Ball Corp (BALL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation third-quarter earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded Thursday, October 30, 2014.

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

Please proceed.

Thank you, Edison, and good morning, everyone.

This is Ball Corporation's conference call regarding the Company's third-quarter 2014 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 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 is Scott Morrison, Senior Vice President and Chief Financial Officer.

I will provide a brief overview of our Company's performance, Scott will discuss financial and global packaging metrics, and then I will finish up with comments on our aerospace business and the outlook for the remainder of 2014.

In short, we had a solid third quarter, with strong beverage and aerospace operating performance and a lower tax rate offsetting weaker can demand in Brazil and North American food.

During the third quarter, many of the second-half themes that we referenced in our last earnings call came true.

Volume comps were challenging year over year, aluminum headwinds remained, and our food and household segment continued to work through operational challenges at our US metal service center.

In spite of these challenges, there were a number of highlights as well.

Lower operating costs in our European beverage can segment offset the LME premia headwinds we expected.

Continued specialty can and beer container growth in North America nearly offset weaker demand for standard carbonated soft drink containers.

Strong performance in our European impact extruded aluminum and aerospace businesses continued.

Ball was again selected for the Dow Jones Sustainability World and North American indices for the second time in a row.

Our food and household products business received a Partner to Win supplier award from Unilever.

And the Ball-built WorldView-3 satellite was successfully launched from Vandenberg Air Force Base.

As we close out 2014, we remain very focused on controlling the things we can control and managing through the slow growth environment.

Given our year-to-date results and cash flow -- very strong cash flow generation, 2014 is shaping up to be a very strong year for Ball Corporation.

And with that, I'll turn it over to Scott for a review of our third-quarter numbers.

Scott?

Thanks, John.

Ball's comparable diluted earnings per share were $1.10 versus last year's $1.00.

In addition to John's comments around operating performance and a lower tax rate, a lower share count also contributed to our improved results.

During the first nine months, we acquired a net $308 million of stock and returned another $55 million to shareholders in the form of dividends.

And for 2014, the majority of our free cash flow is expected to be returned to shareholders via share repurchases and dividends.

For the full year, there are a few minor tweaks to our 2014 financial metrics.

Free cash flow is now expected to exceed $600 million.

Share buybacks will continue to be in the range of $500 million.

CapEx should end the year around $375 million if ongoing project dollars are spent on schedule.

Interest expense will be closer to $160 million.

The effective tax rate is now expected to be in the range of 25%, primarily due to the release of some uncertain tax positions due to the lapses of the statute of limitations.

And full-year corporate undistributed is now expected to be closer to $85 million due to higher medical and incentive compensation costs.

Net balance sheet debt at the end of the quarter was approximately $3.1 billion.

Credit quality and liquidity of the Company remains quite solid, with comparable EBIT to interest coverage of 5.7 times and net debt to comparable EBITDA at 2.5 times.

Committed credit and available liquidity at quarter end was in excess of $1 billion.

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.

Also as a heads-up for the fourth quarter, Ball will record a non-cash charge of approximately $40 million related to a settlement of pension obligations for certain former employees.

The settlement should reduce the Company's pension liabilities by approximately $80 million at year end and generate ongoing administrative and PBGC premium savings for the Company's US pension plans.

Now moving to operations, our metal beverage Americas and Asia segment comparable earnings were roughly flat versus third-quarter 2013.

While operating performance was excellent at the plant level and mid-single-digit volume growth in China and double-digit specialty can growth in North America contributed to segment results, mid-teens volume declined in Ball's Brazilian business post-World Cup due to the segment's third-quarter performance.

Ultimately, Ball's mix of customers underperformed the overall market post the World Cup, resulting in us underperforming the Brazilian canned industry, which was up around 1% in the third quarter.

More importantly, as we head into the fourth quarter in Brazil, the summer selling season is upon us, and we expect Ball's volumes to bounce back to seasonal fourth-quarter norms.

European segment profit was up roughly $3 million in the third quarter on essentially flat volumes, and aluminum premium headwinds being more than offset by anticipated cost-out efforts.

As John briefly touched on, the OME premium is meaningfully higher than it was in our last conference call, and we expect EUR6 million of premium cost to flow through in the fourth quarter.

Depending on the strength of the fourth quarter volumes, our ongoing cost savings initiatives might be enough to offset the aluminum premium headwinds for the remainder of this year.

Food and household comparable segment earnings were down approximately [$15 million] in the quarter, as segment volume declines and manufacturing inefficiencies in our US metal service center pressured the results.

More specifically, North American food can volumes were down nearly 8%, with about half the decline due to a very poor salmon pack.

On the flipside, our extruded -- European extruded aluminum business continues to perform at a high level.

As the food and household segment enters 2015, improving operating efficiencies, pruning the manufacturing footprint, and related administrative and plant headcounts are items within our control, and the team is executing on these initiatives to ensure a right-sized cost base after the January 1, 2015 customer shift.

In summary, our global beverage operating team continues to execute on near-term capital projects that will improve our business in North America, Europe, and Asia in the second half of 2015 while also identifying additional cost-efficient, high-returning growth opportunities to benefit Ball in future years.

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

Great.

Thanks, Scott.

Our aerospace business continues to exceed expectations.

During the quarter, solid execution, a flawless on-orbit deployment of a Ball-built satellite, and niche product wins for antennas and sensors are some of the highlights.

Contracted backlog ended the quarter at $846 million.

And while we have secured some smaller contract awards in the third quarter, larger programs that we are in the process of bidding on are expected to be awarded either late this year or more likely in 2015.

