Ball Corp (BALL) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation third quarter earnings conference call.

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

Afterward we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS) This conference is being recorded Thursday, October 30, 2008.

I would now like to turn conference over to Dave Hoover, CEO.

Good morning, everyone.

This is Ball Corporation's conference call regarding our company's third quarter 2008 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 in the Company's latest 10-Q and in other Company SEC filings as well as Company news releases.

If you don't have our earnings release, it's available on our website at www.ball.com.

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

With me today are Ray Seabrook, Executive Vice-President and Chief Financial Officer, and John Hayes, Executive Vice President and Chief Operating Officer.

Our overall performance in the quarter was very good.

All but one of our business segments reported improved profitability compared to the third quarter of 2007, despite the difficult economic environment.

We have been taking actions to position the company for near term and long term growth and we have an excellent platform from which to do so.

Ray and John will say more about that and provide color on our financial and operations performance.

And then I'll close with a few comments about our outlook.

Ray?

Comparable diluted earnings per share for the quarter were at $1.13 and through the first nine months were at $3.03.

Up in the quarter and up through the first nine months compared to last year's record per share earnings.

While earnings and cash flow continued to show up, our share prices traded at 8.5 times, trailing 12 months comparable earnings which is at a 20 year low for a business we think is mostly recession resistant.

To offset reduced US beverage can demand and strengthen our competitive position, earlier today we announced the closure of two beverage can plants.

A plant in Kansas City which manufactures specialty beverage cans will be closed by the end of the first quarter 2009 with manufacturing volumes absorbed by other North American beverage can plants.

Also a plant in Puerto Rico which manufactures 12-ounce beverage cans will be closed by the end of this year with the manufacturing equipment redeployed internationally.

An after tax charge of approximately $32 million will be recorded to reflect these plant closings of which about $28 million will be recorded in the fourth quarter and $4 million will be booked in the first quarter of 2009.

Inclusive of income tax benefits, these closures are expected to be $9 million cash positive on the final disposition of the assets and cost reductions associated with the plant closings are expected to exceed $30 million in 2009.

Turning to operations, third quarter comparative earnings were higher than a year ago in all business segments with the exception of plastics.

The higher operating earnings and lower administrative and interest costs along with a lower share count due to our share buy-back program were the key factors to higher third quarter comparable earnings per share.

Full-year pre-cash flow is projected to be in the range of $275 to $300 million which is after deducting the one-time $70 million legal settlement paid in the first quarter.

We also anticipate full year capital spending will be around $325 million with more than 50% of that spending being for new top line growth projects.

The targeted 2008,$300 million stock buyback program is progressing as planned and through the first three quarters we have purchased a net $258 million of stock and we continue to see outstanding value in our stock buyback program especially at these prices.

During the quarter we tried to get consent from our 2012 Bond holders amend a covenant for what we considered a reasonable cost that would allow for more stock buyback commencing in 2009.

We could not get the consent at a reasonable cost so the stock buyback program for 2009 will probably be in the $150 million to $175 million range with additional 2009 free cash flow being used for debt reduction to strengthen the Company's credit profile.

Moving to liquidity and the balance sheet.

We expect to have over $.5 billion of committed credit available by December 31st and no major debt refinancings due until October 2011.

We continue to monitor counter-party risk associated with our interest rate and commodity derivatives that are spread out to numerous counter-parties so that the risk is not concentrated with only a few financial institutions.

Net balance sheet debt at the end of the quarter was $2.55 billion down from $2.7 billion at the end of the second quarter.

We expect net balance sheet debt to be well below $2.2 billion at the year end due to a weaker Euro and strong fourth quarter cash flow.

The rolling four quarters interest coverage is at 4.5 times and total net debt to the rolling four quarters EBITDA is at 2.7 times at the end of the third quarter.

With that I'll turn it over to John.

As Dave and Ray mentioned, we had a strong third quarter, especially given the macro economic environment.

Our continued focus on execution, coupled with taking necessary actions around pricing and capacity decisions in many of our businesses positions fall well for 2009 and beyond.

Our 2008 activities have been focused on getting ourselves well positioned for future.

We have a strong platform and the correct strategy.

