Ball Corp (BALL) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Ball Corporation's third-quarter 2016 earnings call. (Operator Instructions). As a reminder, the call is being recorded Thursday, November 3, 2016. I would now like to turn the call over to Chairman, President and Chief Executive Officer, John Hayes. Please proceed.

Great. Thank you, James and good morning, everyone. This is Ball Corporation's conference call regarding the Company's third-quarter 2016 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 third-quarter earnings release, it is available on our website at ball.com. Information regarding descriptions of our new segment reporting and the use of non-GAAP financial measures may also be found in the notes section of today's earnings release, which includes a simplified table format summarizing business consolidation and other activities, as well as a reconciliation of comparable operating earnings and diluted earnings-per-share calculations.

Joining me on the call today is Scott Morrison, our Senior Vice President and Chief Financial Officer and if we sound a bit tired, we are. The Chicago Cubs won the World Series, baby. Dreams do come true.

I will provide a brief overview of the 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 future.

We are pleased that the new combined business, as well as our existing businesses, are right on track versus our expectations and the anticipated earnings momentum has continued to materialize, particularly in beverage and aerospace. Upon the close of the acquisition, we discussed that the second half of 2016 might be a bit choppy from an earnings and cash flow perspective due to one-time integration costs, but that we felt confident as we went into 2017 that we would be able to generate comparable earnings and cash flow that we discussed for both 2017 and beyond. This is exactly how it is playing out and we continue to expect to achieve all of the 2017 to 2019 financial metrics and synergy goals we laid out on our prior earnings call.

During our initial review of the new locations, we welcomed our new team members into the Ball culture and experienced a smooth integration to date. Where we have recognized the need for minor changes from a personnel or policy perspective, actions have been taken or are well underway. In the coming months, we will focus on securing the appropriate value for our products while fighting for our proportionate share of the volume. And at the same time, we will be chasing the value capture opportunities in sourcing, freight, logistic and footprint optimization, as well as ongoing cost-saving initiatives like the closure of the London and Charlotte offices.

Certain work from these locations has already begun to migrate to other Ball locations and Ball will exit the Millbank office by December 2016 and close the Charlotte office in the first half of 2017. We thank the Millbank and Charlotte teams for their support during this integration. Future announcements regarding other changes will be made when decisions are finalized.

In addition to the complex integration and separation work, during the third quarter, we continued ramping up line speeds at our new Monterrey, Mexico beverage facility. We shipped and invoiced salable cans from our new Myanmar facility late in the third quarter. We continued the previously-initiated European beverage cost-out initiatives, including the closure of the Berlin, Germany beverage can facility that was announced in December of 2015. We achieved solid operational performance in our food and aerosol business despite depressed US food can demand in the period, and we further grew our aerospace contracted backlog to a record $1.4 billion.

It was an incredibly busy and rewarding quarter and with that, I will turn it over to Mr. Morrison. Scott.

Thanks, John. Ball's comparable diluted earnings per share for the third quarter of 2016 were $0.96 versus last year's $1.10 on a higher share count and a higher year-over-year effective tax rate. Third-quarter comparable diluted earnings per share reflect year-over-year improvement largely due to the beverage can acquisition, solid global beverage can demand and improved aerospace performance, offset by higher corporate costs related to truing up our employee compensation accruals, the extra expense for stock plans due to the runup of our share price, as well as some pension expense for inactives not tied to a continuing business segment, higher interest expense related to the timing of the Rexam debt payoff, a higher share count and tax rate.

Our GAAP results in the first nine months were impacted by transaction-related earnings, hedging, purchase accounting and other customary closing adjustments. Details are provided in Note 2 of today's earnings release and additional information will also be provided in our 10-Q, which will be filed next week.

Our beverage packaging North and Central America segment, which comprises 17 legacy Ball facilities, plus the nine acquired facilities, including joint ventures, had comparable operating earnings for third quarter 2016 that were up year-over-year due to the contribution of the recently acquired plants in the US and Mexico and continued specialty can growth. Industry demand across North America grew 1.5% in the third quarter and on a comparable basis, Ball was in line with the industry during the quarter.

Our new Monterrey, Mexico facility continues to make production strides and Mexican domestic and export demand remains strong. Of note, the recently acquired JVs in Guatemala and Panama, as well as our legacy Rocky Mountain Metal Container JV, are not consolidated and therefore are included in equity earnings of affiliates.

Our beverage packaging South America segment, which consists of the 12 acquired facilities, plus two legacy Ball facilities, recorded a solid third quarter as can demand in Brazil gained traction in the quarter in part because of the seasonal summer build. Brazilian market demand, as well as our volume in the quarter, was relatively flat and down 2% year-to-date. Both Brazilian and Argentine can demand has been impacted by the inflationary environment in those countries. The team in South America is managing the business well given the current economic and supply/demand conditions in the region.