Overall, government contracting continues to slide slightly to the right, and we are keeping a close eye on this during the election cycle.

Now looking out across our Company today, we are pleased with our year-to-date results and the incredible employee effort it took to accomplish them.

Though some challenges still exist, there are also many opportunities to improve our businesses going forward.

With nine months under our belt, we remain confident in our ability to achieve our long-term diluted EPS growth goal of 10% to 15% per year while growing both our EVA dollars and, as we've done for the prior five years, returning nearly all the free cash flow back to our fellow shareholders.

And with that, Edison, we are ready for questions.

(Operator Instructions) Ghansham Panjabi, Robert W. Baird.

First off for the volume declines in Brazil, is it a customer-specific issue that maybe impacted numbers during the third quarter?

Any specific region within Brazil that stood out as particularly weak?

And also can you quantify what is actually happening in October there?

Ghansham, this is Scott.

It really is customer specific.

Our customer base wasn't one of the official sponsors of the World Cup.

And the other customers, I think, saw a bump in the second quarter, and I think that carried into the third quarter.

And so it really was customer specific, I don't think anything to get too alarmed about.

We are seeing -- we're only one month into the fourth quarter, but it appears like it's tracking back to normal and what we would have expected, so expect the fourth quarter to be more normalized.

Okay.

And then just thinking about 2015, realizing it's a little bit early, but focusing on Americas, Asia.

You do have an FX headwind there.

The World Cup obviously benefited at least part of 2014.

And North American CFG seems to be sort of a sluggish category, and it seems like that's probably a good run rate for next year as well.

Do you actually foresee operating income going up year over year in 2015 for that segment?

Yes, I think -- if you go piece by piece, North American beverage continues to perform very well.

Cost-out activities being very efficient, growth in specialty can is helping to grow earnings and grow EVA dollars in that business.

Brazil, we talked about before.

Even in the second quarter, we thought 2015 would be flatter.

But they are doing some things from a cost-out perspective that I think will help and from efficiency standpoint.

In Asia, the volumes continue to grow.

It's really dependent on pricing, where pricing settles out when you get to the end of this year into next year.

But with volume growth, hopefully we can offset any pricing pressure.

So actually do expect it to grow next year.

Okay.

Thanks so much.

That's helpful.

Chris Manuel, Wells Fargo.

Good morning, gentlemen, and congratulations on a -- or I guess, yes, good morning, and congratulations on a strong quarter.

Thank you --

If I could take one second and focus on the metal food and household, you specifically cited some inefficiencies in service centers.

And I was thinking that you were consolidating a few of those.

Is there anything extra to that, or could you give us some color there?

Yes, you're right, Chris.

We have over the last couple of years consolidated those.

And we've just -- we've had -- there's been a variety of issues.

As I said on the second quarter, some of them had been self-inflicted, some of them have not.

And what I mean by that and give you a little bit more color around that is we have actually put -- we took out some of the excess slack in our capacity.

And when you do that, it puts a higher burden on you to perform, and we haven't been performing as well as we could.

Having said that, we've had some quality issues from some of our metal suppliers in some on-time delivery that has exacerbated that a little bit.

The way -- given that it's a service center and it's on the front end of the manufacturing part of our supply chain, if you will, we did see this coming.

And that's why we said back at the end of the second quarter that for the second half of this year that we would have to kind of flow this through, and that's exactly what we're doing.

We are very much focused.

We think we are on the right track, but it is just going to take a little bit of time.

And as we go into 2015, we expect this to sequentially get much better.

Okay.

And have you quantified what the headwind was for this, or could you?

No.

We talked about -- I think in the second quarter, I did say roughly 1/3d of our decline was related to volume and roughly 2/3 manufacturing, and that held generally true in the third quarter.

Okay, that's helpful.

Last question I had was on aerospace side.

It looked like you had another really strong quarter there.

And were there any elements that were unusual with performance payments?

You mentioned a flawless execution.

Bottom line, I guess what we are trying to get our arms around is how we should think about 2015 as kind of a normalized rate there, given what you see in the backlog and you have today.

Yes, you know it's -- roughly speaking, I think year to date we've made about $70 million of EBIT in that business, and so that averages about $23 million or so.

And I do think that our business has been running well.

I think -- the bigger issue, I think, Chris, is not so much that because we have talked about it being lumpy, and there wasn't anything out of the -- extraordinary in the quarter.

I think it's really as much is to when the government and some of these commercial enterprises are going to start awarding contracts and getting money flowing.

Because like everything with the government, seems like things just start to push out a little bit.

A couple of quarters ago, we thought that we would have a lot of these opportunities decided by the end of 2014, and now it looks like they're kind of split between the end of 2014 and the first quarter of 2015.

And so nothing to be alarmed about; it's just sliding a little bit, and that's really going to be the driver as we go into 2015.

Okay.

Thank you.

Good luck.

Tyler Langton, JPMorgan.

Just had a question on some of the European beverage volumes down a little bit.

Do you think that's more just tough comps, or are you generally seen a slowdown going forward?

And do have any thoughts on what Q4 could look like?

No, it was really tough comps, Tyler.

Last year, if you remember, volumes really started to ramp up in the third quarter and in the fourth quarter.

So we knew we had tougher comps in the second half of the year, and that's all that we are seeing there.

Yes, you know, it's interesting, also.

The weather in the third quarter was not all that good, and you just look at some of our customers' results, both on the soft drink and the beer side.

And when you try and look geography -- region by region what was going on, you really kind of saw it in many different places.

