Ball Corp (BALL) 2011 Q3 法說會逐字稿

Welcome to the Ball Corporation third quarter 2011 earnings 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, October 27, 2011.

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

Please go ahead.

Good morning, everyone.

Thank you, Edison.

This is Ball Corporation's conference call regarding the Company's third quarter 2011 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 results or outcomes to differ are in the Company's latest 10-K and in other Company SEC filings as well as the Company news releases.

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

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

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

In a moment, Scott will discuss our results, and Ray will follow up with details about 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 improved third quarter results despite a difficult economic environment in most of our key markets.

After starting slow, global demand for beverage cans accelerated toward the end of the quarter and improved throughout the quarter in every market or nearly every market.

The numerous CapEx projects in packaging and aerospace are proceeding nicely and are on budget and on time.

Recent M&A investments continue to perform very well and are above expectations.

As many of you know, we held an investor conference out here in Colorado 2 weeks ago.

Over 40 investors and analysts participated, and we certainly appreciate all of you who came.

At our conference, we discussed our Drive for 10 vision for the Company and the areas in which we are providing increased emphasis.

As we look to the future, we know and are focused on those things that have made us successful in the past, including prudent risk management and disciplined capital deployment.

I will not go into all that we discussed on today's call, but if you'd like a transcript, please feel free to reach out to Ann Scott, our Director of Investor Relations.

She can provide you with the transcript and background materials that were reviewed.

Our global employee team continues to do a great job of executing on our strategy, including maximizing the value of our existing businesses while capitalizing on growth and emerging markets and offering our customers a variety of new products from which they can grow and win in the marketplace.

These efforts are providing Ball with opportunities to finish up the year strong and to grow in 2012 and beyond.

With that, I will turn it over to Scott.

Thanks, John.

Ball's comparable diluted earnings per share in the second quarter were $0.81 versus last year's $0.70, a 16% year-over-year improvement.

The following factors contributed to improved results.

The consolidation of our majority-owned Brazilian JV, the acquisition of the extruded aluminum business in Europe, volume improvements in North America, Brazil, and China, exceptional program performance in our aerospace business, benefits of share repurchases, a lower effective tax rate largely driven by tax benefits from foreign exchange on a local currency basis in Brazil, and a $0.02 FX translation benefit in the quarter.

These positive factors were partially offset by a year-over-year increase in net interest expense due to our recent acquisition and the consolidation of Brazil.

As a reminder, the first 9 months' performance was favorably impacted by 6 additional accounting days in the first quarter compared to the first quarter of 2010.

The fourth quarter will include 6 fewer accounting days than the prior year.

So, when we talk about comparable volumes, we are adjusting the first 9 months' volumes to reflect the extra days.

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

Turning to full-year financial metrics.

We expect CapEx will approach $500 million.

We also expect 2011 free cash flow to be at least $400 million.

We plan to repurchase at least $450 million of our shares, and through the first 9 months of 2011, we acquired a net $381 million of stock.

At current exchange rates, year-end net debt is expected to be a little over $3 billion.

The full year effective tax rate will run under 31%.

Our solid balance sheet and highly competitive capital structure allowed the Company to operate from a position of strength.

We will continue executing our longstanding value creation model of balanced capital deployment and consistently returning value to our shareholders through share repurchases and dividends.

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

Thanks, Scott.

Beverage can volumes were up in the quarter in the Americas and the Asia segment and are up through the first 9 months.

In the quarter, US volumes were up slightly.

Brazil volumes were up in the mid-single-digits, and China volumes were up in the mid-teens.

Segment operating earnings were hurt in the quarter due to out of pattern freight incurred while supporting our manufacturing realignment projects as well as unfavorable sales mix in Brazil.

Out of pattern freight should now subside with the completion of these projects in the US.

The North American capital spending projects are virtually complete.

The new Whitby and Fort Worth can lines have been installed and are running well.

The new Alumi-Tek bottle can line being installed in our Golden, Colorado plant will be making commercial cans in early November.

The new can lines being built in Brazil and Vietnam are on schedule and on budget.

Our new China can plant being built in Qingdao is now expected to be online in January 2012.

We look forward to continuing strong volume growth in China in 2012 and expect to be able to sell every can we make in China again next year.