The beverage packaging Europe segment results, which include Russia, were up nicely in the quarter due largely to the acquisition and strong can demand in Russia during September. Industry supply/demand remains tight and specialty demand remains favorable with a bias towards continued shift into specialty.

As we mentioned in today's release, Ball chose to retain certain volumes in Spain, which will be supplied from a newly constructed plant near Madrid. This investment is supported by a long-term customer contract that was known to all parties prior to the divestment occurring and the plant will help to provide supply to a region that is experiencing sustainable growth.

Beginning in the third quarter, our new segment reporting incorporates the operating performance of Ball's legacy China/Asia business and the acquired EMEA business into other, which also includes the legacy corporate undistributed costs. For clarity in going forward, we will include a footnote in Note 2 of our earnings release financials referencing the amount of corporate undistributed costs included in other. Of note, the UAC JV, 51% investment, is consolidated and is also reflected in the other segment and the 49% outflow is reflected in noncontrolling interest.

While I have the opportunity, our team in China is doing everything they can given the challenges they are faced with. They have met their cost-out goals and the team in EMEA is fitting right in at Ball. The markets are dynamic like the currency situation in Egypt and we have great teams in both regions managing the businesses appropriately.

Food and aerosol comparable segment earnings were flat year-over-year due to lower food can volumes offset by continued growth in global aerosol. Initiatives to further improve production efficiencies are on track and set to benefit 2017 performance.

In summary, our global packaging businesses posted results that were right on top of our expectations and the teams continue to be extremely focused on integrating the new assets, achieving their synergy goals and driving [EBA] dollars from the recent capital and efficiency projects.

Thank you again to our global packaging team members, as well as the corporate support teams. Your collaboration and dedication is appreciated. As I mentioned on the second-quarter call, we will identify all one-time items impacting free cash flow and operating earnings so that the underlying strength of the business is clear. You will notice that our third-quarter net debt, as expected, is about $400 million higher than the pro forma $7 billion net debt reflected in our second-quarter earnings release.

During the third quarter, we paid out $110 million in severance and incentives to divested and separated employees; $90 million to settle Rexam's derivatives; $65 million in advisor, attorney and banker fees; $50 million in tax payments; a July 1 $50 million bond interest payment; and we spent $125 million in CapEx.

Obviously, there were offsets like third-quarter EBITDA and the French sale proceeds. We are on target to flow a lot of cash in the fourth quarter, which is typical. We obviously had a working capital build from the acquired locations and, as we said before, it will take time to address how Rexam manages its balance sheet versus how we will manage ours. Regardless, we still target year-end net debt in the range of $7 billion at current FX rates.

As we think about the remainder of 2016, here are some key metrics. We expect full-year 2016 comparable operating earnings in the range of $1 billion and, to be clear, our comparable earnings going forward will exclude the amortization associated with acquired customer intangibles, which should be roughly $33 million in the fourth quarter.

Since the $83 million inventory stepup was recognized in the third quarter, I wouldn't expect any additional inventory stepup impact in the fourth quarter. The full-year weighted average diluted shares outstanding for 2016 will be in the range of 161 million shares, which reflects the half-year impact of the 32 million shares issued for the acquisition. For Q4 2016 and full-year 2017, weighted average diluted shares outstanding will be roughly 178 million, absent the impact of any share repurchases.

Full-year 2016 interest expense will be in the range of $230 million. Given the negative carry associated with the timing of when the acquired credit agreement, private placement and hybrid debt came out, third-quarter interest ran about $8 million higher than it will in the fourth quarter. The full-year effective tax rate for 2016 on comparable earnings is expected to be in the range of 28%.

Corporate undistributed is now expected to be in the range of $115 million for full-year 2016 versus the $105 million we discussed in the second-quarter call. The $115 million now includes costs to support the integration from locations such as Millbank and Charlotte, as well as a true-up for our employee compensation plan accruals that will pay out to current Ball employees in early 2017 and the impact of known pension expense for inactives in the US and abroad, which will migrate to corporate undistributed in the near term. To be clear, these are not unanticipated costs; it's more about where we have now determined the cost will be reflected from a reporting perspective.

Before I turn it back to John, we have received a few questions to provide a detailed bridge for 2016 to 2017 and we ask that you recall what we said in our second-quarter call. We will not be posting a slide every quarter. For now, we just remind you that, in 2017, we still expect to be in the range of $1.3 billion to $1.4 billion of comparable operating earnings due to value capture savings in the areas of sourcing, manufacturing, logistics and other areas like footprint; 1 billion more units through our new Monterrey plant; cost-out benefits from the F&A metal service center transition; as well as additional global aerosol and specialty beverage can growth; improvement in aerospace and the full-year impact of the acquisition. And by 2019, we aspire to be generating $2 billion of comparable EBITDA and generating in excess of $1 billion of comparable free cash flow.

Our December investor field trip will also provide another chance to add to our messaging and engage in Q&A about our progress. And with that, I will turn it back to you, John.

