Crown Holdings Inc (CCK) 2010 Q2 法說會逐字稿

Good morning and welcome to the Crown Holdings second quarter 2010 earnings conference call. Your lines have been placed on listen only until the question and answer session. Please be advised that this conference is being recorded.

I would now like to turn the call over to Mr. Timothy Donahue, Executive Vice President and Chief Financial Officer. Mr. Donahue, you may begin.

Thank you Shirley and good morning to everybody. Welcome to Crown Holdings' second-quarter earnings conference call. With me on the call today is John Conway, our Chairman and Chief Executive Officer, and Tom Kelley, Senior Vice President of Finance.

Before we begin, I would like to point out that on this call as in the earnings release we will be making a number of forward-looking statements. Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings including comments in the section titled Management's Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K and in subsequent filings.

A reconciliation of generally accepted accounting principles to non-GAAP earnings can be found in our earnings release, and if you do not already have the earnings release it's available on the Company's website at CrownCorp.com. You will also find reconciliations from net income to EBITDA, credit ratio computations and supplemental cash flow data on the Company's website.

I will first review the quarter, update 2010 guidance and then hand the call over to John for his comments.

Earnings per diluted share were $0.69 in the quarter compared to $0.65 in the second quarter of 2009, an increase of 6%. On a comparable basis diluted earnings were $0.67 per share versus $0.66 in last year's second quarter.

As was the case in the first quarter, most businesses performed at or above plan with strong volumes and cost reductions offsetting the 2009 inventory re-pricing gains which did not recur in this year's second quarter. The reference to 2009 inventory re-pricing gains is made against all businesses that use tinplate steel including aerosols, food, closures and specialty packaging as well as our European Beverage business.

As we did on the first-quarter earnings call, we will make reference to segment income as a percentage of sales comparing 2010 to 2008 so as to remove the distortion created by the 2009 inventory re-pricing which will allow for a more comparable review of the operating performance of the businesses. Our comps become a bit easier in the second half, as there is little remaining re-pricing impact.

Net sales in the quarter declined 2.2% compared to the prior year as global unit volume growth was offset by currency translation and the pass-through of lower raw material costs. You may remember that our steel suppliers reduced tinplate prices July 1, 2009, so first and second quarter prices this year are lower than last year's and therefore are passed through to customers.

Excluding the impact of currency translation, segment income was in line with the prior year as strong demand and cost reductions offset the 2009 inventory re-pricing.

Americas Beverage revenue increased 15% over the prior year due to 10% sales unit volume growth. North American volume increased 9% in the quarter while Brazil continued to report strong volume gains over last year. Demand continues to be very strong in Brazil, both for the company and the market in general.

Revenues in our North American food business were down to the prior year as a result of the pass-through of lower tinplate costs and low single digit volume declines. As we have described to you previously, we've closed four food can plants in North America over the past 18 months and purposely pruned lower margin business from our portfolio.

Segment income performance at $33 million compares favorably to last year's result of $29 million. And importantly, year-to-date 2010 segment income at 11.9% to net sales is up more than 4% over the same 2008 figure of 7.7%, and reflects the improvements made in the business without the distortion from the 2009 re-pricing. As discussed, the improvement is the result of numerous cost reduction initiatives including capacity realignment.

Adjusted for currency, European Beverage sales were in line with 2009 as the pass-through of lower raw material costs partially offset a 7% increase in sales unit volumes reported throughout the division. As a percentage of net sales, segment income was quite good at 17.1% but compares against a very strong 2009 performance which reported 19.4%.

Having said that, our results were a bit short of our plan and could've been better in the second quarter. Unit production and cost absorption were impacted by a strike in our Seville, Spain plant which is now settled. John will discuss this further in a moment. With market demand being very strong, this was an unfortunate time for the labor action to occur.

European Food revenues were down due to currency translation of $23 million and the pass-through of lower tinplate costs, which offset 6% volume gains. The business continues to perform on plan and segment income for the quarter at 14% compares very favorably to the 11.3% in the second quarter of 2008, while year-to-date at 12% compared to 9.9% for the same 2008 period also reflects the improvements made in the business without the distortion of the 2009 inventory re-pricing. The improvement over 2008 mainly reflects positive mix, cost reductions and efficiencies gained since that time.

Our global aerosols and Asian businesses continue to perform very well, with year-to-date volumes up high single digits for both. Strong demand in the businesses has offset the 2009 inventory re-pricing.

Interest expense was $17 million lower in the quarter and $31 million lower for the six months due to lower debt outstanding year-over-year. During the quarter we extended our revolving credit facility to June 2015 from May 2011, and at the same time we increased the committed availability under the facility to $1.2 billion from $800 million. For the year, interest expense is projected to be $190 million based on our current capital structure.

Our effective tax rate from ongoing operations is projected to be 30% for the year.

Our net debt at the end of June was under $2.6 billion, and when adjusting for the accounting change related to accounts receivable securitizations, net debt and net leverage are the same as the December 2009 figures.