Our emphasis is on executing better, harder, faster and smarter.

We're making good progress in cost recovery through our pricing initiative.

Optimizing and controlling costs in each business.

Delivering value through our new product development efforts.

Becoming a leader in sustainability and putting in place a more robust process around supply chain and risk management.

As I said, we made good progress but more needs to be done.

Regarding being proactive around balancing our supply with our demand, Ray mentioned the closing of our two beverage can plants in North America, Kansas City, and Puerto Rico.

These actions combined with previously announced rationalization activities and our regular continuous improvement programs results in a reduction of approximately 1100 or 7% of our worldwide positions over the past year.

While closing facilities is something we never welcome, we believe it is necessary to ensure that we remain economically sustainable and fit for the future.

When combined with our other plant closings this year in North America, however, these plant closures are examples of how determined we are to monitor supply and demand relative to current and expected future sales and production requirements and to get paid for the value we and our products deliver.

As we finish out the year, we are focused on ensuring that our inventories are properly aligned relative to our needs going forward and we will curtail production as required to meet our cash flow objectives.

Given the changing dynamics in each of our packaging businesses, it is critical that we transition to a more demand driven business model.

We are focused on being proactive around balancing our supply base with the demand required by the marketplace as well as leveraging our innovation with those customers seeking differentiation.

Examples of progress in our innovation efforts include our continued growth in our overall specialty packaging volumes, reaching roughly 7 billion units this year to date with a forecast to hit over 9 billion units this year across all of our businesses.

In addition, exciting 2008 success stories around innovation including more than 20 new products launched this year such as our 16-ounce Alumitek bottle for a major North American beer customer and our reclosable beverage end being utilized by a major energy drink in Europe.

All totaled, we expect more than 4 billion new units in a variety of markets across our packaging product lines to hit retail shelves this year, something we believe differentiates Ball as a supplier and positions us nicely with brand owners for both the short and long term as they seek to enhance their sales and profits.

Now moving to Metal Beverage Americas, profitability for the quarter was above expectations and above 2007 comparable levels by nearly 5% despite volumes for the quarter down about 6%.

Ball's volumes were off a bit more than the industry due largely to walking away from unprofitable volume for both beer and some selected CST supply locations at the end of last year.

We also experienced lower volumes due to ceasing production at our Kent plant in the third quarter.

Driving this improved profitability was excellent cost optimization in all of our plants and a rigorous focus on cost containment through the rest of the business.

Even with the broader economic slowdown and the impact of high fuel prices on C-store volumes, there are bright spots in the beverage market.

With industry beer can volumes being up approximately 1% year to date and energy drinks, teas, and isotonics all still growing,albeit at a slower rate.

Ball is more leveraged towards the beer and specialty can markets in North America and we expect to continue to capitalize on these trends going forward.

In terms of the commercial side, over the next 15 months, we have a variety of contracts coming up for renewal.

We do not believe that we are getting sufficient economic returns on these contracts and discussions continue regarding these renegotiations.

In China our volumes were up nearly 20% in the quarter and are up over 15% year to date.

A key driver for the volume growth is our very strong customer mix where we are leveraged more towards the beer and tea markets, both of which are seeing strong growth while the CST markets have softened a bit since the Summer Olympics concluded.

In our European operations, volumes grew approximately 5% in the third quarter mainly driven by strong growth in the U.K., Benelux , and southeast Europe.

This growth was partially offset by poor weather conditions in Poland, France, Germany, and Spain during the summer season.

For the year we are up roughly 8% which is consistent with overall industry growth.

Earnings in Europe were up year-over-year due largely to higher volumes in foreign exchange with higher costs partially offsetting these improvements.

WIth the increase in costs experienced over the past year, our European management team is focused on our pricing initiatives as we begin the 2009 negotiation season as well as on cost optimization in this business.

Back in July we also stated that we are monitoring regional economies closely and will adjust our capital investment timing depending on market conditions.

For this reason, in the third quarter we elected to slow down our project in India due to near term higher inflation and a more reserved demand outlook in that country.

However, our Brazilian joint venture is continuing for its plans for a new facility outside Rio de Janeiro.

Brazil continues to see strong consumer demand for cans.