Great. Thanks, Scott. Our aerospace business reported improved third-quarter results driven by solid contract performance. Congratulations to the entire aerospace team. Their hard work paid off. Our contracted backlog closed the quarter at a record $1.4 billion, which is a 129% increase since the beginning of 2016. As I mentioned last quarter, we are ramping up and staffing up for these new contracts, which will benefit the remainder of 2016 and more importantly beyond.

Now, across the Company and as we look forward, we are on track to achieve the numbers that Scott just laid out. Every day, we gain even more visibility into the opportunities before us and while there are always challenges, the team is up for proactively managing these.

In summary, I'm proud of what our team has accomplished so far. Everyone has taken to heart what it means to behave as a true owner. We all know there is much work still to be done and we are focused on our balance sheet, cost-out, footprint, supply/demand balance, supply chain and innovation. Advocating for the beverage can versus other substrates and improving the value generated for the products we sell are things we embrace as an industry leader.

As I mentioned in my introduction, our financial goals and aspirations for 2017 and beyond remain the same. And when our leverage gets to the range of 3 to 3.5 times, we will return value to our fellow shareholders in the form of share repurchases and dividends. And with that, James, we are ready for questions.

(Operator Instructions). Anthony Pettinari, Citi.

Good morning and congratulations on the Cubs. Scott, just a couple questions on guidance. I think you talked about full-year operating earnings in the range of $1 billion. I think previously you had said just north of $1 billion. Is it possible to size that delta, if there is one and what's driving it? And then apologies if I missed this, but with the previous CapEx guidance of around $500 million, or around $500 million, did that include the Madrid expansion?

Sure. On the $1 billion, it's dynamic, obviously, but if things go well, if volumes go well, we could exceed $1 billion. If things are a little lighter and softer, we might be a little bit short, but I don't think it's a gigantic range.

And then as it relates to the capital, yes, one of the things we had planned for some time now is the expansion in Madrid. So in that $500 million for next year is a good chunk of that to build out Madrid.

Okay. That's helpful. And then, John, in your comments, you talked about fighting for a proportionate share of volumes. I'm just wondering if you could talk generally about the commercial environment that you've seen since the closure of the merger. Have you seen share shift or a significant change in customer inquiries? If you can just talk generally about the commercial environment.

Yes, nothing out of the ordinary is what I would say. As we have moved forward, we have talked about this before. We have some new muscles in terms of our relative position and we are developing those and trying to flex them.

As I did say in our prepared remarks, we are trying to get value for the products we deliver and we've had discussions with our customers, like we always do. As we mentioned in prior times, we are very much customer-focused and some of those discussions go easy; some of them are challenging at times, but there is nothing appreciable that's out of the ordinary.

Okay. And then maybe just one last one. Is it possible to say what level of working capital benefit is baked into the 2017 free cash flow target?

There was about $100 million of working capital benefit for 2017 in the numbers we previously gave.

Got it. Thank you. I will turn it over.

Adam Josephson, KeyBanc.

Good morning, everyone. John, Scott, hope you are well. Scott, just one more on the 2016 comparable earnings target. It seems like corporate is $10 million higher than you were expecting before. Is food and aerosol any lower -- is your expectation any lower now than it was before and have any other particular buckets changed?

Well, I think, to the first point on the corporate undistributed, it's not really that it's higher; it's just in a different bucket than the one we had previously anticipated. What we are going to do with some of the pension costs going forward is, if they weren't related -- we've retained some of the German pensions, for example and so next year, we will move some of the German costs for those pensions into corporate undistributed because they really don't relate to the business. So it's really more of just where we are reporting those numbers. It's not really an increase in cost.

As it relates to the second part, food had a little softer quarter in the third quarter, but I think the fourth quarter should be okay and so that plays into the number. Like we said, it's a big business that we are getting our arms around and I think doing really well. We just want to make sure that we are clear; and could there be a little variability to that number? Yes, I think there could.

I hear that, Scott. Just to be clear, on a segment basis, have your expectations changed for the full year?

No, not at all. Not for this year and not really for next year. If anything, we are 120 days into this and I think we are more excited about the opportunities that we see in front of us.

Thanks. Just a couple others. One on the aforementioned food can business. Can you guys just talk about the volume decline that you've experienced and what drove that and the extent to which you think it's one-time or that it won't recur for several more quarters?

Yes. Well, as we said I think in an earnings release, Adam, it was really just two things. Number one, the salmon business -- as you know, that has over time been a pretty volatile business and it was a poor salmon harvest this year, so that was definitely one of them.

The other one was just in our existing customer base, the demand side on the customer didn't perform as well as we had thought. We've talked in the past that we had some share shifts, but that had nothing to do with -- in the quarter. It was just a little bit softer. Some of it bled over into October, but we don't expect October to be meaningful different than it was last year and so I just think it was a little bit softer harvest than we had expected.

