, I -- I don't like to get pinned down exactly.

But we're going to do all that we can to -- achieve that result over time, and I think we've got a real good shot at it this year.

Understand.

Understand.

Now in terms of free cash flow and capital spending in 2007, Ray, as we think about it, are you beginning to see the end in sight on the investment program, if I saw -- if I heard you right -- you're saying $250 million or so net of insurance recoveries.

Could that CAPEX number pick up again in 2008 or beyond, or is 250 a reasonable place to be --

George, we -- we really are at -- getting near the very end of that major, major program we sort of talked to you about two or three years ago.

Said we've got a lot of spending in aerospace to really promote that business.

And Dave -- Dave Taylor who's here has done a great job of growing that business.

But we're getting to the very end of that.

And as you know, the new end program in beverage, we're getting -- we're getting close to the end of that.

And capital spending should come down.

Now the only thing I caution you is, we have some great opportunities worldwide in our beverage can business to that capacity in places that might make a lot of sense for us.

So, we'll have to explore that as we go forward.

But our programs are -- the programs we've historically talked to you about -- are coming to an end.

But, like any good business, I think we've got some great opportunities, and we're always looking.

So yes, I expect it to come down on those programs, and hopefully we can find some good things to put some cap in use in different parts of the world.

Last one, I'll turn it over.

Do you have any number for us in terms of what the change in accounting might have meant in terms of EPS this quarter --

George, if we had booked a LIFO reserve in this quarter it probably would have been about $0.06.

Okay.

On diluted earnings per share.

And, of course, that $0.06 wasn't real because it didn't happen.

Because, in fact, we didn't lose any -- in other words, we didn't really lose the $0.06.

That's why we changed the accounting method.

Okay.

Thanks.

I'll be back.

Thank you.

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

Go ahead.

Hi, guys.

Good morning.

Your volumes seemed to have come in very strong during the fourth quarters, particularly North American bev.

It seems like you already have top volume comparisons in North America for the first half of the year at least.

Should we be looking for flat to down volume quarter during the first quarter or is that too conservative.

Well, I think it's -- this is John Friedery.

I think it's a little bit early to tell.

Certainly as we go into January, we're not seeing any evidence of a significant drop off, but it's three weeks into the year.

I guess I'm referring to your customer expectations.

Yes.

Customer expectations are certainly not -- I don't know that we'll see -- we saw a significant growth in the industry last year.

I mean, up 2.3% in a business that is -- in an industry that's kind of seen a plus or minus 0.5% over the past few years.

So I don't know that we're going to a repeat of what we saw there.

It depends on what their promotion plans are, etcetera.

But we've certainly seen nothing dire that would indicate we're going to fall off a cliff.

On the other side, we've not seen anything that indicates we're going to see a big repeat or even an upswing from last year.

Okay.

And just last question -- on Germany, can you just comment on the beverage can market there and how it's tracking relative to expectations.

Yes.

I'd be happy to.

This is John Hayes speaking.

In Germany, we continue to make progress.

And while, to be honest, it's a little bit slower than we'd like, it's going at the speed that one should reasonably expect.

I think I mentioned this before, but it really is a marathon and not a splint -- a sprint.

It wasn't as if May 1 came and went.

And a light switch was flipped, and the cans were everywhere.

And the consumers were buying it, and the retailers were listing them.

But having said that, since -- and during 2006, the successes that we've had is the returns system has proven to work well.

The reverse vending machines have been put in place largely, although that's still continuing.

Consumer -- we actually recently did some research, and the consumer clearly still appreciates the benefits of -- of cans.

And so our big focus going into 2007 continues to be working with our customers and, more importantly, the retailers to get greater listings on that.

So, as I said, we're off to a reasonably good start.

But in the long term, we fully expect the market to come back over the long term.

In terms of overall volumes, not only in Germany, across Europe, I might answer that now because I'm sure there will be some questions about it.

The volumes in the fourth quarter, the volumes growth were about 8% which was consistent with the full year.

We were up a little bit more than that because largely of eastern Europe, which continues to grow at strong double-digit rates.

And going into 2007, we to be honest from a planning perspective, were a little bit conservative because we didn't know what the -- the impact of the price increases that we pushed through would have on demand.

And also because of the lack of capacity in the first half of the year.

We have relative to our fire in Hassloch, we were, as I said, a bit conservative.

As we sit here now, I think we're a bit more constructive about the volume growth in many of the trends we saw in 2006 continue into 2007.

Obviously, we won't have the World Cup, but if we have a normal weather season, we should expect very strong growth in the can market in 2007 in Europe.

Okay, great.

Thanks.

Thank you.

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

Please go ahead.

Thanks very much and good morning gentlemen.

Question -- actually, two questions.

One, just a quick follow up on the European situation to John Hayes if I may.

