Crown Holdings Inc (CCK) 2010 Q3 法說會逐字稿

Good morning and welcome to the Crown Holdings third-quarter 2010 earnings conference call. (Operator Instructions). 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 third-quarter conference call. With me on the call today are John Conway, our Chairman and Chief Executive Officer, and Tom Kelly, 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 entitled Management's Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for 2009 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 is available on the Company's website at crowncork.com. You will also find a reconciliation from net income to EBITDA, credit ratio computations and supplemental cash flow data on the Company's website.

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

Earnings per diluted share were $0.84 in the quarter compared to $0.67 in the third quarter of 2009, an increase of 25%. On a comparable basis, diluted earnings per share increased 5% to $0.85 from $0.81 in last year's third quarter. Most businesses performed at or above plan as in the first half of the year with strong volumes and cost reductions offsetting foreign exchange and the 2009 inventory repricing gains which did not recur this year.

Before we begin with our review, I would just like to spend a moment reviewing currency. As described in last night's earnings release, currency translation on a year-to-date basis through nine months has had minimal impact on our reported results. While the United States dollar has weakened recently versus the euro, on average through nine months, it was about 4% stronger than last year. For the third quarter, the US dollar was 10% stronger compared to last year and at current rates is about 5% stronger than last year's fourth quarter. So we will probably see some more headwind in Q4 versus 2009; however, at current rates the dollar is about 7% weaker than the average rate for the first nine months of 2010. So currently it appears currency will be a nice tailwind in 2011.

Excluding currency, third-quarter net sales were in line with the prior year as global unit volume growth was offset by the pass-through of lower raw material costs. Sales unit volume growth continued to accelerate in our emerging markets businesses. Segment income on the back of strong volumes and lower cost was up 9% over the 2009 third quarter, and when excluding the impact of currency translation, segment income increased 12%.

Turning to our business segments, Americas Beverage revenue increased 13% over the prior year on the back of 11% sales unit volume growth. North American volume increased 10% in the quarter, and demand continues to be very strong in Brazil. Segment income at $74 million was up 25% both for the third quarter and nine months compared to last year, benefiting from currency translation of $1 million but mainly from strong unit growth and excellent manufacturing performance.

Revenues in our North American food business were down to the prior year as the result of the pass-through of lower tinplate costs. Sales unit volumes were up a bit more than 1% versus the prior year. Segment income was down $10 million compared to the 2009 third quarter and reflects 2009 inventory repricing, which did not recur in 2010, as well as lower planned production, which, as you know, results in lower overall cost absorption. Segment income in the quarter at 15.3 to net sales and 13.3% year-to-date reflects lower operating costs from the structural improvements made to the manufacturing platform over the last several years. Adjusted for currency, European Beverage sales were up 1.2% over last year's third quarter as increased sales unit volumes are partially offset by the pass-through of lower raw material costs. Segment income, when adjusted for currency, was level to the prior year at $74 million. Mid-single digit unit volume growth was offset by the effects of the late June, early July strike we faced in Spain that we previously discussed with you, as well as some price adjustments made in the business.

As a percentage of net sales, segment income at 17% was in line with the prior year and remains the highest in the Company. Demand continued to be strong throughout the division, notably in France, Jordan, Spain and the UK.

When adjusted for currency translation, European revenues were down 7% due to the pass-through of lower tinplate costs and 3% lower volumes on a lower vegetable pack. The business continues to perform very well, and segment income for the third quarter at 14.9% is up 180 basis points over the 13.1% in the third quarter of 2009. Adjusted for currency, segment income was up $3 million or 3.5% over 2009.

Our Specialty Packaging business recorded a nice improvement over the prior year, and segment income at 11% to net sales benefitted from unit volume growth and good cost performance. Our non-reportable businesses performed exceptionally well compared to the prior year with both Asia-Pacific and aerosols performing well. Income from non-reportable businesses was up $11 million or 24% in the quarter, mainly on the strength of very strong volumes in Asia.

Interest expense was $11 million lower in the quarter and $42 million lower for the nine months due to lower debt outstanding year over year. During the quarter we issued EUR500 million due 2018, and we used the proceeds to retire early 65 million of our 2011 euro bonds, as well as the remaining $200 million bond due in 2013.