Thanks, John. Just one on South America. You talked about the market being relatively flat. Obviously, some of your large customers have expressed disappointment about the market of late. Do you have any reason to expect a change in market demand in the foreseeable future? And, relatedly, do you have any thoughts about the potential for additional capacity to be added in that market as demand remains fairly sluggish?

As you know, the Brazilian economy has been challenged economically, so I will start with there. I do know that can, however, continues to perform relatively well overall. For example, overall beer volumes were down a couple percent in the quarter and the cans were flat, which means it continues to take share from other substrates.

I think as we go forward, we continue to expect that. I do think that some of the reforms that Brazil is pushing through gives better confidence over the longer term in terms of the economy improving and the middle class growing, which is real important, as you know, for overall beverage consumption.

There have been discussions about new capacity coming on. It's reasonably tight right now. So as I said on the call last quarter, we are certainly aware of that. We don't think there's going to be any appreciable dislocations because Brazil does have a lot of embedded growth. They are just going through some short-term economic pain.

Thanks very much, John. Best of luck.

Tyler Langton, JPMorgan.

Good morning, thanks. Just had a question in terms of the $150 million of synergies you are looking for in 2017. Do you have a rough sense on how much the closing of Millbank and then Charlotte would contribute towards that?

I think what we said on last quarter, nothing really has changed. Millbank -- between those two things, we had $70 million, $80 million of costs, in that range and we expect to get most of it out. We will have a little bit because there is some incremental support that's required for all those acquired facilities, but I think what we talked about was $60 million, $70 million of total cost that we expect to be able to get out of that.

Okay. And then I guess with South America, the new margins that you reported this quarter were a decent amount above year-ago levels, which were your older assets and in Europe, it's kind of the opposite, the margins now with now I guess the Rexam assets were lower than yours. Can you just talk high level what's driving those changes? Is it businesses or is it one-time items? Just some color there would be great.

First, I caution not only with both of those, but with all of them, the comparability, if you want to call it that, of these segments is a little apples and oranges just because if you're comparing a legacy Ball business, much of what you just described in South America and more importantly in Europe, we divested and so that's the apple and then the other fruit is what we have going forward.

Having said that, I would say in South America we have -- as we've talked before, it's a good business with a great management team. We've got scale, which is real important there and when you have a footprint that you can leverage in a way much greater than we were able to with three facilities, you can see some of the benefit.

I do think in Europe that there is some opportunity. Our legacy business margins were a little bit better than the business we acquired. We knew that going in. There were no surprises there and so our opportunity in some of the cost-out that I mentioned, whether it's Berlin or whether it's from other things, we think there's opportunity again because of the scale of the business. It's a bigger business than we've either had. So over the next couple years, we expect to drive continued improvement in the European segment.

Great. Thanks. Just last question, again, within food and aerosol. I think a couple quarters ago, you commented that it was your goal basically to get EBIT in that segment back to where it had been historically. Is that still a reasonable goal in your view?

Yes, I think it is a reasonable goal. As I said, we are a little bit softer in the third quarter, but other times, sometimes we are a little bit stronger. I think as we look forward, what we talked about before in terms of the service center realignment that's going on that we're going to get the benefit of 2017, we are investing in the Czech Republic to grow the impact extruded side of that business that's going to come onstream late this year, early next year.

We have a new plant in India that really hasn't -- up until recently really hasn't even been generating anything because it was in startup mode. And then we've invested in the UK in terms of impact extruded. That combined with just the overall continued growth for example in our Mexican impact extruded says that over the next couple years, we expect to be able to get in the range of where we had been before.

Great. Thanks so much.

Scott Gaffner, Barclays.

Thanks. Good morning, guys. Just going back to South America for a couple minutes, just to clarify a couple things. I realize we are comparing apples and oranges here, but there was a pretty significant delta on the margins in the legacy Ball facility versus what you did acquire and this is our first look into some of the margins in that market. Is it really just a scale issue? I heard you mention that as being one of the big drivers or is there anything else that made the margins between those two businesses different?

As I said, scale is real important in this business and just, for example, we had G&A that supported three plants. We don't have that much more appreciable G&A that's supporting 13 plus plants in that region and so that's just one example of it. There's many others we can give, but scale is important in our business.

Also remember, Scott, last year in the third quarter, we had a pretty tough quarter, so you're comparing something that was unusually low too, so you've got to be careful with the comparisons.

Okay. Yes, that's a fair point, Scott. I appreciate you highlighting that. And then one other on South America. It sounds like one of your larger customers recently talked about reinvesting in glass bottles for off-premise consumption and I realize the can continues to take marketshare in the long run, but are you seeing anything in the near term just given the macro environment where you are seeing maybe a shift back towards glass in the near term? Is that something you are seeing?

No. As I said, for example, in the third quarter, can continued to gain share relative to glass and we are entering the summer, so it's still early in their summer season, but so far so good. But we haven't seen any appreciable change from the trends we've talked about previously.

