Ball Corp (BALL) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation third quarter 2007 earnings conference call.

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

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, October 25, 2007.

I would now like to turn the conference over to Mr.

Dave Hoover, CEO.

Please go ahead, sir.

Thanks, Anthony.

Good morning, everyone.

This is Ball Corporation's conference call regarding the company's third quarter 2007 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 second quarter 10-Q and in other company SEC filings as well as company news releases.

If you don't already have our earnings release, it is available on our web site at ball.com.

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

With me today on the call are CFO Ray Seabrook, John Friedery, who is CEO of Ball Packaging America and John Hayes, president of Ball Packaging Europe.

Ball Corporation reported a solid quarter with outstanding results in our metal beverage packaging in Europe and Asia, and aerospace and technology segments.

The company announced yesterday a restructuring plan to improve results in our metal, food, and household products Packaging America segment and we announced in this morning's press release, plans to install a new 24-ounce can production line in our Monticello, Indiana beverage can plant.

The new line will help us meet customer demand for this can size in North America and continue the growth of our specialty can business.

Our European operations are performing well.

The can market is very tight there and we have announced plans for line speedups and are looking at possible additional can and end manufacturing capacity in Europe.

Our aerospace and technology segments had an excellent quarter.

The successful launch on September 18th of the WorldView-1 satellite we built for DigitalGlobe marked another important achievement.

Yesterday, we saw some of the images from WorldView-1 that were not yet public and they are stunning.

I will talk more about aerospace in a few minutes.

That's a quick overview of operational highlights.

Ray will discuss our financial performance and then I'll return with a few more comments about our outlook before we take your questions..

Ray?

Thanks, Dave.

Diluted earnings per share for the their quarter were 59 cents and for the first nine months were at $2.40.

Both the third quarter an the nine-month results include an after-tax charge of $51.8 million or $0.50 per diluted share related to a legal settlement with a customer in the metal beverage America's segment.

The settlement arrived through mediation earlier this month, primarily related to the pricing of the aluminum component of container costs.

The bulk of the dispute centers on aluminum price ceilings contracted for in the fourth quarter of 2005, that one of our suppliers was unable to honor.

Prior to mediation, we believe we had solid defenses to the customer's claim.

Discussions and mediation led us to believe otherwise.

Under the terms of the settlement, Ball will continue to supply all of this customer's beverage can requirements through 2015.

As Dave mentioned, international beverage cans and aerospace had an excellent quarter.

Continued strong sales growth in Europe including growth in custom can volumes, better operating margins in China and the strength of the euro were the key factors in higher international beverage can earnings.

The higher euro at $0.04 per diluted share in the quarter compared to last year improved third quarter aerospace earnings were the result of higher sales and better operational performance on major programs.

In North America, third quarter comparable beverage can earnings were lower due to sales mix and higher overhead costs compared to a year ago.

Through the first three quarters, North American beverage can sales volumes were down less than 1% and most of the excess aluminum inventory carried through from 2006 has been eliminated.

Third quarter operating results in the food, household and plastics segment were disappointing with earnings in both segments below last year.

In food and household, lower sales volumes and higher plant costs were the primary factors.

In plastics, lower sales prices in the soda and water markets were the reason for the shortfall compared to a year ago.

Third quarter food and household sales volumes were lower.

Both [inaudible] customer operating issues including a fire at a customer's factory, along with adverse weather conditions in the Midwest.

Plastics sale volumes were up in the quarter and through first three quarters compared to a year ago, but volumes were less than planned.

As a result of the substandard third quarter performance in both of these businesses, it will now be difficult for either business to exceed 2006 full year earnings levels.

As part of our restructuring plan to address some of these performance issues, we announced plans yesterday to close two aerosol plants and exit the Baltimore customer and decorative tin plate can business.

Once completed, this capacity reduction will result in the elimination of 10 manufacturing lines and is expected to yield annualized pretax cost savings in excess of $15 million annually.

We are not satisfied with the results in either the food, household or plastic segments and anticipates further actions which could include more capacity reduction beyond those announced yesterday.

The bulk of the margin squeeze in these businesses has been the lack of cost recovery which, going forward, we will go after forcefully.

Our third quarter tax rate was reduced by several favorable items.