The cool, wet summer in Northern Europe negatively impacted our beverage can volumes in the quarter but had little impact on the aluminum aerosol volumes.

Beverage can volumes were down high single-digits in the quarter but continue to be up slightly through the first 9 months.

Ball Aerocan's aluminum aerosol volumes were up 20% compared to last year in the quarter and year-to-date.

Weather conditions also impacted volumes in the US Metal Food and Household Products segment.

The South was too hot and dry, and the Midwest too wet.

Overall, our volumes in the quarter were off mid-single-digits, and manufacturing costs were a little higher due to production curtailments.

As we start the fourth quarter, the weather has been much better in North America and Europe.

So far, beverage can sales are ahead of expectations.

Our plants are performing very well, and we look forward to finishing this year with a positive traction as we get set for another very busy year in 2012.

With that, I will turn it back to John.

Thanks, Ray.

A few comments on Aerospace, and then, the outlook.

Our Aerospace and Technology business posted double-digit EBIT margins in the third quarter.

Earnings increased primarily due to the continued excellent program performance.

Backlog ended the quarter at $986 million versus backlog at the end of the second quarter of $903 million.

Ball Aerospace's capabilities are strategically important to our customers, and our focus on delivering best-cost, best-value solutions is allowing our backlog to continue to grow.

From a funding perspective, most of the 2012 projects are in good shape.

In terms of program highlights, NPP is scheduled for launch tomorrow from Vandenberg Air Force Base.

NPP is a new generation of earth-observing satellite that will have the ability to measure a wide variety of atmospheric issues including ozone and other climate-related items.

Also during the quarter, we delivered software that is key to the James Webb Space Telescope program.

During our recent investor field trip, guests viewed one of the 18 mirror segments that were performance-based as a single monolithic mirror.

So, in summary for the Corporation, we overcame a pretty tough economic environment during the third quarter and feel good about the rest of the year.

July and August were pretty challenging, and by September, things started bouncing back.

Despite 7% fewer accounting days in the fourth quarter, we anticipate a strong close to 2011, and certainly, momentum headed into 2012.

With that, Edison, we are ready to take questions.

(Operator Instructions) Our first question comes from the line of George Staphos with Bank of America Maryland.

Please proceed.

Thanks.

Hi.

Good morning.

A couple questions.

John, maybe I will start with the final question, usually.

In terms of the outlook, you said you expect to close strongly despite the fewer shipping days.

Should we take that as an increase in earnings year-on-year versus the fourth quarter?

And just for the record, what was the fourth quarter 2010 from an EPS standpoint from your vantage point?

I believe it was $0.53 last year, George.

That was, I know, up well over 20% from the year prior.

We do have 6 fewer days in the fourth quarter, but despite this, we feel good going into the fourth quarter.

Volumes have appeared to stabilize and are now growing again in most of our businesses which provide the momentum that I talked about.

The tough comp that we have in the fewer days create a hole from which we need to overcome, but at this time, we think we can accomplish that.

And, we could do a little bit better, but we will see.

Okay.

I appreciate the color.

With Aerospace, we were pleased to see the backlog pick up.

To the extent that you can comment on these sorts of things, where did you see the backlog pick up in terms of types of programs or markets?

George, I think it was a little bit more of a timing issue.

If you recall in the second quarter, that's right when the US deficit issue was ongoing in Congress and so, a lot of the funding for those programs had stalled.

Once we got past at least that short-term hurdle, we were able to see some of the funding come back area.

Okay.

Now, you mentioned that you feel pretty good about the funding through '12.

Should we read into that that you are less certain -- I guess that would be obvious -- but, maybe more than we would want you to feel less certain about the outlook for '13 funding?

Nothing abnormal, George.

We are not aware of anything.

As we all know, the US government is going through some difficult challenges, but we know nothing that says anything is at risk more than it typically would be.

I've talked in the past about a lot of what we do -- are very strategic to what we do as a country, and some of these are replacement-type things.

We believe the funding should be good.

But, again, we are dealing with Washington.

So, one never knows.

Last one.

What are your customers telling you about Europe and the outlook for next year in terms of beverage cans in particular?

[Word is] the operating rates -- one of your packaging peers, although in a different substrate today, was talking about perhaps taking prices up for 2012.

How do you think that all flushes out as you think about the year next year?

Thanks.