For the year net interest expense is projected to be about $190 million before the impact of borrowing costs related to any further share repurchase activities the Company may undertake in the fourth quarter. Excluding the change in how we report Accounts Receivable securitization, free cash flow for the year is now projected to be at least $425 million after capital expenditures of $300 million.

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

So to summarize, we have had a very good performance so far in 2010. Unit volume demand continues to be very strong across most businesses and markets where we operate. As expected, volume demand was very strong in the emerging markets, and we continue to invest for future growth in these markets.

At this point we want to update you concerning our progress with emerging markets capacity additions and changes in our joint venture ownership structures. I will summarize this by region for you.

Starting with Brazil, as we previously discussed with you, we are building a new plant in Southern Brazil in Ponta Grossa. The plant and line one are scheduled for completion in the first quarter of 2011, and we will then add a second line to the plant in the second quarter of 2011. Additionally we are doubling the capacity of the Estancia plant located in northeast Brazil, and that should also be completed in the second quarter of 2011. The Estancia plant construction and line one were completed in the first quarter of 2009, and since then operational performance has been excellent from the start.

In Europe we have announced the addition of a second beverage can line to our new Slovakian plant also scheduled for completion in the second quarter of 2011, and recently we announced a major capacity addition to our Turkish operations. We will expand our existing plant in Izmit, which is near Istanbul, and we are also going to build a new plant in south-central Turkey in Osmaniye with a commercial startup being in early 2012.

Our activity in Asia, as you might expect, is quite heavy, but it is well organized and manageable. In Southeast Asia we have or will soon double the capacity of three existing plants. The second line in Thailand is now on operation with the third-quarter startup, and very shortly, in the fourth quarter, we will complete the addition of a second line to our Dong Nai, Vietnam plant. We have also announced the addition of a second can line to our plant in Cambodia, which was scheduled for completion in the fourth quarter of next year.

In China we are building four new plants. One in Hangzhou, which is just Southwest of Shanghai. That is scheduled for completion in June of 2011. One in Putian, which is in the Fujian Province. That will be completed in the fourth quarter of 2011. The third plant is in Ziyang, further West in the Sichuan Province, and it is in between the cities of Chengdu and Chongqing, scheduled for completion in the first quarter of 2012. And lastly, in Guangdong Province in Fushan scheduled for completion in the third quarter of 2012.

So certainly there is a lot of activity underway, but as we look at our progress, all the projects are on schedule and on budget. Total capacity expansion during this period is approximately 9 billion units. It is almost 20% additional capacity to our existing global footprint, and that is going to be added across Brazil, Eastern Europe, China, Southeast Asia.

We have also acquired our partner's interest in China and Hanoi, Vietnam. We have had a wonderful partnership over 30 years in the region and look forward to continuing to serve their business in the future. It certainly is a very exciting time here at Crown, and we are fortunate to have many good opportunities. So we will look to finish 2010 on a strong note and continue to prepare ourselves for a busy 2011.

Lastly, we do project full-year earnings per diluted share to be between $2.15 and $2.20, and with that, I will turn it over to John.

Thank you, Tim, and good morning. Tim has done a thorough job of updating you on another solid quarter, and I do not need to add more to it. Our strategy for the Company remains unchanged. We will continue to strengthen our metal packaging businesses in the more mature markets in which we operate through reducing costs, controlling spending tightly, introducing package innovations where appropriate, and working the asset base hard. We will continue to devote the great majority of our capital expenditures to the promising emerging markets in which we operate. We believe that we should be able to grow in these markets at least as fast as the overall packaging markets and often faster as a consequence of the excellent business base that we have established, our outstanding management teams and our extensive experience and knowledge accumulated over many years of operation in these markets and countries.

Finally, even after selectively taking advantage of the good opportunities available to us in these many emerging markets, our businesses will generate free cash to return to our shareholders.

As Tim mentioned to you, our capital expenditures continue to be effectively deployed. We are on budget from a cost perspective and on budget with regard to timing and commercial production in all of these many projects we have underway. Those of you who follow our Company closely know that we have unparalleled capital projects management capability in the Company, and this is a significant reason why we are able to deploy capital in so many projects around the world. It also explains why we have been able to employ capital cost effectively and create significant capacity additions at relatively low capital cost.