We were able to resolve an issue with the IRS concerning interest reduction and a company on life insurance plan, and to record the benefits of a Canadian tax loss and lower European tax rates that became effective in the third quarter.

The fourth quarter effective tax rate is forecast to be similar to the first half, with rates at around 32%.

We continue to focus on free cash flow and still expect full-year capital spending of around $300 million, net of the property insurance recoveries, despite the increase in the euro.

We also still foresee adjusted full-year free cash flow to be $400 million or better even with some year-end [inaudible] in food and household inventory levels.

As discussed on previous calls, we still anticipate making an approximate $45 million or $27 million after tax, incremental fourth quarter payment to our North American pension plans, to fund those pension obligations to 95% level.

The after-tax impact of this payment will be shown in our consolidated cash flow statement as an operating activity and, therefore, we will be reconciling items to our free cash flow computation.

Some of the other key financial metrics for full year 2007, we still expect full-year share repurchases in the $200 million range, and full-year interest expense and year-end debt levels will be a little higher due to the weakness in the U.S.

dollar.

Year-end debt levels are forecasted to be close to $2.2 billion.

Finally, the ruling fourth quarter EBITDA interest coverage is at 4.4 times and net debt EBITDA is at 2.5 times for the period ended September 30th.

With that, I will turn it back to you, Dave.

Thank you, Ray.

During our July conference call, I said that we believed the second half performance would be a difficult comparison with the first half and that continues to be the case.

We benefited last year in the fourth quarter from a significant increase in volumes in the North American beverage can industry and as a result of that increase, we deferred some normal maintenance into this year.

We will be curtailing some operations in the fourth quarter of this year to perform that maintenance, as well as to balance supply with demand.

We expect Ball aerospace to have record performance in 2007.

The backlog is currently $882 million.

In addition to worldview's success which I discussed earlier, aerospace was chosen earlier this month as a finalist from five industry teams that submitted proposals for the Ares 1 crew launch vehicle contract.

NASA is expected to select a single prime contractor for that Ares instrument unit later this year, so we'll have our fingers crossed.

Looking at Ball Corporation overall, three-quarters of our company is performing very well.

Our global beverage can business is growing organically as well as through our operations in developing markets.

We are determined to make our best businesses even better and to bring our underperforming businesses to more acceptable level.

And with that Anthony, I think we are ready for questions.

Thank you.

Ladies and gentlemen.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of George Staphos with Banc of America Securities.

Please proceed with your question.

Thanks.

Hi, everyone.

Good morning.

Hi.

First question, just in terms of trends that you saw in the third quarter, and as they are embedded into the fourth quarter, guys, you know, obviously you had a favorable variance on the tax rate this quarter.

My guess is, Ray, you didn't know that at the time you provided 2Q guidance that it was probably resolved and you got visibility on it in this quarter.

Yet, in the free cash flow guidance, which, again, you are having a great year on free cash flow, hasn't necessarily changed.

It's still in the excess of $400 million.

So are there any businesses that maybe still a little bit of deceleration above and beyond what you would have expected in the third quarter or are trends pretty much as you expected?

My follow-on question and then I will turn it over to the other guys.

You mentioned that there's a bit of a pickup in overhead costs in beverage cans America.

Is that related to the maintenance downtime or anything else that you are seeing in the fourth quarter?

Thanks.

Well, George, I think there are about four questions there, but I will try to answer a couple of them and then maybe I will ask John Friedery to talk about North American beverage.

With the new tax FIN 48, you are likely to see taxes to be a little bit more bouncy than they normally would be because those new rules - when the event happens, you put it through in the quarter when we used to sort of, if you will --

Amortize.

Put that into an effective tax rate for the full year.

So, what happened primarily in the quarter is we settled our IRS dispute which was good.

We also have been working for a while on this Canadian issue and we finished with some asset appraisals and we needed a tax selection for that to happen and that all happened in the their quarter.

And the European tax rates, we always knew it was going to happen but it depended on the legislation.

So the legislation was actually passed by the German parliament and the UK in the third quarter.

So, all that stuff just happened in the third quarter.

Under the old rules, we probably would have -- we would have blended that in throughout the rest of the year.

In the new rules, it requires to be booked at the same time.

That's why I said that our tax rates for the fourth quarter will look closer to 31% to 32% which is closer to what's been happening in the first half.