Everywhere from the East to France, Netherlands, UK; they were all softer than we had expected and flat to down slightly, actually.

Thanks.

And are you seeing any signs that's getting a little bit better through October, or is it too early to tell?

Fourth quarter is kind of a slower volume quarter.

I wouldn't expect big trends out of this quarter, but I think it's normalized.

Yes, exactly.

Okay.

And then just with China, I guess you -- how much more with your existing capacity do you think you can continue to grow as you're up mid-single digits this quarter?

Can you -- outside of capacity, can you continue to grow at the market getting your current footprint?

I think we can continue to speed things up.

But those guys are doing a really good job of being able to eke out more and more out of those facilities.

But we are still seeing solid growth, and so we will be careful about how we deploy capital.

But where we think we can get decent returns, we will deploy capital to grow.

Yes, we've been -- as you know, we've been full all year, but we've been able to quote unquote eke out mid to upper single-digit volumes.

So at some point in time, the low-hanging fruit will be over.

But as Scott said, I think that our guys have been doing a very nice job of getting -- sweating the assets.

Okay.

And just last question on working capital, now it looks like it is going to be a strong contributor this year and sort of in the past several years, the same thing.

Is there a lot much more?

I know you're always working to get more, but could it be as big of a contributor just going forward, or do things slow down a little bit?

Every year, I keep thinking we're about done with what we can do.

And our people across the business, in the businesses, in treasury and IT, sourcing have all done a great job of continuing to have various types of programs to eke out more benefits, more dollars out of working capital.

I think we're going to have another decent year this year being a source of funds, and I think it will continue in 2015.

Now, how much beyond that, I don't know.

But I think we will see another benefit next year.

All right, great.

Thanks so much.

Scott Gaffner, Barclays Capital.

Just wanted to focus on the free cash flow for a minute in 2014.

You did take it up by $50 million.

I didn't hear on the CapEx part if you took CapEx down.

But could you walk through the bridge between the $550 million and $600 million of free cash flow in 2014?

It's mostly better working capital.

We still think we're going to spend -- we've got to spend at a pretty good clip in the fourth quarter to get to the $375 million, but we're still thinking we're going to get to the $375 million.

But mostly the change really had to do with working capital.

Certainly relative to prior expectations.

Year over year, it's coming from all that.

I think we have much stronger net income and earnings growth as well as working capital.

Is the better working capital coming from the facility closures, or is there something you can point to that was really driving the better working capital for the year?

I think when you go through our balance sheet, you can see it everywhere.

I think we've done a very good job on the receivables side of it.

We've done an excellent job on the inventory side of it.

Our days outstanding have improved meaningfully.

And then on the payable side, as Scott had mentioned, everywhere from IT to sourcing to manufacturing, our folks have been doing a very good job of not only measuring but managing those things.

Okay.

And when I look at -- you mentioned still thinking $375 million of CapEx in 2014, obviously some of that slipped from, I think, 2013 to 2014 before.

But assuming nothing slips into 2015, what sort of step-down should we assume in CapEx as we move into 2015?

Well, Scott, in my life at Ball, I have never seen capital not slip into the next year (laughter).

So there will be some that will split -- that will slip.

We've got a number of good-size projects we're working on that will go into 2015.

We're adding special capacity in Europe and in North America.

We will be building our Myanmar plant.

We've got some growth in aluminum aerosol.

We're still finding good opportunities to deploy capital and get above target returns.

So right now, to call 2015 CapEx is probably too early, but we will update you as we get it -- get into next year what that might look like.

Sounds good.

Appreciate all the color.

Thanks.

Mark Wilde, Bank of Montreal.

I wondered if we can get just a sense of what you see as underlying beverage can growth outside of North America right now.

What is Brazil doing?

What is the underlying market in China?

And what are you seeing in Europe?

I think one of the bigger trends that we continue to see in most places is the canned continues to take share from other forms of packaging, particularly in the beer category.

And so I do think -- and we've talked about this earlier on the call that there has been a -- in the third quarter, there was a bit of a slow-down in Brazil, for example.

The overall market was much more muted after the World Cup.

There was a mix issue relative to customer base there, but I don't think fundamentally things have changed in a material way.

In Europe, the weather wasn't all that great.

The overall economy is a bit softer than expected in Europe.

But, again, we don't see any trends that are different than what we saw.

Over in Asia, China, and particularly -- but also Southeast Asia, you continue to see beer growing faster than perhaps the herbal teas and the energy drinks and the soft drinks.

And you are seeing cans continue to take share from competitive packages in those categories.

And so nothing fundamentally has changed.

I think there are some issues related to the third quarter that we saw, but we don't expect those to be a trend, so to speak.

Okay.

And then you guys have talked about a new product for an undisclosed customer in North America in 2015.

I wondered when we will be able to get some sense of what the product might be and then the size of that opportunity for Ball.

I think in the -- certainly as we go into 2015 and the first half of 2015, it's something that our customer has asked us not to talk about until they are ready to talk about it, and so we are respecting their wishes.

Okay, that's fine.

Then finally, can you just talk about the metal premium issue as we move toward 2015?

Yes.

It continues to be a headwind.

It was a bigger headwind in the third quarter.

I grew a little bit, so it's even a little larger headwind in the fourth quarter.

And if it doesn't come down, it would be a drag into 2015.

But it's been pretty volatile.

But right now, we said in the fourth quarter, it's probably EUR6 million or EUR7 million different year over year.

All right.

And it sounds, Scott, from just listening to other players in the industry that we are not likely to see terms change contractually over the next year or so with regards to passing that premium on.

Is that your view as well?