Turning to metal food and household products, we remain on-track to improve this business.

Our pricing initiatives, cost control plans, and favorable product mix added to another solid quarter.

As reported in our second quarter 10-Q, during the third quarter our aerosol business experienced a tin plate supply issue.

A supplier failed to deliver committed metal.

While this matter affected a limited seasonal part of our product mix, it caused a supply disruption with some of our customers that resulted in lost sales and profitability in the quarter.

Any disruption to our customers is unacceptable.

Ball has made every effort to fulfill our customers' requests and minimize the impact on our customer base.

Today, Ball is receiving the necessary tin plate to produce products for our customers and we are working through the remaining production issues caused by this field shortage.

While year to date industry volumes are down mid-single digits, for the quarter Ball experienced slight volume growth driven by favorable food and aerosol can demand.

We continue to expect full-year volumes to remain consistent with our expectations.

Performance in this business is progressing as we expected and the previously announced rationalization program continues to be on schedule and should deliver at least $15 million of cost savings in 2009.

Customers are being notified of the steep steel price hikes anticipated on January 1st, 2009, and our need to recover these and other costs as they are incurred.

We are confident we are well positioned to continue our progress in this business.

Plastic Packaging Americas results are slightly behind last year before the costs associated with plant closures and remain economically unsustainable.

Overall volumes for our plastic business were down more than 13%.

A bright spot was the 6% increase in our custom PET container volumes, further validating our strategy to grow this segment in a measured way.

With almost 25% of our total volume now coming from custom containers and with our contract renegotiations for 2009 nearly finalized, we believe we are well positioned for meaningful improvement and profitability next year and beyond.

Ball Aerospace had another strong quarter, building on what will be a very strong year.

Excellent program execution is driving much of the improved performance and we continue to be focused on building our backlog which has declined to $672 million during this difficult transitional period for the US Federal Government.

While we expect to gain more visibility on the 2009 outlook after the Presidential election, one significant new booking in the quarter was the award of the Orion Navigation Sensor Suite which represents our first major work content in this emerging human space exploration market, an important area of new business opportunity.

As in all of our businesses, we have plans in place at the ATC to closely monitor our future demand and make adjustments to our cost base as necessary.

In summary, the combination of solid and improving performance from our operations and aggressive actions to transition our business to a more disciplined demand driven focused are positioning Ball for a strong 2009.

With that I'll turn it back to

Thanks, John, and thank you, Ray.

On a business by business basis we're improving performance, adjusting our manufacturing footprint and focusing clearly on execution.

Since John Hayes became our Chief Operating Officer back in January, we've taken deep dives into each of our businesses and the company as a whole to look at our future strategic direction.

We believe our strategy to grow our worldwide beverage can business and aerospace business, improve our food and household plastics businesses and to generate substantial free cash flow and use it to return value to our shareholders is correct and our focus is on execution of that strategy.

In many ways, today's environment plays into Ball's strengths.

Operational excellence, relentless attention to detail, commitment to customer focus, creating value added innovation, and empowering our employees to think and act like owners.

If we execute the way I think we can, I expect improved results in 2009.

As all of you know, today's broader economic environment is truly unusual, something I haven't seen in nearly 40 years in business.

But I like where we are as a company and I'm bullish about our future.

With that, Sara, I think we're ready for questions.

Thank you ladies and gentlemen.

(OPERATOR INSTRUCTIONS).

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

Please proceed with your question.

Good morning.

A few questions.

First of all, quickly, the Kansas City facility, I remember that being one of the original Reynolds custom facilities, it might have been the first one.

Realizing that you're managing supply to demand does the shutdown reflect any moderation in growth or plans within the custom can market, Dave or John?

No, not really.

John, why don't you answer that.

Not really.

We have seen a slowdown, but that has historically been a high cost plant.

And as we're trying to get fit for the future, what we're trying to do is maximize the output of our low cost facilities and it's nothing more than that.

We still have high aspirations for custom can market, trying to take a leadership position in that.

A lot of our new products revolve around custom containers and so this is not a backwards step at all in terms of our commitment to the custom market.

John, on the 9 billion units that you mentioned, how much of that is actually cans?

Good question.

The majority of it.