As far as the U.S.

beverage business go with a high overhead costs, let me ask John to answer that.

Sure.

George, part of that is we had some claims experienced in the quarter that we got taken care of, and then secondly, the higher overhead costs Ray referred to were also some employee costs and compensation costs.

I understand.

Ray, just to finish up on the first question.

I'm not necessarily critiquing the tax rate.

My question is if tax rate was lower and free cash flow guidance is unchanged, it suggests that maybe there was less free cash flowing trend in some of the other businesses.

I know it's hard to be 100% precise with this, so I will just check.

Not really, George.

We said it's $400 million or better.

I understand.

So we have always known this is going to be a very strong year for free cash flow.

You know, if you look through the three quarters, we have $175 or $180 million of build and working capital and as you know, we have been telling everybody that we expect pretty much all of that build to kind of wash out in the fourth quarter.

I understand.

I will be back.

We are a little stronger, George, but it's hard to predict.

But we're pretty confident that we've got better than $400 million or better.

Okay.

Thanks, guys.

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

Please proceed with your question.

Hi, guys.

Good morning.

During the first half of the year, you benefited from low cost aluminum as the price of aluminum went up.

Did that impact margins in the third quarter as the price aluminum came down?

Probably a little bit but, you know, because we were always cautious that, you know, we had to get rid of that inventory, so it probably had some impact, Ghansham, but not near the impact it had in the first quarter.

So we probably lost a little bit in North America as a result of that.

So why are -- you know, why was operating profit in your America's beverage business sort of flattish, even though sales were up so much then?

Well, we talked about the fact that we had the cost of some claims, and some employee costs that went up.

And the world margins impact year-over-year, I think when we look at where metal was on an average, we're up from 2006.

The other thing, you know, sales volumes are fundamentally flat in North America.

And the dollar increase, you see, Ghansham, is the price of aluminum.

Okay.

In Europe, were you affected by these new Lines coming on in terms of margins, year-over-year?

Probably not.

I mean, I don't think of it that way.

You know, we had the start-ups of the three different lines.

They all went well.

We desperately needed the cans through the summer, so they were fully occupied.

You know, there's always a learning curve and a start-up curve which we had.

It was better than normal.

You always have a little bit more cost when you do things like that, but I wouldn't say it was material.

Okay.

Good.

Thanks.

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

Please proceed with your question.

Good morning, guys

Good morning.

Is the $400 million free cash flow estimate include the $45 million pension contribution?

Yes, the pension contribution will be around 25 to 27 net, Dan, so you got the tax affected.

And probably, it basically will be not included.

We would not include that.

Yeah.

And then, Ray, the Miller settlement, is that actually a cash payment that gets paid out over time?

I don't know if you addressed that or if it was -- or is it some kind of a credit or adjustment.

How does that work in terms of the cash flow statement?

The -- the way it works is that we -- we will be paying $70 million in the first quarter.

Okay.

Of next year, and the other one gets paid out over time.

Okay.

And then one real quick one, the tax rate for '08, or is it too early to --

It's a little too early.

You know we're still working on that.

We have a couple of things in the fire, that if it goes our way, you know, it could make it a little lower, but I'm not prepared to say that at this stage.

Okay.

This is the last question.

The steel producers, from what I can tell, have announced about a 15% price increase for tin plate, I guess, for 2008.

Have you guys -- you know, first of all, have you announced price increases or -- that's a pretty steep raw material cost increase - What do you intend to do about that?

Are you talking to your customers?

Have you already worked on that or are you hearing anything about that price increase?

What's the status?

Yeah, what I would say is we have heard about that, certainly, and have not settled still.

We have not initiated our increases per se, but we have initiated discussions with all customers about what I would call significant and material increases for next year.

Right.

I mean, this is something, I guess, that, you know, particularly in your tin plate food and aerosol that that has to go through, correct?

Absolutely.

Yeah.

Okay.

And so far in your discussions, -- I mean, your customers realize -- I mean, they are saying the same thing that you guys are seeing in terms of commodities and they know tin plate prices are going up and are you confident you will be able to get this through?

Well, you know, customers are certainly never welcome this kind of news with open arms but they read the papers and they know what's happening fundamentally within the steel industry and with all basic materials globally.