So, in conclusion, performance continues to be strong. Demand characteristics in all of the markets in which we operate are very promising, and our strategy is sound and execution remains excellent.

With that, operator, we will throw the call open to questions.

(Operator Instructions). Tim Thein, Citigroup.

Congrats on another strong quarter. First, Tim, just a follow-up on the EPS guidance you provided. Any change or any tweaking of the free cash flow number for this year? Can you just remind us?

Yes, we did. I think for the first two quarters this year we had been projecting $400 million, at least $400 million, and I just said at least $425 million.

Okay. Sorry, I missed that. And then separately I suspect you are a little hesitant to give any kind of outlook into 2011, but can you just help us -- help frame -- there is a litany of projects here going on starting, I guess, back to '09. But from the new bev can projects, as we look out to 2011, any kind of help you can provide as to the -- just kind of ballpark it with regards to an EBIT impact. I know there will be some startup costs and some learning curves, but any way you can help frame that opportunity for us as we look into next year?

I think I want to be a little careful of what I say about 2011 because, as you say, it is very early. There are a lot of moving pieces. But generally, as you can tell, we feel very good about the outlook. Volume demand is extremely strong, and as you all know, we are adding a lot of capacity.

What I can -- the only thing I would say is that you are beginning to see some increased performance at the segment income line in the non-reportables, mainly coming from the Asian businesses, and also in the Americas, some of which is certainly attributable to volume growth and performance in the United States, and a lot of that coming from volume growth in Brazil. But beyond that, I don't think I really want to start at this point is very early estimating EBIT growth or segment income growth from emerging markets, capital projects. But you can see significant improvement already this year.

Yes, Tim, John Conway. If I could add something. We have the complication of a lot of projects and a lot of learning curves, and so we think it is a little bit premature to get very specific. But what I think we can say with a great deal of confidence is that all of the capacity that we are adding that is coming on stream in 2011 and quite a bit in 2012 is already we believe sold out under long-term contracts with mostly major multinational or regional brewers or soft drink companies or other drinks companies. So we feel very confident that everything we can make we can sell.

Okay. And last one, Tim, on the corporate line, it has obviously grown to be a bigger number with the pension in there, but given there is a significant amount of European-based costs, I was surprised that that number actually fell as it did in the third quarter. Any color you can shed on that and then the outlook as you look out into the fourth quarter?

Yes, well, as we pointed out, there is a fair amount of currency in there, and then the rest would be -- pension is actually lower year on year as you know. I think last year our pension was $130 million. And earlier in the year, we would have provided guidance for pension this year, and I think we said about $110 million, $115 million. So the quarterly effects of the lower pension are running through, and principally we have probably got some lower legal expenses, things like that. So that would be the corporate line adjustment. Not a lot other than that to explain to you.

Peter Ruschmeier, Barclays Capital.

Congratulations on the quarter, guys. I wanted to follow-up on your emerging market growth for bev cans in particular. It certainly looks to be accelerating, even though it is a larger base. I'm trying to better understand, is this something you attribute to more of a one-time step change of a larger footprint, or do you think that you are, in fact, going to a new higher level rate of growth in those markets?

Well, I think it is probably both. We are growing off a bigger base, of course, so the unit addition is more significant. But, at the same time, it seems that there has been an acceleration in the most dynamic markets of conversions to metal cans. So we're getting the benefit of increasing overall growth and an increasing rate of packaged mix change. And it is not just from the glass to aluminum cans, but it is also from -- these welded cans to aluminum cans and other forms of packaging to aluminum cans. So we think that trend is going to continue, and as we look over the next five years, we think the pace of the trend is going to continue. I'm not sure it is going to continue to accelerate, but we don't think that the rate of acceleration is going to decrease. So at the moment it looks like all of the markets in which we are located almost without exception are very, very promising.

And John, most of your growth has been in bev cans. I mean can you shed any light on your food can outlook, and should we expect another leg of growth in that business?

I think it is too soon to say. We are looking a lot at food cans throughout Asia, but the size of the market, processed foods, for example, in China and Southeast Asia, is still quite a bit smaller than relative to beverages of various types, and there are some fairly well established incumbents. So I think there is going to be more growth for us in food, but for us the focus over the next five years anyway will continue to be beverage with regard to growth opportunities.

