Ball Corp (BALL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation first quarter 2009 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, April 23, 2009.

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

Dave Hoover, CEO.

Please go ahead, sir.

Thanks, Mark, and good morning, everybody.

This is Ball Corporation's conference call regarding the Company's first quarter 2009 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 in other Company SEC filings as well as Company news releases.

And if you don't already have our earnings release, it is available on our website at ball.com.

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

With me today on our call are Ray Seabrook, Executive VP and Chief Financial Officer, and John Hayes, Executive VP and Chief Operating Officer of Ball.

And on a comparable basis, our diluted earnings per share were $0.77 in the first quarter compared to $0.80 in the same period last year which was a record.

Our operations performed well in the quarter -- that is historically slow for us.

Excellent results from our metal, food, and household products segment, and a net inventory gain across all our packaging businesses helped offset a slow start in our other packaging segments where we have seen volumes increasing in April.

We anticipate volume and margin trends will improve as we head into the summer season.

And the second half of the year is going to be stronger than the first half.

And I think that is both relatively and absolutely.

So with that, I'd like to turn the call over to Ray Seabrook.

Thanks Dave.

As Dave mentioned, the comparable diluted earnings per share for the quarter were slightly lower compared to last year's first quarter record for share earnings.

The lower per share earnings were a primary result of a slow start to the year in North American and Asian beverage can sales, negative foreign currency impacts in Europe and Brazil, some price cost compression in Europe, and two less accounting days in the quarter.

These items were somewhat offset by consolidated net inventory holding gains across our packaging businesses, lower interest costs, a lower tax rate, and lower share count due to our 2008 share buy back program.

Turning to the operations, North American and Asia beverage can sales started slowly, as I said, in both places, accounting for approximately $9 million of the first quarter year-over-year earnings shortfall with the sale of higher cost inventory making up the remainder.

The high cost inventory resulted from 2008 fourth quarter production curtailments.

Which were followed by a rapid plummet in aluminum prices, which are reflected in our selling prices.

To a much smaller extent, higher cost inventory will also have some negative impact in the second quarter segment earnings.

As we have talked many times before, commodity prices are a pass-through on our packaging businesses.

However, for the most part, we retain the inventory holding impact on the pass-through between the time the metal is purchased and sold.

Generally, inventory holding gains or losses are not significant unless there is extreme movement in commodity prices as happened in the past two quarters.

The second half of the year should be much improved, due to lower manufacturing costs as a result of the plant closings completed at the end of the first quarter and the elimination of the higher cost inventories.

European beverage can sales were down slightly in the first quarter compared to a year ago.

With the year-over-year segment earnings decrease attributed to foreign currency declines, higher cost inventory, and some price cost compression -- all about in equal proportions.

Looking forward, the high cost inventory issue is behind us in Europe, and operating margins should be improved by lower cost.

The food and household segment is off to an outstanding start.

Better manufacturing performance offset lower sales volumes in the quarter with most of the year-over-year segment earnings improvement attributable to inventory holding gains as a result of significant tinplate steel price increases.

We expect strong performance from this segment throughout the remainder of the year due to the production consolidation program commenced in May, 2007.

First quarter equity earnings of affiliates were negatively impacted by poor manufacturing performance and foreign currency losses in Brazil.

Brazil's currency losses reduced diluted per share earnings by $0.04 in the quarter.

Due primarily due to lower interest rates and a weaker Euro, interest expense is $10 million lower in the quarter compared to a year ago and is forecasted to be $35 million lower for the full-year compared to 2008.

The first quarter effective tax rate of 28% is a little better than our initial forecast due to a favorable foreign tax settlement in the quarter.

The full-year effective tax rate should also be lower and is now forecasted in the 32% range.

Turning to free cash flow, we still anticipate full-year free cash flow to be around $375 million and expect full-year capital spending to be below $250 million.

Credit quality ratios have improved with rolling four quarters adjusted EBIT to interest coverage of 4.9 times, and net debt to adjusted EBITDA at 2.9 times.

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

Thank you, sir.

As Ray indicated, a combination of factors impacted our packaging segment EBIT mix, both positively and negatively in the first quarter.

We have made much progress at Ball Corporation over the past 12 to 18 months.

And while we are currently pleased -- certainly pleased with the meaningful progress being made in the food and household product business, we still have much to do.

Particularly as it relates to the level of contribution being made by the remaining packaging operations.

While a softening consumer demand has impacted the entire economy, and we are not alone.

We remain vigilant in proactively addressing those things that we can control.

For example, over the last 12 months, we have closed or announced the closing of eight manufacturing plants in North America as we align our businesses with the current realities in market demand.

Our recent announcement regarding the closure of our Baldwinsville, New York, and Watertown, Wisconsin PET facilities is yet another proof point to this commitment of matching supply with demand.

We have reduced staffing at more than a dozen other plants, and we have reduced positions or not filled existing positions in our aerospace business and our support staff functions.

Combined with the plant closings I mentioned, these actions have resulted in the reduction of approximately 12% of our total workforce.

We have hired a new global head of strategic sourcing to improve our internal processes around the supply chain, and how we align our purchasing programs with our sales contracts.

Year-to-date travel expenses are down over 25% versus 2008 as we leverage technology, including the use of video conferencing and webcasting.

Energy, gas, and water use per unit of volume is down across the board as we focus on our sustainability goals.

And we have delayed many of our growth capital investment programs, including those in Poland, India, Serbia, and other regions until such time we see markets recovering.

These are things that we must do in order to ensure that we are fit for the future.

Our focus is on identifying those things we do to add value for our customers and to eliminate things that add cost and don't add value.