I don't have the numbers off the top of my head.

I would say approximately 75%.

But I'd be certainly happy to get back to you on that.

I appreciate that, John.

As far as tin plate goes and realizing now that you're in the process of adjusting for and smoothing out any supply issues that you might have had earlier in the quarter, do you anticipate that disruption leads to any volume loss in 2009?

Or do you think your customer relationships remain solid for those customers that were affected?

In trying times, it always puts strains on customer relations.

And we're trying to make sure we're doing as much as we humanly can to make sure any impact is minimized with our customer base.

So as we go into 2009, it's too early to tell or see.

But we think a lot of our key strategies about being close to the customer should help us in this.

It has been a challenging time for our food and household products group.

Have you announced a general increase yet for food and household for next year?

We have both orally and in writing been in communications with our customers.

We are in the midst of finalizing of metal pricing in the coming days and once that is finalized we plan to formally communicate the specific price increases to our customers.

Okay.

Thanks.

I'll turn it over.

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

Please proceed with your question.

Hi, guys, good morning.

John, could you touch on volume trajectories in Europe during the quarter with September meaningfully weaker than the prior two months.

How should we think about 2009 for Europe?

Should we be thinking volumes in the low single digits and maybe a little help from pricing?

Let me tackle your first question.

If you recall the second quarter conference call I said July started off very strong and it was double digits in the month July.

It started to slow down and effectively we saw near flat volumes in the month of September.

We've seen a little bit of rebound in October, up low to mid-single digits and so you never know.

You can't look month by month because these things, there's aberrations within various months there.

But there has been a slowdown.

It's not been a significant or a material slowdown.

As we look to 2009, recall that we had always talked about from a planning perspective we always assume mid-single digits growth.

And we see nothing that that fundamentally changes.

We're just not going to see the strong double digit growth that we've been afforded and awarded over the past couple of years.

And on pricing in Europe for '09?

We're right in the beginning of pricing discussions.

Despite some of the things coming off recently, they're still well above historical norms.

We're going out and as I said in my prepared comments, our management team over there is very much focused on maximizing the price opportunity.

But it's not -- like every time, it's challenging out there.

But they're focused on that.

Okay, thank you.

Our next question comes from the line of Claudia Hueston with JPMorgan.

Please proceed with your question.

Thanks very much.

Just first on the European business, I think last quarter you talked a little bit about some transportation issues that had affected the quarter.

Can you just comment on that situation now and how it was in the third quarter?

That's largely over.

If you recall that we said a major customer of ours on the Continent had a strike and it created all sorts of disruption in the supply chain.

That was more a second quarter event.

There's a little bit in the third quarter but it's not worth talking about.

Perfect, thank you.

And then just on the metal, food and household business.

On the tin plate issue, I just want to be clear.

So the supply issues of tin plate are pretty much over now and you have the supply that you need?

Is that right?

And then if it's possible to quantify the impact that it had on the third quarter, that would be helpful as well.

We are receiving tin plate.

That's not the issue.

What it is is getting the appropriate line time for the specific sizes because, as you know, our lines can make different things.

We still have a bubble from a production point of view.

But we're working our way through that as we speak right now.

And I'm sorry, your second question was?

If you could quantify the impact of the tin plate on the third quarter?

We're still in the midst of it.

It did cost us both some lost sales and profits.

I don't want to get into any specifics right now because it's ongoing.

But it certainly did cost us some money.

Okay, thanks.

Remember this is a small part of just a portion of the food and household products group.

Yes.

Our next question comes from the line of Timothy Thein with Citigroup.

Please proceed with your question.

Two questions, first, John, I was curious if you could you shared some outlooks in the past in terms of what your expectations were for Germany in terms of domestic filling.

Where do you think that can be, given the economic change in the environment?

Say in a year or two.

I don't know if you've changed your view on that.

And the second question was just more broadly speaking, if commodities continue to come in, in the past the CST and brewers have been a little bit more aggressive.

This year they raised prices north of CPI which they hadn't done in awhile.

If that reverses and I understand it takes time to trickle through, what do you think if anything that that means in terms of can makers as potentially your customers push a little harder on volume over price.

First in Germany, we were there last week.

