Ball Corp (BALL) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation fourth quarter 2008 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 29, 2009.

I would like turn the call over to Dave Hoover, CEO of Ball Corporation.

Please go ahead, sir.

Thanks a lot and good morning, everyone.

This is Ball Corporation's conference call regarding the Company's fourth quarter and full year 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 are in the Company's latest 10-Q and 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 ball.com.

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

And with me today on the call are Ray Seabrook, Execute Vice President and Chief Financial Officer, and John Hayes, Executive Vice President and Chief Operating Officer.

On a comparable basis our diluted earnings per share were $3.61 in 2008, an increase over our previous record of $3.50 in 2007.

This improved performance came during a global downturn that we all realize may be here for some time.

In this economic environment, our businesses are performing.

The products we make generally have been recession-resistant and historical have done well even during economic downturns.

But we're not sitting still.

In 2008, we took a number of actions to more efficiently align our supply footprint with market demand.

These actions, and our continued strong focus on executing our strategy, positioned Ball for improved performance in 2009 and beyond.

There are accounting related impacts in our numbers that Ray will explain in a moment and John will provide more detail on our operations.

But all things considered I like where we are as 2009 begins and while I hope the global economic situation improves, I'm optimistic about what we can do this year.

Ray?

Thanks, Dave.

Comparable diluted earnings per share for the quarter were $0.56 and for the year were $3.61, slightly lower in the quarter compared to last year but as Dave said up for the year compared to last year's record per share earnings.

Overall the fourth quarter numbers came in pretty much as expected with several notable exceptions.

On the positive side the food and household earnings were improved by the resolution of a claim in the amount of almost $7 million.

However, this gain was more than offset by an $11.5 million mark-to-market accounting loss on aluminum hedge recorded in undistributed cost.

For accounting purposes, the aluminum hedge became ineffective in the fourth quarter due to the large decline in aluminum prices but from an economic standpoint there will be no lodge as the aluminum head is back to back with customer contracts and therefore will reverse in 2009 resulting in $11.5 million more earnings during 2009.

The final item of note was the $4 million increase in taxes due to the impact of the broad market decline on certain non taxable benefit plan investments.

Before getting to the operations, the other item of note is on October 30, 2008, we announced the closure of two U.S.

beverage can plants and recorded an after tax charge of $25.2 million in the quarter to reflect these plant closings.

A net after tax gain of $5.6 million was also recorded to reflect the recovery of business consolidation costs previously expensed.

We also estimate that an additional $3 million after tax charge will be recorded in the first quarter of 2009 pertaining to these plant closings.

These closures, combined with the previous announced closure of metal beverage plant in Kent, Washington, are expected to be over $10 million cash positive of the final disposition of the assets and cost reductions associated with the plant closings are expected to exceed $30 million in 2009.

Now turning to the operations.

Earnings in the aerosol and food and household segments were up sharply in the quarter, offset to a large extent by lower earnings in North American beverage cans and plastics.

Aerospace's strong quarterly improvement was driven by strength in component technologies, antenna and contract services.

Improved margins were due to a favorable mix of higher margin fixed price contracts and lower overhead and benefit costs.

Much improved fourth quarter food and household earnings were the result of higher sales, better manufacturing performance, and the claim settlement discussed previously.

Fourth quarter comparable earnings in North American beverage cans and plastics were lower than last year, due to lower sales volume, unfavorable sales mix and higher costs due to plant downtime for inventory control purposes.

While full year 2008 plastics earnings were disappointing, the business was able to generate almost $60 million of free cash flow for the year.

A lower Euro in the quarter compared to last year reduced diluted per share earnings by $0.02 and for the full year, a higher Euro added $0.15 per diluted share compared to 2007.

Turning to full year free cash flow $321 million was better than expected primarily due to higher cash collections and lower capital spending in the fourth quarter.

Net balance sheet debt at the end of the year was at $2.28 billion, a little higher than expected, due to $105 million of net cash collateral deposits made in the fourth quarter on aluminum derivative hedging contracts, of which we expect to have these deposits fully refunded in 2009.

Credit quality and liquidity of the Company remain stable with the 2008 rolling fourth quarter's adjusted EBIT to interest coverage of 4.6 times and net debt to adjusted EBITDA of 2.4 times.

Committed credit available at year-end was in excess $500 million.

Although it's early in the year, as we look to full year 2009 earnings and cash flow, we project the following financial metrics.

Capital spending will be slowed and is estimated in the $250 million range.