Well, you need to have contracts mature and roll off and then renegotiate new contracts.

So you don't get that much of your contracts that roll off each year.

Maybe a third, roughly.

And so on new contracts, I think it's something where it hasn't been just a temporary spike.

It's been pretty much a permanent rise or what appears to be a longer-term rise in the premium.

And so that needs to come into play what we're looking at, what the products should be priced at.

Okay.

All right.

That's helpful.

Good luck in the fourth quarter.

George Staphos, Bank of America Merrill Lynch.

I guess my first question was just a piggyback on Mark's prior question.

You talked about trends not changing relative to third quarter's one-off issues.

But I was hoping you might be able to actually talk specifically about fourth quarter.

In Brazil, are you seeing a year-on-year increase at this juncture in beverage can shipments?

You are recognizing that seasonally things should be picking up anyway.

And for Europe and for China, can you talk to what the early growth rates are in the quarter?

And then on the same topic of growth, if you mentioned it, I had missed it.

What did you say your North American beverage can volumes grew at in 3Q?

Yes, George, this is John.

Let me try and handle that.

It's recognized that the month of October isn't even finished, so it's kind of tough to talk about that.

But in Brazil, as Scott said, we had kind of expected flattish volumes in the second half of this year.

And in the third quarter, they are a bit softer than that.

But we are ramping up towards their summer selling season, and we are seeing much more -- volumes much more getting back to flattish -- it depends as an industry -- maybe up very, very slightly.

But I think for us, and that's all I can comment on right now because I've seen no industry data for us -- down in Brazil, they have bounced back from what was a softer quarter, full stop.

I think in Asia, we're seeing the exact same thing.

We are seeing decent growth there.

And we are -- because we are tight from the capacity point of view, we are trying to sell as many as we can and get as many out the door as we can.

And over in Europe, we have seen -- it really was -- when you go back and look at the quarter, it was really in the month of August that we saw some softness.

And I think as you go into the October, November, December, the biggest time of the quarter -- in the fourth quarter is really the month of late November and December because that's around the Christmas season.

And so it's before that, but everything is going according to what our expectations would be.

Getting back to your question in North America bev, I think the overall market was down, call it, about 1%-ish.

We are about the same as well.

I think when you take a step back, Scott had mentioned our specialty was up double-digit, our beer was up a couple percent, and our soft drink was off 3%-ish plus or minus.

And so that's -- when you weighted-average all that, that's why we are off very slightly relative to being flat.

Thanks for that detail, John.

I want to go back to food and household.

You said that the manufacturing issues were roughly comparable 2Q to 3Q in terms of their proportion of the year-on-year decline if we look at 2Q 2013 to 2Q 2014 and, similarly, 3Q and 3Q.

Yet, if I did my math correctly, the dollar decline in 3Q versus 3Q was greater than what we saw in 2Q.

So was that just the cumulative effect of seasonality and just you have that much more volume in the third quarter, and therefore the inefficiencies were magnified by that?

Or were there some other factors at work?

And then specific to the manufacturing issues, are you having any kind of quality issues either with the sheet you're producing, the declaration you're doing, anything like that?

Or is it more on the -- if you will, the supplier side?

Well, getting to your question, you're absolutely right because the third quarter is a seasonally high selling point for it.

I think it was magnified a bit by that.

And, as you know, when you -- the turns from an inventory perspective in that business are lower than they are in the beverage can business.

And so it takes in time for it to snake through the system, if you will.

And so that's why we are able -- we knew that that was -- as we look forward into the third quarter, that would be forthcoming.

With respect to the quality issues, I don't think that -- it certainly is a combination of things.

But when you are not running smoothly and then you have some quality issues from the metal perspective, I think it puts a little bit more stress on the system.

But, again, I think most of it, we believe, is to be behind us.

Not completely; but as we go into 2015, we feel pretty confident where we sit right now that we've got our hands on the issue and that we're cycling through these issues.

Okay.

And I guess my last question before I turn it over, our rough math would suggest that pension, if we look at current discount rates, might be worth a dime-plus of headwind next year to the Company.

Do you have an official view or unofficial view that you would care to share at this juncture?

And then -- thanks, guys.

I will turn it over.

A little too early to tell, George, because it's all set right at the end of the year.

You're right; right now, if rates stayed where they are at, it's a bit of headwind.

But part of what I mentioned of this paying out certain term-vested pension and reducing our liability will help that income next year.

So that's a plus.

So you have to get through the end of the year to know what it will do.

But I would say net net, it's probably not a big mover one way or the other.

Okay.

Thanks, Scott.

Hello, Edison?

Anthony Pettinari, Citi.

I just had a follow-up question on pack mix shifts.

You talked about the shift to cans you are seeing outside of the US.

And I was just wondering about -- if you could talk about what you seen in the US this year.

It seems like cans have outperformed glass more than some of us had expected.

And I was wondering are your conversations with customers accelerating, or would you expect us to continue into 2015 even if the consumer gets a little bit stronger?

I was just wondering if you provide some detail on what you are seeing in the US.

Yes, I think largely where we've seen the growth -- and you see it from an industry perspective as well as a Ball perspective -- is on the beer side.

And the can as a share of the package mix on the beer side has continued to grow, even through the first three quarters of 2014.

So I think that's a trend that certainly we've been benefiting from.

Some of it has to do with the craft beer that we've talked about in past conference calls; some of it has to do with consumer preferences.

I don't see any appreciable change as we go into 2015.

Obviously it's a bit premature.

But at some point in time, the can will be well penetrated relative to that.

