Ball Corp (BALL) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you or standing by.

Welcome to the Ball Corporation first quarter 2011 earnings conference call.

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

Afterwards we will conduct a question and answer session.

(Operator Instructions) As a reminder, this conference is being recorded Thursday, April 28, 2011.

I would now like to turn the conference over to John Hayes, President and CEO.

Please go ahead.

Thank you, Edison, and good morning, everyone.

This is Ball Corporations conference call regarding the Company's first quarter 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 on the Company's latest 10-K and in other SEC filings, as well as the Company's news releases.

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 web site.

Joining me on the call today are Ray Seabrook, Chief Operating Officer of Global Packaging, and Scott Morrison, Senior Vice President and Chief Financial Officer.

In a moment, Scott will discuss our progress from a financial point of view, and Ray will follow up with details about the progress we are making in our packaging operations.

I will close with comments on aerospace and the outlook for the balance of the year and beyond.

As mentioned in our press release, Ball reported very strong first-quarter results, due largely to strong volume growth in our global beverage can businesses and strong operating performance across all of our packaging businesses.

Excellent performance in our aerospace business, continued double-digit growth in the emerging markets, particularly China and Brazil.

Benefit from our prior actions to better match our supply with market demand here in North America.

And better-than-anticipated performance from our recent M&A activity.

In addition to our strong results in the quarter, we also closed on the Aerocan acquisition, successfully started up beverage can lines in Tres Rios, Brazil and Belgrade, Serbia, began construction on a new plant in Alagoinhas, Brazil, and formed a joint venture in Vietnam.

Our aerospace business won additional work, ramped up hiring for new programs, and increased quarter end backlog to more than $1 billion.

As you see, it's a busy and exciting time to be at Ball Corporation.

Recall that our strategy revolves around maximizing the value of our existing businesses, broadening our geographic reach, aligning ourselves with winning customers and markets, expanding into new products and capabilities, and lastly, leveraging our technology in new product development (inaudible) abilities.

And over the past period of time, we've been successfully executing on just that.

Our announcement early in the quarter of realigning our 12-ounce and specialty beverage can capacity in the US sets our North American beverage can business up well for the balance of the year and beyond.

The new capacity in eastern Europe, Brazil, China, and Southeast Asia allows us to participate in strong growth now and in the future.

Our slug and extruded aluminum acquisitions position us well for what we believe are good global growth opportunities, and have hit the ground running in terms of performance.

And our new product development activities continue to pay dividends, with new investments in our Alumi-Tech bottle technology and our specialty can capabilities.

In fact, our new products and specialty can growth around the world is up approximately 30% year over year, and our expectation is that this will condition.

All of this would not be possible without our talented and dedicated people who take true ownership in all that we do on a daily basis.

In summary, we have good momentum in our business as we enter the seasonally strong summer season.

And our investments in the future that Ray will discuss key us up well in the future.

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

Thanks, John.

Ball's comparable diluted earnings per share in the first quarter were $0.58 versus last year's $0.43.

The following factors contributed to improved results.

Growth in and consolidation of our majority-owned Brazilian joint venture as the first quarter of Brazil is seasonally strong.

Volume improvements and excellent operating performance in our global metal packaging businesses.

Inventory holding gains in our food and household segment added a few cents in the quarter.

Exceptional program performance in our aerospace business.

A lower share count.

And six additional accounting days in the quarter compared to the first quarter of 2010.

Since there are still only 365 days in a year, this means there will be six fewer accounting days in the fourth quarter of 2011.

These positive factors were partially offset by a year-over-year increase in corporate undistributed, primarily due to higher incentive accruals, an increase in the effective tax rate, and higher interest expense.

The euro had essentially no impact to earnings in the quarter.

Also in the quarter, the Company recorded a $6.4 million after-tax charge or $0.04 per diluted share for the closure of our Torrance, California beverage container facility.

For a complete summary of first quarter results on a GAAP and non-GAAP basis, please refer to the notes section of today's earnings release.

As an update to the 2011 financial metrics provided on our January call, we anticipate full-year interest expense to be closer to $185 million, up $5 million over previous estimates due to the recent strengthening of the euro.

With the growing contribution of earnings from our beverage America's segment, our full-year effective tax rate will now be closer to 32%, up from the prior indication of 31%.

As indicated in January, 2011 CapEx will be approximately $500 million.

Each of these CapEx projects exceeds our after tax investment hurdle within three years.

And Ray will provide an update on these projects in a minute.

Given our strong performance, we expect corporate undistributed to run in the low $70 millions for the full year versus the low $60 millions that I mentioned on the January call.

We continue to expect 2011 free cash flow of at least $400 million, with the majority of free cash flow going to share repurchases.

In the quarter we acquired a net $150 million of stock.

And as of today's call, we've acquired approximately a net $180 million of stock since the beginning of the year.

At current exchange rates, year-end net debt is expected to be approximately $2.9 billion, up slightly due to the Aerocan acquisition and cash being oriented to share repurchases and dividends versus debt paydown.

Our balance sheet is solid, our capital structure is highly competitive, and the operations are providing high-quality results and strong cash flow.

We will continue our longstanding approach to balanced capital deployment and consistently return value to our shareholders through share repurchases and dividends.

With that, I'll turn it over to Ray to talk more about the packaging operations.

Thanks, Scott.