Free cash flow is projected to be around $375 million.

US Pension Plan Funding could be in the order of $25 million higher after tax, but pension expense is projected to be only slightly higher in 2009 at around $71million or $72 million.

The consolidated tax rate is likely to increase to around 33.5% due to projected higher US earnings, which is our highest tax jurisdiction.

We don't expect to buy back stock until capital markets show some signs of recovery.

Initially we will be reducing debt and growing cash balances in 2009.

And finally, interest expense is also anticipated to be more than $20 million lower in 2009.

With that, I'll turn it over to John.

Thanks, Ray.

As you've heard from both Dave and Ray, Ball Corporation continues to perform well.

While we certainly are not recession proof, our broad mix of end markets and customers that we serve across all of our businesses should hold up well on a relative basis.

Combined with our initiatives of taking a leadership position in all that we do, relentless attention and focus on doing the things right, taking necessary actions to ensure that we're fit to the future, and managing all of this through detailed execution, we are faring well.

We believe the actions with took in 2008 sets us up well going forward.

As we enter 2009 overall we're generally on target on our pricing initiatives, our cost optimization programs, delivering value to our renovation efforts, driving our sustainable development, and being proactive around supply chain and risk management.

We spent the last year focusing on these activities, which, given the environment, has allowed us to get ahead of the curve in terms of managing through this economic downturn.

Now turning to our various businesses, profitability for the quarter in our Metal Beverage Packaging Americas and Asia segment was slightly above our expectations but down from 2007.

This was driven largely by our efforts to run for cash which included taking a fair amount of downtime in the fourth quarter to manage inventories.

Cost containment in this business remains excellent.

Our volumes in North America were off approximately 5% in the quarter versus 4% for the industry.

Driving this difference was relatively stronger CSD volumes offset by lower volumes in the beer segment due to a previously-announced decision to walk away from one profitable business.

Volume comparables will become more normalized as we head into 2009.

In China, volumes were up in the mid single digits after adjusting for sales of broker cans from a joint venture partner.

As we look into 2009 we expect profitability in this segment to be improved driven by cost savings resulting from the previously-announced capacity closures, continued focus on our cost optimization initiatives, and continued growth from a variety of new product launches from 2008.

However, we will experience challenging EBIT comparisons in the first quarter as we work off higher cost inventories resulting from the fourth quarter plant curtailment in the wind down of our previously announced closures.

In our European operations, volumes grew in the upper single digits, driven by solid volumes in several of our core markets and very strong export sales, particularly in the second half of the quarter.

Profitability was affected by a negative product mix and higher freight costs that offset the volume gains as well as a weaker Euro relative to the dollar.

As we look towards 2009, we expect overall industry volumes to increase in the low single digits, which is obviously well below the last three years of 8% plus growth.

Our pricing initiatives are more challenging in this segment due to the soft economy, and profitability in the first half of the year is expected to be lower due to higher cost materials flowing through our business.

However, we currently expect a stronger second half as these cost pressures mitigate.

Now in light of the current environment, we've put on hold our various projects in Poland, India and other growth areas, but are prepared to restart them should market conditions warrant.

Given the challenging environment in our core markets, our European management team stands ready to adjust to any deviations to our expectations.

Our Food and Household Products Group continues to perform well and remains on track versus our expectations.

Excellent progress in our rationalization program, tight discipline around our pricing and cost recovery initiatives, and overall attention to detail and focused execution are all contributing to strong performance.

Core volumes for the quarter were up in the mid single digits and generally in line with industry volumes.

Longer and stronger than normal seasonal pack in several regions and significant promotional activity by some of our customers were partly offset by lower salmon volumes.

Aerosol volumes continue to improve from the late summer.

As many of you know, we faced significant tin plate increases in this business for 2009 and we have no choice but to pass these costs on.

Currently we're on plan and on track with these cost recovery initiatives.

As we go into 2009, we see limited evidence of demand destruction resulting from these increases but it is early in the year.

Despite this, we expect our Food and Household Products Division to have a very strong year as we finalize our rationalization program and prepare to take the next step in terms of maximizing profitability and generating acceptable returns.

Plastic Packaging Americas had a challenging fourth quarter driven primarily by lower volumes in the CSD and water segments.

Overall volumes were down in the low teens and we took a significant amount of down time in the fourth quarter to manage to inventory targets.

With regard to our various contract negotiations, we have reached agreement with all of our customers and are in the process of finalizing these contracts.