And so, you know, we are -- we are confident that we are going to be able to get significant material increases through.

Okay.

Great.

Thanks, guys.

And our next question comes from the line of Mark Wilde with Deutsche Bank.

Please proceed with your question.

Good morning.

Can you give us a little more color on the weakness in the plastic bottle volumes and also what you are looking at in the way of options for that business.

Yeah, I might -- in terms of options, we are not going to tell you what options there are.

You know what they are, I think, Mark, in terms of going forward.

But where we are now is in real serious discussions with our largest customer about subsequent year contracts.

And, you know, that will add discussion, we hope will result in improving the revenue side of the business.

We're operating pretty well.

John Friedery, would you talk about the volume side a little bit?

Yeah, sure.

The volume side, we were down in some of the water and the carbonated soft drink areas.

Just haven't seen the push through that we thought.

Our hot fill business volumes were a little bit better in the third quarter than they were in the earlier part of the year but not where we expected them to be.

So that part of the business has been disappointing for sure.

Okay.

And in addition, you mentioned looking at capital additions in both cans and ends over in Europe and perhaps elsewhere.

I wondered if you could just give us some sense of when we might have more details on that and what the implications are for capital spending next year.

This is -- I will take that.

This is John Hayes speaking.

The only thing I would say is stay tuned.

We are actively looking at a variety of different things and at the right time, we will tell you about that

Is it all Europe, John.

No, I think we are looking at our beverage can business as a global business.

You know, today, we talked about the new 24-ounce line in America and I think, that is probably one of a series of different things throughout the world.

Okay.

Thanks very much.

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

Please proceed with your question.

Good morning, gentlemen.

Good morning.

A couple of questions for you.

First, when we look at the -- I missed -- if you went through this earlier, it was pretty quick.

I kind of missed it.

Could you give us a rough sense of what volumes were up by some of the different regions in bev can and improved cans and such?

Sure.

I will take you through.

Beverage, we were off a little bit less than 1% in the quarter and year-to-date is kind of the same thing.

So we are a little better than the industry there.

In -- and I will go through the North American volumes and then let John Hayes comment on Europe.

In plastic, we are just a little bit up for the year.

A couple percentage points, but as I said, we were down in the water and the CSD categories, up a little bit because we brought on new heat tech or new heat tech, heat set business this year.

And food and household in the quarter was off 12% on the food side, off just a little bit on aerosol and year-to-date on the food side, we are down about 10%.

And just slightly off from last year on the aerosol side.

And from an international perspective, volumes in Europe continue good growth despite one of the worst summers weather-wise, at least on record.

Industry volumes were up in the 6% to 7% across Europe, driven largely by the same trends that we talked about on earlier conference calls.

That's continued very strong growth in eastern Europe and growing at a rate faster than soft drinks.

From a Ball perspective, what that means is we are up just slightly more than the industry because we are weighed towards easter Europe and we are weighted more towards beer than soft drink.

Although it has slowed a bit from the first half as you recall some of the numbers I said before.

This really is largely attributed to the wet and cold summer throughout all of Europe and we think the fundamentals remain the same.

I think from a China perspective, the volumes were relatively flat on the quarter and -- but we continue to see strong growth there.

That had to do with some one-off type of things.

Okay.

And then the next question I wanted to ask centered around, Mr.

Friedery, if you could help me in the North American piece a little.

When we adjust for the customer settlement, that profit was essentially flattish and you talked about some employee costs being more sizable.

If I remember from 3Q last year, you had some abnormally high cost since you were running dual sets of equipment for ends and things of that nature and you normally had some productivity and such.

Can you give us a sense of rise of the delta for extra employee costs and to help us with what this difference might be.

Yeah, there was a couple million dollars worth of stock expense that got pushed down.

It's the year-over-year increase from last year.

And I believe there were some other overhead expenses as well related to, as I said, some of our customer claims.

Okay.

And then my final question is -- I can visualize Mr.

Hoover shaking his finger at me right now.

I'm not doing that at all.

[ LAUGHTER ] If I understand from your prepared remarks earlier, it sounded like -- and, again, this is me talking, not you.

It sounds like you had -- with the Miller settlement we're talking here, it sounds like you incurred some -- charged extra aluminum and your supplier didn't necessarily honor a contract.