It is an exciting time to be serving the Company as the Global Packaging COO.

As John said, we have a lot going, and it's all real good.

It's also reassuring to me to see firsthand that we have a lot of outstanding, dedicated people that work for our Company.

Metal beverage America Asia segment reported considerably higher earnings for the quarter, due mainly to the inclusion of Brazil earnings, which were not in the first-quarter 2010 results, and higher sales volumes in all geographic areas.

Excluding the effect of six additional days in the quarter, as Scott talked about, normalized sales volumes in North America were up mid-single digits, and normalized sales volumes were up in Brazil and China more than 15%.

We continue to see earnings growth opportunities in north America as we lower our cost structure, improve our manufacturing footprint, and develop innovative products like the Alumi-Tech bottle.

All of our major capital projects are on time and within budget.

The relocation of a 12-ounce can line to Whitby, Ontario from Torrance, California is, scheduled to start up by mid May.

A new 16/24-ounce swing line will be installed and running in our Fort Worth plant by September.

And the Torrance plant is scheduled for closure in the fourth quarter.

All of these activities will contribute to second half and Q2 year's results.

Beverage can growth continues strong in both Brazil and China, and to keep pace we have announced plans to build a new beverage can plant in Alagoinhas, Brazil.

We are also replacing existing beverage can plant in Qingdao, China with a much larger, more modern plant.

We expect to be making commercial cans by the end of 2011 in Qingdao, and in early 2012 in Alagoinhas.

Turning to Europe, our acquisition of Ball Aerocan on January 18 of this year is off to an excellent start.

Sales and earnings exceeded the acquisition plan in the quarter, and sales volumes in this product line are up over 20% year over year.

Metal beverage, Europe's normalized sales volumes, are also up mid-single digits in the first quarter.

And the sale of beverage cans in Germany continues to grow.

We foresee German beverage can growth in the range of 50% this year.

Market growth continues, and we have just finished the installation of a second can line at our Belgrade, Serbia, plant.

And our supply-demand balance in Europe remains very tight.

The metal food and household product results in the quarter benefited from volume gains in aerosol containers, earnings from the aluminum slug business we acquired in mid 2010, and some small inventory gains, as Scott talked about.

Normalized food can volumes were a little soft in the first quarter, but manufacturing performance in this sector was excellent.

To sum up, our operations are performing well.

We are seeing increased demand in our businesses throughout the world, and we are investing in our operations for continued growth.

With that, I'll turn it back to you, John.

Thanks, Ray.

A few comments on aerospace, and then the outlook.

Our aerospace and technologies business reported near double-digit EBIT margins in the first quarter.

Earnings increased primarily due to continued excellent program performance.

Backlog, as I said, ended the quarter at more than $1 billion.

Under the US government's continuing resolution, only a few of our programs are experiencing funding issues, and the outlook in total is positive for the remainder of 2011.

Multi-year programs and associated hiring are ramping up.

And we plan to expand our satellite manufacturing building later on this year to provide the necessary infrastructure to execute on these new wins.

We're keeping a close eye on the activities in Washington, and we believe our ability to deliver value-based capabilities in terms of cost, quality, and schedule, that are strategically important to our customer base, sets us up well for the next couple of years.

In summary, Ball Corporation's improved year-to-date performance is due to the execution of our strategy.

We are maximizing our returns in cash flow and mature markets, broadening our product portfolio, growing in emerging markets, and providing technology and innovation to our customers.

And our shareholders are benefiting from our customer-led focus-type discipline and balanced approach to deploying capital, as Scott said.

We fully expect to generate 2011 results in excess of those in 2010, and we are well on our way to achieving our long-term goal of 10% to 15% earnings growth per year.

With that, Edison, we're ready for questions.

(Operator Instructions) George Staphos from Bank of America/Merrill Lynch.

Good morning.

Ray, good to have you on the call again.

The first question I had, could you go back and repeat what the timing of the startups on the replacement plant in Qingdao and the new plant in Brazil are?

And to the extent possible, can you remind us or provide what the customer base is for each, you know, remind us on the contracts presale nature, et cetera, if possible?

Thank you.

That's a lot of questions, George.

Qingdao, we need can by December.

So we expect that to be starting up probably mid-to late December.

So that's Qingdau.

Alagainhas is a probably March startup for that plant.

The main customer base for both plants is beer.

We have, I believe, a seven-year contract in Brazil.

And we have contracts that support the Qingdau plant.

Did I answer all the questions, or did I miss one?

And I'm guessing that the contracts, or the volume anticipates pretty much all required from the key customers.

There's not any capacity on the come?

No.

Yes, it's all sold out.

Thank you.

Second question I had relates to the European beverage can market.

I think you mentioned that you are sold out.

Have you experienced, nonetheless, any price compression or margin compression in any of the regions?

Some of the reports who have reported thus far suggest that there were some pockets of price competition during the quarter, for the outlook for 2011.

We're a competitive industry.

There's always competition.

We do remain tight.

I believe, as they say, if things go according to plan, we may need to add more capacity in Europe if the market continues to grow.

The price, we have experienced some price issues.

And we've walked away from some business on price.

There's no use trying to get business that -- we're filling up our capacity with our best business.

Ghansham Panjabi from Robert W.

Baird.

Hi, guys, good morning.