While the various terms are in line with our expectations, we expect continued market softness in this segment and as a result, we are considering a variety of measures to maximize profitability and value in the short and long-term.

We do expect profitability in the segment to be up year-over-year.

Our aerospace business had another strong quarter with sales in EBIT above both expectations in the fourth quarter of 2007.

This excellent performance was achieved despite a tough market caused in large part by a lack of funding and decision making by the US government.

While our antenna component and services businesses are maintaining solid growth, our traditional space hardware business has slowed, and management is aggressively addressing the issue of right-sizing the business while rebuilding the backlog to position this business for growth in the future.

So, overall we are pleased with operational performance of our company.

Our continued emphasis on being close to the customer, balancing our supply and demand, and relentless focus and execution on the things that allow us to excel, should position ourselves for a strong 2009.

And, with that, I'll turn it over to Dave.

Well thank you, John and thanks to you, Ray for your comments.

These are challenging times but we're managing our businesses prudently through this environment.

We took disciplined actions where needed in 2008.

Our products and services provide value to our customers and have historically been defensive in economic downturns.

And our balance sheet is strong with no significant debt repayment obligations until the fourth quarter of 2011.

We have confidence in our strategy and our competitive position.

We're managing Ball for long-term growth to continue to deliver value to our customers and to create value for our shareholders.

And with that, Elena, we're ready for questions.

(Operator Instructions) Our first question comes from the line of Ghansham Panjabi from Wachovia.

Please proceed with your question.

Hi guys, good morning.

Good morning.

Hoping you could give us more color, John on the volume outlook for Europe in the low single digits for '09.

What gives you comfort on that and how does it compare on a reasonable basis, western Europe versus eastern Europe, thanks?

You're last part of the question is I think the most important part.

We have seen a significant slowdown in the east generally, whether you're talking about Poland, Russia, Ukraine -- all the region in there.

So that's one of the main reasons why we've slowed down our [loogland] project.

In the west whether it's in the UK or France and even to an extent in Germany, we are seeing volumes hold up on a relative basis and given the continued trends we see going from two-way packaging to one-way packaging, that does favor the can and while we don't expect a significant amount of growth nor are we anticipating it, currently we think in some of those western countries we will see modest growth.

Okay and just as a measure of clarification, the $23.2 million of operating profit in metal household, that includes the $6.8 million claim?

Right?

Correct.

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, Ray, a question on your free cash assumptions for 2009.

Help me with some of the buckets here.

If you're starting, let's say at I think a 321 base from '08, looking forward to '09, you're not going to have I think a Miller payment recurring.

You talked about [patension] possibly being up a little bit but it sounds like your CapEx down by greater than that amount.

It sounds to me as though that could be a bit conservative.

Are there some other pieces potentially working capital or restructuring cash, that we may be missing to help us with the rest of the puzzle?

Yes, remember -- the pension expense and the cash contributions are different numbers so what I said was the expense running through our P&L is only up slightly.

It will be up a couple million dollars probably in the neighborhood.

We had expenses this year -- probably our P&L pension expense in 2008 is probably around $69 million or $70 million and I'm looking for probably in the neighborhood of $72 million next year.

That's a non-cash item.

You go over to the cash side, and because of the broad decline in the stock markets we're going to have to put more cash in our pension plans and mainly in the US because the [cherman] plans are unfunded.

That amount that we -- as I sit here today I expect that number to be in the neighborhood of $40 million.

Call it $25 million after tax.

So we put in around the same as we expensed last year.

We put in about $72 million to $73 million.

We'll probably put in the neighborhood of $108 million next year in our pension plans which will get us close to being 80% funded in the US.

Okay, thanks.

And working capital as well.

If you take those things into account and a little conservatism you'll get 375.

Okay, thank you.

Our next question comes from the line of Mark Master from JPMorgan.

Please proceed with your question.

Good morning.

Good morning.

I wonder if you could elaborate a little more on the price mix in Europe.

It was down for the quarter.

I think last quarter it was maybe some specialty cans there?

I was just wondering if you could give a little more color?

Yes, unlike the US, Europe has a much broader mix of can sizes anywhere from 33 centiliter to 50 centiliter.

The speciality ones you're referring to, the 250ml and everything in between.

We saw more of a gravitation towards more of the commodity smaller sizes -- towards 33cl, which effectively was the mix that I was talking about.

Okay.

Is that something that's happening in North America as well in terms of specialty cans?