And there were positive signs coming out of the German market.

And there are two specific examples I'll give you.

A major soft drink customer starting to promote the can, actively promote the can.

They're selling six packs for the price of five.

That's, by my knowledge, the first real promotional activity in a major way by a major customer in Germany.

The second is that some of the discounters have had discussions about reintroducing the can which have they haven't done yet due to this returnable system.

They're talking about reintroducing cans for beer which is another good sign.

Nothing has happened there.

But as your question asked does it look like a year to two years.

As you recall, I always talked about this being a marathon, not a sprint and it's going to take awhile.

I always look back to Denmark when they put in the deposit system, and it really took about five or six years to really see meaningful improvement and logarithmic growth if you will.

And we hope some of this activity by both the soft drink companies and the beer and the retailers will be helpful in the long term.

As to your second question about commodities coming off and promotion activity of our customers.

They have put price increases through.

You all can look in the public forum about what's going on in terms of soft drinks in North America.

It's challenging times for them and they're looking at a wide variety of SKUs and proliferation of SKUs to get their volume growing.

I think it's always helpful not only as commodities come down but also in a more challenging economic environment where people stay home more, our products are for the home consumption market.

And I think that could play favorably.

And this is what we're talking about balancing supply and demand.

And not only in the current but also in the future.

And as we go through and look at these capacity rationalizations, we stress test our systems to look at various scenarios about volumes going down, volumes going up to making sure we're in the right spot at the right time.

Great.

Thank you.

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

Please proceed with your question.

Good morning.

I had a question for Ray.

I wondered if you could help us think about perspective impact from FX in Q4 and then into '09?

You're talking about on the translation of our foreign earnings?

Exactly, yes.

Year to date it's $0.17.

It was about $0.05 in the third quarter.

And depending on where the exchange rate is next year, we have 100% of our next year's first quarter earnings hedged and we have about 50% of the second two quarters hedged.

And we've got those hedged at a rate of 150 Euros for the first quarter, but 147 Euros for the other two.

So we will have in impact, it will always be lower.

It will all depend on what the rate is.

But through the first three quarters you've had $0.17 compared to the year before.

It will be lower.

But we have some of that impact hedged.

What about sort of outside of the Euro zone, impact in other areas.

You mentioned Brazil.

Brazil's equity accounting -- Brazil has very little impact.

And Canada has very little impact.

When you look at our operations, it's primarily coming from China and Europe.

China, their currency generally hasn't moved too much.

When we really look at our foreign currency impact it's really mainly all coming from Europe.

We do have Canada impact and we do have some China impact but they're very, very small.

That's the answer I was looking for.

Thanks.

Our next question comes from the line Joseph Naya with UBS.

Good morning, guys.

Looking at (inaudible).

Excuse me.

We're having trouble hearing you.

Is that better?

Yes.

Just was curious looking at results the last couple of quarters, you had strong volume growth coming from Asia.

Just wondering what your thinking going forward about that.

If you had a bump there related to the Olympics or you expect that sort of growth to continue.

I think there was a bump in the Olympics.

I think we even commented on, at least on the soft drink side.

What we see and what I think the trend will continue to be is certainly on the beer and teas and other kinds of things.

There's a fair amount of growth.

We're leveraged a little bit more like we are in all of our business to that side of the business.

You know, you tell me what the impact of the young people in the world's economies is going to have on demand everywhere.

But I think in '09 we won't see the kind of growth we did in 2008 which got the lift from the Olympics and probably a better economics.

I expect there'll still be growth there.

John, do you have any view on that?

I think some of the macro trends in China do portend well for the growth of the beverage can.

We have the rise in the middle class, going from the rural areas to the urban areas which is very important.

At the same time you're seeing finally the consolidation on the beer side.

And then thirdly, the can as a percent of the package mix is still in the range of 3% to 4%.

It's low by any comparison of any country in the world.

Combined with the first two macro economic events and with the low can penetration, we think there's room for upward growth there.

And you mentioned that your project you've kind of scaled that back or slowed it down.

Do you have an idea of any thoughts as to when that might be going live?

Well, we could put out some dates, but I think in this current economic environment, it would be premature to do that.

We do over the long term think there's a good can market in India.