It looks like your big beer customers in North America seem to have raised prices on their sub premium brands, which has riven some level of premiumization, benefiting glass, to some extent, at the expense of cans.

I think the CMI numbers support that for the first quarter anyway.

Can you touch on what you saw in 1Q specific to beer, just given your large exposure towards the sub category?

Thanks.

Ghansham, this is John.

I'll take that.

Recall over the past couple years, the share of the can as a percentage of the packaging has gone up from, call it, 48% to 52%.

So we've been a beneficiary relative to other substrates.

I think first quarter, it was a little bit soft but not abnormally soft.

I think it was down about 1% or so.

But let's remember that's the January through March, it's not the time that people are going to be drinking beer.

Many customers have been focusing on value over volume.

I think the conversations we've been having with them suggest that they are very much focused on trying to grow their brands.

Yes, they have created less of a differential between the premium and sub premium, but we're still pretty constructive on what's going on in the beer industry for the can.

Okay.

And just switching to soft drinks, can you just update us on your thoughts on what we should expect going forward, particularly given that your customers are digesting some pretty heavy rum increases of what's inside the can, not just the can itself?

And I'm curious as to whether you think they've cut back on promotional spending just to offset some of that margin pressure?

I don't think I know the answer to that, Ghansham.

Here's what I can tell you.

Obviously, we've got a fairly big market share in the US, so we deal with everybody.

What we're seeing is different customers doing different things.

We have some customers that are, quite frankly, fairly aggressive in the US.

And we have some that are less.

It's a bit of a mixed bag.

One final one, if I could.

There's been some talk about Russia potentially banning beer and PET which could occur by ' 13.

I know previously you had plans for a plant in the country.

Can you update us on that?

We have a plant in Russia, and it makes good economic sense for us to stay in Russia, we will.

We haven't announced anything yet because we haven't found the right entry point relative to customers where we could make a decent return.

Your mention about PET, our understanding it's not gone into law yet but is certainly being bantered around [Azuma] which is the government body in Russia.

So we'll see how that develops, and that could be a positive outcome for the industry.

Alton Stump with Longbow Research.

Good morning.

It's actually Phil Terpolilli calling in for Alton.

A lot of our questions have been answered, but we just had a quick one.

If there's any ballpark estimate you might have on America's Beverage, especially North America.

You mentioned mid-single digit growth.

What percentage of that is coming from maybe contract wins or new business this year?

Thanks.

If you recall over the last 12 days to 18 months, we've talked about in 2010 we were going to be taking a step down, and we'd be getting back in 2011 back to the 2008-2009 levels.

That's exactly where we are right now.

And what that means on a year-over-year basis is, as we said, mid-single digits increases over 2010.

We're entering the busy summer selling season, so we have had only a first quarter under our belt.

But we expect exactly what we said in January to be occurring through 2011.

Chris Manuel with Key Bank Capital Markets.

Good morning, gentlemen.

I think last quarter I commented that they had some big shoes to fill.

Given what you guys are doing thus far it seems like you're stepping into them pretty well.

Appreciate that.

But one quarter doesn't a year or a decade make.

As we said, in January, and we say it now, we have good moment in our business, we have people focused.

We're very much focused on the execution of our capital projects in Touchwood.

It is only the end of April now, but thing are going well at the Company.

That's what I like to hear.

That you're still going at it.

So I did have a couple of questions for you here.

First, let's talk for a second about the aerospace side of the business.

If memory serves, that's almost a record backlog, I believe.

How does that start to get monetized through as we look over the next 12 to 24 months?

Can that get back the kind of record EBIT levels here, or how should we think about that?

Recall back in August of last year, we really won four big programs in the satellite side of the business.

Some of them are classified so we can't talk about them.

But these are multi-year programs.

What we said is, as they begin to ramp up in 2011, we'll get some benefit.

But, really, as we go into '12 and '13, that's what will come in.

The only caution I will note relative to that is that the funding at the US government level is still unclear.

We're operating under a continuing resolution right now.

We've got debt ceiling issues.

And until the September timeframe when the fiscal 2012 budget is put into place, we won't have better visibility than we do now.

What I will tell you, and I said in my prepared remarks, is that the wins that we have are very strategic for our customer base.

And we believe that one of the reasons that we won some of this business is because we have shown an ability to deliver good value, good quality on a good timeline at a low cost.

So it set us up nicely as we go into 2012 and '13.

That's helpful.

And then one other question.

As you look at the metal gains you had in the quarter, is there a way you can help us to quantify those so we can get a sense of trajectory here into 2Q, 3Q or will some of those also continue into 2Q, as well?

No, I mentioned that in the food and household segment we had just a few cents.

It wasn't a huge impact, and going forward it really is nothing.

It shouldn't affect the numbers as we look forward throughout the rest of the year.

Okay.

Then in that metal, food, household section -- I'm sorry, the European section, it did take a big step up, and I'm assuming a chunk of that's Aerocan.

Can you maybe give us a sense as to what the revenue and the EBIT were in that business?

You want me to do that, John?

Yes, go ahead.

The revenue is about $100 million.

I'm talking US dollars now.

Of course, they're running that business in euros.

But $100 million is the revenue, and call it $7 million is the contribution.

Mark Wilde with Deutsche Bank.

Good morning.

Is it possible to give a little bit of color on what might have gone on in the first quarter in terms of just North American food can volumes?