And maybe lastly, and I will turn it over, certainly you have got a lot of growth on your plate through 2012. It looks like you have already got the visibility of the free cash flows to pay for that and then some. Can you talk about priorities for free cash flow above and beyond what you have got outlined for growth?

Yes, so obviously after the growth that we have outlined, we still expect to generate as we say here at least $425 million, and we are going to continually try to grow that each year. So that is what is available to either continue to de-lever or return to shareholders. You saw a first small step at returning funds to shareholders during Q3 with the purchase of $100 million of shares, and we will continue to look at the best way to deploy the Company's capital whether that is further deleveraging or buying back shares.

George Staphos, Bank of America/Merrill Lynch.

I wanted to follow up on that comment on free cash flow guidance. So, even with all of the expansion in emerging markets, Tim, were you suggesting that free cash flow in your view should grow in 2011, or is it to early to call that? And the related comment would be your question, where would you target, if you could, capital spending for 2011 at this juncture?

Well, as we said this year, we're going to spend right around $300 million. Whether the number is 290 or 310, we don't know. I would say that for 2011, we will at least be at $300 million. You can tell by the number of projects we have underway, they are certainly not all going to be complete this year. So the spending and the completion of those projects will run into next year, and if we continue to be as fortunate with opportunities, we will identify some other good opportunities that we feel appropriate to spend money on. So I think at least $300 million for CapEx next year, and we will do our best to continue to grow cash flow.

If you do your best from what you can see, would you expect that free cash flow could grow next year at this juncture?

Yes, it is just far too early, George. I don't know what your definition of growth is. If we grow $1 million or do we need to grow $100 million? So it is just too early.

Directional at this juncture is --

Directional -- I think directionally, yes.

I appreciate the color there. John, what do you consider to be the risk if any despite the fact that most of this capacity is coming on with long-term contracts. I think you said effectively all of it that you perhaps excess capacitize some of these markets. Are there any markets that you would be more worried about or that we should be more worried about versus others, or do you feel there is limited risk either in Brazil or China or what have you in terms of excess capacitizing at this juncture?

I think there is quite limited risk. I mean to your earlier question, most of the CapEx as you can see is going into Brazil, Southeast Asia and China. And we have had a sustained period of very substantial growth in Brazil and Southeast Asia. It is supported heavily by equivalent or more capital spending by our customers who are aggressively expanding their capacity. And so I think we feel very confident about that.

China we think has perhaps reached another level now. And (inaudible) is a consequence of continued growth in beer, conversion from glass to cans, a growing middle class, more disposable income and so on. And, in addition, we have this very strong effect of a variety of Asian drinks, teas, juices, health drinks, etc. converting from other packaging into aluminum cans. So we are pretty confident of all of it, and at the pace at which it is going, as I said earlier, we think over the next five years we can plan sensibly for continuing growth that we're going to need to service if we want to keep our customers happy.

Okay. I appreciate that. Two last questions and I will turn it over. One, very quickly, if I take the interest expense from 3Q and just annualize, I get above $190 million. Can you remind me what I might be missing in that calculation?

And then as far as North American Food, was the path a little bit weaker? Was there any kind of run over into the fourth quarter in terms of packs that could help earnings and your volumes? Thanks, guys. Good luck in the quarter.

Yes, so, George, I forgot to mention, congratulations, and so answering your interest expense question, I said net interest expense. You would have to back out interest income and do the same likewise for Q4. So you should get right around 190 million, maybe a couple a million more or less.

Okay. Thanks for that. Sorry about that.

And then on the pact in the United States, certainly some of the crops have been delayed as you are well aware into the fourth quarter. Some of the crops actually ended early in the upper Midwest. Actually we were quite pleased with our volume performance in Q3. As you know, as I said, we were up a little over 1%, about -- it looks like we are up about 1.3% in the United States in volume terms. And so our results reflect the fact that we reduce production as planned as we come through here in the fourth quarter, but I don't think we have any real concerns about the pack being extremely strong or weak as we look at Q4.

Chip Dillion, Credit Suisse.

The first question is, I think if I heard you right, you said that your North American Beverage can volume was up like 10%, which was pretty -- if I have got that right. Could you explain why that was so strong?