We are beginning to see results.

While it can take 12 to 18 months for the effects of some of these larger initiatives to translate to improved profitability, we are confident we will see a positive impact in the second half of the year and into 2010 as a result of the actions that have been taken.

Also occurring in the quarter was the naming of Mike Herdman to the position of Chief Commercial Officer, Global Metal Beverage Containers, and of Gerrit Heske to the position of President of our European operations.

Mike has established relationships across our worldwide customer base that will allow him to effectively help address a wide variety of negotiations and other growth opportunities on the horizon.

And we are pleased that he has accepted this position to ensure we receive proper value for our products, while staying close to our customers during these turbulent economic times.

Gerrit Heske, on the other hand, is a great example of our next generation of leaders.

He and I worked extremely close together over the past several years.

And his pragmatic, proactive, and confident leadership style will suit him well now, and in the future.

Now turning to the operations, profitability in the quarter in our metal beverage packaging Americas and Asia segment was below our expectations.

As Ray indicated, this was driven largely by lower volume, higher cost inventory, and inventory holding losses on aluminum.

Our volumes in North America were down high single digits.

Driving this difference was weaker CSD volumes on branded products and slightly lower beer volumes.

Many of our branded CSD customers continued to focus on value with prices increasing in the high single digits year-over-year and volumes resulting in similar declines.

Private label, which Ball does not have significant exposure to, increased their volumes significantly on lower price increases.

For the balance of the year, we expect some promotional activity from our customers as we head into the seasonally high summer months.

In China, volumes were lower than last year, due to the Chinese New Year falling earlier in the calendar year in 2009 and to a slight shift in packaging mix, which we expect to abate as we move through the year.

As we look to the remaining quarters of 2009, we expect profitability in this segment to be pressured slightly in the second quarter as we flush out the balance of higher cost metal inventory remaining in the system.

Second half 2009 will benefit from savings related to our previously announced plant closures, improved volume, and ongoing cost saving initiatives.

In our European operations, volumes declined in the low single digits, driven by significantly reduced consumer demand across Eastern Europe, offset by relatively strong export sales.

Relatively speaking, France, the UK, and the Netherlands held up well.

Profitability was affected higher cost inventory, a negative product mix toward $0.33 a liter packages, some price cost compression, and a weaker Euro relative to the dollar as Ray mentioned.

As we move forward in the year, we expect overall industry volumes to recover as we move into the summer months.

April has seen an improvement in shipments in the mid-single digits versus 2008.

We fully expect profitability to improve in the coming quarter since the higher cost inventory in the segment has already cycled through the system.

Our food and household products group continues to perform very well, and we see upside to the performance of this group relative to our expectations.

Much better manufacturing performance and disciplined pricing strategy offset high single digit food can volume declines and slightly higher aerosol declines.

Due in large part to some pre-buying from our customers in late 2008.

While much of the first quarter earnings improvement in the segment resulted from the inventory holding gains, this business is on track and ahead of plan to deliver the profitability that we expect.

Volume trends improved sequentially throughout the quarter, with March food can volumes approximately 15% higher over 2008 levels.

Plastic packaging Americas continues to be challenged.

As indicated in January, measures would be taken to maximize profitability, and these decisions were made swiftly as market volumes experienced double digit declines in the first quarter.

Profitability in the segment will be up year-over-year, as a result of savings generated from the 2008 Brampton plant closure and improved pricing.

In addition, recent volume trends indicate a pickup in customer and consumer demand.

Our aerospace business had a relatively good quarter with sales and EBIT coming in slightly above our expectations.

During the quarter, the Ball-built Kepler instrument was successfully launched, and initial on-orbit reports are favorable.

Our antenna, components, and services businesses continue to grow nicely.

However, our traditional space hardware business has slowed.

The coming quarters bring more difficult comps for this business as the government contracting cycle has shown no real signs of improvement.

Margins can hold, but on reduced volumes.

The management team at Ball Aerospace has done an excellent job of managing its resources to match business demands.

Even with the puts and takes of the operations contribution in the first quarter, we are confident that we will deliver improved operating performance over the remainder of 2009 and into 2010.

Continued and accelerated benefits from the actions we began taking at the beginning of 2008 in our North American and Asia metal beverage and our plastic segments, continued proactive and disciplined execution of our food and household products segment, our sustainability in innovation efforts, and our supply chain and other key cost optimization initiatives, will all help drive our profitability and cash flow over the next months and years.

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

Well thanks, John.

Thank you, Ray.

Overall, our comparable results for quarter were very close to our record first quarter results last year.

As John commented, we're not sitting still.

We outlined the steps we have been taking in our operations, and we continue to assess our business and are taking aggressive actions where needed to improve results.

At the same time, volumes have picked up in April.

And as we move further into the busier spring and summer season, we expect that trend to continue.

We will also begin to get more of the benefit from the plant consolidations we've announced which will add momentum to our business.

As a result, we expect second half performance to be much stronger than the first half, and full-year earnings per diluted share to exceed last year's results.

So with that, Mark, I think we're ready to take questions.

Operator?

(Operator Instructions).

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

Please proceed with your question.

Good morning gentlemen.

Good morning.

Couple of questions for you.

First, you mentioned some price compression in Europe.

Could you elaborate a little more there?

Is this something that is just a -- a beginning of the year event?

Or is this -- something that is going to persist all year?

Or help us -- a little more dialogue there, please?

Yes, Chris, this is John.

It was a little bit more of a -- I'll call it beginning of the year event.

Recall that we make both aluminum and steel beverage cans over in Europe.