How are those holding up in North America?

Those are holding up relatively well because when you look at the end markets and you look at energy drinks for example.

Energy drink I think is the only drink category in the US that is up in 2008.

It was up based on the information we have about 7%.

All of the other various end markets were in decline and as you know the speciality market really is driven by the energy drink side.

Okay, good, thank you.

(Operator Instructions) And our next question comes from the line of Alton Stump from Longbow Research.

Please proceed with your question.

Thank you.

Good morning.

Just a quick question.

I think you mentioned in your presentation about pricing in Europe maybe not being as favorable as you might like in the first half with the weak market demand.

But with the overall supply and demand situation being pretty solid still, I guess the question is what would be driving that lack of better pricing power?

It's not as if we haven't been trying to get price in the marketplace and it isn't as if we haven't been successful.

We have been successful.

It's just as we started into our pricing discussions last fall, remember this deflation had not occurred so as we are going through those negotiations, and the additional capacity that has been brought on stream, it did create a little bit of issue in terms of trying to get pricing as we move through the balance of 2008.

And so it's not a big issue but it's certainly an issue that we didn't get as much as our expectations.

The other thing going on in Europe is we have both aluminum and steel.

We all know what is going on with steel so we have a high amount of high-cost inventory, if you will, sitting in steel in the first half of this year and that's what I was referring to.

That the first half may be lower than this time last year, largely due to that price cost issue.

But as we work that through and we expect that some of these commodity prices will continue to come down as the year goes on we expect we will be able to make that up.

Thanks and one quick follow-up, Ray.

Just to clarify and you might have mentioned this already.

Sorry if I missed it but with the inventory at $11.5 million that you took with the hedging on -- I think that was going to show up in '09.

Can you give us an idea of when the actual timing is, will that be in the first quarter mostly or over the course of the year?

Well, yes, unfortunately, these are derivatives of products that now we're going to have to mark-to-market.

Those products will have washed themselves through our system.

They'll be totally out of it by the third quarter.

So by the end of the third quarter we will through undistributed cost have picked up $11.5 million of additional earnings.

I can't tell you by quarter -- it depends on the price of aluminum.

But, fundamentally there can be no economic loss to this thing.

It's an accounting item -- it's not really economics.

We will pick up $11.5 million somewhere between the first and the third quarter of next year.

Okay, thank you.

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

Please proceed with your question.

Good morning, guys.

Good morning.

Hi Dan.

Hi, I jumped on a little bit late so I'm going to ask a couple of very quick questions and I apologize if they've already been asked or if you've talked about these items.

First of all, in the food can and aerosol can business which you showed a very nice improvement year-over-year-in, how much of the pricing initiative in Q1 was actually in place for the full quarter, and also, I know you've been restructuring that business to take cost out.

Where are you in that process as well?

Yeah, I think if I understood your question on the pricing, Dan, in the fourth quarter, none of our 2009 pricing initiatives were in the fourth quarter 2008.

Okay.

So do you, do you did put some pricing in for Q1 though, correct?

Absolutely.

As I mentioned, we've had unprecedented steel price increases and we've had no choice but to pass those on.

Okay, good.

And how do you feel about the success of that initiative?

Did you feel like you've gotten the pricing through?

Yes, I think in my comments I said we're on track and on target.

Good, on the second item just real quick -- did the restructuring activity that you began, I guess it was over a year ago now in the aerosol food can business -- after the purchase of US can.

Are there still activities taking place there?

We're on track with that as well, and so as we move into 2009, we expect to get approximately $15 million of cost savings in that business.

And we have other initiatives that we're taking going to the next step in terms of continuing to try and improve that business and the management team of that business is doing a very good job.

The improvement, Dan, not all priced.

A lot of it is related to taking out costs and running better.

Right.

Okay, great.

That's going to be an area that's going to do well in 2009.

You are certainly counting on it to do reasonably well in '09 for you guys?

Yes that's our expectation.

Last question -- well two more real quick ones.

The plastics business was break even.

I don't know if you addressed this in your commentary.

Resin prices have fallen.

Are you expecting better performance in that business or is it just too tough of an outlook for that business?

Yes, we said we expect profitability to be up, but the main problem is related to demand being soft right now.

But we're adjusting as we go forward and we'll continue to do that.

Okay.

Free cash flow, pay down debt, I guess.

You're not going to buy back stock?

Yes, initially, these capital markets are really a scary thing right now.

We don't have any refinancing until October of 2011 and so we just really want to flow some cash and we'll see how the markets are.