Well, as we have predicted earlier in the year, we were the beneficiaries of some competitors doing some compassionate realignments that left us with plants that were better situated from a freight standpoint. So we picked up some volume as a consequence of that. When you look at a our customer mix here and it is a combination of beer, branded soft drinks, private-label soft drinks, collectively they just all had a very strong third quarter. So it is really just as simple as that.

And we have been running at about that level for the full year.

Got you. Getting back to the growth track that you are on, it seems to me that when you look at your bigger -- your two largest competitors globally, obviously one has been in a debt pay down mode, and the other has been more or less acquiring capacity or joint venture interest. I would assume that as you go into your customers and talk about helping them with their needs in these emerging economies, that there is probably no one else left in the waiting room to meet with. Do you think is that a fair characterization, and do you think -- how much longer do you think you are going to sort of have this opportunity to garner the lion's share of growth going forward?

Well, believe it or not, there is a lot of competition out there. And some of the markets, some are more concentrated than others. So we face competition every place in the world, and the customers bring competitive alternatives to our attention. If not people that are already active in the countries where we are, then those who they might wish to invite in. So we don't have an absolute open field here.

But having said that, as I've said in the opening remarks and we have said for quite some time, we do feel with the base that we have and the markets that we feel are the most promising combined with the management teams that we have who are largely local citizens, etc. of the countries where we are located and have been with us for quite some period of time, you have put that all together, and we feel we've got a pretty good understanding of the markets, where they are going, what our customers want to do, where their new capital projects are going to be. And so far we have done reasonably well anticipating where the growth is going to be. And I would take this back to the early 90s when we began making significant investments in the Middle East. And we have carried right on, and so we are hopeful that we will continue to grow as I said at least as fast as the markets or faster, but there is always competition out there. No one should believe that there isn't. There is plenty of capital in the world now, and there are a lot of smart, talented people. So we don't have a completely open field, believe me.

And just two quick ones and turning it over. One is, you did mention I think, John, that in some areas you actually are seeing a pretty steady transition from glass into beverage cans. Can you talk a little bit about where and in what products?

And then lastly, if you have just any early view on pension expense next year. Obviously it is a moving target, but with long-term rates down, I would imagine that is going to go up, and I did not know if you had an early read on how much that would likely go up.

Yes, the package conversions I think have been most pronounced in Eastern Europe, although our presence, until we did the Slovakia plant, has been pretty minimal. So I cannot talk a great deal to that. But where we are seeing a lot of it now is principally in Brazil and in China.

Southeast Asia in many of the markets, there never was any returnable -- there was very little returnable glass and not a lot of beer for that matter. So there, for example, the brewers and a lot of the other companies are going directly to cans. They are not going through a transition of returnable glass and then on to cans. So the biggest places where we're seeing package mix changes, as I said earlier, are China and Brazil.

Got you.

And then on pension expense, as you say, it is early. We will -- as you know, we mark-to-market based on the final discount rate we select and the final market value of assets. We don't smooth it, but the final market value of assets on 12/31 -- I think Tom is here. We looked at this a couple of weeks ago. If we had to look at pension absolutely right now, we are probably the expense is perhaps $10 million to $12 million, $10 million to $15 million higher --

Pretax?

Pretax than 2010. However, that is largely offset by changes in post-retirement medical costs as we look into next year. So, from a benefit standpoint in North America, I don't think we're going to see a huge difference in overall benefit cost pension and retiree medical year over year.

Ghansham Panjabi, Robert W. Baird.

I'm sorry if I missed this, but did you break out volumes for AsiaPac and also aerosols?

We did not. Let's see, aerosols on a global basis were down about 1%. It was up about 1.5% in North America, down a little bit more than that in Europe, so just under 1%. Asia volumes, it is somewhere between 15% and 20%. I will leave it at that. I don't want to be too exact.

Okay. That is helpful.

It is a big number, though.

Yes, it sure is. And you also touched on lower tinplate costs that you cycled through on a year-over-year basis during the third quarter. There obviously has been broad-based commodity inflation over the past six weeks. Can you give us some color on your cost curve into the fourth quarter and also into 2011 and more specifically on tinplate?