Okay. One last one for me. John, you mentioned this a couple times. You talk about securing appropriate value for the product and some of that was prefaced on sourcing freight and logistics, but I got the sense that maybe you feel like maybe you've not been getting full value for the product over the last couple of years maybe because of competitive dynamics or something else in the market. How should we read that commentary?

Read it as exactly what the words that came out of my mouth. We think that the beverage can is the most sustainable package from an economic perspective. And while at the same time, we want to make sure we are getting paid for our innovation efforts and we've put a lot of effort and energy into the specialty can side, growth and development of not only the cam itself, but the market itself. You think about the aluminum bottles. You think about the service that we provide. You think about the quality we provide and my comments stand on their own two feet.

And the complexity of the business is way different. We need to make sure that we are getting paid appropriately for that complexity.

Yes. Another example on that is, given the retail environment, there's a lot of movements and shifts in terms of in-and-out packages and so when you contract on a standard 12 ounce can basis and you have long runs, it's changing today and so that's just another example of how we have to modify our muscle memory to reflect the current realities.

Sure. I really appreciate that. I guess one follow-up on that. You can see from some of the customers, they are able to significantly -- upcharge significantly from a customer perspective with some of these new can sizes, for instance, moving from a 12 ounce to a 7.5 ounce doesn't just get you -- on the CSD side -- doesn't just get you more per ounce for the beverage guys. It actually gets you more on the total dollar amount. Did they recognize that value as well or not?

Yes. Look, let me attack it a little bit different way. When we are able to help our customers grow their profits and grow their profit pools, there's greater money to go around. What we try and do is actually make the can the most sustainable package and make it become the most profitable package for our customer. That's our aspiration because if we can do that, that's what we mean about being the most sustainable package in the beverage world.

Thanks. I do see a lot more cans in other things like sparkling water these days, so it's interesting to see the growth. I appreciate it.

One customer at a time.

Ghansham Panjabi, Robert W. Baird & Co.

Good morning. It's actually Mehul Dalia sitting in for Ghansham. Just piggybacking off of that last question in terms of value capture, is there a particular region where you feel value isn't up to par, or is it just broad-based across your entire portfolio?

No, generally speaking, it's broad-based, but specifically when you think about the greatest amount of changes in terms of the package sizes, shapes, those types of things, I would certainly say Europe and North America.

Okay. Makes sense. Thanks. Can you give us some clarity on your expected synergy run rate by the end of 2016? I know you guys reiterated your 2017 and 2019 targets, but just what you guys expect to achieve by 2016 on a run rate (multiple speakers)?

Yes, we never gave a number for 2016. We get a 2017 number, so we have lots of plans in place, a lot of things that are progressing as we expected and that's why we are reiterating the number for 2017. It's the same as what we told you a couple months ago.

Yes. For 2016, as we've said before, the second half of 2016 is as much about getting after -- from an integration point of view -- getting after those cost synergies that we are able to deliver on in 2017, so you shouldn't expect too much in 2016.

Yes. There's probably a little bit of drag actually in 2016 as we get after some of this stuff.

Makes sense. Just one last one, and relatedly, has there been an impact on synergies from the recent pound devaluation and if so, how are you offsetting that to stay at your targets?

No. Our pound business actually isn't that big and then, today, the UK Court said the vote for Brexit was illegal and that Parliament has to vote, so the pound [popped], so it's a dynamic world.

Yes. Remember, the UK business as a percent of our revenues is south of 5%, so it's not a big driver.

Thank you.

George Staphos, Bank of America.

Thanks for all the details and congratulations on the closing and again, also on the Cubs. I guess my first question; Scott, I forget if you mentioned it, the cash costs associated with the integration, has that changed at all, or is that very much on track with your expectations for both 2016 and 2017? Has there been any change in the timing there of?

No, no real change, George. Everything that we expected to happen in the third quarter post-close is exactly what happened at the costs we anticipated, and as we look into 2017, any actions we might take there, none of those costs have changed.

Okay. Thanks for that. I don't know -- I don't think you can provide a lot of detail and clarity on this for various reasons, but could you give us some qualitative view on how customer specialty did by region within your business?

I'm sorry. You said specialty?

Yes, correct.

Yes. Let me just quickly try and go through it. I think the overall trends that we've talked about really haven't changed all that much and, what I mean by that, in North America, we continue to see -- on a pro forma basis -- again, you have to keep that in mind -- but we were up high single digits in the United States and North America, that segment.

In Europe, I don't have the numbers off the top of my head, but as we talked in our prepared remarks, there continues to be a bias towards specialty and so that's been growing at a faster rate than the standard containers. And then when you go into other regions, whether it's South America or even Asia, you're continuing to see specialty can growth higher; in the case of Asia much higher than you are standard containers.

Okay. Appreciate that, John. One thing I wanted to ask at is the Madrid plant. Can you provide a little bit more color? I think you said it was an existing contract you had that you elected to keep and you're building this new facility. If there's any more commentary you could share around it. I forget if you said how large the facility was going to be. And then I had one last follow-up before I turn it over.