For this first six months free cash flow was $155 million above last year's level at this time. This is primarily due to tight working capital controls. But also, some is related to lower inventory levels resulting from very strong global demand. Strike-related production losses in Spain have also contributed to lower inventory levels.

Excluding the change in how we report accounts receivable securitization, free cash flow for the year is still projected to be at least $400 million after capital expenditures of $300 million. The Company will continue to delever its balance sheet and will also dedicate a significant portion of its cash flow to share buybacks.

As we have said, we've had a good start in the first half and demand remains very strong throughout all of our businesses. After giving effect to a much stronger US dollar, a higher tax rate and the Spanish strike we now project 2010 earnings per diluted share to be in the range of $2.10 to $2.20. For the third quarter of 2010 we project between $0.80 per share and $0.85 per share.

And with that, I will turn it over to John.

Thank you and good morning. Tim has done a good job summarizing what we regard as a very strong quarter throughout our businesses around the world. As we mentioned at the end of the first quarter, demand was then strong and it has continued to strengthen during the second quarter.

In more mature markets, demand returned to more normal levels. And with the many efforts we have made to reduce costs and improve efficiencies, profitability was excellent. Our emerging markets businesses continue to be exceptionally strong, with demand tracking as it has for the past seven years in a very positive fashion.

I thought it would be well to anticipate questions regarding our European Beverage business.

As you can see, segment income was down second quarter 2010 versus 2009. For the most part we had planned for and anticipated this. The results reflect our decision to maintain market share in the European market, principally in Western Europe where there has been some new capacity added by a new competitor.

Unfortunately we experienced a strike during the quarter in one of our large Spanish beverage can plants which has since been resolved, but which affected performance adversely. Production costs not only increased at the striking plant, but also at other plants in Europe asked to fill in and modify their production schedules to do so. In addition, freight delivery costs were impacted as well. Fortunately the disputes causing the strike are now resolved and the plant is back in production.

Notwithstanding this, European beverage can profits and margins still remain very healthy with segment income at 17.1% of sales for the quarter. Looking ahead, we forecast demand to be strong for the balance of the year.

We've talked in the past and we mentioned in the press release numerous growth projects that we have underway. All of them are on schedule and within budget.

As you know, our principal growth focus is an organic growth in the world's most promising emerging markets such as China and Southeast Asia, Brazil, the Middle East and Eastern Europe. Most of our expansion projects are for beverage cans targeted to growing consumer middle class in numerous emerging markets. We believe that middle-class creation will accelerate in the years ahead, and that our emphasis on the most promising emerging markets will continue to generate significant sales and earnings growth for our company.

The result is that we were able to convert capital into increased sales and income at excellent returns. Efficient use of our capital is critical. We always aim to do a lot with as little as we can. We also continue to be focused on those cost reduction activities which provide rapid and significant returns. Otherwise, we prefer to emphasize use of growth capital in the best growth markets.

Tim mentioned that we will be generating significant free cash in 2010 even after the very ambitious capital expenditure program we have underway. We have demonstrated and we will continue to be able to show that we can grow the Company in a significant fashion by funding many attractive growth projects, and at the same time generate free cash flow that can be used for a variety of purposes. In our view we have come to the point where returning cash to our shareholders is clearly appropriate and we will be making a significant share repurchase this year. We plan to continue a similar pattern of organic growth combined with return of cash to our shareholders in the years ahead.

In sum, we're very pleased with the performance of all of our businesses in the quarter and believe we're on track for a very strong year in line with the guidance which Tim mentioned a moment ago. With that, I think we would be very happy to take questions.

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

On the European food can business, obviously significant volume growth. Just curious; was there any sort of price adjustment to your customers relative to year ago? Also, I know the comparisons are quite a bit easier after two tough years, but I just wondered if you have a sense as to how much the market itself moved on a year-over-year basis.

In terms of price adjustment, we basically year on year were passing through cost changes in the food business. So I wouldn't say there was anything dramatic as there was in the prior period.

And regarding the overall market, we think our growth is pretty much in line with the market. Finally, we have had a really good, positive change in the second quarter in food. It's been getting better for the last number of quarters but I think appreciably better in the second and we're really happy about that. We think that is going to carry on now through the year. Signs look very positive in food and beverage.

And just a clarification, Tim, on the EPS guidance, what kind of FX assumption are you using?

I think we're assuming that the euro is going to stay right about where it is today for the rest of the year.

So 1.28-ish.

Remember we average, right, so our average will be a touch lower than that for the year.

Understood, thank you.

Claudia Hueston, JPMorgan.

I was just hoping you could talk a little bit about the food can business in North America. The margins there are obviously a lot better. I was wondering if you could talk a little bit about the cost reductions and sort of where you see the benefits rolling through. Is there still more to come from the plant closures or how should we think about that?

You're right; we've had quite an ambitious program over the past 1.5 years to realign our plants and improve efficiencies and reduce plants where we have not needed them, and fully load those we have remaining. And there has been a lot of good success there. I think there are more benefits to come. And I would not say we're early days in the process, but we have a ways to go. So we think we should see a pickup from a cost perspective as we move ahead.