Yes, you can follow aluminum as well as I can. But coming over to the tinplate side, it appears to us virtually certain that there are going to be significant tinplate price increases in the Americas. Asia has already occurred where there is quarterly pricing, and so we are already seeing prices having moved up already. And the very significant -- probably certainly double-digit perhaps in the neighborhood of 20%, 20% to 25% and maybe high as 25% tinplate price increases in Europe. So it would appear that -- and this is all driven, of course, by coking coal, iron ore and the new formula basis that the steel companies are using to price a lot of their products, including tinplate. So we are looking for another necessity on our part of having to pass this all through to our customers January 1, 2011.

Okay. And then could you just remind us on your current global beverage can footprint in terms of units and then also how much of that is emerging markets, that would be helpful. Thank you very much.

Well, I think we did about 9 -- we probably did about 45 billion units. We will do close to probably 47.5 billion, 48 billion this year. Emerging markets -- (multiple speakers). You have probably got at least 20 billion -- at least 20 billion of the 48 billion; I just don't have an exact number.

And then you said by 2012, you would add 9 billion, and then all of that would be in the emerging markets, right?

Yes.

Al Kabili, Macquarie.

Just a question on North America Food. On the margins, usually you see a sequential margin expansion in North America Food 2Q to 3Q just given the seasonally stronger quarter. It was kind of flat. I am just wondering if there was anything unusual that happened there?

Well, I don't think there is anything unusual. I just will remind you that the actual performance is quite strong for Food can business historically and currently. I think we were at 15.3%, which is a pretty nice performance in Food.

We did have the year-over-year comparison of the inventory pricing gains that we talked to you about in the second quarter that we had last year in Q3 that we did not have this year. That was about $6 million. And the balance is nothing more than lower planned production. So we brought production down just to reduce inventories marginally coming into Q4. But, other than that, I think it is always beneficial to keep in mind where we are in absolute terms, and I think we are really quite pleased with the performance of the business.

Okay, that is fair. In Europe with volume still modestly down, obviously weather was not helpful. Can you give us some color on what you're seeing in food near term trends in Eastern Europe? Do you expect that we could see volume growth in the near term, or are your end markets still sluggish as well?

The reference is Food, is it?

European Food.

European Food.

I think a combination of things. They did have a cold wet third quarter, so there was an adverse weather effect to a degree throughout Europe and particularly France and Benelux. Eastern Europe volumes were reasonably good. I think they were somewhat softer in Western Europe. Some of it had to do from the outset that we now understand with plantings that were somewhat less this year than last year as some of the agricultural segment was attempting to get better price points for products, our customers as well who grow under contract there. So that is what we ascribe the slight weakness to.

But, again, let's keep it in perspective. From an absolute performance basis, almost 15%, up almost a full 2 percentage points over last year, and operationally the business performing very well, excluding currency segment income up about 3% to 4% year on year.

Yes, understood. Okay. If we could switch to beverage in Europe, how are you guys feeling about pricing next year on the contracts that are starting to roll over?

We think supply/demand is tightening in Europe year on year. Demand was reasonably strong actually throughout Europe and starting to come back in Eastern Europe. And so for us, when we look across Europe, the only market in which we had softness this year was Greece, and it is a small market. We do a lot of exporting from there, but the market itself is quite small. The balance for the markets year on year have been up. So we think the price cost opportunities for 2011 look at this point better than they did last year.

Okay. Very good. And then final question on all of the capacity expansion in Beverage, and if I add it all up, it looks like it's close to 6 billion cans in 2011, of course, varying throughout the year. Is there a way with startup and whatnot, is there a way to think about realistically how much of that capacity addition next year will actually contribute to earnings next year?

Well, there is a way, but we think it's a little premature to do it. And so what we would prefer is we need to wait a little until we have a better understanding of all the learning curves and all the things we think are going to be happening. But you can be sure we will one way or another share that with you but not now.

Richard Skidmore, Goldman Sachs.

Can we just talk maybe about the returns you are expecting on the new capacity that you are bringing on? Any reason that the new capacity should come on with either higher or lower margins than the specific regions that those facilities are coming on in?

No, I don't think -- as John talked about earlier, demand is extremely strong in almost every one of these regions that we are bringing this additional capacity in. So you have started to see the expansion of margins in some of these regions as we have doubled the capacity in certain plants. And certainly the doubling of capacity will yield a better return than line one in a facility. But there is no reason to believe that the margins should be materially different. If they are different, we would do that in an upward bias.