With the very strong increase in steel pricing, that put a little price cost pressure into the system.

We expect that to be abating, as I had mentioned in my prepared remarks, over balance of the year though.

Okay, that is helpful.

And then, Ray, you talked so fast.

I'm just a simple guy.

I get confused, but you talked about some benefits in inventories.

And you talked about how inventories had hurt you a bit in some of the different divisions.

And I think you were referring to more hurt in the aluminum side and more help in the tinplate side, if that sounds right?

But can you help us balance, as a whole, how it was across the system?

Do you look at the benefits in one side roughly equaling the other side?

I tried the talk nice and slow, but I guess not slow enough.

Anyway, the -- .

We're challenged out here in Cleveland.

I understand.

(Laughter) It is a net gain.

In other words, we had -- we had a little bit more in food than we did the negatives in the beverage business.

Okay, so across the whole system a slight gain.

That is helpful.

Across the whole system, a gain, yes.

Okay, last question I had was -- is, you -- you talked about some of the plant closures and things that you have got going.

Can you just refresh us?

I think there have been a number of them, both in the beverage and now in plastics and metal, food.

Are the cadence of the improvement from lower expenses, i.e., plant closures and things as this year goes on -- in 2009.

And what carries over into 2010?

Yes, let me attack that.

Recall that starting with food and household, about 15 or 18 months ago, we announced the closure of our commerce in Tallapoosa.

Those really didn't come out of the system until the first quarter this year.

And so, we expect to see as the balance of the year -- we expect to see the improvement starting to flow through there.

We also last year about this time, announced the closure of Kent, Washington.

We did say at the time, because of customer contracts, that we would incur some higher freight.

That we really wouldn't get the benefit until 2010.

And then, I mentioned Brampton in my remarks that we had closed, and we were expecting to see improvement there.

And then the other ones, Kansas City and Puerto Rico, for example.

Kansas City didn't come completely down in our system until the end of the first quarter this year.

So while we're decommissioning it right now, I think we're going to see the vast majority of the benefits going into 2010.

And then with the Baldwinsville and Watertown announcement we recently did, that is really a second half event that we get the full benefit going into 2010.

Okay, so just to help me put some numbers on these, if I remember food and household was, I think you had said at least $20 million.

That is a this-year event.

Do you have some numbers for the others as well?

Well, I think when we talked about the other ones, it is significant.

We were talking in excess, I believe, $80 million or so of fixed costs.

And as I said because of the timing of some of these things, we would expect the full-year effects really to be more in 2010.

Although, we will get some of the benefit in 2009.

Thank you very much, gentlemen.

Our next question comes from the line of George Staphos with Bank of America.

Please proceed with your question.

Thanks, hi everyone.

Good morning.

I just want to be clear on the answer you gave to Chris, so the $80 million of plant closing savings, is that the total or would there be in excess of that in savings, given the food can plant closings?

No, I think if you go back, and this is all what we reported when we announced these closures, that if you sum it all up, it is in excess of $80 million.

Okay, fair enough.

Thanks, John.

Now the second question I had -- over the years, the Company has done a fairly good job of matching input cost with selling price, especially within beverage cans.

The industry has moved in this manner as well.

Why would you, in Europe, have some margin compression from higher steel?

Why wouldn't you adjust pricing for steel beverage cans to reflect the higher input costs relative to whatever you needed to charge within an aluminum beverage can?

Well, it varies so much.

But a can is a can, and that is how we sell them in Europe.

And so we get the benefits over time of having a dual metal strategy.

As we all know over the last six to nine months, aluminum has come way off, and steel has gone up.

It has put, on a relative basis, more pressure on the system.

As we work off some of that and sell more aluminum relative to steel, as I said before, we would expect that to abate a bit over the balance of the year.

Okay, and John, just to -- maybe try to clarify a bit more.

We appreciate all the detail that you provided.

Are we to take from your comments and Ray's comments and Dave's that within Americas and Asia beverage, we should assume down EBIT in 2Q, but in the second half, increases in EBIT year-on-year?

And within Europe, how should we think about the comparisons over the course of the year?

Why don't I quickly take it, and then I'll turn it over the Ray.

We said in the North America beverage cans, we have a little bit of headwind because of this higher cost aluminum in the second quarter.

But in the second half, we are going to get the benefits from these plant closures.

And then in Europe, as we move through -- remember, last fall, we talked about running for cash given the current economic environment.

And what that did is put a little deferred variances on our balance sheet that really flowed through in Europe and in North America in the first quarter.

As those higher cost inventories flush out, we expect Europe to be sequentially improving.

Right, on a year-on-year basis -- .

The only thing I would add to that George is, remember that we said we had a little bit more of this to go in the second quarter in North America and Asia.

And let's just say that.

And the gains from the plant closings offset in the second quarter.

And then the benefits for all of these plant closings, fall right straight down to the bottom line in the third and the fourth quarter.

So, you would expect to see the North American beverage [ments] a lot stronger.

The other thing we hadn't talked about is, remember you have got exchange.

You got Europe at $1.50 last year first quarter, and it's $1.30 as we speak.

So, you got $0.20 of exchange difference.

When you look at their sales and stuff, $15 million of reduction in sales in Europe.

It is not volume related.

It has got to do with exchange.

So we had some exchange going on as well.

Understand, just trying to get clarification.

I'll turn it over, guys.

Thanks.

Thank you.

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

Please proceed with your question.

Thanks very much, good morning.

I was hoping in the metal, food, and household business you could just provide a little bit more color on the improvement you saw in the quarter.

And maybe just talk about what was price?