Your numbers sound like they were pretty much down the line with the industry.

But it seems like a pretty big drop for a relatively stable business.

Yes, we're still looking at that.

Our volume probably normalized we're down probably in the neighborhood of 4% on the food side.

And they were probably up 5% or 6% in aerosol.

And they're still soft, as we speak.

Some of it's timing, I think.

Some of it's, steel guys have raised the prices on steel to a point where I think our customers are sitting on some inventories they're trying to get rid of before they pull the cans.

Remember, this is a very seasonal business.

Just because they haven't pulled them now doesn't mean it's not going to be a good pack.

I'm not sure that's totally what you're looking for.

But it has been a lift little soft here to date.

We expect it to pick up when some of our customers' inventories are pulled down.

Okay.

And a couple questions on Brazil.

Can you quantify the impact from the benefit from increasing your position in the joint venture in Brazil?

Yes.

I'll take it first and then Scott, you can come in.

Remember, what we did was we went from a 50/50 unconsolidated joint venture to a 60% consolidated joint venture.

So when you look at not only the contribution at the EBIT line but also the equity line last year and the non-controlling interest line this year and netting them, you really only have a slight improvement given the 10% increase in ownership.

I think what you're seeing also, though, is the benefit of the growth in Brazil that the business is performing well.

Scott, do you have anything else?

No, that's it.

Going forward you'll see the 40% that we don't own coming out in non controlling interest.

Okay.

Do you have a sense, just based on the first quarter, about how Brazilian volumes are doing this year?

Just for the market as a whole?

Yes, I think the market is up 12%, 13%, we're up a little higher than that.

Chip Dillon with Credit Suisse.

Yes, good morning.

I probably missed this but could you just again verify the volume in beverage cans in Europe, what the change was?

And if you could isolate what it would have been without the improvement in Germany.

I don't know if I can isolate it without the improvement in Germany.

But I would tell you our beverage can volumes are up 4% in Europe in the first quarter.

Yes.

Let's recall also, Germany we've had some good improvement there, but it was off a very small base.

And so yes, it was a portion of the growth that Ray just mentioned, but it certainly wasn't all of it by any stretch.

Got you.

And then in terms of the Eurocan acquisition you closed on last year, my understanding is that this business was -- I don't want to say left for dead but was not performing well under its previous owner five or six years ago.

And maybe you could just talk a little bit about what turned that around, what the market changes have been that provide acceptance for their particular technologies.

And what you expect that business to size at, say, three to five years from now, whether it's organic or through acquisition.

This is John.

Maybe I'll take a first crack and then turn it over to Ray.

Recall in January, we talked a bit about this.

Five years ago, it was an underperforming business in a larger conglomerate.

And they had several facilities that were losing money.

They had some accounting issues in certain plants.

And they ultimately LBO'd it with the local management.

And that local management did a wonderful job of cleaning things up.

They closed a facility in Spain.

They fixed the plants in France.

They significantly expanded their Eastern European presence.

And they were doing this all at the time when the markets started improving from a demand point of view.

So as we looked at the acquisition, it was a very well-run business with some good growth potential, some embedded capability from not only a technology point of view but from a fixed cost absorption, as you add incremental capacity in the Eastern European facility.

And so it's all good.

And maybe, Ray, if you want to talk about what we're seeing now and as we go forward.

Yes.

Basically we just approved some more capital.

We're installing another line in the facility that John just talked about.

And, quite frankly, we're sold out in that business.

And I told you year-over-year volumes are up 20% in the first quarter.

We continue to see growth, not only in Europe but worldwide in that business.

So, we're looking to see what we can do to continue to expedite our look at that business.

Now, I did misspeak one before, is that, what I said was we had $100 million in sales in the first quarter.

It's more like $40 million.

I picked the wrong number.

It's more like $40 million of sales and $7 million of EBIT.

As we go forward, just to give context, the global aerosol, aluminum aerosol market is approximately 6 billion units.

It depends on how you look at it, but go with us on that.

Europe's about half of that, a little bit less, but about half of that.

And we've got a 20% share.

The growth rates in Europe are quite strong right now.

This is a lot about beauty and other things like that.

It's not about paint, it's not about general line, and we're seeing good growth there.

There's opportunities in North America, as we said before.

Opportunities in South America, where the strongest growth is probably occurring down in South America.

And even in Asia, there's good growth opportunity.

So we got into this business thinking that we have some capabilities to provide to the business.

It has some capabilities that we can help to leverage as we look in other places.

And that's exactly what we're attempting to do here.

And then, one quick followup.

Thank you very much for that.

As we look around the world, the only place that I know of, and you may know of others, John and Ray, where you see in essence new entrants into beverage cans.

There's, I believe, a Chinese company in Vietnam that is building a plant that I believe is based on steel as opposed to aluminum.

Would you say that's a one-off situation, or do you see competitors coming in?

When you're talking about Vietnam, that's an announced plant.

I'm not sure they're really going to build it.

They've announced they're going to do it but I don't know if they're actually going to do it.

We have competitors.

We tend to run into the same competitors worldwide.

When I look at the world market in beverage cans, we have more competitors in Asia than anywhere else.

If you look at Asia, there is more competitors, it seems to be, in Asia.

We tend to run into the same probably four competitors, three or four competitors, pretty much the rest of the world.