Yes, George.

This is Ray.

I think that we were -- without this volume shortfall that happened to us in July and August, we were thinking of adding capacity because we were fundamentally sold out.

We are going to try to run next year with not adding capacity, but we are going to be tight.

So we are not thinking about reducing prices, that's for sure.

Okay.

Thanks.

I will turn it over.

Thank you.

The next question comes from the line of Ghansham Panjabi with RW Baird.

Please proceed.

Hello.

Good morning.

Good morning.

Ray, could you just clarify what volumes in beverage were down for Europe in the third quarter?

Was that high single-digits?

Is that what you said?

Yes, Europe was down 8%, Ghansham.

Down 8%.

Can you parse that between the different regions?

And, maybe beer versus soft drinks, too?

Well, since we are more heavily weighted to beer, it was more beer than soft drinks.

We are much more -- we are really not located so much in the South, but most of our business is in the North.

So, I think that was -- I think the South was actually a little bit better.

I think when you get into Spain and some of those countries, I don't think the volumes were down quite as bad.

But, when you talk about England and Northern Europe, they had just a terrible July and August for weather.

It really impacted us.

Okay.

And just as a follow-up to George's question, on promotional activity.

You touched on Europe.

What are your major customers saying about North America?

Because it seems like you and your peers are just mirroring what your customers are seeing in terms of volume weakness.

Maybe there's a little bit of inventory correction.

But, in terms of promotional activity looking out to 2012, is there a reason to be a little bit more optimistic in North America?

I think it depends on the customer.

Some of our customers are actually quite optimistic, and some of them are not as optimistic.

You'd almost have to go through it piece by piece.

But I think we are looking for flat to maybe slightly down.

The market was down close to 3.5% this year -- or 3.8% year-to-date.

We are not looking for any kind of decline anywhere near that next year.

It could be down 1% or flat, but it depends on the customer, quite frankly, George -- Ghansham.

Got it.

Thanks so much.

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

Please proceed.

Thank you.

Good morning.

Good morning.

With the [bev] can volumes in Europe, just to clarify -- [having] mentioned that they are trending ahead of expectations so far in the fourth quarter.

Does that mean that you think you'll see core growth?

Or, have the declines simply lessened versus 3Q?

The weather in July and August in Northern Europe was -- talking to people that were there, which I wasn't -- but it was the worst they had seen in a long, long time.

I think it really did impact -- every time they got to a weekend, it was cold and rainy.

It really impacted our volumes.

Remember, our European business is our most seasonal businesses.

70% of what we do is in the middle 2 quarters.

It had an impact on us.

In the fourth quarter, the weather seemed to get better.

We were over there in September, and the weather seemed to break.

Ever since September and October, the volumes have been much stronger than we otherwise would have expected to see.

We are expecting to finish up good this year and get back to more of a normal year next year.

Okay.

That's all I have.

Thank you.

The next question comes from the line of Philip Ng with Jefferies.

Please proceed.

Good morning.

You have made a lot of [nuspens] in Asia and Brazil.

In theory, that's a faster growing market.

Nicer margins, in general.

When should we expect some of those returns flowing through and improve margins in that segment?

Is this more of a low teen, mid-teen-type business going forward?

I would -- again, this is Ray.

I think the -- I don't think you are going to see it so much in margins, but I think what you are going to see it in is the top line.

Fundamentally, we are growing the business.

Our margins are -- we think our margins are okay where they are at.

What you are going to see it -- you are going to see it in the top line.

Top line as well as EBIT growth.

EBIT, yes.

I think what Ray is saying is we don't expect to see a significant amount of margin expansion.

Okay.

That's helpful.

Can you talk about trends in Brazil?

Certainly, 2Q was a little soft.

It sounds like things have picked up a bit in 3Q.

I just want to get your thoughts heading into the peak summer season.

As a matter of fact, I was talking to somebody from Brazil yesterday, and they said that the weather is starting to get a lot better.

Our volumes, certainly, picked up near the end of the quarter.

We were up high single-digits.

We are expecting to be up.

Year-to-date, we are not up as much because we had a very slow second quarter, but we are expecting to pick a lot of that up in the fourth quarter.

Okay.

Thanks.

(Operator Instructions) Our next question comes from the line of Chip Dillon with Vertical Research Partners.