And what was productivity and cost structure improvements?

And what was inventory?

If you could put a little more color on that, that would be helpful.

A couple of things.

I'll put the inventory holding game aside, but just from -- I'll call it a core operating perspective.

Our commercial people did a very good job in managing a very difficult situation with the whole steel pass-through.

And so, we did a very effective job of passing those costs through.

On the manufacturing side, though, is where we have seen the greatest amount of improvement.

And just to give you a sense, in the first quarter on labor costs alone, year-over-year, we were 19% below last year.

Driven in large part, because we were very effectively managing our overtime and some other things because we were getting better operational performance out of the lines.

So, both from the commercial side and from the operating performance side, we're seeing improvement in all areas.

Okay.

And then -- I think you mentioned that March volumes were up significantly.

Can you just talk about if there was one particular area and was that -- food cans and aerosols?

Any color there?

You really have to go back and look at the whole quarter.

Starting out the year, despite our efforts to minimize the amount of pre-buy from our customers.

We did in retrospect experience some pre-buy from our customers.

And then after significantly reduced shipments in January, we did see sequential improvements during February and March.

And as I said, March shipments were up 15%.

April started off a bit soft, but conversations with our customers indicate that for the remainder of the year, we should meet our expectations.

Obviously, assuming the weather and normal pack season.

And those trends are pretty similar in aerosol and food cans?

Correct, generally speaking.

I would say -- this is Dave, Claudia.

I think that if anything this year, if you add together weather in North America and also the state of the economy, which has hurt demand for some of the branded products.

We're probably seeing those factors make the first quarter more seasonally slow, versus the rest of the year, than we normally would.

If that helps at all.

That does.

Thanks.

Our next question comes from the line of Chip Dillon with Credit Suisse.

Please go ahead, sir.

Yes, good morning.

On the tax rate, just to be clear.

You mentioned, Ray, that the rate for the full-year would be 32%.

But given it was 27% in the first, should we be using something above 32% to make it average out?

Did I hear that correctly?

Yes, probably.

When we first -- when we were in January and talked about the full-year, we thought we would have a tax rate closer to 33%.

But we had a settlement of an item in Europe that caused the first quarter to be a little lower than otherwise would be.

But yes, you should use probably a little bit higher than 32% for the rest of the year.

We should finish at around 32%.

So remember, we're going the make a lot more money the rest of the year than the first quarter.

The first quarter is a very slow quarter for us anyway.

It is usually -- the first and fourth quarter are usually are our slowest quarters.

The middle two are our highest.

So when you actually do it by dollars, what you will find is it won't make that much of an impact.

But fundamentally, when you get finished with the full-year, we expect a 32% tax rate, rather than the 33% that we had advertised in January.

Got you.

And of course, it sounds like one way to look at this, is that that benefit was pretty much equal to the currency and other problems you had in the equity line?

Yes, it just turned out that way.

We had some currency losses.

I talked about in Brazil.

And the operations are not performing quite as well in Brazil as they had in the past.

And those numbers just turned out to be relatively in the same magnitude.

The tax adjustment was around $4 million US, and I think that Brazil, as I said, was $4.5 million on the exchange -- on the currency.

Got you, and when you look at the -- it was just obviously lights out in the food margins, mid-teens.

How do you see that moderating?

How do you see that inventory gain working down?

Do you think you will be back up in the mid- to upper single digits say, by the third quarter?

Or will it linger beyond that?

No, I think directionally, you're correct.

And you probably will have some, but not what you had in the first quarter, as we look at the second quarter.

Yes, I think there is a little bit, but not much.

And so, we're still expecting -- we started a plant consolidation program in 2007.

And we have been sort of advertising the earnings are going to get a lot higher in this business, and we're on track.

Now this year, some of that's going to be caused by this one-time item that won't be repeatable.

But, we still expect the sustainable earnings in the business to be significantly higher than we have had in the past.

And we have been telling you that all along.

And some of that has been offset by some of the negative things in aluminum on the beverage businesses.

Got you, thank you very much.

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

Please proceed with your question.

Yes, thank you.

First question is on the North American beverage can segment.

I'm trying to figure out, I understand on the mix side and how that hurts you on the CSD side.

But looks like now for several quarters, you have been kind of close to or maybe worse than the 'industry'.

And given that your mix is more heavily geared toward beer, I'm trying to figure out why that's the case.

And I think, Kent probably would have hurt you in '08, if I'm correct on that, in terms of skewing that a little bit.

Can you just maybe comment as to why I think you said your beer volumes were down in the first quarter?

Yes, they were down slightly.

It really has to do with customer mix.

And without going into much detail, when you look at the various beer customers that the industry serves, and that we serve, some have been performing better than others.

So it's not anything other than that.

And John, curious -- your thoughts as a seller of obviously, of both cans as well as PET.

What your thoughts are in terms of some of the bottlers as well as the brand owners have been a bit more vocal about changing the packaging formats and sizes and the like.

And seem to be talking a little stronger about price over volume than they have in the past.

How do you think that plays to, again, to the various package formats that you plan?

Yes, well it is just generally speaking, you're right.

They have been pursuing value over volume.

And that has actually been hurting them relative to private label.

And just based on our discussions with the various soft drink customers that they are trying to get this right.

And they can't continue to experience the declines they are.

.

So as you pointed out, they are trying a vast majority of SKUs.

You have to remember it depends on what channel you are talking about.

If you are talking about the convenience channel which is historically a PET channel, they're trying some different things.

But that is still a predominantly PET channel.

On the food store side, it has historically been more of a can volume, and we expect that to

Okay, and lastly, are you concerned about -- I don't know if concern is the right word.