You might have a straggler here or there.

But I would say the more competitors we see are in Asia.

Richard Skidmore with Goldman Sachs.

Just wanted to follow up a bit on Brazil and how you see the supply and demand dynamic evolving in Brazil over the next couple of years given both your capacity expansion and what you're seeing with some of your competitors.

A lot of it's to do with beer.

I think beer penetration is still in the low 30%.

When you look at developed markets, it usually gets to 50%-ish.

We've continued to see growth.

They've got the World Cup and the Olympics coming to Brazil.

There is inflation.

They've tried to slow the economy down a little bit.

They put some taxes on some things.

I don't think it's without bumps, but I think Brazil's pretty much still sold out on cans.

You've heard all our competitors announce, we've announced expansion, but it's really to fill the growth in.

And we're trying not to put capacity in unless we know exactly where it's going.

We're not just building something for the sake of building it.

I continue to see growth in Brazil.

I think the next three, four, five years will still be reasonably strong.

I think that we'll take our fair share of the growth, as well as our competitors.

And I see Brazil as a good place to be doing business right now.

John, do you have anything to add?

Yes, let's not forget in context, 2010, it was short 1.5 billion, 2 billion cans that were imported from other regions.

So they're starting in a hole going into 2011, a big hole.

And, as Ray said, we continue to see strong industry growth there.

And on a base of, call it, $18 billion plus or minus, and you can do the math there, that's 3 billion or 4 billion cans that are needed in 2011 that weren't being supplied locally in 2010.

So you think about that and extrapolate, and given the embedded growth that we believe, related to some of the things Ray mentioned, we think the prospects over the next couple of years are very constructive.

Having said that, we also are very cognizant of what we're doing, and making sure that our contracts are tied up and that we're not over building relative to the demand that we see from our customer base.

And just on that, in terms of the contracts, are the contracts essentially guaranteed such that if the customer chooses then not to build their facility, do you get some remuneration for your investment?

Or is it essentially you then just have to do what you did with the Poland plant and ultimately not start it up and relocate it somewhere else?

Suffice to say -- we're not going to get into specifics of our contracts -- but suffice to say that we feel confident that we have the necessary provisions in place to adequately protect the risk management of these contracts.

Peter Ruschmeier with Barclays Capital.

Good morning.

Congratulations on a strong quarter.

Ray, welcome back to the call.

I wanted to ask, if I could operationally, can you talk more about Belgrade, Serbia, and Tres Rios?

How is it performing versus expectations?

Maybe remind us what kind of learning curve you'd expect and whether there was any startup cost that was incurred in the quarter and how we should think about that learning curve going forward.

You mentioned Tres Rios, the startup in our Brazilian operations has been probably some of the best I've seen in my whole career.

These plant we put in, we spent a lot of money to put them, and I guess it showed when we start them up because they just started up impeccably.

The startups in Brazil, I would say, have been the best we've ever had.

They just start up, and we're making quality cans, a lot of them, right off the bat.

And we just recently installed that line in Serbia.

I think it made its first cans a couple week ago.

So we're still in the startup phase.

So it's just really starting up.

But I'm not expecting any difficulties.

Touch wood, we've been real fortunate the last few years that our startups have gone probably better than expected.

And in terms of learning curve, do you think Serbia could be up and going full in 6 to 9 months?

No, no.

I think -- as I said, capacity is tight in Europe.

I need cans this year, I need cans by mid May out of Serbia.

So, we're going to be, as I said, our supply/demand in Europe is tight.

I need those cans this year.

It's going to be producing quality commercial cans mid May, and it's going to be running flat out pretty quickly here.

Okay.

I'm curious on some of the growth in Brazil.

Maybe John, if you could help us to understand the organic growth versus the share gains, as you see some of the trade up from a returnable bottle market into more of a one-way package market.

If you were to think about bifurcating the demand growth, how would you do that?

I think when you look at overall literage of beer and soft drink, that continues to grow strong, and a lot of it is growing because it's not necessarily in the Rio areas, in the Sao Paolo areas, although that's growing nicely.

But you're seeing it in the north, you're seeing it in the northeast, in some of the more developing areas within Brazil.

As we said, a lot of infrastructure is going in those areas.

For example, the World Cup, they're going to be in eight different cities, so it's not just in Rio and in Sao Paolo.

So that's driving it.

And you combine that with a package share penetration, as Ray said, in the mid-30%s, and we think there's some upward mobility, it's going to provide some additional acceleration of the beverage can over the next couple of years.

Do we expect it to last forever?

No, probably not.

But certainly over the next few years given the infrastructure build and the dynamics we just talked about, we think there's some good runway there.

Okay.

And maybe lastly, back in the US, I'm curious if you can talk about a relatively small market, but the microbrews and the trends you're seeing there, both in terms of pack, pack types, growth rates?

Any color you can offer

Yes.

The craft beer market's been certainly a bright spot in terms of volume relative to not only us but the overall beer category.

It's the fastest growing segment within the beer category.

Cans five years ago were effectively nothing in that segment, and they are growing very, very strong.

And as it takes hold with some of the smaller ones, the question remains is, will it start to take hold with some of the larger craft beer makers.

All I'd say is stay tuned on that.

Philip Ng with Jefferies.

Good morning, guys.

Just a quick question.

You mentioned how in Asia some of your competitors are generally smaller.