So I would not expect over the long term that we are going to infinitely continue to gain share as a percentage of the package mix, but we have certainly been a beneficiary of it right now.

But we do also at the same time see on the craft side continued good, penetration growth into that area.

Okay, that's helpful.

And then just shifting to food and household, can you talk a little bit more about the India opportunity in extruded aluminum and what your investment there is?

I don't think we have disclosed the size of investment, but it's a decent size but not huge, to be honest.

But it's a great opportunity as that business continues to -- the customer base continues to globalize.

We had a great opportunity to make an investment in there, and we expect kind of by this time next year, we will be up and running.

We are focusing on not only the regional customers but some of the global customers as well.

And while -- as I said, and we are only putting one line initially, so it's not that big of an investment.

I think over time, we will be happy that we have gotten into the business because in India, the market for those containers is $700 million and is growing at 20% plus.

Okay.

So the real earnings contribution there is in 2016, essentially?

Yes.

I think so.

Okay, that's helpful.

I'll turn it over.

Al Kabili, Macquarie.

John, I wanted to circle up with some of your earlier comments on expecting some growth in the Americas and Asia bev segment.

How instrumental do you see North America earnings growth in that view next year?

And I guess that's part one of that question.

I do think there is some earnings growth in North America.

I think both from this mix issue, as it especially continues to grow.

But equally important, we've been spending a lot of time -- and there is a fair amount of fruit we can go after in terms of the freight and logistics and optimizing our footprint perspective.

Over the past several years, we've put some systems in place that have been helpful in terms of providing a level of transparency around our costs on the freight and transportation at a far greater clip than we have had in the past.

And so we have specific plans that we are going after some of those things.

So I think for those two reasons, mix as well as the cost side of our business, I think there's some upside there.

Okay.

And following on that, at this juncture, can you give us a sense maybe what you think the cost-out opportunity is there?

And in addition, is there anything specific that you have visibility on?

Some sort of contractual gains -- specific share gain on cans for next year that belies some of the confidence as well?

I think on the second part first, I just think we have a pretty good footprint in terms of specialty, and that has been growing.

We were overweighted towards beer, and that's been growing.

So I think, qualitatively, we feel okay there.

And then on the cost-out side, it's a bit premature to talk about that.

But it's not insignificant dollars when you think about we've got a base -- we've got a revenue base well in excess of $3 billion there.

And so I think there's real opportunity there.

Okay.

Thank you.

I appreciate that.

And then just the second question is just based on -- assuming aluminum premiums will look like they will continue to be a headwind, what's the opportunity next year?

Some of the -- you've been able with cost outs this year -- you've been quite successful at that, offsetting this.

And what's the opportunity to continue to maybe offset some of the headwinds next year with cost-outs?

And just as some of the contracts roll off, maybe the opportunity to recover some of the loss margin as well?

Thanks, and good luck.

Sure.

Well, our guys continue to be very focused on taking cost out.

I was just with the European guys recently, and they have a number of things that they're working on that will continue to make their business more efficient.

On the contract side, you have to wait until those customer contracts expire, or you are negotiating a new one before you can get any kind of a pass-through or a change in the pricing mechanism so that you are incorporating it into your price.

So that takes a little bit longer.

But in all of our businesses, we are always very focused on costs and making ourselves more efficient, offsetting these kind of headwinds.

The other thing I would add is don't -- let's not forget that we've making an investment to continue to grow our business in Oss in the Netherlands.

In 2013, we have been running full out.

And typically when you run full out with the seasonality that business has, you leave some money on the table relative to some of the freight and other opportunities.

I'd mentioned that we are doing a lot in North America, and we -- I think our European folks are trying to grab on to some of the ideas that our North American people have been doing.

And there's a lot of opportunity, as we get a little bit more capacity, to be able to run a little bit more smoothly.

I think optimizing the shipping lanes and the freight cost, there's going to be some opportunities over time there as well.

Okay, that makes sense.

Thanks a lot, and good luck.

Chip Dillon, Vertical Research Partners.

John, I had a question about the -- I noticed the other day or maybe it was yesterday, you all appointed a new director to the Board.

And I didn't know if that was replacement director or -- and it looks like he has quite a background in aerospace.

And I didn't know if that was basically a sign that maybe you're going to make aerospace a bigger part of what Ball is all about.

Well, a couple of things I'd point out.

Number one, we, like many companies, have mandatory retirements for our directors at 72 years old.

And so, without going into any details, over the next few years we have directors retiring.

And so this was -- Mike is a wonderful person, has a great reputation, has a lot of great experience not only in the aerospace side, but just in general management.

He's a finance person by background.

He ran Boeing Capital for a while, so he has a lot of very good finance expertise.

And as we started talking with him, it just made a lot of sense to get him on board and to help with the transition over time, as by natural forces, some of our Board members retire.

Okay, got you.

And then going back to India, that's been -- obviously not only does it have great opportunity with being the second most populous country, but it's been a challenge for other folks in the packaging business there.

And I was just wondering as you look to India, could we see what looks like to be a food can initiative eventually become a beverage can initiative?

And if it did, does it make sense to -- can you do something like that in baby steps?

Or is, as we've seen in most other places, the scale of investment required make that less likely?

Well, yes.

First on India, just so we're clear, it's actually an aluminum-impact extruded opportunity.

And, as you know, the scale of that relative to putting a beverage can line is very, very different.

And so this is an opportunity for us to start small and grow as that market continues to grow.

Whether or not we then think about using the experience learned in doing business in India and gravitate it over to the beverage can side, that remains to be seen.