But the news here with Pepsi and PBG, that there is potentially some disruption ahead of the summer selling season.

Is that an issue at all for you, do you think?

No, I don't think it is at all.

We don't worry about that.

I think what our customers are trying to do, make sure that their alignment within their system to make sure that they can execute and get to market as quickly and as efficiently as possible.

Okay.

Thanks a lot.

(Operator Instructions).

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

Please proceed with your question.

Good morning.

Thank you.

Just to clarify, in the food and household, was the statement that you made that the year-over-year improvement in food and household profitability was largely all the inventory gain?

So you had a $30 million-plus inventory gain there?

Yes, that is what I said, so what John talked about is -- what we said in food and household, our volumes were down in the first quarter, so that is a negative.

We also said our price cost was positive.

So those two kind of more or less offset, to some extent.

And most of the gain in the first quarter was the inventory holding gain.

That won't be the case second, third and fourth quarter.

Of what we continue to expect in foods.

Great.

I just wanted to clarify.

Then secondly, Ray, can you just talk about use of free cash flow as you go through the year?

And you've made statements in the past that you were targeting 10% to 15% EPS growth.

And given that you're not in a share buyback mode perhaps this year, should that EPS growth this year be thought to be 5% to 10% because you don't have the normal 5% share buyback?

Just before Ray answers that, Richard, I would like to comment.

I think it's hard for us to get right down to percentages.

Our long-term goal is still to grow 10% to 15%.

If things break our way, I think we can do that this year.

We have got to average -- I made the statement earlier we expect to make more this year than last year.

It looks to me like we have got an average over a bucket share in the final three quarters to do that.

So we understand that.

But to get real precise around whether it is 9.3% or 11.1%, or 7.2%.

It is going to be hard to do at this stage.

If things break for us, and the trends that we beginning to see developing in volumes.

And that is really in Europe, it is in the PET business as a matter of fact, that we have seen it.

We expect we're a seasonal pack food supplier and provider, as John mentioned earlier.

The weather works, and the fish swim, and so on.

We see a pretty good year.

The thing that I am most encouraged about is that we have got a hold of our business real tight.

And we're running it well, and we're beginning to see the benefits of the actions that we have been taking.

I think we have got a shot at meeting that.

But I wouldn't say that here in late April, the game is still on the table.

But we're fired up about it.

Thanks, Dave.

But from a free cash flow standpoint, share buyback still not on the table for '09, is that correct?

At least for now.

I wouldn't say -- we got -- one of our covenants is a little tighter than we'd like on restricted payments, which affects our share buyback.

We said that our plan right now is not to buy back shares, and we're sticking with that.

We could get to the third or fourth quarter, and have a strong cash flow.

We could change that a little bit.

But at the end of the exercise, right now we are not buying back our shares.

We don't plan to.

We have got some other things that we think provide more value, and that is what we're going to do.

Thank you.

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

Please proceed with your question.

Yes, thank you.

Good morning.

Good morning.

I think I might have missed it, but I believe you had mentioned, I think it was you, Dave, that you were seeing at least some rebounds in bev can volumes in Europe in April versus the first quarter result?

Is that correct?

Yes, I think I said it.

I think John said it, too.

And I think you might have said it was up mid-single digits, is that right?

Just wanted to get an idea what the outlook might be there?

If you think we'll see that rebound continue over next quarter.

Or if we could see it go back down to being down slightly like it was in the first quarter?

Yes, John why don't you comment on that.

Yes, one of the things that is going on -- you have to look at the markets, and what is going on in the markets.

And the first quarter is seasonally slow.

We are aware that filled stock inventories of our customers are relatively low.

Last summer, recall, it was not a pretty summer throughout most of Europe.

It is, as Dave said, it is only April.

We are seeing decent some decent improvement in the volumes in the month of April, but the summer is ahead of us.

And if things continue to go our way, we would expect to see some improvement there.

Alright, thanks.

And then, just one other question on this whole inventory holding gain issue.

Is there any way we can get some clarity, either now or in the Q on a per segment basis as to what the impact was in both bev and food cans?

Just in terms of making it easier to model over the next couple of quarters?

If you just go back to my comments were, I thought I was clear.

But let me repeat it.

North America, I said the $9 million of the shortfall was to do with volume.

And I said the remainder of it was with the inventory.

So if you subtract the two numbers you should be able the figure out what that is.

And food, we have just clarified and said most of the gain was inventory.

And in Europe we said we had three things happen to us, which proportionally were about the same.

So I don't know how else to spell it out.

So if you take the math and figure it out, I think you can come up with a number.

Okay.

Thanks, Ray.

Our next question comes from the line of Peter Ruschmeier with Barclays Capital.

Please proceed with your question.

Thanks, good morning.

Good morning.

A couple of questions.

Just to clarify, if your European bev volumes were down and had some destocking.

And April was up nicely year-over-year, combining that with your normal seasonal trends.

Sounds like this year, just seasonally, we're going to have a bigger variance, is that fair in 2Q, 3Q, relative to what you have seen in the past?

As we were just talking before, we're going into the summer selling season.

It's too early to predict anything.

What we have seen is kind of month-over-month.

And again, it varies by country or by region.

But we have seen greater volatility in volumes on a month-to-month basis than we have in the past.

But based on what we are seeing as we sit here today, we think things could be improving.

And is there anything unusual about the year-ago April to provide an easy comp for those volumes to be up so strong this year?

Not that we're aware of.

Okay, that is helpful.

Maybe a question for Ray.

I'm curious about working capital.