When they do add capacity, are they locking up long-term contracts?

And are they setting it up in a similar fashion, as well?

I don't know the answer to that.

As I say, I think some of our competitors are.

I don't think they all are.

You got to remember, some of our competitors are state-owned companies in China.

Owned by the government.

So I think they do sometimes things a little differently than we do, quite frankly.

And I think that our worldwide competitors probably do things more similar to what we do.

But, China, just to give you a sense, we are importing cans into China.

We are sold out, as we speak.

And so that's why I said I need that capacity in Qingdao by December.

The market is increasing in China.

I think the beer penetration's at 4% or something like that.

So you can see that if that moves up a little bit, you're going to need more can plants in China.

So we're looking at that, we're studying that, we're making sure that we get, again, our fair share of whatever's happening over there.

But China tends to not necessarily work exactly like more of the rest of the world because we have more competitors there that do things maybe a little bit differently than we do.

Okay.

That's helpful.

And just for modeling purposes, you're America's beverage segment obviously, you're seeing a nice lift from Brazil, from the consolidation and some of your investments flowing through more fully.

Should we expect margins to be pretty stable across the board throughout the quarters now?

We always have seasonal upticks in the second and third quarter of North America when we get the volume upticks, the margins look a little better.

But until we get a full year of Brazil in our numbers, it's going to dampen the seasonality we've had in the past.

Because their busy time is the first and fourth quarters.

And our busy time is the second and third quarters.

So it should bring the margins a little bit closer over time.

But you've got to get a full year before that really starts to happen.

So you should still see a modest up, of sorts, step in 2Q and 3Q?

Yes, yes.

That's the busiest time.

And the US business, obviously, is much larger than the Brazilian business.

Albert Kabili with Macquarie.

Thanks.

Just to clarify on Europe beverage cans, the 4% volume growth.

Was that also adjusted for the 6 extra days during the quarter?

That was adjusted.

If you didn't adjust it, it would look more like 10% or 11%.

Okay, fair enough.

And also a follow-up question on Brazil.

Do you have next year any meaningful contracts coming up for renewal in Brazil next year?

How we should think about -- I know you've locked up some of the new capacity you've added, but wondered some of the existing contracts that are out there how those come up.

We have one contract that's coming up at the end of '11.

And we're negotiating it now and I'm not expecting any issues.

It represents probably 20% of our business, 15% to 20%.

Okay, thank you.

And then also on the food can business, any questions on productivity?

I know with the Richmond, Canada closure last year, can you just update us if the cost savings there will start accruing, or if you saw some of that benefit already in the first quarter?

No, we haven't seen the benefit.

We are in the process of relocating that equipment, as we speak.

A lot of those cans that will be used in this year's pack have already been made.

They were made in Richmond.

And you won't see the benefit of that probably until next year.

Okay.

Final question.

Certainly the euro, from where we're at today, certainly looks like it's going to be a nice tailwind starting in second quarter here.

Are there any hedges that you have out there that would impact how we think about FX?

And also just want to get your view on updates on how you think about hedging in general right here at current exchange rates.

Thanks.

I mentioned in the first quarter, the euro essentially had no impact year over year.

As we sit here now, at $1.47 and moving higher, obviously we'll get the benefit of that as we move through the year.

We do put hedges in place, but we tend to use things where we have upside and protect downside.

And so whatever the euro ends up being, we should translate it fairly close to that number.

Even taking into account our hedges.

But we put downside protection in below certain numbers.

And we're well above those numbers right now.

So we should get the benefit on that side, but that's also pushing up the interest expense a little bit and the debt that we have over in Europe will push it up a little bit.

Tim Thein, Citigroup

Thank you, and congrats, again on a strong quarter.

I want to circle back on the specialty can growth.

I think you had mentioned earlier that you had quoted 30% global growth.

Can you just provide a little bit of color in terms of the regional breakdown and maybe certain regions that contributed to that growth?

I don't have that in front of me.

But we are seeing strong specialty growth.

Ray mentioned the 16 and 24-ounce particularly.

But even our new 7.5 ounce can size here in North America.

Down in Brazil we have a sleek can that's growing.

And then even in Europe, whether it's 15 cl or going up to 568 cl.

I think brand owners are looking at trying to differentiate their brands and position of brands relative to being a little bit more distinguished to the consumer.

And given that we have a large, relatively large portion of our output that has the capability of becoming specialty, we're benefiting from that.

And can you still, John, get paid for that kind of innovation in term of the margins?

I know in recent years, up to, say, two or three years ago, before more capacity was allocated to the segment, the margins that at least one of your competitors had quoted, it was up to 3X a conventional can.

Not to pin you down on the exact numbers, but is there still a nice premium margin for specialty relative to conventional?

By definition there should be because we're investing in it.

If you want to get an appropriate return on investment you ought to be getting better than just the steady state.

Okay, but is that true in Europe?

Yes.

I think it's generally true wherever we are.

Okay.

Coming back, did you say on Aerocan it was 7 million euros of EBIT on $40 million of sales?

I said it was $40 million -- dollars -- of US sales and $7 million of EBIT.

Approximately.

All right.

Do you guys see, your EVA model, is this deal going to be accretive by the second year, or maybe even the first year?

It's accretive now.

As I said in my prepared remarks, we really hit the ground running with all of our M&A activity relative to our expectations.