Thanks. And then just on the European beverage can business, I was hoping you could just comment on the Middle East volume trends there and also the situation in Saudi Arabia with tax there and how demand is responding.

Yes, actually the second quarter volume in Middle East came back nicely, and we're -- at this point we believe we're sold out in the Middle East through the balance of the year. The Saudi -- actually it was a price situation where the Saudi soft drink, two big soft drink companies significantly increased their price. So that is a little bit soft but it is improving. What we anticipate is, as the consumers become conditioned to the pricing, it should gradually improve through the balance of the year and into next year.

Great, thank you.

Peter Ruschmeier, Barclays Capital.

I was curious if you could -- aside from Brazil, where we're adding three beverage can lines next year, can you comment on where you're most capacity constrained in your system as we look forward? And I guess on a related point regarding your growth initiatives in Brazil, Thailand, Vietnam, China as you detailed in your press release over the next two years, remind us how much capital is cumulatively being invested in all of those growth projects.

Peter, John Conway here. We'll let Tim do the capital part and I will describe capacity constraints. In fact, we're capacity constrained in Brazil. We're oversold in Brazil as we speak. And we're reasonably certain, actually very certain, that the new capacity in Brazil is going to be sold out from the day we put it into operation. And so that is just a fact and that marketshare remain very, very strong as far as we can see in the foreseeable future.

We're capacity constrained in China and Southeast Asia. We've been oversold in China now for several years, but reluctant to add more capacity until we were more sure about growth in the market. We're getting there. You have seen that with the new plant we're building outside Shanghai and we're looking at some other opportunities currently.

In Southeast Asia, notwithstanding the capacity we've been adding, we have the same issues. That's why we've announced and we are moving ahead with doubling the size of the plant we just purchased within the last nine months or so. So the markets, really all of the emerging markets are doing very, very well.

The Middle East has recovered very, very nicely. The drag has been this significant price increase at retail by our customers for soft drinks in Saudi and we think that is going to work its way through. So the whole situation for us, I think, is quite positive. We're pretty fully loaded in North America now and of course the numbers reflect that. Tim can talk to the capital and so forth.

On capital, we've probably announced about seven projects to date, so the spending doesn't happen all in one year, but I would say over two years the capital required for those growth projects is about $400 million. And that's in addition to other capital that we spend, the other capital being a lot of growth as well. We have other [growth for closures] in North America, Western Europe, food products as well that we are not -- we haven't talked about here. We're just talking about the large beverage can opportunities in the emerging markets.

That's helpful. Maybe just lastly, John, you mentioned potentially significant return of capital to shareholders this year. Can you remind us of your buyback authorization and whether you plan to use that or a portion of that?

Yes. We have a significant authorization which we anticipate the board will be extending and probably upsizing. So we're looking at a share buyback this year of at least $100 million. And as we look ahead this year and the next number of years, you can see as I said in my remarks that we think we can and we will put ourselves on a program here of significant share repurchases for the foreseeable future.

Running at roughly $300 million a year we can do an awful lot of really great projects around the world and yet we're still generating a lot of excess cash. Leverage levels are coming down, as you know, and they're going to continue to come down as EBITDA increases and we're confident that it will. So we're feeling we are finally at a point we feel very confident that we can start more actively and directly and consistently returning cash to our shareholders.

Thank you very much.

Tim Thein, Citigroup.

First question was on the Americas within the beverage can segment. I think you noted, Tim, 9% volume growth. I believe the industry was just under 1% growth for the second quarter. So I'm maybe hoping you could give a little bit more color around that. I saw one of the two large branded [CSD] makers noted this morning that the conditions in the CSD segment were pretty soft in the quarter. Was that you guys gaining share and/or your customers, or what is going on there?

Tim will comment as well, but one thing that you'll recall -- we talked about this before -- is we picked up a fairly large chunk of business in the Pacific Northwest from one of our competitors who closed another utilized plant and we were able to pick up the volume there, so that was helpful to us. And we picked up a little bit as well with another customer, a little bit of rebalancing, frankly, as sometimes the big soft drink people move volume around one to another. So that was just our good fortune.

Keep in mind, of course, that when we talked about the Americas we're also including Canada, Mexico, Colombia and Brazil, all of which had a real good quarter. So that affects our figures in a way that you wouldn't see you would see in CMI data that you are referring to.

But CMI data that you're talking about, Tim, you're right. The CMI was up about 1% for the quarter and in the CMI territory of the United States we were up 9%.

Okay.

Mainly owing to the good fortune that John remarked earlier.

And I had that in our numbers. I guess it was a little bigger number than I thought. Secondly, you just mentioned in terms of China growth, you mentioned that you're looking at some other opportunities. Does the recent news -- I don't know if it if there's any validity behind it, but Can-Pack has announced pretty aggressive -- I think I saw a number of four plants that are -- they're potentially looking at in China. Does that alter your outlook going forward if in fact those -- or I mean, how real do you think those numbers are?