Their economy has slowed down particularly, even before the credit crisis started hitting.

Because they are a net importer of commodities.

And as the commodity price increases went through, I think inflation put a damper on the middle class which hurts can demand.

Whether it's a year or two years, I can't tell you.

But we are paying very close attention to not only India, but the other parts of the world as well.

So the project is pretty well on hold at this point?

That's correct.

Very good.

Thank you.

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

Please proceed.

Congratulations on a great quarter.

A couple questions for you.

First Ray, could you -- help us bucket with what CapEx may look like for 2009.

I know it's bounced around a little bit over the last few years.

But just where you're thinking today.

You know, I'm going to answer and then turn it to John.

We've been telling people fairly consistently that it will be kind of in the 350 range and we still have a lot of stuff to do.

As John talked about, some of these things we're pushing -- as result of everything slowing down we're kind of pushing them out a little bit.

And so as we currently see we're working on our budgets and plans, we think we'll spend less than depreciation.

We haven't got a number.

John, do you want to add anything?

The only thing I'd say is we are taking a fresh look at every one of our projects in light of the current economic situation and we're prepared to slow down or stop them if required, if we don't think the demand is there.

So it's pretty safe to --

Probably on the high end as we sit today.

Depreciation is 300.

We said less than depreciation so that should get you in the ballpark.

And then, Ray, a second question is SG&A was down a lot this quarter compared to where it was the first couple quarters.

Can you maybe help us --

Yes, a lot of that, we do have this thing in our deferred comp plans, we have these mark to market on our stock price.

When our stock price goes down, that impacts our deferred comp plans and it runs through our P&L.

You've got probably $4 million or $5 million of that stuff in there.

You've also got our aerospace business.

You saw the continued strong profits in aerospace.

And the year before we had a lot of bid and proposal costs work that we were working on and we haven't had as much of that and so their G&A is down.

Those are the two major items that's causing that.

And if you look for the full year it's also down and we also had less R&D expense and primarily a lot of that is coming out of aerospace as well.

We do a lot of R&D in aerospace and we've had less of that.

Those are the primary drivers.

If you put those two pieces together, that's probably 10 or so of the differential.

That's pretty much most of it.

Between aerospace and deferred comp and IC accruals, that's pretty much all of it.

That's helpful.

And the next question I had was as you're looking at the contracts, Mr.

Hayes, I think you talked to us about having some come up in 2009, 2010.

Could you help us bucket oh, I don't know, percent of your North American portfolio that are coming due in '09 and' 10.

Just so we can get a sense of the magnitude of what's being renegotiated.

What I tell you is over the next 15 months.

We have -- I'm just --give me a second, I want to be clear.

Approximately 40% to 50% of our contracts coming up for renewal.

And as I said, I stick by what I said in the prepared remarks.

We are focused on making sure we're doing those things in the right way.

Are the bulk of those 2010 events or are there more of them that will besetting up for '09?

Can you give us a little granularity.

It's more weighted closer to 15 months out than it is three months out.

That's helpful.

I'm jump back in the queue.

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

Please proceed with your question.

Thank you, good morning.

Just to follow up on the contract.

Specifically in plastics, do you expect to have that contract done by the end of the year?

Is that something that gets pushed into 2009?

No, that's our current expectation.

So the benefit really shows up in the first quarter of '09?

Yes.

And just to talk quickly about the matching supply with demand in beverage cans in North America, what's the current assumption that you have for beverage can demand in North America that's driving the capacity closures today.

And as you look out, do you think that you've closed sufficient capacity?

Or do you expect there might be some more to come?

Your first question about can demand -- this is -- it's very difficult to predict right now.

Because the soft economy plays into the favor of the cans.

And the soft drink and beer companies needing to push volume.

And the can is a wonderful package with which to do that.

I think these rising commodity costs have put a little bit of a damper in terms of them having to pass costs onto the consumers which has softened it a little bit.

We remain relatively constructive about the beverage can volume over the next call it 18 months or so.

We don't expect a huge material decrease to it.

But we have contingency plans if that happens.

Various scenarios on what we would do.

We feel pretty good about where we sit right now in terms of the supply and demand as we see going forward.