That is, John, I think I know the answer, but I want to make sure.

You said strong volume growth across Europe, right?

As you look at Western Europe, it's not just Germany that's driving this 8%, right?

No, that's correct.

It's throughout Europe.

Great.

Thank you.

And then, perhaps then turning to the metal food and household products.

Dave Hoover, you said on the -- in the press release that those businesses -- that business is not meeting your expectations.

Can you talk about some of the measures you're putting in place and perhaps some of the payoff.

Yes.

I might defer also to John Friedery to help answer this.

I think, we -- it's sort of a mixture on the plastic acquisition that we bought actually is -- I think, John, would you agree, is running a bit ahead of where we thought we'd be.

Generally we're very pleased with that.

And we've encountered some -- within the market -- unexpectedly things aren't quite as -- as strong as we thought when we started.

We had Wal-Mart destocking, but I thought -- I think that we're getting this better organized and have plans and programs to both cost reduce the business and promote it commercially in a good way.

Would you add to that, John?

Yes.

I'd just say on the food and household side, obviously, struggled a little bit.

Our food volumes were down because of the losses we'd seen -- market losses we've seen the previous year that we talked about.

And a little bit at the beginning of last year.

Aerosol volumes were pretty steady, but we were very disappointed with the pricing environment.

There'd been some discounting out there and really has caused us some -- some anxiety.

But we are hanging on to our volumes, and we are looking very hard at our cost structure in that business right now.

On the cost side, I'll talk just a little bit.

I mentioned last time, we had a couple of plants that have gone slower than we anticipated.

And we actually kind of had to take a step back to get systems and working to get the systems in place and get a good footprint that will build the -- the operating efficiencies that we expect in the future.

So it has been a bit of a challenge, but we're hard at it and refocused on that part of the business.

And.

Is there a period of which contracts were set and if -- if part of the problem is price here, when can we look for an update on whether or not the industry's becoming more disciplined there?

Well, we're obviously in a -- an annual -- some contracts are annual, some are longer term.

And so there's a bit of a mix.

And I think it's going to be a little bit through this year before we're able to see, hopefully get some -- some better revenue improvement on that side.

So this year's the focus is cost focus.

Absolutely.

Great.

Thanks very much.

Good luck, gentlemen.

Thank you.

Thanks.

Thank you.

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

Please go ahead.

Good morning, gentlemen.

Hi.

Let's -- you segue way me perfect right here to the price question.

And I'm glad someone else got to ask you about the earnings guidance, because I didn't want to get tongue lashings for that one.

So on the price side of the equation, would there be any reason to expect that as your escalators kick through here in North America that you shouldn't be, on the bev can side at least, caught up now on the pricing?

And then as you look at other lines of business such as food cans, aerosol, beverage in Europe, can you give us an update as to if you think you now, or can be with pricing that you're anticipating putting through, fully caught up to where you were say in '03, '04, or previous times?

I'll start out North America and talk a little bit on the bev can side.

There's not much, as you say, the escalators have kicked in, and we're coming off -- we've got another round of those kicking in.

And we should be getting ourselves caught up generally.

Certainly looking at -- at opportunities to -- to recover everything we can, where we can, on some of the annual contracts.

But I would say that in general we're are -- if you're looking at margins where they were, you've got to remember that raw material costs are up significantly, which puts a natural squeeze on margins.

So -- overall I'd say we're beginning to get back to where we thought we'd be as we see this next round.

And assuming we don't get another high round of inflation coming through, throughout '07.

On the food side, we're still not settled out on steel, so we're still not settled out with customers.

But generally we feel that that process and those discussions are going okay, and then as I mentioned, on the aerosol side, it's been some tough sledding.

And from a European perspective, I think I mentioned at the end of the third quarter, we've actually been discussing price recovery initiatives with our customers for over a year now.

With many of these customers in 2006, we had firm, fixed contracts with them, and we're discussing price recovery outside in terms of our agreement.

And we had some success with that.

As we entered the 2007 contract negotiations, much of our business was up for renewal, and I had mentioned in the third quarter that we were discussing price increases that were both significant and material.

I'm not going to discuss individual situations obviously, but what I can tell you today is that we are largely complete with these missions, we are on target, and were main constructive regarding the situation.

I might just add, John talked about margin squeezes due to higher material prices.

By and large as you know, we passed those along.

The main raw materials in all the businesses that we have.

So it's the apparent squeeze, simply meaning that the -- the costs of the material goes up, you know, the percentage margin could go down.

But profit can still go up.

And I think that's understood by everybody.

But we weren't trying to say that we were hurt by those raw material price increases.

Okay.

And then since Mr. Taylor's there, let me ask him about the aerospace business.

You know, it appears as though you guys have pointed out that business is turning around quite well.

And you actually had a very, very good margin level in the fourth quarter or operating income level.