If the markets come back, then we feel more comfortable and we may start buying our stock.

I think it's a great price, so we may start buying it.

But, as of right now our number one priority is to delever a little bit and flow some cash and then we'll see how the capital markets look.

Okay, well, good job guys.

Thanks.

Thanks, Dan.

(Operator Instructions) Our next question comes from the line of Mike Sheridan with Cobalt.

Please proceed with your question.

Hi, guys good morning.

Could you just help me understand how the pass through of steel -- how much of a pass through do you need pricing-wise to recover your steel inflation for the year?

Well, to be honest we don't talk about those things publicly but, as I said, the pricing increase on steel has been significant.

So we are passing that through, but --

If I think about steel content as a percent of cost of a can -- maybe that's the best way for me to look at it it.

Can you just help me understand how much steel content as far as cost of goods sold is contained in a can?

Again it depends upon the size of a can.

A big can has more steel on a relative basis than a small can.

But, generally it's more than half.

Okay.

Great, thank you very much.

Our next question comes from the the line of [Kian Martin] from Singer.

Please proceed with your question.

Good morning gentlemen.

I wonder if you could provide a bit more background on your comments on Russia.

Obviously the growth in the market started to slow during the third quarter, just wondering whether you could provide figures for what the market has delivered you in the fourth quarter?

Well, as you probably know, we currently are not in Russia.

We have a very small amount of export, but I use that as an example to say in all the east, including Russia, that in the fourth quarter there are actually declines in volume in the fourth quarter in Russia and other parts of the east.

Okay.

And then just moving onto your comments on specialty cans.

Would it be possible for you to breakout the high single digit growth you saw in European volumes between the standard 12-ounce cans and specialty?

I don't have that in front of me but the majority of the growth I believe came from the 33 centiliter can.

Okay, is it true to say that the speciality can is still growing?

Or has that slipped into your negative?

No it certainly does continue to grow.

Okay.

That's great, thank you very much for your time.

(Operator Instructions).

We have a follow-up question from Chris Manuel from KeyBanc Capital Markets..

Please proceed with your question.

Yes, this is Chris Manuel from KeyBanc.

Two quick follow-ups for you.

One is when you think about your position versus the competitive landscape both in North America and Europe, you talked a little bit about taking some down time so that your inventories were in the correct position.

As you look across or to the extent you can see what competitors are doing or what you think they're doing, is it your anticipation that the supply/demand is reasonably in balance and that there's not a large inventory overhang that needs to be worked through?

Well, we can't really comment on what our competitors do or don't do but if you've been watching plant closures across the industries and so on, my impression is that your assumption is probably right.

I know it is in our case but I think we better not talk about what our competitors do.

I think in North America clearly we've seen that but in Europe it's tougher to get a sense there.

I would like to see what opinion you've got as to whether you think that inventory levels are reasonable there or not?

Again as Dave said we can only look at our business.

Our inventory levels are reasonable going into 2009 and there's also structural impediments that don't allow a lot of inventory hangover because you have to produce cans with the appropriate labels and given the promotional activity using labels in Europe it's not as if you can build a large stock of what I would call standard labels.

That's helpful actually.

Second question I had was with respect to how you would -- Ray as you pointed out, the capital markets are in a bit of a turmoil here, particularly on the debt side but how you would think about acquisition market at this point and time.

Your balance sheet's in pretty good shape and there's potential for some consolidation opportunities.

I just -- a sense as to whether that's something you would be willing to consider or whether it's more of a batten down the hatches type of approach right now?

Well, I think the circumstances around this could well present opportunity for people like ourselves as we look forward.

Part of the reason to have a strong balance sheet and to strengthen it a little bit more is for that very thing when nothing in particular in mind.

But I do believe that guys that were running around stapling eight times or ten times EBITDA financings suddenly have no money.

Our debt that has a [faishio] of under 7% that's due in 2018 traded above 9%, it's now below 8% on a market basis.

Indicating that's what the market thinks.

So if the cost of debt is higher, then you've got to look real hard if you're financing it with debt at any transaction that you do, but we wouldn't rule that out and I think maybe prices for acquisitions as we get through this period are going to be a little more rational.

But that's all I can say.

It's all speculation.

Thank you very much.

And there are no further questions at this time.

Okay, Elena, thank you very much.

You've done a great job with this call.

I thank all of you for listening to our conference call and we'll look forward to speaking with you again in April.

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

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