Therefore, you had to sell it to your customer at what they were supposed to anyway and you had to absorb the difference?

Is that -- am I understanding this correctly?

You know, I'd say two things, Chris.

First, you are not going to get the level of detail that you are looking for because we and our customer have agreed not to disclose all of that.

And this was basically a settlement.

I think if you back and read Ray's words, it best describes the circumstances around which this happened.

And I believe that we acted appropriately under the circumstances and I think we became convinced that while we did our best to make sure that our customer had cans, and we believe, dealt with it in an appropriate way, lawyers convinced us that perhaps, had we gone through a real arbitration process here, we had some downside.

When you think of the length of our relationship, the breadth of it here and overseas and so forth, we are really in a position where we cleared the air and retained the business.

I believe we are going to have a better circumstance going forward.

This isn't a lot of money in the context of our overall relationship with these people.

Okay.

And would that -- [Overlapping speakers] Would this allow you to do the same thing to your supplier to recover some of this difference?

You are trying to go to a place where I told you we can't take you.

Don't think of it -- don't try to figure that out because you won't come to any real right conclusion.

It was a settlement.

Nobody got what they wanted out of it.

Okay.

And my last question has to do with the forward-looking piece.

The -- I think the extra -- the difference between the $86 million and the $70 million, the other $16 million, and that's just essentially going to come at $2 million a year for the next how many years -- through the remainder of the contract?

Is that --

I think you could think of it that way.

Isn't that about right, Ray?

I would say that's about right, but, of course, it will have no impact on us that because that number will get reversed back to our P&L.

Okay.

Thanks, gentlemen.

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

Please proceed with your question.

Okay.

Good morning.

Good morning.

I just have a quick question, actually, once again on the European bev can business.

Thank you for breaking out the volumes that you saw.

I want to make sure that things are back to normal there, obviously, after some pretty poor weather during the mid and late summer.

Yes.

Literally words can't describe how bad the summer was throughout, particularly the northern part, meaning the UK, northern France, Germany, and those are important markets, some of the biggest markets in Europe.

What we see in the month of September, for example, we saw volumes up significantly again.

This, as we go into the fourth quarter.

This is a very big time for the UK, in particular, because the brewers in UK use the Christmas season as a very strong selling season.

They had a -- and if you look at the reports, you will see it, they had a very difficult year because of the weather, and so the question is, how much are they going to be pushing their volumes in the fourth quarter?

But as I said in my earlier, we see nothing that says this is nothing more than weather and that the fundamentals remain strong for the beverage can.

Okay.

Thank you.

And just a quick followup on that, with your new plant that you have or your new lines that you brought up during the late spring, I just want to get sort of an updated report on how that is doing.

I think last quarter, you said you expected it might do something over a billion cans from that added capacity towards the end of the year.

Is that still accurate?

Yes, I think it is still accurate.

I must commend our whole manufacturing group because over the last 18 to 24 months, they have done a remarkable job of getting cans out of our system.

As I said earlier, the start-up in our home store facility was one of the best ever.

Our manufacturing group has done a very, very good job in a very, very difficult situation.

Yeah, we went over there -- I was over there a couple times in September and saw both Hassloch where the fire was and the Hermsdorf plant.

In fact, we had reopening ceremonies about that, and two really wonderful plants in terms of how they are running.

You know, the additional line of Hermsdorf brings it to a two-line plant and we are already speeding it up.

And Hassloch has some of the cleanest layout and conveying and so forth that I've seen.

So, I think we are going to see further improvement there with opportunity to grow.

Okay.

Great.

Thank you.

Our next question comes from the line of Tim Thein with Citi.

Please proceed with your questions.

Thank you.

Good morning.

My question, first part, on the new line at Monticello, is that going to replace -- is that an additional line or are you replacing 12-ounce capacity with that?

Yes, that is an additional line.

We have previously converted capacity and we, as well as others, have taken a pretty significant chunk of 12-ounce capacity out of the industry over the past three or four years.

We are down to where we didn't quite have enough open 12-ounce to do that in this case, so putting this in, we'll continue to look to balance our capacity around the system as we go forward.

Okay.

But was it in bev cans?

You said earlier, you are taking some maintenance downtime in the fourth quarter; is that right?