But you are right: the scale of beverage can investments, at least historically, have been much greater and very different than impact extruded.

We have, particularly in Asia, our guys have done a very good job of really focusing on how to make smaller-scale investments on the beverage can side.

And it's probably premature to talk about that a little bit.

But we have no specific plans as we sit here today to be announcing and building beverage can capacity in India.

But certainly, you never know.

And then last quick one, I know Brazil has seen a major move in the last five, 10 years in displacing other substrates for aluminum.

And I think in the beer category, we must be pushing the mid-40s in terms of the percent that are in a can.

I think North America is around 55%.

If you could correct those numbers and tell us how many more years you think we would get until we had sort of a saturation point in Brazil.

Well, it's a good question.

I think your numbers are generally in line with what reality is.

In the United States, it's actually even a little bit higher; it's probably 57%, 58%.

It's interesting when you go around the world and you look at it, you look at the can penetration rates.

In the UK, it's north of 60%.

We mentioned the United States.

In other places, it's lower.

It really depends, and there's two factors that go into it.

Number one, it's consumer preference.

But number two, it's also on-trade versus off-trade.

I think down in Brazil, you have seen a shift over time as people have more disposable income that they have been moving a little bit more to the off-trade.

And as they move to the off-trade, they have gone to one-way packaging.

And as they go to one-way packaging, they've gone to the can.

That is a trend that we see time and time again.

And I think even you are seeing it a bit in China, for example, as the can as a share of the package mix continues to grow there.

So I think you're directionally correct.

Will it get to 55%?

Will it get to 60%?

When will it get to that?

It's a bit premature to speculate, but I -- but you are absolutely right, probably six, seven, eight years ago, it was in the 20%, and now it's in the mid-40s.

Okay.

Thank you.

Deborah Jones, Deutsche Bank.

I was hoping you could talk about -- well, there have been a few large M&A moves in the space lately, and I was just wondering about Ball's appetite for M&A right now.

And if you could maybe contrast those opportunities with internal projects or share repurchases.

Yes, well, Debbie, as you know, we are all about EVA discipline.

And we've made a tremendous amount of money over time by being very disciplined around that, and nothing has changed on that front.

Right now, as we sit here, we see more opportunities, actually over the past couple of years, in terms of internal greenfield investments where we have been able to generate returns relative to the prices one has to pay in the M&A world.

Sometimes the M&A world comes and goes depending on financing markets and depending on other things like that.

And so we're going to continue to deploy capital per our EVA discipline, whether internal or external.

And in the meantime, we have created a tremendous amount of value for our shareholders by being disciplined and, if we don't see opportunities, by buying back our stock and returning it to our shareholders that way.

So the key point of all that is nothing is changing.

Okay.

Thanks.

And I guess as a follow-up, if I could just ask a question on China.

Should we expect Ball to grow in line with the industry at this point without adding new capacity?

And then are you more or less optimistic about China then you were maybe six months to a year ago?

Well, I think we're going to -- if it grows it 20%, we're not able to add capacity to that level.

So I think it could get a little smaller from a market share standpoint, but we want to make sure that we are deploying capital where we can make money.

Am I feeling better or worse about it?

It still continues to grow, but there's still a ton of competition, so pricing environment is not as disciplined.

I'm hoping that what we've seen in the last year is the floor pricing, but you never know.

We are trying to focus on all the things that we can control from a cost-out standpoint to make our business more efficient and more profitable without relying upon price recovery.

And if price recovery happens, we'll get a nice leverage on that.

But control what you can control.

Okay, great.

Thanks.

Alex Hutter, Jefferies.

It's actually Phil.

Hopped on a little late.

Question for you, Scott.

Free cash for 2014 coming really strong.

I understand that working capital is quite advantageous this year.

But thinking about 2015, is $600 million a good base to work on going forward?

I'm sorry, what was the number you threw out?

$600 million free cash flow.

For 2015?

Yes.

Yes, it depends on what CapEx is and what working capital is.

So I wouldn't -- I am not -- what I said was that we could continue to generate money out of working capital next year as we did this year.

And I don't think there will be a meaningful difference in CapEx, so I think it should stay relatively high.

I think free cash flow should stay relatively high.

Okay --

Whether it starts with a six or not, I don't know.

Okay, that's helpful.

And then your food can business from a margin standpoint stayed lighter than we expected.

Part of that is obviously the operational setbacks.

How much of that was pricing too?

I understand you guys ceded some price in the quarter.

How should we be thinking about margin next year with one of your lower-margin customers exiting your portfolio?

From a pricing perspective, it was nothing appreciable.

It really had to do with volumes and operating performance that -- Phil, I know you were not on, but we talked about earlier.

So if we want to talk offline or if you want to read the transcript, that's fine.

As we go into next year, margins actually -- on a pure margin basis, it probably should be better.

Because when you look at the mix issues of that, I think it's premature to say because we haven't quantified those things.

But we've already begun to take actions that take additional costs out of our system.

And so from a margin percentage perspective, it should be better next year.

Okay, that's helpful.

And just my last question, on the sheet aluminum business, India is a new opportunity for you.

I would imagine Brazil being a larger opportunity set.

Can you talk about what's available there, or are you guys approaching it more from an M&A standpoint?

Well, I think I would rather not going into any specific details about what our strategic plans are.

But what I would say is on a global basis, there continues to be opportunities.

That package grows; is growing in many places.

The growth is a bit more muted here in the United States, although it is growing here.

A lot of filling is going from the United States down into Mexico, and there is some growth down in South America generally, whether it's Brazil, whether it's Argentina.