And the folks over in the Aerocan business, the folks in the former Newman Aluminum business are doing a great job and we're quite excited about it.

Dan Khoshaba from KSA Capital.

Good morning, guys.

Just looking at some of your recent competitors and the increasing capital expenditures, and your increasing capital expenditures, the whole industry's done a great job investing and making these plans come on time and getting great returns.

But I was thinking back, after looking at those numbers, that for the last 20 years, I think you guys would probably agree, the industry benefited during times when capital expenditures were coming in, and operating rates were tight.

And it allows you to have pricing, and wonderful things happened in terms of performance and stock prices and all those things.

All of a sudden, we're seeing CapEx for the entire industry, not just you guys, for everybody -- and, again, I think the industry structure's a lot different.

But you have to be wondering, or at least thinking, what's different this time so that the increase in CapEx that is happening throughout the industry doesn't lead to what it led to back in the -- I guess it would have been the mid-1990s probably, right?

In terms of returns.

So how do you think about that, and when will you know?

I guess you never really know, but you get my point.

Dan, let me just quickly walk through.

Number one, and I'll speak to our capital, obviously, we're a very different business than we were back then.

And the capital investments we're making right now are very diversified, and they're for varying reasons.

You go into Asia, Ray just said we're importing cans right now into China.

So we need that capacity.

You go to Brazil, I said that the capacity last year as an industry, we believe, was short 1.5 billion to 2 billion cans, and it's growing 15% to 20% year over year.

Over in Europe, as Ray said, we are short cans, and we need cans out of Serbia.

Then here in North America, it was more of a cost play, that we actually closed, took out a bunch of fixed costs and took some of that equipment, moved it up into Whitby, Ontario and saved a bunch of freight.

And we were able to install a new line, 16- and 24-ounce line.

And, remember, Torrance made 16-ounce, so we needed some 16-ounce capability in a segment of the North American market that's growing 30%.

All of those are very different.

It's fair to take a look from a top-level down looking at it.

But when you look at it bottoms up, we feel pretty confident in what we're talking about.

And as we have been saying for a number of months, we're very much focused on the execution.

We're not going to get over our skis, but we think these are good return opportunities for us.

Right.

So then the answer is that the drivers are different than they were, perhaps, 15 years ago?

Yes.

And remember, Dan, a lot of it, us and our competitors, a lot of the spending is in emerging markets.

That wasn't the case before.

Sure.

That is a big difference.

Yes.

Ray, good to hear you.

I appreciate it.

Good quarter, guys.

George Staphos of Bank of America.

Thanks, hi, guys.

A couple questions.

One, what's the latest on BPA and your coating supplier's ability to provide you an alternative that's BPA free, if required by your customers, without getting into the science and whether there's any real fact to whether it should be in the first place a concern for people.

But what's your supplier's ability to help you right now?

We won't get into facts since no one else seems to be getting into facts about BPA.

But the reality is, let's talk about beverage on one hand and food on the other.

On the beverage can side, we are testing various internal coatings, and we believe that if push comes to shove we will be in reasonably good position to execute on the BPA front on the beverage side.

On the food can side, it varies so much because there's a tremendous amount of different specs relative to if you're talking about tomatoes or if you're talking about green beans or other food stuff.

We will be having approximately 20% of our cans in BPA non-intent this year, and we think we can go over 50% next year.

And we are struggling with some categories, but those categories we're struggling with are not an important part of our business.

Okay.

So you, John, if I heard you right, you said you would have the capability of being BPA-free in roughly 20% of your specs in food right now?

Yes.

That's what we're currently targeting.

And discussions continue with the coating supplier.

One thing that I was thinking about, both off of this call and some of the others that have occurred this morning, obviously there's a lot of discussion about food inflation and whether that's having an effect on demand or not.

And I was wondering, do you think, realizing that you're, probably unintentionally, but nonetheless biased, do you think that an environment where you start to see food inflation once again impacting grocery demand, that the food can would hold up relatively better or relatively worse relative to other products that are packaged and other packaging materials, do you think?

We have always tried to, at least internally look at economic cycles, inflation cycles relative to the products that we serve.

And there is a strong case to be made that we ought to be better off relative to other packaging types in times where the consumer has less money in their pocket.

And whether that's an economic cycle or an inflationary cycle, we haven't been able to draw a direct correlation to that.

But I think intuition would suggest that.

We've seen a bit softness this quarter, but as Ray said, it's the first quarter, the seasonal pack is really coming up.

It largely has to do with what we believe are inventories being held by customers.

I think as time goes on, George, we'll see better visibility as to if that thesis holds true.

Last question.

Over the last 20 years, you've seen this conversion that's occurred gradually over time in food cans from three to two piece.

You had, Milwaukee and Columbus, your competitor in Owatonna see conversions.

Would a two-piece can provide a cost benefit to your customer?

And what I'm thinking about is how do you preserve the can's place in the grocery aisle and the center of the store when you've had so much in the way of template increases?

Or, are the capital issues associated with two piece and the lack of flexibility still impediments and so your share has settled out from an industry standpoint now where it likely will settle out in terms of two versus three piece?

And part of the question behind the question is, if there was opportunity to move more towards two piece, then that would be another way that you could over time balance the 12-ounce market in beverage in the US.

What are your thoughts there?

Possibly, George.