We've always thought about that business or you kind of constructed us to think about it as an 8% to 8.5% is a normalized margin.

Is that a -- a reasonable level, or way to think about what we could see the next few years, or in fact with some of the new contracts, could it in fact be better?

Yes, I think so.

I mean, as Dave has been talking throughout the year, we had a difficult year due to program stretch-outs and government funding moving around.

And we're pretty happy with the whole year.

I mean, if you look at the momentum we generated, we had a 9% Q3, and a 10% Q4.

But 1% of that 10% in Q4 was due to a onetime accounting change, a rate hit.

So I think looking forward, we're at 8% to 9% business.

And that's across all our businesses because we have a lot of cost reimbursable business, and we're picking up more fixed price business.

But believe it or not, we make more margin on the fixed price business.

I think what you're talking about is pretty much correct.

Okay.

Thanks.

I'll jump back in the queue.

Thank you.

Our next question comes from the line of Mark Wilde from Deutsche Bank.

Please go ahead.

Morning.

Morning.

Ray, I wonder if it's possible to get a number for the food and household products packaging business net of the -- the closure charge.

I think you've got it in the segment information.

I think that's there.

I mean we take the closure charge, and we try to show it separately.

So that number should be there for you.

The other thing that I will point out in the segment numbers for that business is that under purchase accounting is that when you -- when you buy a business you have to ferret out the inventories.

When you ferret out the inventories you take some of the profit out.

And that's a one-time thing.

As we said in our press release that number is $6 million.

So if you were to think, just think about normalizing that -- those numbers for three quarters -- you would add $6 million to that segment number you got there.

Okay.

One other follow-on question.

To kind of clean it up on pricing here.

Last year, you talked a lot about not being able to pass along costs over in China.

Can you give us a little update on that market and whether things are a little more constructive over there.

Yes.

Last year was a tough one because it was such a ramp-up right as we were concluding kind of the annual negotiations and so it just -- it got very tough in the -- we were not able to pass costs on.

As we move forward, we've moved a significant portion of our -- of our volume into multi-year contracts with -- with some of the key customers over there.

And those have provisions which recognize the movements in metal.

And will be much more constructive for us as we move forward.

So that's the China business is -- we expect to recover nicely in 2007.

And I would say that the market continues to grow nicely at 10% to 11%.

And we're growing right along with the market.

So the combination of the growth plus your ability now to pass through more effectively, making you a little more optimistic about what you might want to do in that market over time?

That's correct.

Ray alluded to that earlier in terms of looking at growth opportunities.

Okay.

Very good.

Thanks.

Thank you.

Our next question comes from the line of Claudia Shank from JP Morgan.

Thank you and good morning.

Just wondered if we could just move back and talk about costs again and maybe just comment on transportation costs and how they're trending.

And sort of what you're doing on the logistics side to try to improve some efficiency or reduce haul costs.

Sure, Claudia.

On the North American side, what I'd tell is we look at a component of costs is obviously diesel.

Diesel after a big run-up last year is kind of right now about where it was a year ago.

And the trend has been downward a little bit, certainly due to a warmer winter in the northeast and a little less pressure on heating oil stocks which is transferred over to the diesel market, as well.

So what's happening in the general crude market.

So that trend is working for us right now a little bit.

To the other extent, we have just embarked on a significant logistics effort.

We will be working with a third-party logistics provider to better source all of our transportation.

We used nearly a quarter of a million truckloads of freight capacity a year.

And so there's significant opportunity to bundle that to go out and get the best rates across the country.

So that's in progress, and the results of that will unfold.

It will take a little while.

I think as I said last quarter, as we look at this one of the challenges is to make sure that all of that -- all those truckloads -- are basically shipped on adjusted time basis.

So we've got to make sure and move very -- what's the word I'm looking for?

Very cautiously, I guess, to -- to make sure that we don't disrupt any customers with our efforts to improve our -- our freight situation.

So all that's ongoing, and we'll be updating you as we move forward.

Okay.

Thanks.

Then just a quick comment on the weather and sort of the west coast freeze.

Are you seeing any impact of that, or do you have any sort of concerns about the potential impact that might have?

Yes, there's a lot of snow here in Colorado.

But on the -- the west coast freeze hasn't really caused us any issues at this point in time.

Okay.

Great.

Thanks so much.

Thank you.

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

Hi, guys.

Can you talk a little bit about the U.S.-Canada acquisition in terms of the -- I believe it was anticipated $20 million of cost savings.

Where are you on that, and how do you expect that to trend over the 2007 year?

I'm going to start it and then I'll pass it to John.

But, basically, Dan, we've got I would say in the 2006 numbers probably 3/4 of that number we've actually got, it's there.

And, we -- wouldn't have been able to make some of those moves we did in food without having that aerosol business.

So, the problem is that we're going to get more than that $20 million.