Obviously, you have seen some big swings in pricing and costs.

What is your working capital expectation for the full-year in terms of a put or a take?

That is always the $64 question this time of year.

But if I look at what our forecasts show me, it is probably a $60 million negative.

You know it's-- as John said -- it is a little early in the year.

We always push guys when it comes to the end of the year.

It depends on sales volumes, and it depends on a lot of things.

Probably, remember, we have had some significant price increases in some of our raw materials.

So that alone adds working capital to me.

We are hoping to make it better than that, but as I said -- I sit here today.

It will be a negative, just a matter of how much.

As we work through the year, depending on different factors, that can move around depending on what we want to do.

But you know, it should be a negative.

Alright that is helpful.

And just lastly, for Dave.

I'm curious if you can remind us your latest capital spending guidance, and if you think about what your key spending initiatives are this year.

And if you have a back burner that you put off for 2010, what are the kinds of things that you're thinking about in terms of priorities for that CapEx?

I think we put this in the release.

We expect to spend under $250 million, and just how much under will be determined.

And we're -- as I mentioned earlier, we have got to hold the business real tight.

In fact, we were having in one of our meetings yesterday, Ray assured all the operating people that they could beat that number by quite a bit.

And nobody said they couldn't.

So, I think this is a year where we don't have -- we're not spending.

As John mentioned, we've stopped spending at the moment in Poland.

We're ready to go ahead with that when we see demand turn.

We have some other projects around the world.

Places that have been talked about, and that we have done.

So we're not spending growth capital right now.

We're keeping our hand on the throttle -- throttling back on any capital that we can without hurting the business.

So I think, you'll see us spend less capital.

I think some of that cash Ray is looking for may come out of that account.

Does that answer your question?

That is helpful.

And maybe just a last question related to that.

If capital spending can potentially be beat by quite a bit, under the $250 million -- I don't want to read too much into this.

But your free cash flow guidance is the same.

I'm curious on other factors that may have changed?

Whether it is working capital, or whether it is some of the volume issues?

And if you could elaborate, or are you just being conservative on the free cash flow guidance?

Well, it is early days.

That's one thing.

Ray just talked about the working capital number.

To some degree, sometimes it is in your best interest as you approach the end of the year just as we do, to let that run up a little bit.

The other thing that I think we all understand, I don't expect the amount of volatility going forward that we've seen in the last year and a half or so among some of the raw materials and other things that we buy.

But as we work through this, a lot of people have hedged their materials and so on.

And remember that is reflected in our numbers.

So, you may see a market price that is well off what the hedge is.

It is not exposure for us, but that can drive the working capital a little bit, too.

I think we're just -- by nature, why would I want to grandstand and make any overt comments about what might be nine months from now.

Nine months ago, where were we?

As an economy and as a world?

So I think we're just a little cautious.

But we're comfortable saying that our free cash flow will be around $375 million.

I hope we beat it.

But, we'll see.

Fair enough, thanks very much.

Our next question comes from the line of Al Kabili with MacQuarie.

Please proceed with your question.

Yes, good morning.

I was hoping you could clarify a little bit on US beverage cans.

Just how much drag you see the inventory holding losses in 2Q?

What should we expect for the second quarter there?

If you can give us some color there?

Here is what to expect, is that it will be single digit, first of all.

But what happens is we talked about some of these plant closing costs benefiting this year.

That is all true.

And so the plant closing costs, the gains from that will offset any inventory effect.

So we're set another way, both of those two things should offset.

It will look like there is nothing there.

But in fact, we really will have an inventory holding loss.

And we'll have some benefits from these plants shutdowns that John was talking about.

And when you really will see the benefits in the third and fourth quarter for the plant shutdowns.

That is why we're confident that the second half looks a lot better.

Okay, and to clarify, when you say single digit, you're -- that is in millions of dollars?

That is in millions, yes.

Okay.

And in terms of cost saves, how much are we looking at total realized cost savings on the US beverage side this year?

I know in total, somewhere in the $40 million with the three plants you have shut last year in Kansas City.

But could you just help us with how much you expect to realize in 2009?

Yes, to be honest, I don't have the numbers off the top of my head.

I do know, as I mentioned earlier when I went plant by plant, the Kent, Washington closure -- we really don't get much benefit now because any fixed cost benefit is offset by some freight in 2009 that will go away in 2010.

And then on the Kansas City and Puerto Rico, as I mentioned, we are in the process of decommissioning Kansas City as we speak right now so we are incurring some costs there.

But once that's completely done, which we expect in the second quarter.

The second half, we should get get those benefits.

But, I think you're right.

I think those numbers are around $40 million if my memory serves me correct.

Okay, got it.

It's just that you won't realize the full run rate of that this year.

Maybe half of it, it sounds like.

No, we'll get more than half.

Okay.

And then on -- I would assume in terms of the pricing escalators for PPI and whatnot.

Doesn't that start to help a little bit in the second quarter in US bev as well?

Any way to think about that?

Yes, it should.

Recall as David mentioned before, nine months ago the PPI indicators were quite high, and all because of the last quarter they came down significantly.

So yes, there is a little benefit, but it is not a huge number.

Okay.

And then on the -- switching over to food cans a bit.

The $15 million of cost savings this year.

Did any of that show up in the first quarter?

I may have missed that.

Very little, because as I mentioned, our two plants that we closed, we were actually running them in the first quarter.

We shut them down in the first quarter.

So we really expect to see the benefits through the balance of this year.

Okay, and then finally on Brazil.

You mentioned some operational issues you're having there.

Can you give us some color there?

What is the outlook going forward?