Yeah, in bev cans, we will take a little maintenance downtime and really the curtailments for capacity will be primarily in our PET operations.

Okay.

The real point I was trying to make in that was that last year we didn't do that and it would be normal this time of year to be doing that.

Yes.

And so we -- we put in into next year.

Okay.

And if I remember correctly, did you call in on the second quarter, is that right?

That you would be taking more maintenance in the fourth or --

I believe so, but I don't have that script in front of me but certainly, it's not new.

Okay.

All right.

And what do you think about, just going back to the food can business, you announced the closure this morning or last night in aerosol.

Do you think there's room for -- or how do you think about your footprint in the food can business, given the erosion that you have seen there -- or not erosion but some of the volume weakness?

I think our will have weakness is attributable to the factors that we talked about.

You know, we haven't been catching many breaks this summer with either weather or we have one customer with a fire in the plant and so forth..

I think that's abnormally low.

At the same time, the consolidation as you look at it is to move some aerosol capacity into two different food plants so we are going to get better utilization.

I think at this point -- remember, we closed a plant a little over a year ago in food and so I don't think we think that we've got a lot of extra food capacity -- am I right on that, John?

Yes, that's correct.

We will continue to look at it, obviously, as we talk about part of what we are doing in that whole business, just taking a look at all of our product lines.

We will continue forward with product lines that are profitable and we are not going to with the ones we can't make a profit on.

At this point in time, I can say we feel we are okay on capacity but will be looking real hard and there may be further actions down the road.

Thank you and good luck in the quarter.

Thank you.

And our next question comes from the line of Mark Moskowitz with JPMorgan.

Please proceed with your question.

Good afternoon.

Could you talk about dimension you are seeing in specialty cans in North America and approximately what percentage of your mix is that specialty?

Well, specialty cans in North America are -- as far as a percentage of mix are better than 10% now, and the trends that we are seeing is towards the larger formats, hence the announcement of our line in Monticello, but we still have a good, strong business in the smaller than 12-ounce sizes as well.

Okay.

Good.

Thank you.

And our next question is a follow-up question from George Staphos with Banc of America Securities.

Please proceed with your question.

Thanks.

Hi, guys.

As we look out to next year directionally -- I know you can't forecast or provide us a number right now, but should we expect free cash flow to be able to grow or will it be flat to down given that this year's offer is a fairly different comparison?

And as a sidebar question, Ray, I didn't quite follow or missed your answer relative to Dan's question.

In this year's guidance, you are including the pension contribution?

And then I had a couple of follow-ons.

Yes -- oh, George, next year, -- as you remember, last year, we were disappointed with our free cash flow number because we had all our aluminum build in the fourth quarter and a lot of that is coming out this year.

That's creating a little bit of a positive for us this year compared to next year.

I did say in my scripted comments that we will have a little bit in our build, the food and household business that we were not expecting earlier and that will wash out next year.

So what I would tell you about free cash flow next year, I think it would be less than 400.

I think it will be somewhere between 300 and 400 probably.

Again, I don't have those numbers.

And -- that gives you some guidance on where I think that will fall out.

Now, I would expect our share might be higher next year than last year.

I think our debt levels are where they should be, give or take.

So we will be using a lot of that free cash flow for share buyback, even more so than this year.

As far as the one-time pension payment, that -- depending on how the thing goes, when I think of the $400 million, I'm excluding that from that number.

Now if the range that you just provided and again, I realize there are no guarantees, does that include potential investments outside of North America in beverage cans or those investments, if in fact they materialize, further change the range or put a wider range?

Well, I think if you -- you know, obviously, George, you have been following us for a long time.

We would expect.

We wouldn't normally expect our capital spending to go way down next year because, you know, a lot of the stuff that we have talking about, you know, we have to complete but as John mentioned, we have these fantastic opportunities internationally as a result of the growth in the beverage can to invest at very, very good returns.

So that's going to require a little bit of capital.

And so, you know, I would expect capital to be around what it is this year with the majority of -- with by far the majority with virtually most of it going to Europe and then the next biggest sale will be North American beverage cans.

That's where all the capital is going.

We say we think we have great opportunity in those two places.

I understand.

As far as the review of the contracts go in PT, when do you expect you will be done with that?