I don't think they're very real. We follow all of our competitors closely and some of them have a penchant for announcing plant expansions that don't come to fruition and we suspect China is going to be one of those. And beyond that, it's a great big market and we think growth in the future is going to be driven not by carbonated soft drinks but by beer, the so-called Asian drinks, herbal teas, juices.

And there is a big conversion underway from three-piece steel welded cans in the juice/tea segment to two-piece aluminum beverage cans. Something similar is beginning to take hold in beer, going from returnable glass to one-way aluminum beverage cans. So the China market is big enough to accommodate a lot of players and there are a lot of strong competitors there. But, no; the company you just mentioned and their plans to really deter us.

Okay, thanks a lot.

Alton Stump, Longbow Research.

Looking at the food can business, it looks like you had a pretty sharp recovery in the volume front. I'm just trying to get an idea of why there wasn't better operational leverage from it. In that vein, if you could maybe spell out what the impact if there was any on -- like with production cost in that business, obviously you mentioned with the Spain plant and on the beverage can side of things. Was there anything that popped up in the quarter in food cans?

The only thing in food cans, we have the comparison of the inventory re-pricing which there was still an impact in Q2 last year. We've got a bit of -- you've got a big a bit of currency that impacted European food, much of our European food businesses in the euro zone or sterling zone. And it is euros or sterling; it's not dollar-denominated or other dollar linked currency. Currency was about $4 million and without giving you the number for re-pricing it was a -- it was a significant number in Q2 last year.

And on the volume front --

But having said that, I'm sorry; as I said, the businesses on our operating plan, I think the businesses are on our operating plan for the year.

On the buying front, I think you mentioned you do expect strong volumes to continue on the beverage can side of things in Europe. Would those thoughts be similar for the food can business?

Yes.

Mark Wilde, Deutsche Bank.

Good morning. Is it possible to get sort of a ballpark number for the impact of that strike if you add up the direct and indirect costs?

Well, you know, we haven't really gotten to that. We just resolved it last week. The plant went back into operations, as a matter of fact, full-time last Friday. So we just don't have it. As I said, it is kind of dispersed through our whole beverage can operating system through Europe.

Another question; you talked -- we talked a lot about the repurchase activity this morning. Any thoughts to a dividend, John?

We thought a lot about it and it's something that the board reflects on constantly. I would say at this juncture we're more inclined to want to focus on reasonably aggressive share repurchases, but it is something we're contemplating constantly looking at. And always looking at it from the standpoint of the extent to which it is going to enhance shareholder value or not, so that is the context. If we felt we would do better by the shareholders with a significant dividend, we would do that. If we think share repurchases is a better catalyst that tends to be our focus, and at the moment share repurchases is where we are focused.

And finally just coming back around to beverage cans in the emerging markets. I'm just curious; do you have a sense of the degree to which what you are enjoying is sheer market growth in canned and bottled beverages? Or is it picking up share from other forms of packaging?

Well, you really need to go market by market. I would say in general what we have enjoyed over the past number of years in general has simply been sheer market growth, with a couple of exceptions. Brazil clearly has been both market growth and effectively glass to can conversions.

Or put another way, it would appear to us that virtually all of the growth in Brazil in beer is going to cans. So that has been very, very positive and a country like Brazil just lends itself beautifully to aluminum cans. It's the perfect place for it, just like the continental United States.

China is, we think, perhaps just at the beginning of a similar process; maybe a few years away. But we think the same kind of thing is going to happen. But by and large, what we're talking about is just consumer-led growth associated with year on year of 4%, 5%, 6%, 8%, 9% GDP growth and the consequent improvement in disposable income with a growing middle class.

Okay, and John is there a likelihood that we would see you expand your footprint down in Latin America the way you have gone into some of the kind of small to middle sized economies in Asia?

No. And keep in mind, you talk about Vietnam, there are 100 million people and Cambodia is 40 million. So, I think Thailand is 55 million, 60 million. They're kind of -- they sound relatively small relative to China, but in fact they're quite large. So, no; where we are in South America is where we're going to stay for the future.

George Staphos, BofA Merrill Lynch.

Maybe bigger picture question first, it's amazing from our vantage point how the Company has come full circle relative to where it had been in the '70s and '80s, coming off (inaudible) a lot of difficulties in the '50s and '60s you pursued emerging market growth. You generated a lot of cash. You started repurchasing shares and that was a big driver of the EPS growth that the Company had during that period. It seems like it is more or less the same game plan.

What are the hurdles now? You are pursuing beverage cans versus, say, Crown growth back during that period or food can growth. What are the hurdles now to replicating that playbook? What are the differences? Can you use any of the existing capacity you have in developed markets as you continue to grow in emerging markets? Just some thoughts there, guys.

You're quite a historian of the can industry and the packaging industry and probably you are outdoing us in that regard, but we'll take a stab at it.