Sure. This is a customer we've been selling to for a while. We were servicing them out of another plant that was outside of Spain in the old Ball legacy business. During the process of working with the EC, we kept that particular contract, which was a long multiyear contract way beyond five years, which is the anchor tenant of all that volume. It will initially -- the plant will come up in 2018 with one line and then another line added after that. And so a vast majority of it is contracted and then the Spanish market continues to be one of the better markets across Europe and so we will be able to grow with that market.

Okay, great. Thanks for that, Scott. As you think about Mexico, given the potential for various outcomes post-election, is the way you are planning for that business to progress or develop, or for that matter the way your customers are planning, has any of that changed over the last six months relative to where we are right now? And then I don't know if you have a quick update on Chinese pricing and the outlook for 2017, but I figured I would throw that in there. Thank you, guys. Good luck.

All right. Why don't I tackle Mexico right now? No, no changes. As you know, we make in Mexico and sell in Mexico. Now, the finished product is often exported in the United States, but it really plays into the broader demographics that's going on there. I think you are intimating what happens in the election. I think it's premature to speculate there, but it's challenging to think that there is going to be meaningful changes in domestic consumption here in the US given the demographics that have gone on, certainly in the next few years. So we don't see any change relative to where we were six months or even a year ago.

But would you consider maybe tightening up the cost structure if currencies further devalue? I guess that was part of the question.

The cost structure is really -- we've pretty much inoculated ourselves from Mexican currency swings because it really is a dollar-based business. (multiple speakers)

Yes. Then in the China market, we are right in the early part of the throes of the annual price negotiations. As you all know, we took a big stepdown last year. Relative to our expectations, we still think there's oversupply in the market. We still think it's challenging. We also know that a lot of can makers that are publicly traded over there have publicly expressed that they are quite challenged in the market.

So I think it's premature to determine exactly what's going to happen, but we've taken a ton of cost out in that business in 2016. We have further plans to do that and we think we've hit a low point. But, having said that, it is early November and the pricing discussions haven't been finalized.

Thank you, guys. Good luck. Congratulations on the progress.

Chip Dillon, Vertical Research Partners.

Good morning, John and Scott. First question is I guess we really appreciate the detail and it's pretty noticeable that if you look at the first-half results in Asia, they were actually it looks like negative $13 million and of course, that's just legacy Ball and then in the third quarter, they shot up to $22 million, as you indicated. Interpolating from the other line, of course. I didn't know if all of that improvement was Rexam, or are there other moving parts?

No, if you looked at the Asia business alone, we took a big hit in the first quarter. We had inventory revaluation down, which was a big impact in the first quarter. So the first quarter was particularly rough. It has progressively gotten better as we've gotten the cost out too. Remember, we had a pretty significant cost-out plan and that has matured through the first quarter into the third quarter and that's why sequentially we've gotten better as the year has gone on.

Yes, but to answer your other part of the question, the other remember also includes EMEA and that is a profitable business. So we've made a lot of good progress in China, but don't -- I think you are intimating it, it went from negative $13 million in the first half to positive $22 million. (multiple speakers).

Actually, to be fair, it was positive $15 million in the first half of 2015, but I appreciate that answer about the first quarter. That's right. And the other thing that really sticks out, of course, is the margin that we see in South America and how much better it looks like, at least it appears to be at with the Rexam assets and of course, that's even with a little bit of a hand tied behind your back with the stepped-up depreciation. I'm sure there's a little bit of that. Is that all of it? Was it just the differential in the businesses you acquired versus what you had before? And I guess there was a divestiture maybe in there as well and is this sustainable, this 18% to 19% EBIT multiple we saw in the third quarter?

Remember, what you are comparing to was a really soft quarter in our legacy business in the third quarter of last year, so you are really not making a fair comparison. But the business we acquired is a much bigger business that has a lot more scale and is a very well-run business. Where the margins go over time, we will see. It's a good business.

Yes, the other thing, as you all know, we never really talk about margins because metal passthrough is such a big component. With aluminum being softer, it makes the margin look higher. We look at the return on capital and that's a better way to be looking at it. So I wouldn't read too much into these margin things that you are mentioning.

Okay. And then on the plant in Madrid, as I look at it, it looks like you have an aluminum aerosol plant starting up in the Czech Republic and that's basically it until Madrid. And given that you are working hard on all the synergies, I would imagine that can change, but that's really the only thing that's out there and should I assume it's what, 800 million can per line, one in 2018 and one in 2019? Is that a good ballpark?

It's a good ballpark. Like Scott said, we are going to be putting this first line in and then ramping up and building infrastructure for the second line and so the timing of it is dependent upon how the Spanish market continues to grow. But in terms of your broader question about CapEx, we have been spending a fair amount of money and you mentioned -- actually just to be clear, we are not building a new plant in the Czech Republic; we are significantly expanding an existing plant -- but we continue to make specialty can investments in our business.