In fact, Argentina is quite a large user of those containers.

So we keep our eyes on that.

And it's really a function of where we can generate the most EVA dollars, whether it's greenfield investments or M&A opportunities.

Okay, very helpful.

Thanks.

Adam Josephson, KeyBanc.

Forgive me if my questions were asked; I just got on a bit late.

Just one about 2015, I know it's early, but can you talk about -- in broad terms about which segments you think you can grow next year and profitwise?

Brazil is obviously facing tough comparisons.

North America, both in bev and food, are flattish, modestly down.

Europe is obviously a tough economy at the moment.

And aerospace has had a really terrific year this year.

So I would think the year-ago comparisons next year would be fairly challenging.

So any thoughts you have along those lines would be appreciated.

Well, listen, Scott, why don't you talk about beverage, and I will go through the other one?

Okay.

Yes, we did cover that, but I will give you quick color on that.

That's okay.

North American beverage, we feel pretty good about.

It's all dependent on volume.

What happens with 12-ounce and soft drink business.

But our specialty business continues to grow, and so we've been able to grow earnings and EVA dollars in that business, and we would expect that to continue to occur next year.

China, the volumes continue to grow.

And while the pricing environment remains tough, we've been able to grow volumes and offset some of that price pressure.

We haven't got into the real season of setting the price for next year, so we don't have that good of visibility to what 2015 looks like, but our guys are doing a nice job on the cost side.

In Brazil, we've had -- our business probably didn't get as much of a pop from the World Cup as we thought it would.

And so next year, it does look slower, but I think we can continue to improve the profitability but probably not at the pace that we've had -- a couple of jumps we've had in the last few years.

And in Europe, there's a lot of cost-out still going on.

There's volume growth -- specialty volume growth.

And it depends on does this aluminum premium come off a lot or not.

If it stays high, it is a pretty significant headwind.

So we will see.

But we feel pretty good about where all the businesses are at and, then more importantly, the investments that we are making today that will make our business better later in 2015 and definitely in 2016.

Yes.

And then from a food and household products as well as an aerospace perspective, I think food is going to be challenged and make the profitability just because of this customer shift that is happening 1-1-2015.

Although, having said that, we fully expect to get back on track relative to the operational improvements or issues we've been having in 2014, so that will provide a positive bridge.

It's premature to say can we get back to the full-year 2014 because 2014 isn't even finished.

I think it is a bit of a stretch, but our guys are pushing real hard -- our men and women pushing real hard on that.

And then on the aerospace side, you are right: we have been growing very nicely.

We have a number of proposals outstanding as we go into 2015, so it's dependent upon that.

But I think overall when you take a step back and you think about how we feel not only going into 2015 but longer-term, I think we feel pretty good.

We are making investments in Myanmar.

We are making specialty investments in North America.

We are building -- expanding our footprint in Europe through the AUS.

From a cost-out perspective, we spent a lot of money on the system side of our business, and we see a lot of low-hanging fruit from a freight and warehouse logistics in addition to just continuous improvement there.

And we continue to see opportunities to capture our share of the growth whether it be in the Americas, Europe, or certain parts of Asia.

And so I think we feel okay as we sit here today looking out, saying we can continue to grow our business and make it a stronger, healthier business while at the same time, as I said before, maintaining a very strict discipline around the EVA dollar generation that we always talk about.

Thanks, John.

Thanks, Scott.

And just one on -- John, on North American beverage cans.

How would you characterize the market at the moment?

Obviously, CSD remains fairly weak.

One of your competitors yesterday talked about weakness among the mega-beer brands in the US, but you've got specialty growing for you, obviously, to some extent.

So to what extent is the growth in specialty offsetting these other factors?

And how do you see that playing out beyond this year?

Yes, well, I think earlier -- maybe you weren't on, but we talked about we had growth in specialty and we had growth in beer this year, and soft drink has been down.

I think year to date, we are up slightly.

We are up probably about a percent or so for the full year -- forget about the third quarter for a minute -- and it's driven by growth in specialty, growth in beer, offset by declines in CSD.

We all know that CSD is under a lot of pressure, but let's broaden the definition.

And what I'm talking about not just sodas, but sparkling beverages.

And I think we've seen some good growth in sparkling waters and some other things like that.

I do know that the soda companies are acutely focused on trying to make sure that they are as relevant in today's environment where health and wellness plays a more important part.

Will they be able to turn that tide at a rate better than they have in the past?

It's premature to see.

But I do think as we go into 2015, what I just described, even though some of these quote mega-beer brands are having a little bit of volume issues, the can has been winning relative to other substrates.

And we still have only upper single-digit, if not very low teens, penetration on the craft side.

Thanks a lot, John.

Appreciate it.

Andrew Feinman, Iridian Asset Management.

Given your EVA discipline and the fact that you have been patient, I've been thinking that this was -- this is probably a good opportunity for you to at least consider deploying some capital in the aerospace and technologies business, given the uncertainties in that industry and the prices of those companies have come down.

So then today, you announced this really great new Board member, Michael Cave, who I would think could really help you a lot in that process.

So the question is do you think we might see some opportunities for increases in the value of Ball Corporation through its hidden gem, the aerospace and technologies business, sometime in the investable future?

Yes, Andy, this is John.

Two observations.

Number one is I think in each and every one of our businesses, we are going to continue to be very disciplined on the EVA dollar side of it.

Having said that, I do think that as we look into the aerospace side of the business, there are opportunities, as you point out.

As a wise old colleague once said, you need motive and opportunity at the save time.

And so you have to be patient about these things.