Actually, if you want to go back to the '50s, '60s and '70s and so forth, Crown's growth generally speaking was centered pretty much entirely in the United States and Canada, although there was some bottle cap Crown growth in Europe. And -- but really if you looked at the period, I think you would see that through that up until the '90s CapEx, capital expenditures were really not very significant in relation to the whole Company.

Share buybacks were very significant. Generation of cash was very significant. Pay down of debt to zero was very significant. It was not nearly as broadly-based or an aggressive approach as we have.

The product line was very, very limited as you know; entirely focused really on beverage cans, so the food business was very -- almost nonexistent. It was a bottle cap, equipment and subsequently beverage can in that business.

Today, you're right in the sense that we're back to understanding the metal packaging business, which you can do a lot of very good things from a growth perspective provided you have the opportunities, and we do, and still generate a lot of cash and do a lot of things with it for the benefit of the shareholders. So that's where we are.

We couldn't do this, George, if we had not spent 25, 30 years getting established in China, Southeast Asia, Brazil, Mexico, Europe, the Middle East, Turkey. This didn't just happen overnight. It happened as a result of a lot of years of hard work and we got lucky. The markets we believed over time would really be dynamic really be dynamic and vibrant and so forth have really exceeded our expectations and pretty much everybody else's. So, we've been lucky and yet we worked hard at it as well.

Can you utilize some of your existing capacity, whether it is operating now or mothballed, if there's any reserve of that as you grow in emerging markets? Or is that model not useful in this period?

We've done quite a bit of that, as you know, over the last 10 years and we're at the point now where the only place that we really have had excess production equipment over the last 10 years is in the United States. But at the moment, if the markets continue as we forecast them to, we're pretty fully loaded in North America and Western Europe. So I'm afraid that going forward, pretty much all of these plants that we're talking about, everything we're doing is new equipment and which has a positive aspect because it prepares us better for competition the future where we know we're going to have to be very low cost.

Everything we do is always with a view towards can we be cost effective 10 years from now as our competitors get bigger and more sophisticated and the customers become more demanding. So, no; we can't really move much used equipment anymore.

Okay, a couple of follow-ons, more nitty-gritty; I know you -- I think in answering Claudia's question you were saying Middle East has been recovering nicely. But it didn't really state what the change was. When I did some rough reverse engineering of your numbers it seems like the Middle East was still down meaningfully in 2Q. Is that correct or could you give us any kind of parameter for the growth or decline?

Yes, we have something here.

The Middle East for the quarter was up 3% in total across the Middle East businesses. John got hung up explaining the Saudi situation to Claudia's question. Saudi is still down, although it is improving, but across the Middle East we are up 3% in the quarter.

Jordan, Iraq and the Gulf have been very, very strong. And Saudi, as I said, it is still off somewhat but it is a function of this -- the underlying demand for the products is there. It's just there has been a tremendous price increase by Pepsi, Coke and the others at the retail level.

But presumably the comp is now easier and you have seen the low watermark from a demand standpoint, so all else equal that should be a better trend for you over the course of the year. You would agree?

Yes, we do, and into next year as well.

Last question and I will turn it over. Has the pricing compression in Eastern Europe, and I guess maybe even Western Europe, stabilized? Has it worsened given the new capacity (inaudible) again, have we seen the low watermark on that? Hopefully it's stable to improving from here on out.

I think it has. The market itself -- the overall market itself is pretty healthy, as you can see in our numbers. We don't think our numbers in Western Europe, or Eastern Europe for that matter, are any different than anybody else's. So the industry is doing well and we believe it has -- we think we're through some margin compression now from 19.5 or something to 17.1, not all bad, but yes; we believe it has.

Al Kabili, Macquarie.

I was wondering if you could just clarify what currency was -- impact on EBIT in Europe beverage and Europe food.

On EBIT in Europe food, it was $4 million. And it was $1 million in Europe beverage.

And I guess you haven't fully quantified the impact of the strike, but could you maybe rank order for us what -- in terms of the decline in Europe beverage, how much was driven by the strike versus difficult tinplate gains versus pricing compression? Is there way to just think about that?

I think certainly the strike is the first and foremost, and all of the related production losses and inefficiencies across the whole system, as John mentioned. And then we had -- in that business, I will tell you we had about $2 million of inventory re-pricing in the second quarter of last year. Currency was $1 million.

Start up costs in Slovakia; you're getting me to go through a whole list and we didn't want to make a whole list here for you. But start up costs in Slovakia probably cost us about $2 million in the quarter, and as John mentioned there were some pricing impacts as well.

Okay. So as you look out --

That's not everything though; just off the top of my head I am feeling things off. There are other items as well.

Right. So as you look out into the back half, given the strong volume outlook in Europe, can you -- are you going to be down a little bit still in EBIT year on year in Europe beverage? Or what is the outlook kind of in the back half of the year?

The strike carried on into this quarter. As I said we concluded it in mid-July. The result was we ran down inventory every place. We broke up production runs in a lot of places and so it's going to take us a little while to recover in spite of the strong demand. So frankly it's just a little bit premature.