By the end of this year?

Is that a 2008 milestone?

Well, I think it's hard for us to predict exactly, but, you know, we can see it certainly before the end of '08.

Okay.

Probably well before then.

Okay fair enough but somewhat unlikely by the end of this year, Dave.

I wouldn't say that either.

I just think because it's a discussion that we are only one-half of.

We can't predict the date.

We don't have a date.

We are just working on it real hard.

I understand.

And having real good discussions about this.

Now, with the food and household restructuring, and I realize you said that there may be some opportunities for you to become even more, you know, efficient or productive, and perhaps more capacity to come out.

You know, you have been in the business for a reasonably long time now.

What else might you be able to achieve with this restructuring that would be different than what you are seeing with some other adjustments that you have made to the capacity in the business over time.

Is it just right size capacity relative to your existing demand level right now?

I think it's essentially shedding a fair amount of extra capacity in the aerosol side.

You know, 10 lines is a fairly big reconstruction.

It will take us the better part of next year to get all of that done because we have to continue supplying people as we are installing the capacity in the food plants.

But I think this is an example of what we thought was possible, you know, when we first acquired the business.

As I mentioned too, we have to work both sides of this equation.

One is the revenue side, as well as the cost side.

And John said earlier that we are hard after that.

And we need to be, in part, because we see costs going up but we also, in our business, have to work both sides of that equation so that we can get back to better margins and acceptable margins.

Last question.

Aerospace had a great quarter.

Can we keep these margins for the foreseeable future or should we be more in the normal 8% to 9% range?

I don't think we'll have these margins.

As a matter of fact, I think the full year margin will go down from the third quarter.

I think the fourth quarter might be a little tighter because this is the time of year when we -- tighter because this is the time of year when we cheer up our rates overhead and G&A rates.

That business, I must say, and you know, you've known us a long time, George, and you have heard this term.

You used "lumpiness," so you know, we have seen - if you look at the sales, they have come down a little bit quarter by quarter.

I think that will happen again in the fourth.

I think the first part of next year will be a little tougher.

Some of these opportunities that we are pursuing, like Ares and several other bevs and how we are positioned for work that we see coming down the pipe, we are really well positioned, you know, to take that up.

At the same time, you know, we are constantly adjusting our work force to the available level as well.

So we are probably going to have to reduce our force a little bit over time.

This is not new in this business, but we had a real good review of it last Friday, of the state of the business, and I really like where we are positioned in these markets.

But I would say to your question, just about margins, don't expect the fourth quarter to be equal to the third.

Okay.

All right, guys.

Thank you very much.

And our next question comes from the line of Joel Spungin from Merrill Lynch.

Please proceed with your question.

Hi.

Just a quick question.

You may have actually said this and I missed it but just in terms of your North American specialty cans volume growth, sort of what -- about what level is that running at?

It's running in the mid to high single digits.

As I said, we -- the growth in the smaller formats has slowed a little bit and we are seeing more growth due to beer and energy drink markets in the larger than 12-ounce formats.

Thank you very much.

That's it.

And we have a follow-up question from the line of Chris Manuel with KeyBanc Capital Markets.

Please proceed with your question.

Good morning again.

I actually wanted to -- well, my follow-up question in Aerospace.

And, George, actually hit most of what I wanted to ask, but do you have an updated backlog number for us there?

I think I said it was 882.

Is that right, Ray?

Yeah, I think that's right, Dave.

Okay.

And then the second was, in the pieces of U.S.

can that you can purchase, it seems as though there were some contracts that maybe, were not as favorable as you thought originally.

At what point -- and that's one of sides that you are attacking on the revenue side.

At what point do some of these maybe less favorable contracts begin to roll off?

Is it -- are most of the contracts in this business typically one year, two year, three year or --

They are all over the place.

They are all over the place but to the extent the phenomenon you talk about exists, it carries somewhat into '08, I think, for largely, that's the end of it.

Is that right, John.

Yes.

Do you have further comment on that?

No, that's correct.

Okay, thank you, gentlemen.

And Mr.

Hoover, there are no further questions at this time.

I will now turn the call back over to you.

Okay well, Anthony, you have done a great job.

Thanks, everyone, for being with us.

We will look forward to talking with you again in January, and we're gonna go back to work.

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.