That's not the issue.

What the issue is, we've had situations in the marketplace that has taken some of that away from us.

I'll turn it to John.

Okay.

Thanks.

Yes.

Just to -- to continue on, as Ray said, we've got about 3/4 of that.

We're out of the Lombard office, that's shut down.

We've taken the people out that we expected to take out of -- of that part of the business.

And we continue to work very hard.

The Burlington plant, as Ray alluded to, is -- has ceased operations.

And we are moving those volumes elsewhere into the system.

And we're moving some pieces of equipment to accommodate those volumes.

So that will unfold over the year so we're really beginning to see the results of that closure later in the year.

But as we've talked earlier, the -- the revenue side of the business on that aerosol side has not been pleasant, and so we're focusing very hard on -- on the cost side right now.

Right.

And have you been able to get synergies between the food can -- the food can business is primarily three piece I believe.

But is -- are there synergies between the two businesses on the cost side and -- and as part of that $20 million or whatever number you're looking at, is that -- are those two different businesses integrated in terms of that, that cost savings number?

Yes.

That cost savings number contained a little bit of integration.

We're aggressively going at-- we made good progress in certain parts of getting that whole three-piece organization put together.

And we're continuing to move expeditiously and aggressively in getting that whole organization streamlined and put together to be able to realize some additional opportunities.

Okay, good, guys.

Thanks.

Yes.

Thank you.

Our next question comes from the line of Alton Stump from Longbow Research.

Please go ahead.

Thank you.

Good morning.

Good morning.

Just -- two quick questions.

I guess getting back to the pricing side of things.

In Europe, I think last quarter you had talked about the fact that with the market being very tight that that was helping you guys as you were negotiating pricing.

Is that tight market still -- is it wending in your favor in terms of your pricing conversations with your customers?

Well, the short answer to that is yes.

I would believe that capacity across Europe, we believe, is relatively tight.

For us, it's particularly tight.

In fact, we -- we're going to have an interesting year because our biggest challenge right now is trying to keep up with the man particularly in the first half of the year.

We can't make enough to sell.

And as we sit here today, one of the challenges, if we have a hot summer, I worry a little bit about our ability to deliver because we don't have the ability to build the inventories like we typically do.

Our sales force, our supply and demand people and our manufacturing people are doing an excellent job working together.

But it is quite tight.

We'll get some relief in the second half of the year as our projects come on stream.

But it is going to be a challenging year in terms of overall supply and demand.

Okay.

Great.

And then just one other quick question here in North America.

Obviously with the LME staying high, in the last three to six months, are the contracts in place still very efficient in terms of passing through those escalators so that there is no margin exposure outside of a simple one-to-one simple cost pass-through issue on margins?

Correct.

Okay.

Great.

Thanks, guys.

Thank you.

Our next question comes from the line of Richard Skidmore from Goldman Sachs.

Please go ahead.

Good morning.

Thank you.

Just a question with regards to the North American beverage can market.

Volumes look like they were pretty strong and probably above the year growth number.

Can you just talk about what drove that volume in the fourth quarter, and is there any -- is there any extent of pre-buying by your customers ahead of those price caps rolling off in the first quarter?

There seem to be -- we've seen very little evidence of pre-buy.

I -- as far as what's driven it, I think it was just continued strong promoting for the fourth quarter.

Both on the beer side and the beverage side.

And certainly the energy drink market continues to be strong.

But we've seen very little -- little evidence of a pre-buy going into 2007.

And as you look at 2007 and the promotions from your -- your customers in their -- and their thinking with cans, can prices to them going up, do you sense that they're going to change their promotion and shift more to the plastics side or do you get a very good read of that yet?

No, I haven't seen -- don't have a good read this early in the year obviously, well ahead of kind of the traditional promotions season.

But certainly haven't seen any -- any indications to this point or any forecasts that would indicate a shift out of cans and into PET or other forms of packaging.

And then just one last question.

You talked about growth globally.

Can you just talk about perhaps some of the markets that you're looking at.

I think -- I think we won't say specifically because if we're looking at them we don't want to advertise that.

But there are places where there are lots of people and no cans.

Think about it that way.

Certainly we've been in China a long, long time.

We've had a rough history there.

But the last few years the markets started to grow again.

And we're making good profits there.

We're going to look to maintain our part of that growing can market.

So that's one place where we are.

We-- we look lots of places.

And typically, where we're looking to go is where there are people and there's demand, but no cans.

We tend to follow our large customers into those locations, and given our position, we get to look at lots of opportunities.

But we're not going to go nuts about it.

What we're looking for is something that we can go spend money and make return.

Ray and I always think about that in the context of -- we don't want to be doing too many things that we have to wait until long after we're retired to get the benefit from.

Okay.

Thank you.

Kind of a nonanswer for you, but don't be surprised if we turn up a couple of new places.