Thank you.

(OPERATOR INSTRUCTIONS).

And we have a follow-up question from the line of George Staphos with Banc of America Securities.

Please proceed with your question.

You mentioned that with your food can customers that you had orally and in writing begun to notify them on what pricing might look like.

Perhaps I paraphrased it poorly, but that was the substance of what I thought I heard.

Have you done the same thing where it's relevant for your beverage can customers for 2009?

Yes.

Okay.

And realizing that you can't get into the tone of the negotiations at this juncture and that's going to take the next 15 months or so, would you say that the customers have been more understanding than perhaps in past years of your need to recover costs and returns and whatever other color you could provide around that would be appreciated.

George, I don't think that it's a matter of understanding or state of mind or whatever.

What we've got to do is run our business and figure out what kind of a return we have to have to be a viable enterprise.

And that's how we're addressing this.

And we are professional about it as are our customers.

We don't get price because we're nice.

We basically have a business to run and they do, too.

So I'm optimistic with all the steps that we've been taking in terms of what's been referred to as our footprint and so on and so forth.

And being realistic, rational and communicating constantly about what's going on.

We're in these discussions all the time.

And on the one hand we have to be competitive and on the other hand we have to get a return.

I'm optimistic that we're going to be moving forward in a positive way and continue to make good returns and create value for shareholders.

I appreciate that, Dave.

And shutting two beverage can plans, I wouldn't suggest that you're just nice either.

Would -- could you remind us --

But George, you know better -

I know you're nice, generally.

After dealing with you the last 20 years.

What effect should we expect from PPI adjusters in North American for next year, can you quantify that for us at all?

Not off the top of my head.

We have it but I'd prefer not to talk about it right now.

In part because, think about this.

Three months ago we were talking about hyper inflation.

And now people are talking about deflation.

And those have material impacts on these PPI indices.

And then how it translates into the timing of the PPI index, whether it's year-over-year, whether it's third quarter over third quarter.

There's a wide variety of mechanisms.

And so it's changing quite rapidly as we speak.

I think --

Sorry, Dave, go ahead.

I was going to say the real task right now is just to stay on top of this stuff as we are.

Meaning as things move and so forth and to be in close communication with customers.

We tend -- not tend -- we don't want to take risks on the big commodities.

And we don't.

But we have to stay alert, alive, and work very closely as we do with our customers on those things.

If you think about a business that Ray described as being recession resistant, with commodities coming back the other direction, maybe it gives us a chance to catch up a little bit.

But we're taking nothing for granted in this environment.

One last question on that and one on aerospace and I'll turn it over.

Are most of the PPI adjustments done on a weighted average basis year on year or are they point to point?

And then in aerospace was the contract that you talked about one of the ones that you had hoped to receive this year, one of the larger ones?

And what benefit might that give to your revenues and backlog going forward?

Maybe I'll take the PPI one and, Dave, you can talk about aerospace.

If I understand your question correctly, it's on a trailing 12 month basis.

Does that answer your question?

I think so.

I'll handle it off line.

And on aerospace?

This is not a huge contract.

It's a good contract in an area that's new business for us.

But it is not one of the couple of contracts that we had alluded to which are still sort of sliding.

Until we get -- is there an election going on?

I think there is.

And once that's over we might begin to get some more clarity.

But it will take awhile.

Thanks a lot, guys.

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

Thank you.

Good morning.

Just a quick question with European bev can business.

I think you've already answered a couple of times what we can see next year in terms of volumes.

Is there any difference right now between eastern Europe and western Europe in terms of the growth rate coming down a bit or are they both acting in line with each other?

It's difficult to really look at the past couple of months.

Eastern Europe has gone down more on a relative basis than western Europe.

I will tell you firsthand they had no summer.

And when I say no summer.

Typically, it's sunny and 30 degrees Celsius there.

It was in the 15 degrees Celsius and pouring rain for most of the summer.

I recall, starting with Euro Cup soccer and going through August, September, it was like that as well.

But in talking with our customers in the eastern Europe, they can't believe this is an anomaly and they continue to believe that there is good growth in that region generally.

We have seen a slowdown, a greater slowdown in the east relative to the west, but again, I think it's more specific relative to certain events.