We talked about in North America on the last conference call that there is some capital that's going to be required to upgrade the facilities we acquired. So there's a whole bunch of distributed things like that, and we stand by what we said in the range of $500 million for next year.

Okay. Okay, and last quick one. I know the depreciation, this is the first look we've had with the stepup. If you annualized the fourth quarter, I guess it would be, what, [456]? Is that a good ballpark to be in next year, the [450] range?

Yes. That sounds about right and then add the amortization that we are going to exclude is on top of that, but that's (multiple speakers).

Which is [130] (inaudible) give or take?

Correct. (multiple speakers).

Okay. That's good. Thank you.

Chris Manuel, Wells Fargo.

Good morning, gentlemen and congratulations to a strong -- what sounds like a strong first 120 days or so. Let's see here, so a couple questions I wanted to ask. I think I understand what's happening in Spain, but I wanted to also dive into the aerospace business a little bit. The backlog is up quite a bit. If we look back historically, 2012, 2013, 2014, you've been $900 million plus of revenue there before. What do you think the path is towards monetizing some of that backlog? Should 2017, 2018 be $900 million plus revenue kind of numbers, or what's the path there?

Yes. I think the path -- we have a record amount of backlog and it's obviously a very good story there. I think as time goes on, we are going to be able to surpass what we've done in the past in terms of revenue and in terms of profitability. I mentioned last quarter that we had a lot on our plates in terms of won not booked and the biggest surprise that happened in the third quarter for us is given that the government pushed out the continuing resolution until after the election, we were pleasantly surprised and so some of the wins turned into funded wins, which went into our backlog.

We are still chasing a variety of things in the aerospace business and, even getting back to the capital, I think over the next couple of years, it's not big dollars, but we are going to be investing in that in terms of new chambers, in terms of expanding our manufacturing capability and capacity and building out some of our existing facilities because our backlog is the highest we've ever had it and we're ramping up big time in terms of hiring people, getting people going and, as I mentioned, I think you are going to start to see it roll out as early as the fourth quarter of 2016 and then as we go to 2017 and beyond, we feel good about that business. They've been doing a great job.

Okay. That's helpful. And then the second question I had was -- and I fully appreciate you are going to have an analyst event for us in a few months -- but given that the business, particularly in Europe and in South America, is quite different than your historic business, or at least the footprint to an extent is, help us -- give us a sense of what you would anticipate say the next one, two, three years the organic growth profile of the new Ball business looks like. Even in North America too given that maybe we've had a bit of an inflection point here.

That's a very -- there's a very long answer to that. I would encourage you to come to the investor conference and hear directly from our presidents in that region. That's part of what we are planning on doing, explaining what we see from a demand perspective, a supply perspective, a footprint perspective, a size, shape, capacity, innovation, all those various things at the Investor Day.

Okay. I will wait for that. Thank you.

Philip Ng, Jefferies.

It sounds like what you are seeing is some increase momentum there. Can you provide some color what kind of trends you are seeing and how should we think about mix relative to your business in Europe going forward?

I'm sorry; can you repeat the question? You were breaking in and out.

Sure. Russia seems to be gaining a bit of momentum here. Can you talk about what's driving the growth; where you see that market taking off next year and what kind of impact should we think about from a mix standpoint?

Yes, the Russia market is good. It's a good business; it's a growing business. The can continues to do well and we would expect that to continue going forward.

Any big delta from a margin standpoint relative to Europe, positive or negative?

No, not appreciably; not appreciably. No is the short answer.

Okay. And I don't know if I missed this, piggybacking off of Chris's question about the aerospace business, backlogs have obviously picked up pretty meaningfully, how quickly of a ramp do we expect to see that flow through your P&L and are there any startup costs that we need to be mindful of in terms of that potentially impacting margins?

No. No, there are no start-up costs and it's going to be ramped up as we go and really get going. It's a difficult question to answer because we have, like in every time, we have some contracts that are coming off, some contracts that are coming on.

I will point out a couple things though. The majority of the business we've one is a cost-plus business, cost-plus, fixed-fee business and that usually -- we've talked about this in the past. When you have a fixed-price contract, usually the margins when you start out are a bit lower and then if you execute successfully, your margins will pick up as you deliver those.

In a cost-plus environment, it's a little bit more stable. The margin is across, so I don't expect our margin profile, having said that, to change meaningfully as we look forward. I think it's as much about growing the revenues. And some of these programs we've won our multi-year programs. Some of them are single year. It's a big mix, but the vast majority of this is cost-plus, which is actually good from an overall profitability perspective.

Okay. That's really helpful. Just one last one from me. I know one of your partners in Mexico announced they are acquiring a brewery in Mexico. Is that an opportunity for you to slide in from an existing facility, or through potentially more capacity down the road? Just want to talk about the opportunity down the road. Thanks. Appreciate it.