And then just maybe a quick question about the China facilities, how do the Chinese margins in your business relate to, say, the overall Americas segment or something that we can compare it to? Are you making similar types of returns in the China market?

Well, the China margins historically three or four, five years ago were at North American levels but, the last couple of years they are well over North American levels, reflecting again the growth in the market. I think we have talked about this with you and others over the last several years. We have been capacity constrained in China and did not want to add any capacity until we felt that we were more confident the market was really going to grow in a more significant way, which is where we are now. So the China margins are now quite a bit above North America.

Just one last question maybe for Tim. As you alluded to, I think, in your comments with regards to net interest expense, but if you look at how your leverage usually declines third quarter to fourth quarter, you are going to be in the low 2s from a leverage standpoint. Your revolver is pretty inexpensive financing. Any reason not to take up your leverage and be a little bit more aggressive either returning cash to shareholders or financing additional growth?

Well, there is no reason. I think, as John said, we are going to continue to look at growth opportunities over the next several years, and that could be as many as five years, as John said, as long as we feel that it can be done in a responsible way. Obviously our method of growth, organic that is, is capital expenditure, which does reduce reported free cash flow, whereas acquisitions is not a free cash flow item. So we are dedicated to trying to generate as much free cash flow as we can for the benefit of shareholders. So we want to be as responsible in that review.

I think there is -- I did mention when I talked about expected interest expense for the year, that it was before any borrowing costs that would be related to any further share repurchases in Q4, and we will continue to look at that. So the answer is at this time money is cheap, but again, we want to be responsible with respect to the balance sheet and numerous opportunities that we could have in the business.

And maybe just lastly, how much do you have available or what is your share repurchase authorization that is currently outstanding, and how much is left on that?

The authorization that we had was $500 million. We have about $355 million remaining. That does expire at the end of this year, so we will have to re-approach the Board of Directors to get a new authorization.

Mark Wilde, Deutsche Bank.

We have talked a lot about all of this expansion in the emerging markets. I wondered if you could also talk about thoughts on acquisition activity or whether you would be willing to pursue large acquisitions?

Well, we are not adverse to that. If the acquisitions made real good strategic sense and strengthened in a significant way positions that we already have in mature markets for example or added more rapidly to our base of operations in the emerging markets, it is something we would certainly consider. We look all the time. So, if we feel that we need to do that in order to understand what the opportunities are, so yes, we are open to that.

Okay. Also, I wondered if you could provide a little color on the administrative headcount cuts. That seems like that was a nice benefit for you from a cost standpoint.

Well, the restructuring charge that we took care here in Q3 provided no benefit on the S&A line here in Q3. The benefit that you are seeing coming through Q3 was last year's restructuring. We did a fair number of administrative reductions in quarter three last year, so it is just cycling through now. As well as the other reductions you see in that line would be currency, and quite frankly, some of the European business' performance is below last year. So bonus accrual at this point we now know does not need to be as high as we had previously accrued.

But the headcounts that we just made, you will see that benefit as we go forward. What you are seeing now, as I said, is from last year's restructuring.

Okay. And finally, John, it seems like you got a lot of tailwind, a lot of things going well at this point. What do you regard as the biggest challenges or the biggest risks you're facing right now?

Well, I mean at the moment things are fortunately going our way, and we believe that we have got risks spread around the world in different countries, different economies, different characteristics to each of them. But, of course, the common thread seems to be sustained growth in the emerging markets. The economies that are not over-levered, economies where the central bankers are behaving very conservative from the standpoint of concern about keeping interest rates competitive but controlling inflation, and there is this widespread focus by so many government leaders on trying to maintain significant growth and consequently increase the size of their middle-class disposable income and so forth. So we have trouble coming up with any nightmare scenarios, frankly, as we look at the business today.

Okay. Well, listen, good luck in the fourth quarter, good luck next year.

Chris Manuel, KeyBanc Capital.

Congratulations on a solid quarter. A couple of questions for you. First, if we could -- I'm going to come back to a question I think that Al asked earlier and a little bit of the cadence as we see these plants start up. Maybe we could use some of the plants that have started up over the last 12 months as an example.