Great.

Thanks.

Thank you.

Our next question comes from the line of Andy Feinman from Iridian.

Please go ahead.

Thanks.

The -- let's see, how much can you tell me, are you going to stop giving us the revenues for Asia?

Because I noticed it wasn't in there.

And you -- you used to always give it.

Andy, we've never really -- Asia is part of our international business.

So the revenues for Asia are with the international.

All right.

The -- if you look at your press release and your segments, the undistributed corporate costs for last year were 25.8, and I --

Yes.

That was a big drop from what I had before.

So, I was trying to understand that.

It was a big drop from this year, too.

I mean, it was much lower than this year.

This year you got 37.5.

Last year was 25.8.

So what -- I don't think it was 25.8 before you did the restatements.

Was there something that made that number so low?

Because that's pretty low, just looking at the last two years.

You know, the -- that -- I'm not sure, of the 25.8.

I can tell you the -- the increase between the 25.8 and the 37 -- what basically was, is we took -- we took some of our compensation costs when the accounting rules changed to expense stock options and things like that, we basically took those costs and we allocated them in each division where they belonged.

Before that we might have had them in the undistributed as just sort of part of the undistributed.

As the stock option rules changed and accounting, we probably took the costs in and put them up in each division.

So, each division now if we issue options to the people in that division, that's where those expenses are.

The difference between the 25 and the 37, it's fundamentally, it's more legal and professional fees.

And remember, we had those in -- in the first quarter we had that one-time out of period $6 million cost in the first -- in the first quarter of the year this year.

But that's in the undistributed number.

Oh, the $6 million -- $6.1 million that you had to write up the assets and expenses in there.

No, that's $6 million -- that we had inventory in the food and household business.

That's in the food and household segment.

Okay.

That's what I would have thought.

You could add $6 million to it and get more of a running cost --

So if you are missing $90 million when I go through all your numbers of cash.

If you look at your change in net debt minus the difference between sources and uses, minus the stock buy-back.

So was that $90 million?

Let me make this real simple, net debt is $100 million more than we had reforecasted.

We thought it would be about $2.2 billion.

It's more like $2.3 billion.

The $100 million is the $70 million, if you will, timing difference in our free cash flow.

And the other -- the other $30 million of that is the exchange rate.

You've got last year, I believe, the Euro number -- a lot of our debt was to finance the European operation.

It's part -- it's nominated in Europe.

So it -- if you take the Euros and multiply it by 1.18, I believe, which was the exchange rate at the end of last year, and take those same numbers and multiply it by 1.3, you get another $30 million worth of debt.

That's just with the exchange rate.

Okay, so $30 million of my $90 million.

And the other $60, you said you paid down your securitized receivables --

That was only $10 million.

The other part is the timing of our free cash flow.

You know, we expected 250 and we -- we delivered 180.

And that's really timing, and it will flow out --

Okay.

I'll call you later.

I mean, that's all in the numbers.

So -- that's it.

Thank you very much.

Okay.

Thank you.

Our next question comes from the line of David Ireland from ABN AMRO.

Please go ahead.

Good morning to all of you.

Just a question back on the [inaudible] price. [Inaudible] prices are obviously a fair bit higher than was generally expected mainly because of the unusually large trading position that was built up.

Or has been built up.

We obviously don't know how long that's going to last.

But is that practically having an impact on you?

Not really.

As we've said, I think Ray's answer was correct to the question of do we pass this through.

I suppose if you thought that commodities go up and they go down, and as you say maybe the trading that's going on in the [Almeeds] having something to do with it now.

The fundamentals certainly don't support the levels where it is in my opinion.

But we aren't seeing, and I don't believe we're going to have any kind of permanent dislocation based on where aluminum's trading now.

Great.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Myles Allsop from UBS.

Please go ahead.

Hi, I just wanted to clarify.

You're saying you passed on all the higher aluminum costs in Europe and all the contracts have been signed.

So in absolute profitability should we expect the European bev can business to improve profitability in '07 versus '06?

Well, that's our plan and expectation because we're continuing to grow with the markets, not only the cost side but the revenue side, as well.

And we're trying to make sure that we -- we continue to grow with the market.

And as a result, as we sit here today in late January, our expectation is, yes, we're trying to grow our profitability in Europe.

And is -- is that the case in terms of absolute profitability for your North American bev can business?

Yes.

As we talked earlier about what happens with volumes, volumes were up strong for the industry last year and this year.

But as we sit here today we expect to be able to improve on what we've done.

And maybe one sort of final question.

And looking at sort of last year and you kind of -- the market grew by 8%.

You grew in Europe, that is you grew ahead of the market despite Hassloch being closed.

And Hassloch, I guess is what has 15% to 20% of your production capacity in Europe.

And it looks like your assets must have been running that much more efficiently.