Yes. We've got a very good relationship with that customer you are mentioning. I think it's premature and it's not fair for us to comment on what some of their plans are. I'll just say that we have a very good relationship with them to supply 100% of their needs in Mexico.

Mark Wilde, BMO.

Good morning, John; good morning, Scott. Just actually following on Mexico, John, is it possible to get some sense of what you are seeing in terms of the can's share of the mix for both domestic and exported beer out of Mexico?

Yes. I don't have them off the top of my head. Some observations though high level is, number one, the can penetration is certainly lower in Mexico than it is in North America. Number two -- and I say that on the beer side; I want to say it's in the 20s versus 50s here in North America, so there is a lot of good runway there. And I think as a lot of the Mexican beer companies look to develop their brands, they recognize they've been underweighted cans relative to glass and other substrates, and so they've been putting much more emphasis on the can, which I think longer term and shorter term is a benefit for us.

Okay. What about on the export side? Do you have any sense of the export mix, how much of that is going in cans and how much is going in bottles and how that might shift?

Yes. It's the same trend. Historically, it had been more weighted towards glass than it had been cans and I think as we look now and going forward, we are seeing a greater weight of cans relative to glass for the export.

Okay. I'm just curious, over the last 90 days, you've said no changes to any of your targets, but has there been anything that you would highlight over the last 90 days as you've gotten into Rexam much deeper that surprised you at all one way or the other?

On the conference call three months ago, our initial observations was the engagement of the people was awesome and we would reiterate that. Great bunch of people who are very excited and I think as time goes on -- we had a management conference; got the top 300 plus people in a room together and really galvanized about who we are, what we are trying to do and how we are going to get there and what each and every person's role is and really this behaved like a true owner, as I talked about in my opening remarks. That's a positive.

I think in terms of when you peel away the onion, there's always puts and takes, but, as Scott had mentioned, we see some -- we have to firm these things up, but we see some opportunities on the cost side, whether it's footprint, whether it's supply/demand dynamics, whether it's best practice sharing in the manufacturing footprints, all those things. We are getting after it now and as we dig into it, we are excited.

Okay. Scott, I'm curious, with that Rexam headquarters wind-down, is there any potential benefit for you in terms of being able to sell the remaining years on the lease?

My experience is -- we are going to try to re-lease the property. We don't own it. There's usually not a huge upside. The market is higher than it was when we entered the lease, so maybe there is a little bit, but that is rounding.

Yes. Okay. That's good. Final question I had, any way to quantify the benefit from aluminum premiums in the third quarter?

Nothing for us really.

Okay. All right. Sounds good. I will turn it over.

(Operator Instructions). Kyle White, Deutsche Bank.

Thanks for taking my question. A large brewer recently said that they were starting to see some slowdown in the craft beer market and I'm just curious if you guys are seeing that as well with some of your customers. I know I think last quarter you said it was growing at 30% year-to-date, but just what are you expecting going forward from that?

No, it's still growing strong. I think whoever was mentioning that -- you have seen a change though. I think some of the larger craft brewers have slowed down. The top 10 brands in the craft brewing side has slowed down. But on the other side of the curve, many of the smaller ones, they continue to grow very strong on the can side because they were in glass historically, or they did not exist. And so we continue to see a strong uptick in some of the smaller craft beers going into cans.

Okay. That's helpful. Sorry to go back to the new facility in Spain. I'm just trying to fully understand -- it's a customer that you are servicing now, so are you guys seeing increased cost maybe from transportation or whatnot that this new facility is more of a cost-saving with some added growth to it, or how should we think about that?

Well, we were servicing out of a facility that we had to divest.

Okay.

So that business will come when we get that plant up and running, and it will be much more beneficial from a cost standpoint because it'll be very closely located to where all that volume is going.

That's helpful. Thank you. I will turn it over.

Chris Manuel, Wells Fargo Securities.

Hello again, gentlemen. Just one quick follow-up for Scott and if you have the answer for this handy, that would be wonderful. If not, if you could get back to us. Wanted to get a sense of the pension; where we are today; where we are heading into 2017. Mainly, what is the liability so that we can try to calculate some sensitivities on what happens with stuff, but your expectations for what the liability is, what the funding level is and how that might play out into 2017 as well?

Sure. I don't have the exact liability numbers with me right now, but the pension plans that we acquired were actually better funded than the Ball legacy pension plans. So in fact, in the UK, they have a very sizable pension there. It's actually overfunded by a few hundred million dollars. And in the US, it's better funded than our plans have been. So we don't anticipate a major change in the pension expense going forward and most of the expense that we will have will be really related to our US legacy business versus what we acquired. I can get you some more specific numbers, but big picture (multiple speakers).

The fund status would be helpful too. Thanks.

Sure.

There are no further questions from the phone lines at this time.

Okay, great. Well, thank you, James and we look forward to seeing you all at our upcoming investor conference in December. And if anyone who has not registered, we'd ask you to please reach out to Ann Scott and do so and look forward to getting into 2017 and delivering on what we expect. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you.