Please proceed.

Yes.

Thank you.

Good morning.

Could you -- first question is, could you talk a little bit about what you think has changed with your customers, especially in beer.

Is it just, you think, the debt crisis and the macro discussions that were going on in August?

Or is there something else going on that would have explained the weak July, August, and then, the much stronger September.

I know the weather was a factor, but normally, I think your customers tend to let their inventories go down, especially in Europe this time of year.

This is John.

I will take that, and then, maybe turn it over to Ray.

It really was a weather -- I'm presuming you are talking about Europe, so, I will focus my comments on Europe.

Yes, primarily.

It really was a weather issue.

The way that the beer gets sold throughout the summer, people were not having their barbecues on the weekends.

People were not out in the pubs.

It literally was -- in Fahrenheit terms -- 55, 65 degrees and raining the whole time.

That is just not conducive to beer drinking.

When we talked to our customers, and you look at some of the public comments of many of our customers that operate in Western and Northwestern Europe, you see exactly what we are talking about.

Got you.

You gave us a good roadmap in Colorado a couple weeks ago.

Could you just update us on the specific timing -- I believe, in addition to China which you mentioned first quarter -- and this may be more for Ray.

When you expect the Brazil plant and the Vietnam plant to start up?

Maybe it is early days, but what comes behind this?

You suggested that given your market share, you could justify doing 3 plants a year.

Well, Brazil -- actually, Brazil plant comes up in March.

The Vietnam plant comes up in March.

We saw, again, some numbers yesterday when our Board were in.

Vietnam is sold out, as we speak.

Brazil, we have our long-term contract, and we expect that to be sold out as well.

When we turn to China, and we look at our -- one of our strategies is to keep our capacity utilization in balance.

I could see, potentially, relocating another line from the US into China next year.

We do have to continue to expand China.

I think I said when you were out here, we expect [1.4 billion] cans to be additional volume next year for us.

The year after that, we've got the same thing going on.

So, we've got to get capacity in to meet it.

And, do you expect as you do this that most of what you are building is actually taking share from other substrates?

Or is all of that growth?

Is all of it just market growth?

No, not at all.

Well, it's a combination of both.

It's can penetration, and it's also market growth.

Got you.

Thank you.

Thank you.

The next question comes from the line of Phil Gresh with JPMorgan.

Please proceed.

Good morning.

Good morning.

Wondering if you could just elaborate on the out of pattern freight that you talked about?

How much did that impact the quarter?

It was probably in the mid-single-digits in terms of cost -- millions of [dollars].

We have a little bit of inflation.

Remember in a lot of our contracts, we have a lag in terms of pass-through of inflation.

So there's a little bit of that, too.

But, nothing -- really out of the ordinary.

The out-of-pattern shipping and warehousing is pretty much done now.

Okay.

And then in the Americas -- Food side.

Could you talk about the trends in food versus aerosol?

You said down mid-single for the whole business, but maybe just parse that out?

What we said was down 4% in the quarter for food.

That wasn't the whole business.

Our aerosol business is down a little bit more than that.

The reason is that we had lost some business in the first quarter to a competitor.

Now, I know that the CMI numbers -- it looks like the market is down more than it really is because the competitor that we lost that business to -- their numbers are not in the CMI numbers.

So, the market's not -- the aerosol market's not down that much.

The fortunate part for us is, the business that we lost was pretty low margin business for us.

Got it.

How are you thinking about fourth quarter trends on the food side?

Well, the food business -- you remember, we are more heavily weighted to [veggies], the seasonal, than probably some of our competitors are.

When we finished the third quarter -- aerosol is not that way -- but when you talk about the food side, there's not a lot to be done.

We have obviously got some shipping and some things to do, but the food business is fundamentally done for us at the end of the third quarter.

That's not the case with aerosol.

So we expect, the fourth quarter to be less than last year.

We would still expect to make more in our food can business in 2011 than we did in 2010.

Got it.

Thank you.

Our next question is a follow-up question from the line of George Staphos with Bank of America Merrill Lynch.

Please proceed.

Thanks.

Hello.

It was great going down in Golden again and seeing the facility.

It's amazing how efficient that plant is even though it dates back to the 60's.

I was wondering, directionally, can you comment -- is there further room to improve within North America on things like skeleton, metal usage, and line speeds?