Should we worry in the second half of the year when Hassloch sort of comes back on stream that the market will actually have quite a bit of oversupply because you've been running that much more efficiently this year?

Yes.

I wouldn't worry about that too much.

As of April -- when we had the fire in April -- we had obviously built up inventories in anticipation of the World Cup.

And we were able to really drive those down.

And if you recall, beginning in August, the weather turned on us.

And it really wasn't a great fall from a weather perspective.

As we look into 2007, we also at the same time, our plants had been running full out.

We haven't taken as much down time related to maintenance and other things that we would have liked.

And our manufacturing people have done a tremendous job to really sweat the assets.

That in the long term is not sustainable.

And so as we get this new capacity, we'll get back to what I will call "daily life" if you want to call it that.

And I wouldn't expect too much capacity.

But what we tried to do in terms of our planning with both Hassloch and Hermsdorf is prepare for the future -- prepare for the future in terms of market growth.

That's why we put a new can line up in Hermsdorf, because it's not only for the German market but for all of eastern Europe.

It sits close to the Polish border, and that is a great opportunity as those eastern European markets continue to grow.

So I wouldn't worry about that too much.

Okay.

Thanks for your help.

Thanks.

Thank you.

Our next question comes from the line of Tim Burns from Cranial Capital.

Please go ahead.

Mr. Burns, your line is now open.

Okay.

We have a follow up question from the line of Chris Manuel from KeyBanc Capital.

Please go ahead.

Two quick follow ups.

The first is for John Hayes.

When you say that you're anticipating the lines being up and running again in second quarter, can you help fine-tune that a bit for me.

Can you anticipate them in April, May, or in June?

Which -- earlier or later in the quarter?

Yes, what I would tell you is the first cans off the line would be more the April-May timeframe.

But there's obviously a startup curve and a learning curve if you will.

Because it's with new -- new equipment.

You always have to debug it.

So getting up to what our expectation is, there's a several-month ramp-up after that.

That's why we say going into the summer, we don't have that capacity.

But as we leave it and are able to balance out the system, we get a little bit of relief there.

Okay.

Then the second question is for Mr. Hayes.

I'm going to hit up the Johns here.

What -- with respect to the -- as Ray put it the end of the end project that is kicking through here in North America, can you remind us of where you are with the modules and timing of how many of those -- I think there were six or seven that you were bringing on all together.

And is the majority of the drag from that behind you such that we should start to see nice incremental lift as the year goes on?

Thank you.

Okay.

Yes.

Let me address that.

The question -- or I should say the fact -- is that the total of eight modules, we have three up and running, the next two will be up and running within the first -- by the end of the first half.

Hopefully by the end of the first quarter, and then we'll put one more in this year.

So then there'll be two into '08.

We're kind of 5/8 of the way there in terms of what we've spent.

We'll work through earlier issues with the equipment speed that we had there, and our modules are now running at designed capacity.

So we're very pleased with what's happening.

Just as an aside, we're running in -- our new cdl-plus ends in 17 customer locations today, and we will make and ship at least 10 billion cdl-plus ends this year.

So the retail end lines are down, and that -- and that closure is complete.

So we're now down to four operating locations per ends from five.

So that's a bit of a -- a look at it.

But we should start to see, yes, we are experiencing now some of the benefits of those first modules come on.

And that should continue to swing as we continue to complete this project.

How many ends did you say that was that you were anticipating this year?

Was it 10?

Or how many was it --

10, one-zero.

Okay. 10 billion?

Billion.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] We have another follow up question from the line of George Staphos from Banc of America Securities.

Please go ahead.

Thanks, everyone.

As we look at fourth quarter profit dollars versus a year ago for beverage North America, they're very very good year-on-year comparison.

If we have a rank order of the drivers of that, was it volume first, the picking up or increased traction on the end-making project second, how would you rank order the various items that drove that performance, and then I have a couple of follow-ons.

George, I would probably say it was volume.

It was decreasing headwind.

We were kind of stumbling after Katrina with all of the dislocations in the energy markets and in the freight markets in 2005.

It's that -- I would rank second.

And then beginning to pick up some tailwind from the end project.

Okay.

Secondly, back to household and food, as we think about it US Can back in the 1990's was, at times, inconsistent performer.

Food can, you're, since the time you've been in the business, I think that would be a fair comment, as well, and not earning cost of capital.

You know, over time, you've tried to dress the situations there through, at least in food cans, through shutting a plant here, shutting a plant there.

And it would appear from your comments that there's still more work to be done.

But it's the same type of work that's been done already.

Is there something else, John, as you think about, you know, household and food aerosol and food cans -- maybe this isn't the term you would use, some magic bullet that will finally get the business collectively to where you expect it to be in terms of returns?

And maybe this isn't a great forum to talk about it, but what things should we expect looking out to get you there?