This is Ray.

The trouble with two piece is you need a lot of volume in the same size.

So you start changing sizes or diameter or heights on cans, it doesn't bode well for two piece.

You need 500 million, 600 million units in the same size, otherwise it doesn't work for two piece.

Yes, the two piece is probably a slightly lower cost technology, but you got to have the volume.

So over time, things with higher volumes have migrated to two piece, but a lot of what's left in three piece, it's different sizes, diameters, shapes, and it doesn't have enough volume to justify two piece.

So all that's happened, I believe, and I think as, let's face it, as long as steel stays competitive to the other product traits, food can is going to be just fine.

One last thing to play on that is, there is a very bill infrastructure in place in terms of processing food cans.

And to recapitalize that for no volume, that's a consideration on our customers' minds.

Christopher Manuel with KeyBanc Capital Markets.

Two quick ones.

And they center on the same thing.

As you're looking out today at, you've been very active on the acquisition front in the last couple of years.

And you found some really terrific opportunities that you're moving forward with.

What are you seeing as you look out today?

Are you finding any opportunities or any specific geographies?

How do you think about new product sets again, things of that nature?

Let me first talk generally about capital allocation because that's what you're getting to, and then maybe I'll try as best I can to talk about specifics.

We've created a lot of value at this Company over the years by taking the cash flow and deploying it in three ways.

Number one, through acquisition.

Number two, through investments internally through internal growth CapEx projects.

And three, through return of capital via share repurchase and dividends.

That is not changing.

In any given year, there's a relative prioritization that occurs given the opportunity set that you see out there.

We've been able to be patient and tenacious at the same time around some of these acquisitions and we will continue to do so.

As any company that looks at acquisitions, we at any given time have a number of pokers in the fire, so to speak, and you never know when those will hit.

And today's no different than it is right now.

As Scott has said in his comments, we are investing internally in CapEx.

We've talked about that.

And unless something else happens on the M&A side, we're going to be delivering the balance of our cash flow to share repurchase and dividends.

So I know I'm not specifically talking about the acquisitions that you'd like me to, but I think it would be premature to do that.

That's fair.

And, to be clear, I'm in no way questioning your ability to redeploy capital.

You have an outstanding record over the past few years of doing that using all three of the levers you suggested.

But as a followup, as we think about the next, let's call it, 12 to 24 months, obviously right now you're in a bigger capital spurt as you're adding some capacity in numerous environments.

And you laid out that $200 million is more of a maintenance level, given some of the commentary in the press release today.

How does that move forward the next 24 to 36 months as you think about opportunity that you see today?

Do you still continue to see more opportunities to deploy above maintenance-oriented capital levels, or do you think that moves back closer to that $200 million, $250-ish million level over the next couple of years?

I think what we've said is this is probably higher than what we'd expect as we go forward.

Scott had mentioned that certainly in the January call.

Again, it is opportunity specific from a bottoms up.

We would expect our capital to be coming down.

But at the same time, if the markets continue to grow like they are, we want to be responsive to that.

And a good example of that is the Aerocan business that we recently acquired.

We ha thought we would have to put capital in late this year or early next year to fund some of this growth, and it happened more quickly so we're accelerating that a bit It was always in our plans, but the timing of it relative to late this year to versus earlier this year, that's a good example of how you can never predict this to an exact science.

But we would expect over time, absent good projects out there, for it certainly to be coming down.

Chip Dillon with Credit Suisse.

One of your big competitors has been on quite a tear in terms of building capacity, as you know.

It's very clear, I think, to a number of us, that they are probably going to down throttle quite a bit next year.

It may be early days, but you mentioned, John, opportunities.

Do you think -- let's just make the assumption that that is their strategy -- that there might be increased potential for more plants like you're doing now in China and Brazil as we look at '12 and '13?

It's always difficult to predict.

We're very customer focused, we talk about that.

And our philosophy around capital is we'll do it on the back of a long-term agreement with our customers.

We've been very successful doing that.

And to the extent our customers see value in continuing to do that, we're going to consider it.

But I do think it is premature to be talking about that.

But we want to keep up, as Ray has said, we want to keep up with our relative share of the growth.

And we fully expect to do that.

And would it be fair to say -- again, it's early days -- but you look at Brazil, a lot of what's happened there seems like is a bit of catch-up to handle the fact that they're importing cans.

Whereas my perception is that Asia still has a lot more to go.

As you look at your 3 to 5 year plan, would you agree with that, that probably relative to each other, that Asia has probably more growth potential than Latin America?

I think that's generally true.

And let me just give you two data points that would help support that.

Number one, it's the largest beer market in the world in terms of overall consumption of beer.

And number two, as Ray said, it's got a 4% or 5% can share as a percent of the package mix.

So you combine those two, and there's only one way to go for the can.

Whereas in Brazil, is good, strong growth market, but it already has mid-30%s penetration.

Mr.

Hayes, there are no further questions.

Okay, excellent.

Thank you, Edison.

And thanks, everyone, for participating on the call.

I have one announcement we'd like to make.

On October 10 and 11 here in Colorado, we're going to be having an investor field trip.

Ann Scott will be reaching out to others but if you want to mark your calendars on that.

Again, thank you for your participation.

We look forward to catching up with everyone on our second-quarter call.

Ladies and gentlemen, this does conclude the conference call for today.

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