In other words, how do you keep improving returns within an existing base of investment that has been around for a number of years?

How would you size that for us right now?

I will start, and I will pass it over to John, George.

One of the things that I'm always amazed at -- remember my -- if you go back, I'm kind of a financial guy in my background.

But, the strength of our Company really rests on our plant floor.

When you go into those plants and most guys that work there -- I'm always amazed at the quality of the people and the expertise of our people.

The law of diminishing returns is, obviously, it gets harder and harder all the time.

I guarantee you every year we put together our plans and operating plants, and there's always performance improvements that those plants generated.

If there is one thing I can tell you -- the one thing I have all the confidence in the world in -- it's our people that work in the plants.

They just do a tremendous job.

They really do.

In fact, if you look over the past couple years since we acquired the former metal container plants, some of those efficiencies have actually accelerated.

We've put some new systems in place to help provide the data in a more predictive way.

Our guys are just doing a fantastic job.

We expect as we go forward to be able to continue to get more efficiency out of these plants.

People always think that there has to be a curve that starts to slow down.

I am sure there is one, but our guys have proven that we haven't seen the end yet.

John, could you size the improvement in productivity one way or another?

Either output can grow a percent a year?

Or, you can keep the output the same but reduce the investment by a percent a year?

How would you, if you would, have us think about that?

Here is what happens, George.

As we make improvements and the output improves, that means that since the market is not growing that means that we free up assets.

I just said that, fundamentally, I probably expect to relocate another can line to an emerging market this year.

The reason I expect to do that is the efficiencies we are talking about.

Fair point, Ray.

I guess the other question I had, maybe to wrap up from our side.

What are the imperatives as you see them for 2012?

Are there going to be any changes in incentive comp?

Or how are you going to align incentive comp around those imperatives as you look at?

I realize it's not January yet.

But, if you have an early read on that, we'd appreciate it.

Thanks.

George, as you know, our incentive comp from our level all the way down to the plant floor in many cases is based on return on investments.

We've been investing a lot this year.

Next year is about getting the returns from those investments.

A lot of next year is about execution on the projects that have gone in.

Whether it is the Alumi-Tek line in Golden that's up later this month, early November.

Whether it is about [Whidbey] and Fort Worth that Ray talked about.

Whether it's about Brazil.

Whether it's about Qingdao.

Whether it's about Vietnam.

It's time to start generating the return from those investments that are just getting put in the ground.

Thank you.

Thanks.

Our next question is a follow-up question from the line of Chip Dillon with Vertical Research Partners.

Please proceed.

Yes, hello.

When you go back and look over the last 2 years and what is kind of interesting is 2 years ago was just after you closed on the metal container, or were about to.

You have basically used all of your free cash flow, and maybe even then some to buy back stock.

I guess just as you think about it, fundamentally next year, is that something that we would expect to see continue?

Said differently, let's say you don't find a major -- obviously, if you find a major acquisition that makes sense, you don't want to push the envelope too far.

Barring that, is there any reason why you wouldn't continue to use all your free cash flow essentially to buy back stock?

No -- this is Scott.

Actually, if you look back over the last 24 months, by the end of this year, we will have bought back about $1 billion of stock.

We will have made $0.5 billion of acquisitions and a $0.5 billion of investments in growth capital.

When I talked before about balanced capital deployment, we can do a lot of things at the same time.

The cash machine has been growing.

If you recall, when you were here at the investor conference, I showed how the free cash flow has been growing over the last decade or so.

With the investments that we're making, we expect that to continue to grow.

It gives us even more capability to continue to do a variety of things at the same time.

Orienting a lot of our free cash flow to buying back our stock -- we don't have much in the way of debt maturities.

Our balance sheet is in good shape.

We have a lot of liquidity.

I would expect the vast majority of our free cash flow, if not all of it or more, to be going back to be buying back our stock.

Thank you.

While still investing in a lot of growth projects.

Got you.

That's great.

Thanks.

And there are no further questions at this time.

I will turn it back to you, Mr.

Hayes.

Great.

Thank you, Edison.

I appreciate it.

We appreciate all your support, and it was good to see all of you a couple weeks ago.

We look forward to talking to you on our January call.

Everyone have a good quarter.

Ladies and gentlemen, that does include your conference call for today.

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