Well, I -- I think, you know, as far as a magic bullet, I certainly talked about the fact that we've been very disappointed in what's happened in the pricing environment.

And so one would be certainly for us to be able to -- to stabilize and get things moving there.

But pricing has always been up and down in that business, even though there should be relatively stable pricing given there are only three players.

So is it just that you think you'll bring more rationality now that you own the business?

Well, I think we're over 50% in the market, and we'll -- you know, conduct ourselves to try to sell at fair price, George, and we'll work hard on the cost side of the equation.

We're not satisfied with it.

That's what we said in our -- we're also not going to go into grievous detail with you to explain everything we're doing.

We're all over this like a dirty shirt right now.

The last question I had, guys, with aerospace -- has there been any changes in terms of how you look at the business, what your strategy is, given that there have been some recent, you know, very favorable transactions in the industry recently that certainly put a very favorable light on aerospace and defense businesses?

Thanks, guys.

Good luck in the quarter.

I don't know, Dave.

Are you for sale?

I'm all ears, Dave.

You know, George, it's the same old thing.

You look at this business, and you look at how to perform.

We just spent a couple of days with the Board and reviewed our business plans for the next -- both short and long term.

And, this business is one of our top performers.

So -- and if we just go sell it, it hurts us.

Well, I understand that.

Understand that.

Are the areas --

But we like it.

We're going to grow it and make it good and make a lot of money and flow like cash.

And we're glad that the rest of the world understands how valuable it is.

You should, too.

Probably raise our stock price because we have it.

I can't comment to that here.

But are the areas that you're investing in in aerospace comparable to where there's been increased interest within the market overall?

Sure.

This is Dave.

We've actually done a lot over the past, I don't know three, four years to tune up the business.

And we talked about running with a harder edge, making it more of a -- of a bottom-line business and keeping the culture that we like in terms of what we do as a living.

But I think what we've done in terms of investment on the capital side is exactly where it need to be.

You've heard we put a lot of money into the antenna business.

We -- we have a very good market position in what we call low [inaudible] microstrip antennas for practically every tactical vehicle in the United States military.

And we've put a lot of capacity in there -- we've also -- we basically ran out of capacity in our big aerospace section in terms of cleaning rooms and things like that.

So we're adding capacity there.

We did a upgrade to what we call our detector technology center, which is where we make focal planes.

We make a lot of high-end space-borne instruments.

Here all of those have these ccb's.

We put a lot of energy into there.

So investments are going into where we think the market is going and where we have a competitive advantage.

Okay.

Thanks a lot, guys.

You bet.

Thank you.

Our next question from the line of Bill Joel, private investor.

Please go ahead.

Good morning, everybody.

Hi.

Good morning.

It's amazing we can put a man on the moon but still can't put metal in a microwave.

Ball has certainly contributed to the former but really still hasn't perfected the latter.

So -- I know that Ball like other manufacturers have been actively developing and perfecting the microwavable can.

When will your company begin reaping the results this project?

We are working hard with several of our customers.

We have some products that we're working on that we've talked about -- the Fusion-Tek product which is out in tests with our customers.

So it will just be a matter of when their -- when their marketing and processing plants fit well with us.

I can't give you an exact timeframe, but we're feeling very good about that.

And we're -- we're ready to support that market as soon as it takes off.

Thank you very much.

You bet.

Thank you.

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

Please go ahead.

Thanks very much.

Quick question for Ray.

Ray, you said you were, I think, very positive on first-quarter cash flow if I recall.

Just a quick follow up.

Is that just because you think you'll be able to normalize the inventory situation in the first quarter?

Yes.

We -- we said that, yes, we expected a very strong first quarter.

That was both from a cash-flow perspective and earning perspective.

Okay.

But it -- it seemed -- okay.

And just on that, is there any reason why -- maybe follow up on the earnings side.

I can see the cash flow side.

Is there a reason why -- you would get residual benefits on the first quarter, you just expected from --

We -- we said in our comments that second half of this year has been a lot stronger than the first half.

That's not unusual in itself because that -- that's normally the case.

You know, we just -- we've heard John and John and we have some momentum.

And David, in our aerospace.

But we have built up some momentum in the business in the second half.

That we think is going to continue on in the first half of next year, very noticeably in the first quarter.

So it's an operating --

The inventory builds have happened in part, you know, in North America.

They were related to threatened strikes and so on.

It just takes time to chew through that.

So I don't think it will be just the first-quarter phenomenon, but I think clearly we're pretty darn sure we know how to get this working capital back to normal levels.

And it will happen.

It probably will all happen in the first quarter.

Not working Capitol --

Yes.

Okay.

Great.

Thank you.

Thank you.

We have a follow up question from the line of Andy Feinman from Iridian.

Go ahead.

I love the the way that John said significant and material when he was talking about price increases in Europe.