The good part is demand continues to be very, very strong. And so we're hopeful, as quickly as we can come back up and the whole system starts running more effectively, and we get the Slovakian plant further up the learning curve, it's going to be positive. But unfortunately, once you start breaking up production runs in the middle of the summer in the beverage business it's not a good thing for unit volume costs. So that is our concern.

I appreciate the extra color there. I know this may be hard to quantify, but is there any initial estimate you guys might have in terms of what World Cup may have temporarily improved demand in the European Beverage business?

We honestly don't have a clue. Anything we gave you would be absolutely something that we just pulled off the wall. We don't have any idea.

Okay. Final question is just throughout the quarter, was there any businesses that stood out in terms of accelerating trends or decelerating trends as the quarter progressed?

Well, nothing that we haven't already mentioned. I think the food volume in Europe is very, very positive, really a good, strong, solid quarter. It's been coming back, as I said on the call, but that was very positive.

To me anyway, the European volume was almost somewhat surprising; very strong. We've been expecting it to come back. We've been expecting growth to resume. Our customers have been telling us that, but to see it was very positive.

Brazil continues to be surprising; just tremendous, dynamic growth. All of that capacity that we have committed ourselves to, I think we almost believe we have it all sold out at this point under contract, and frankly more customers wanting the capacity than there's going to be capacity available at the moment.

Southeast Asia has been tremendous, just a tremendous market for us in virtually every country and China has started to come back. So it is really -- it has been a surprisingly resilient, strong demand quarter. And talking to our fellows all around the world, and we're having a big -- a global management meeting tomorrow, the reports we're getting is we believe the trends are going to continue.

And a follow-up to that what are you seeing on the more cyclical side of your businesses in Europe specialty and the aerosol business in terms of volumes?

Aerosols have been strong on both sides of the Atlantic since the first of the year, very positive sign, and specialty started coming back as well. So, we had a period last year when not only was new construction clearly off and so specialty was adversely affected, but do-it-yourself went to virtually nothing. That started coming back. So specialty is picking up as well, and aerosols, as I said earlier, very, very strong.

Okay, thanks again.

Chip Dillon, Credit Suisse.

First question, John, you mentioned your ability to obviously buy back stock given your free cash flow level, even with $300 million of annual CapEx. Just sort of looking at your project pipeline, it looks like it would be hard for you to spend nearly that much in 2011 unless there are more projects that you have in mind. Could we see sort of the pace of additions continue throughout that year and into 2012?

Which additions are you referring to?

If you add up, there's effectively four plants -- the one in Brazil that has already started and three next year; Thailand, China, Slovakia, Vietnam a couple there. Obviously you picked up CapEx this year from 2008 and 2009. Do think you will stay at that rate in 2011 and 2012?

We do in 2011. We don't want to speculate into 2012. But we would guess, based on what we already have on the drawing boards and things that we see that are likely, we think it will probably be around $300 million next year.

And that includes finishing the spending for the projects that are under way here, which we are going to spend a fair amount of capital in Brazil next year as we finish the projects through the beginning part of next year as well as [Hang Gel].

Got you. As those projects come on, Tim, is it safe to say your tax rate will probably start to edge down and 2011 in 2012, just because the overseas component continues to get bigger relative to the US?

Short of any policy changes, yes, but I don't want to speculate on future tax policy.

Right. But at least your mix will change. What about the -- when you look at the balance sheet, even with the receivables coming back on, it looks like you're down. Even with $100 million or so buyback this year, you will be ending the year in the low $2 billion range.

Is that sort of a point where you feel, if you will, low enough in that we probably would start to see pretty much all of the incremental cash going either to shareholders or for investment such as CapEx or acquisitions?

I think that is what John -- in his prepared remarks I think that is where John was going with the prepared remarks.

The last point; it sounds like you all clearly are expressing a preference for buybacks or a continuation of that versus any sort of ongoing dividend. Certainly the current anticipated tax changes in 2011 would encourage that. Is that the way we should think about how you guys will distribute cash in the future, that we should not count on a dividend and it should totally be buybacks?

I think so. We could always change that. But at the moment our focus, as I said earlier, is on share buybacks and probably not dividends.

Last question. When you look at the non-controlling interest and minority partners, is it still sort of a good place to be to sort of assume they get about 70%-ish of the earnings paid to them in cash every year? I know it bounces around but that seems to be where it has been in recent years. Is that a rough guess to use going forward?

That's about right. And remember when we're paying dividends to them, we're also paying dividends back to the US parent company as well.

Got you. Thank you.

Chris Manuel, KeyBanc Capital Markets.

A couple of questions for you. First, as we look at some of the re-pricing gains and things you have had in the first half, are we at a point where that is largely behind us? Or will there still be some difficult comparisons as we work through the back half of the year?

There's only one business that has anything left in Q3. The North American food business has a little bit more than a handful in Q3, but other than that everybody else is clean going into the back half of the year.