But when you are patient and you are digging hard, opportunities to over time come your way.

And so we have been looking in that area.

Obviously we haven't announced anything.

We made a small acquisition January of last year.

It's doing very well, and it got us into a whole new customer segment, which is great.

So we continue to look at things like that.

So I wouldn't disagree with your thesis that you're laying out.

But obviously we are continuing to focus, but we're going to be disciplined.

Scott Gaffner, Barclays.

Mr. Gaffner, your line is open.

Please proceed with your question and please verify your mute function.

Mark Wilde, Bank of Montreal.

Yes, just a couple of emerging market issues.

One, John, I wonder if you guys can just explain to us how you think about that Indian market for beverage cans.

Because it's just kind of amazing to me that we are seeing so much expansion in Myanmar, Cambodia, Vietnam, elsewhere, and yet the beverage can market in India, relative to the size of the market, seems so, so small at this point.

What will it take for that to grow?

And then the other question I have for you is is there a way to kind of tap into some of these smaller but faster growing markets in places like southern Africa?

Can you build a facility that is less than 800 million cans or 1 billion cans?

Well, as you know, scale is important in beverage cans.

And we also talk about India being India.

Well, there's, I believe, 26 different states there.

Some ban the consumption of alcohol, some do not.

And so you really have to get much more prescriptive in looking at it.

You also have the urban versus rural areas where you have so many people.

But the number of people that can actually consume packaged goods is a very small number, particularly when you look at the price points what they earn versus what it costs to do that type of thing.

And so it's always been the dream that it's going to continue to grow.

But at the end of the day, beverage business remains a scale business, and that even gets to your question about Africa.

There's only a couple of countries to date that have shown any ability to have enough scale where it makes sense.

Whether it's South Africa, whether it's Angola, Nigeria, those are really the three only places other than the far north of Africa that have any kind of beverage can manufacturing facilities.

As that continues to grow and the middle class starts to develop, it's no different than India.

I think that's the most important thing: the middle class has to grow before you see opportunities there.

Okay, that's helpful.

Thanks.

Edison, why don't we -- it's past -- a little bit past the hour, so why don't we just try and take one more question if there are any more?

George Staphos, Bank of America Merrill Lynch.

I will try to ask these in sequence just given it's late in terms of timing.

First of all, John or Scott, would it be possible to parse in your CapEx this year and perhaps next year what you are spending on some of the newer initiatives?

I'm not asking you to identify each one, but if maybe there's a way to aggregate the total that you are spending on the cost-out programs, the new line in North America, Oss, and so on.

Would that be possible at least on a public forum?

Yes, I think -- George, if you think about it, just take $375 million of capital and think -- maintenance capital is probably between $150 million and $200 million.

So you've got a couple hundred million dollars of growth, if you will, growth capital.

When you say cost out, there really hasn't been that much spending on cost out.

Most of the spending that we're doing is on adding really a lot of specialty capacity, whether it's in Europe or North America or, in the past, Brazil or even in Asia.

So a lot of it is growth capital with better-than-typical returns over time.

You've got to mature into those returns.

But they are investments that we are liking to make.

And also in the aluminum aerosol business, we've added some capacity there.

So most of that $200 million of growth is really focused on better-returning type projects and not really -- we had to spend a lot of capital on cost out.

I would say it's a small minority of what we're spending in total.

All right.

So the freight and logistical and all the other points that you made in terms of potential cost-outs for 2015 and beyond, that will require relatively little incremental investment either in terms of capital or, for that matter, other cash costs.

Would that be a fair point?

Yes, I think in the total scheme of things, if you think we're spending $375 million, way less than 10% of it is on cost-out stuff.

Okay.

And then in terms of looking back at third quarter, just from the standpoint of trying to establish a base for the future, would it be fair to say that your profits -- if we actually had visibility into this -- Brazilian profits were clearly down because of your volume decline?

But your North American and Chinese -- Asian, excuse me, profitability was up year on year?

Yes, both those businesses have performed well.

Really, the quarter was all about -- the miss was all about what happened in Brazil and the volumes.

Okay.

The last two and I will turn it over -- China, can you comment at all in terms of whether you are closer than you were, say, three months ago to a new investment there recognizing that will be driven by EVA contracts, et cetera?

And totally switching gears on free cash flow, I recognize you raised free cash flow guidance; a lot of it is from working capital.

But interestingly, the third quarter versus third-quarter free cash performance is actually down.

So was there anything else -- or how do you raise free cash flow guidance despite free cash being down your on year in third quarter?

Thanks, guys, and good luck in the quarter.

Okay.

Well, I guess by the factor of everyday that goes on, we are closer technically to when we spend capital in China.

So I guess we are closer from that standpoint.

But on a serious note, we are continuing to do a good job of getting our cost structure in a place where we can make investments and get the returns.

That's really the magic of future capital spending in China.

We've got to be able to make the returns, not just to grow with the market.

Second part of your question had to do with free cash flow guidance and the change?

Yes, that's correct.

Third quarter this year versus third quarter last year?

It was down, yet you raised your numbers.

You mentioned working capital, we get it.

But was there anything else that drove that increase in free cash flow guidance despite what was a year-on-year worsening in free cash flow?

Oh, I see what you're saying.

No, it's got to do with all the other things -- non-earnings things that we're doing on inventories, payables, receivables, all of those other factors.

All right, guys.

Thank you very much for the details.

Okay.

Thank you.

And Edison, thank you.

We appreciate everyone's participation on our conference call.

We look forward to finishing up 2014 strong, and we will talk to you all in January.

Thanks.

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.