Thank you.

That's all I have.

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

Please proceed with your question.

Good morning again.

And for the record, David, I think you're a nice guy.

Let's don't turn this into one of those.

I'm just kidding.

A couple of things I wanted to follow up on.

With the capacity coming out in Kansas City, is most of that -- help us -- I think it's 1.1 billion units is what you've indicated in the press release.

Is most of that being redeployed into other plants?

Or is that -- what would be a net number coming out if you could help us?

Well, that is what we're doing as we have a variety of plants that can make either standard or custom products.

And what we're doing is looking on the custom side of the business, looking at a rationalization opportunity to make sure we're low cost in that part of the business.

And this is just an extenuation of that strategy.

But the answer is all of it is staying in our system so we're not losing any volume.

It's all being relocated to other plants.

That's helpful.

And the second question I had is as we think about -- you had an outstanding -- and this follows up on some previous questions as well -- you had an outstanding quarter in North American or America Asia beverage in particular.

And if I think about how to bucket roughly 10% operating earnings there, could you help me do so?

I'm sure a portion of that is the plant closure from Kent that's beginning to get traction.

A portion of that has got to be volume up in China.

Maybe downside from volume down here.

Can you help us bucket through what the major pieces were?

I think I tried to say in the prepared remarks.

In the North American portion, actually very little, if any, had to do with Kent because we officially closed it during the third quarter.

We've had excellent performance in our plants in terms of cost optimization as well as all non-plant costs.

There's really been a very tight squeeze on that.

When volumes are down 6% in that business and profits up 5% as I mentioned that just points to the excellent work that our manufacturing and other people have been doing.

On the China side, certainly the volume growth has been a big part of it.

If you think about those two issues right there, that makes up virtually all of the improvement.

Okay.

That's helpful.

And that's all I had.

Thank you.

Thank you.

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

Please proceed.

Just a couple of follow-ups.

John, I think last year you had some December maintenance outage over in Europe.

Is that going to be about the same this year?

Or will there be a year to year change there?

I wouldn't expect a year to year change.

As I said in my prepared remarks, we're cognizant of the environment we're working on and we have our cash flow targets.

If we have to take down even additional down time and make sure that we get our inventories in line, in Europe they generally are right now.

If we have to do more, we're prepared to do that.

I wouldn't expect as we sit here today any material deviation on down time this year versus last year.

The other follow-up is the issue of the bottled water business.

What's your sense of kind of volume in that business?

And is the volume change significant enough that you may take capacity out of the system there?

Yes.

The bottled water business is a challenging market right now.

In fact, I think what you're seeing is a lot of consolidation on the -- I'll call it, not the tier one water companies but some of the tier two water companies, the private label companies, things like that.

Because it's very difficult to make money in that part of the business.

We have seen materials slow down in that largely because of C-store but also because people are recognizing in a tough economy they don't need to be buying bottled water when they can use tap water.

What that means in terms of our capacity, we're paying close attention to it.

We're converting cold fill machines to hot fill machines as required to maintain that.

And we are willing and prepared to take down time including even mothballing certain lines if the demand does not show up in that part of the business.

It's obviously a big problem for our customers.

What you're going to see and what they can see is they're working hard to figure out how to restore some of the lost demand.

The points that John made, it's kind of a perfect storm this summer.

You had high gas prices which ate into not just water but also soft drink in the C-stores.

And I'm not sure how big a deal the so-called sustainability movement is.

It's out there.

My guess is it's not as big as others.

The other thing is is how this is marketed, where it's marketed, the sizes and other things.

I mean, there's a lot going on to try to figure out how to improve that.

And certainly, we're pulling for our customers figuring this out so we can sell more containers.

But as John says, in the event that we don't, we got to have plans and we do.

Very good.

Thanks.

(OPERATOR INSTRUCTIONS).

Okay.

Sara.

I don't hear any more questions and we're getting tired.

You've done a great job on this call.

I appreciate your help and everybody, we'll talk to you again after the first of the year.

I hope you have a good end of this year.

I hope the markets get a little better for all of us.

We're still here and doing pretty well.

Ladies and gentlemen, that concludes the conference call for today.

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