So that will be helpful. On the start up cost side what is typical? Maybe, John, if you could give us a little bit of a feel for -- I think it has been two quarters or so that that plant has been up and running now in Slovakia. So are we largely behind the start up costs? And then the new start up costs will come onboard, those will be from the couple of lines that are coming in the balance of the year, I think Vietnam and Thailand. What is typical as a plant starts up?

Well, we expect the plant to breakeven by about the third quarter of operation. And in the case of Slovakia, we have really planned to start commercial production in March because the construction ran well ahead and equipment deliveries ran ahead, we began in early January. On reflection, maybe we should've gone a little slower on some of the things we did with installation of the line. We're expecting by the fourth quarter we should be through and to at least a breakeven situation in Slovakia. And that is pretty typical.

Now, if we have an existing plant, of course it goes much, much faster. You have fully trained staff. You're adding workers and so on. But a brand-new greenfield facility can take a little longer and that has been the case at Slovakia.

So probably a couple of million dollars a quarter next quarter as well and then start to abate after that. Is that fair?

That would be absolute high-end. It's not going to be that much.

And then as we look out over the next couple of years and you will have a new plant in China, I believe that is a new facility; the ones down in Brazil are in existing lines, so those won't be as significant. Am I thinking about this the right way?

Roughly, you are. One of the Brazil facilities you're referring to is a new plant down in the South, but a lot of the capacity is also (inaudible) into existing plants. So we have had real good luck in Brazil. We have outstanding management team there. We've been able to use the people out of our existing facilities, move them into the new facilities. So that has been very, very smooth.

So frankly it's a lot easier. China will experience the same thing. Some of these other places you are really recruiting in new countries we haven't been in before, it gets a lot more difficult, which is why we've talked about one of the reasons we think we've been able to be as effective as we have been. It's because we're in most of the countries we want to be in, and growth of the existing asset base and employee base is a lot easier.

And just a follow-up on George's question earlier, as you look -- think of white space, there's been discussion in the past. I know it's a small market today of India or places like that. But are there other potential white space areas for beverage cans that you're working with folks today, but might be the next Brazils or next Vietnams or other places over the next decade?

Chris, at the moment we don't see anything. We think the markets we are in are going to keep us fully occupied for quite some time and have begun to grow and so forth. Our experience has been that sometimes you can sit in some of these very promising countries for quite some time before you really start picking up customer packaged goods.

So, India's a very attractive market. It has a lot of the characteristics that look very, very promising. We're aware of it. We've been selling into it out of our Middle Eastern facilities for 20 years, so we know the market. A number of our senior managers in the Middle East are Indian. So we're aware of it and it's something we look at, but I wouldn't say there's anything imminent there.

The last question I had was, there was one component that was -- I won't say notably, but somewhat absent as you talked about ways to redeploy cash and that was acquisition. As you look out over the next 12 to 24 months, you guys have been relatively -- I don't want to say dormant, but on the sidelines looking at a lot of the deals over the past couple of years.

How do you assess the probability or your thought process of looking at deals versus continuing to redeploy cash through share repurchase or potential dividends or things of that nature?

We look at pretty much everything in the metal package space. We have no interest in anything else. In the metal packaging space, we looked at everything that has been available, everything that has been widely talked about and some things that haven't been talked about in Europe, Asia, North America and so on.

We just constantly compare what we think we can do with what we might be acquiring, the growth characteristics and so forth, returns to what we can do with these greenfield, brownfield, organic growth opportunities in the emerging markets where we think the market is going to continue to be very dynamic looking ahead. And frankly, we just get there. We just can't get there. Prices are really going to have to move in the other direction in terms of existing metal packaging companies to mature markets to tempt us. I know Tim might want to add to that.

No, I think John said exactly with the formula is and we've not been able to make it work in almost every case.

Okay, that's helpful. Good luck the balance of the year.

Rick Skidmore, Goldman Sachs.

Tim, could you just talk about how you're thinking both about the balance sheet a little bit more, and specifically it sounds like you're going to let the leverage ratio drift lower as your EBITDA ramps up because of these projects, but would you consider leveraging up the balance sheet a bit more to accelerate the share repurchases?

I think we'll consider everything that, as John said earlier, will enhance shareholder value. I think it is a bit early to consider leveraging up to buy back shares. We have a significant amount of free cash now that we expect to generate this year. And certainly we would expect that number to be higher next year, even after spending $300 million of capital in each year. So I don't think that, while your question is something that we will consider potentially in the future, that it is something we are going to consider in the near term.

And secondly, Tim, how do you think about the pension and the underfunded status in the pension? And given the low interest-rate environment that we seem to be in that might suggest the pension liability goes higher in 2011, can you talk about how you're thinking about the pension?

I think the Company's strategy has been to put in or make cash contributions to its pension plans as required. Fortunately for us, most of our plans are fairly well-funded. They're not all fully funded but they're very well-funded. We do generate a lot of free cash flow which is after pension contributions, but we're not going to chase pension funding when we have other good opportunities.