Actually, the three of us were just in Brazil and Argentina a week or so ago.

Part of that has to do with the fact that we started making 16-ounce cans in our existing plant.

And we're constructing a new plant.

We are just beginning to construct a new plant.

Not major things.

It cost us a little money, and we're on top of it and have it fixed.

But it was introducing a new size into a plant.

That caused some disruption.

When you start and stop, to change the size.

Some of that.

And I think we need the run a little better than we have been.

We have got people on it, and it is not a major problem, but it just caused performance to slack off a little bit.

And in addition to that $4 million or so that Ray was talking about in currency, we experienced a little bit of softness, and we only get half of that because we're a 50% owner.

But that is what he was referring to.

Okay, and does this get better in the second and third quarter, or are you still fighting some of these issues on the operational side?

I think it will get better as the year goes along.

Okay, and then two quick housekeeping questions.

First, on the tax benefit, could you tell us how much exactly the benefit was in the quarter?

I think it was $4 million.

Okay.

And then second one was the last quarter you were hit a little bit in the unallocated corporate on mark-to-market accounting hedges of $11.5 million.

Was there anything going on this quarter related to that?

And do you still see that reversing itself in the second and third quarter?

That is a good question.

What went on this quarter, believe it or not, is another further $1 million dollar mark-to-market loss.

So, I'm at $12.5 million.

And what I see is a gain of $3.5 million for the remaining three quarters.

And it looks like $2 million may drop over into the first quarter of 2010.

Okay, thank you very much.

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

Please proceed with your question.

Hi.

You touched on this earlier, but I was curious, there has been a lot of talk that some of your customers may have the opportunity to do a little bit extra in promotion this year with commodity costs pulling out , coming back.

Just wondering if you're seeing or hearing anything along those

Yes, this is John.

I think in conversations with our customers -- yes, we do expect them to be looking at promotional activity to help drive volume in their business.

So is it sounding like -- it might be more than we have seen in past years?

Well, I can't tell you if -- if it is more than in the past years.

But really over the past 15 months or so, the branded CSD people have been going after value as opposed to volume which effectively means price over volume.

As you mentioned, as commodity costs begin to come off, it gives them a little bit more flexibility to focus more on volume.

Okay, also just curious.

With the timing of Easter, do you have any idea what impact that may have had in the quarter?

If it pushed some volume back into the second quarter?

Or if there were any issues around that?

I think nothing material.

You know, it is in a seasonally slow part of the time of the year.

And usually you see promotional activity and other things in the heavy summer months.

And so yes, there was a three-week delay in Easter this year.

But we couldn't quantify it for you.

Alright, thanks a lot.

And we do have a follow-up question from the line of George Staphos.

Please proceed with your question.

Thanks, everyone.

One or two, nitty-gritty, and then a couple of big picture.

We'll try to keep it quick.

First of all, Dave, you mentioned where Europe is running currently in terms of volumes, mid-single digit.

If you mentioned it, I had missed it.

Can you tell us what the early 2Q trends are in North American beverage can volumes?

Yes, do you have that John?

Well, I don't have it in front of me.

It is -- what we're seeing -- .

Is it up?

Is it down?

Is it flat?

We're not seeing big deviations yet.

But again, it is only the third week of April.

Okay.

So in -- using your thought process and phrasing, if things break your way, such that you have a shot at the 10% or better.

Or, nearly $4 of earnings power this year.

What kind of volume would we need to see North American beverage at?

I don't know if we can get it that precisely.

What will help us is two things.

One, if the beer guys begin to see a little more action on their side.

As John mentioned, that has to do with mix.

To some degree, mix of customers.

And the other thing is, the branded guys decide they want to sell more soda.

And if they do, they always really push hard on cans.

And someone was asking earlier, will they do what they did before?

In my career, I have seen this happen time and time again.

Maybe with a little tailwind of some moderating costs, they can afford to promote more.

And if they do, I think people will buy it.

Tell them they should do that, Dave.

I do.

I do do that, George.

I actually use the products as well.

I try as well during barbecue season.

In terms of thinking about the portfolio packaging businesses, it looks like food and household have finally reached the point where the business in total is earning cost-to-capital and then some.

It looks like it is strategic.

Is that your view at this juncture?

And if we think about plastics in the same way, realizing that the economic environment has not done you any favors in terms of volume.

And maybe it is masking the underlying improvement.

Is plastic strategic?

Can this business ever -- 10 years plus down the road -- earn cost-of-capital?

Well certainly it can.

Everything is possible in life.

I think -- we're disappointed that volumes haven't been better as I'm sure our customers are in the first part of this year.

But as we said I think we expect this to be an up year for that business.

I think next year will be better because of the announcements of the plants closings that we made.

We were talking, just yesterday, we pulled $80 million out of the investment in this business over the last couple of years, I think.

You know it is ours, and we're making it better.

You tell me what is strategic.

What is strategic is always what is doing well.

And a lot of our Company right now is on an upswing, including the plastics part.

Is your expectation it will earn cost-to-capital in the next two years?

I think that's possible.

The last question, I'll turn it over.

You mentioned your customers are really focused on value over volume.

Obviously in the next year or so that becomes an important decision and metric for you all within the beverage can business in North America.

As we think about it, between the plant closings and the new announcements -- Mike is in his new role.

Why should your shareholders and investors have confidence that you get that right over the next year or so?

And what further work do you need to do on that front?

Thanks, have a good quarter.

Well, the big reason, I'll answer it then John maybe you can chime in too.

The big reason that shareholders have confidence is that we're going to get things right is that we're also shareholders.