Just -- also appreciate Dave Taylor giving us that 8% to 9% -- you think you could bring all your divisional values and have them tell us what the operating margins will be for each division this year because that was pretty helpful.

Yes.

I doubt it, Andy.

Well this has been a great call.

I just wanted to ask you, the -- the shares, I think may be 103.5 million shares next year given your stock buy back would be like an average number for the full year, does that sound right?

Even could be a little lower than that, Andy.

You know what they say because we've had done an accelerated share repurchase program through the -- through -- actually the fourth quarter of -- of 2006, and -- and if you listened to my comment, I said of the -- of the 175, we've already a bought back $50 million in the first couple of days of January.

Right.

So I think it was George started out by saying, could you make your 10% to 15% earnings per share goal.

And I don't see any way you're going to earn less than $3.40.

So I expect you to do better than that.

Setting the bar pretty high, Andy.

I don't know.

But I've tried to lower the numbers.

That's what I come up with.

You guys are doing great.

And I just wanted to say so.

Thanks.

Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is a follow up question from the line of Tim Burns, from Cranial Capital.

Please go ahead.

Hi, everybody.

Sorry if I missed that last call.

Dave, when you talk about places with a lot of people and no cans, are you talking about like New York City and the like?

Well, I -- I was thinking New York City when you -- when you said that because whenever I go there, you know, they come -- Cokes come often in little glass bottles, and I think that's the only place in the world you can find those.

But they're way behind.

No, it wouldn't be New York.

Understood.

Then the other question, I mean, I would definitely not sell the aerospace business because I think your Chinese business is going to start to make a lot more money as missiles start to fly up toward satellites.

But that's just a general comment.

And the last thing I have for you -- I don't know, did anybody ask about plastics?

I don't think so, but you're welcome to if you'd like.

I -- I'm curious how the alcan plastic bottle business is being integrated and I guess how pricing is going on your traditional carbonated soft drink business.

Water and carbonated.

Sure.

The integration has gone very, very well.

Essentially complete.

We've got those -- the three remaining plants.

There was one that was a leased facility in California that was shut down toward the end of the summer last year.

And we are in the -- the remaining three, and those have been tucked very nicely into the organization.

In addition, there was a plastics component to the US Can acquisition, a pail business that has been moved over, effective the first of the year into the plastics business, as well.

So all of our plastics manufacturing operations are -- are in one area, and we get the benefit of the knowledge in the engineering that -- backup that we've got there.

In addition, we did close one -- one plastics facility from the former US [inaudible].

Ohio plant is down or is just about ceased operations and will be done and cleaned out by the end of this first quarter.

So all of that is going very well.

And we're generally very pleased with that alcan acquisition that we've -- that we've made.

As far as pricing on general CSD, it certainly continues to be an area of -- of key focus for us.

We are not seeing the returns that we expected in our base CSD business.

And so we continue to look for ways to improve that.

Certainly on the cost side as much as we can, but on the pricing side, as well.

Is making more, you know, custom product for the likes of your larger customers -- I mean, can you pull along higher prices in your traditional business, or is that kind of a pipe dream.

We'll find out.

But that's our plan.

We're -- well, I better be careful of what -- we're after these things.

If you look at our company -- our CFO did a nice job of creating bubbles on charts -- you'd have to see it to understand how significant this is.

The mother ship around here -- not to be confused with Dave Taylor's mother ships which he builds -- but the mother ship is a beverage can business, and it's damn healthy and doing well, and getting going.

We've got a couple of places we've got to stay focused and make them better.

And, we're on it.

And all the things you're thinking about and if you have any other ideas you want to pass along, let me know.

But we've got really good people here.

We've -- we've had a couple things happen that we hadn't anticipated.

But we've got to figure out why is it that we don't perform better in these businesses.

And if we can't in some space of the game, we can't do them anymore.

That's how that is.

Got you.

Got you.

The other thing that happens in our company, how much money we make is directly correlated to how we perform.

And you've seen maybe the charts that we do around creating economic value added and beating your cost of capital and so on.

But we understand that.

In the year that was just concluded we didn't make as much money.

And it really [expletive] us off.

We're going to figure these things out.

Having said all that, we're in a good place.

We've got a lot of good runway in front this company.

We feel real good about it.

Dave, do you have like a workout facility there at the corporate headquarters with like a punching bag or anything?

It's not a punching bag.

We're using weapons that Dave Taylor makes.

This is a classified area that you won't be able to see.

Thanks a lot.

Have a good first quarter, everybody.

Thank you.

And gentlemen, there are no further questions at this time.

I'll turn the conference back over to you.

Thank you very much, Tara.

You're a great hostess.

Good luck on your skating career.

And thanks, everybody, for being with us on this call.

We'll talk to you again in April.

Thank you, 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, and have a great day.