We do know we're in a period here of low interest rates. Whether that is artificially low, being kept down by central banks or not, I'm not going to speculate on at this point. But over time our view is that rates will rise to more appropriate levels to reflect the risk in these more mature countries that are trying to borrow money and the liabilities will moderate at that point. But we're not going to chase after it.

And maybe back to the share repurchase for a moment. Can you talk about -- will the share repurchase be spread more evenly through the year, or will you wait for more of your seasonal free cash flow timing to be in the market buying back stock, i.e. in the second half of the year or fourth quarter?

I'm not going to -- I don't want to give you too much indication of when we're going to buy, because we don't want to disadvantage the shareholders. But I will say with the new revolving credit facility we are not -- we don't need to wait for the seasonal -- the season to be over for those cash flows to come in. We have adequate liquidity right now if we wanted to do something very large.

Andy Feinman, Iridian Asset Management.

Have you guys seen any -- I know you're not in -- or I guess -- I think I know you're not in Germany. But have you seen any -- I guess [they'll] see throughout Europe if the German retailers start to sell cans again. And I had heard that at least one retailer had them on the shelves, was testing that and there were at least maybe two or three others thinking about it. That market is maybe one-third of the size it used to be in terms of consumption, so that would big if it happened, probably for everyone, including you.

We manufacture in Germany, but not beverage cans. And you are right; it is a small market for us and we don't know a lot about it, frankly. We are aware of it but we are not active in it. And, no, I have not heard; there's been some speculation that there might be a pickup there, particularly in beer, but I don't have an update for you on it.

Thanks. I was just trying to get you to do my work for me, but I guess that is not going to happen.

What I can tell you is that the European beverage can business is about 53 billion units. Germany is a couple of billion units. I think anecdotally what I've heard from our guys in Europe, what you say is correct. There are more cans on the shelf, but they don't expect German -- through the first half of the year I don't think they expect the German volumes will be any higher than 150 or 200 million cans. So, on a percentage basis it may sound very high because it is against a low base, but in absolute terms across the European business it is not very high.

And I think you answered a question earlier about North American food margins, which led -- in the third quarter last year; did you say there was still a little metal in there?

Yes. From the inventory we had on hand at the end of 2008, we would have had certain specifications that would not have been sold until the Q3 pack.

So, and your ability -- you probably can't offset that this year. That would be (multiple speakers)

Listen, we're hopeful we're going to continue to offset it with supplying those specifications and customers that provide is a fair return for the work we undertake to make cans, and with further cost reductions throughout the entire system as we have done so far this year.

Okay, great. Thank you.

Joe Stivaletti, Goldman Sachs.

I just wanted to check on a couple of other cash flow items. You talked about CapEx and interest getting down to your $400 million of free cash flow. On the pension front, what do you expect your contributions this year to be relative to what you're expensing on the pension front?

Contributions are expected to be about $75 million and expenses $115 million.

And then do you -- could you give us any guidance on sort of your expectations on the working capital front for the full-year 2010?

If you go back and look at last year, we had a really successful working capital campaign last year. This year, our initial expectation is that working capital would be a use of cash especially as we start to build businesses in Southeast Asia and Brazil, where they do need to build inventory ahead of the Chinese New Year and/or the Carnaval. We have -- inventory is quite low right now. We will see where we get to at the end of the year, but I would still say it is a modest use of cash this year.

Any other sort of big line items? I know you have some cash taxes and the asbestos thing has gotten to be pretty tiny, but any other sort of big line items leading down to that free cash flow guidance you have shared?

You have interest paid versus interest accrued. You've got pension paid versus accrued, as you mentioned; taxes paid versus taxes accrued. Taxes paid are obviously lower than taxes accrued.

We do, from time to time, close plants. And there are payments to sever workers and/or dismantle, crate and move equipment or refurbish the building before sale. Those costs go through free cash flow, while the building sales proceeds do not go through free cash flow. But I think they're the big items outside of what drives out of EBITDA.

Have you shared an estimate on the plant closure type expenses for 2010?

We have. I'm sure we either put it in the first quarter release, the Q or we discuss it in the call. I don't have it in front of me though. We close the plants in -- we announced the closure March. Either in the first quarter Q or somewhere, we will disclose that.

Okay. So, the only other question that I had was when you look at your free cash flow of $400 million or more, and you are talking about -- you shared some numbers about possibly returning some of that to shareholders, but that still leaves you with a pretty big -- it looks like a pretty big amount of cash for debt reduction this year. Is it reasonable for us to assume that is sort of what that cash will be going toward or --?

I think if you think about what we had, free cash flow is what is available to service debt or return to shareholders. They are the two options.

Okay, because I just didn't know if you sort of were thinking about anything on the acquisition front that has -- in terms of a use of that cash.

At this point, no.

Thank you.

You're welcome.

At this time, I will turn the call back to the speakers.

Thank you very much and Shirley. That concludes the call today. We ask you to note that the third quarter 2010 conference call is scheduled for Tuesday, October 19 at nine o'clock Eastern Time. And we do think all of you for listening and we look forward to speaking with you again in October. Bye now.

Thank you. This does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.