And it is really more important to this management team than some, I would say,that we perform well.

But do you have some details for him, John, about how we're going to do this?

Yes, well one of the thing is we work or operate in a very competitive environment.

And as you have seen from the actions we have spoken about, we have put an awful lot of emphasis on getting our costs right.

And if you get your costs right, you can be very competitive in the marketplace.

We want to get value for our products, and we have a variety of different, not only initiatives, but renegotiations and negotiations going on.

We want to make sure we're getting value for our product.

And we'll see.

We'll see.

But as we sit here right now, we think we're taking all the necessary steps to make sure that we remain competitive, not only now, but in the future.

And at the same time, getting value for our products.

Thanks a lot.

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

Please proceed with your question.

Hi everybody.

Good morning.

I just want to let Ray know I'm from Cleveland, too.

And I'm probably 10 yards behind Chris Manuel.

But they are coming out with a new beverage product called Red Calf.

It has got half the caffeine, and the latter half of the caffeine is replaced by Valium.

So it might be an interesting product for you.

Thank you very much.

It sounds like maybe you're drinking it.

(Laughter)

Oh my gosh.

And Ray, I just wanted to let you know the Obama Administration and the Pope have both absolved me about futile comments about the death of the beverage camp.

Not many people wanted to talk about it, but aerospace looks like it had a pretty flat quarter.

It is obviously a gem of a business.

Has the new administration, Gates, the DOD, NASA -- do you foresee any major changes that would impact revenues and margins here?

I think John alluded to this or has talked about it.

We have seen it with past administration changes.

Things tend to slow down.

So the traditional hardware business that we have been doing, we haven't been seeing awards being made for a while here.

That is somewhat troublesome.

The other parts of the businesses actually are growing.

Between the antenna and parts business, as well as the service part of the business.

But they are not growing enough to make up for not winning large -- for us, good-sized jobs.

We're chasing a bunch of them.

And hopefully, some of this will start to break.

Whether that is the Obama Administration or any administration.

The other thing that I think is that, the country is running large deficits.

So as the budgetary process goes forward and so forth.

We have got to get a new head of NASA.

We've got to sort out what we are going to do.

I think, though -- you talked about it being a gem of a business, it's rather entrepreneurial, and I think we're going to be fine.

The good thing about it is, Tim, that you can breathe with it up and down a little bit.

It is not heavy fixed cost in that sense.

Got you, got you.

You know we're hopeful of that.

You know you watch everything that goes on with our government these days.

And I'm not going to get into that.

But sort of slowing -- slow to respond in some cases.

And what are their priorities?

Got you.

The other question I had, and I'll end it, too.

And hopefully get credit from you some time in the future.

Is the metal food and household packaging business -- there is kind of -- we have heard mixed results.

The household under the sink, cabinet-type stuff has had somewhat of a slow grow.

But food as we know is still a bull horse if you will.

But has value pricing there been something that has been pushed, and can it continue to help you increase your margins?

Well, I think if I understand your question correctly in terms of how we're pushing our products to our customers, you know we face the significant price increase in terms of tinplate.

And so we have been passing those on.

We have been getting our costs right as we talked about before.

And hopefully we have been getting value for our products.

And I think the results in the first quarter and what we expect for the balance of the year are proof points of that.

Got you.

There has been some sparring in price historically.

But John, you're brought in as a diplomat to smooth that out.

But it would just seem that your prices, in particular, could improve.

Is that fair, or not necessarily?

Well, we try and maximize the value of our products.

Okay, thanks.

Thank you.

We have another follow-up question coming from the line of Chip Dillon.

Please proceed with your question.

Yes, just a quick housekeeping item.

I noticed that the corporate expense line was a bit more elevated than we have typically seen it in recent quarters.

Is there anything going on there we should know there?

And when we forecast a full-year, do you expect it to go up more than a few percent from where it was in 2008?

You're talking about the in the segmented earnings, the undistributed line?

Is that the one you're talking about?

Yes.

Yes, well that is higher this quarter primarily for mark-to-market.

I talked about the thing that happened to us in the fourth quarter, the million dots were the $1 million.

The other thing that -- our compensation plans, our stock base.

So our stock from where we were at the end of the year to the end of the first quarter has gone up some.

So those costs are also in there.

That's primarily it.

Yes, and is there sort of a rule of thumb we should use when the stock goes up or down a point?

How much that would change that line either per quarter or per year?

I think fundamentally if the stock was up $1, there is $1 million dollars in that line if I remember that.

But remember that is a pre-tax number, so after tax it is $0.5 million.

If I remember right, $1 million dollars increases stock prices like $0.5 million on the bottom line.

After tax per year?

Per -- .

Per quarter?

No, per stock price.

So if the stock goes to $60, it is going to be a big number.

I understand that.

But when you said $1 of stock price is about $1 million pre-tax is that per quarter or per year?

Well, it is $1 million dollars on that undistributed line.

So the cost of our equity programs go up, increased by $1 million.

So that line increases by $1 million.

But then, you tax-effect it, and it is $0.5 million by the time you get to the bottom line.

Right, okay.

And then if you look at the -- you mentioned the second quarter in North America and Asia, cans, certainly being better.

But I believe you were referring solely on a sequential basis.

You didn't mean to intend that year-over-year, did you?

No, you are correct on a sequential basis.

Okay, got you.

Thank you.

We have no further questions at this time.

Okay, well this has been a good call.

We appreciate all of you joining us.

Appreciate your help, Mark, on the phone.

We'll talk to you again after the second quarter.

We're looking forward to a good finish to the year.

Thanks for being with us.

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.