I think in Q1s and Q2s you had volumes up nicely in Europe where you had some capacity come online, but yet profits were down year-over-year. This quarter it looks like, if I take the whole company global beverage up 11% for volume, segment income after currency up 12%, what is the typical ramp maybe as a plant starts up between where it gets to break even, where it starts to earning its cost of capital, etc.? A little color would be helpful.

Yes, it is difficult to do. First of all, you need to keep in mind that these plants are of varying sizes, and so that is an issue. Sometimes, frankly, the bigger they are, the more complex they are. The learning curve is a little slower, if you will. As Tim pointed out, sometimes we are putting second lines, not first lines. Sometimes we are building a plant, not too terribly far from an existing plant. So training and assistance and so forth can be provided by one in a country, whereas another opportunity might need support from our European division or our Americas division in addition to the Asian division, for example. So I think it is tough for us to generalize. But, as I said, if not in December certainly in February, we will have a better handle on the impact in 2011, and we will be sure to share that with you.

But Chris, just, as I said earlier, you have been able to see performance improvement in the Americas Beverage, much of that coming from just the one line we added in Estancia, Brazil in May of '09. So obviously it got through a learning curve very quickly in '09, and it is in full production this year. So you can see that benefit.

In the non-reportables here in Q3, you really see the businesses taking off. And one of the reasons for that is that, in the first two quarters, the aerosols business would have had inventory repricing that would have offset much of the Asian performance year on year, and you don't have that any longer here in Q3 nor going forward. So you are seeing the benefit of the expansions, be they doubling of the capacity or new lines. But, as John says, I think it is -- and, as we have said, it is a bit early to talk about 2011 and our expectations, other than we are very excited about the expectations we have, and we will talk to you about that in greater detail in early February.

I mean it is not as if we don't have a view on this. We do. We -- (multiple speakers) we lay out the next five years constantly. It looks very, very promising. But I think it is a little soon for us to get very granular about 2011 increased production and sales.

No, I understand and I appreciate that. I was kind of looking at the issue trying to understand what has happened, for example, in Americas with some of the stuff in Brazil is that you have also picked up 1 billion, 1.25 billion units in North America that muddies that or really makes the return look bigger, as well as some other structuring efforts. So it is --

By Chris, again, in absolute terms, the operating income or segment income performance of the Americas Beverage business through nine months is up $42 million. You decide how you want to split the $42 million among the US volume pickup and Brazil performance, and whatever number you come up with and divide that by the prior year base, you are going to get a pretty big performance improvement.

Fair enough. Fair enough. The other question I had was, as we think about competitive landscape, over the last two to three months, there have been a number of changes in your biggest business in Europe, the food can business. And obviously a second player that is looking to be -- have adjustments as well. So is there anything you have noticed in the competitive landscape that could either be helping you or hurting you or an update as you think about that?

I think you are referring, I guess, to [Amcor's] purchase of Inpress in the food can space. Our biggest competitor in food in Europe and the number two player went from being owned by a private equity firm to a consolidator that has had a lot of success in the glass industry. So too early for us to tell. We did not pay a lot of attention to what was going on in glass, but generally speaking we think it is probably a favorable development for the food can industry.

But beyond that, no, I would say I mean to the extent, frankly, that on the beverage side, we and our two principal competitors continue to grow around the world, we are happy for them and I think happy for the industry. And that appears to be broadly on track. So we have not seen any adverse developments. Generally speaking we think things have been quite positive.

Okay. That is helpful, and good luck, guys.

Alton Stump, Longbow Research.

Good job on the quarter. I think most of what I was going to ask has been asked already. But I guess just looking at the competitive landscape in food cans in Europe with the number two player being bought here recently. It looks like number three might be bought as well. Is that going to help in terms of pricing in your view longer-term if we see a more rational stance taken by the new players in the market?

Well, in our view we have had pretty rational behavior in the food can industry in Europe for a number of years now. But yes, I don't see anything on the horizon that is going to make things worse, and arguably things are going to continue to get tighter in Europe. We still have a number of smaller players in food cans in Europe. We have heard rumors that a number of them are for sale. So I think we should expect further consolidation. Possibly the new entrant into the metal packaging had a lot of success in consolidation in glass. They may want to carry on and do some more consolidation in food in Europe. So we applaud that, and I think it would be good for the industry.

Andy Feinman, Iridian Asset Management.

During the quarter your net debt at the end of June, it was $2.567 billion. At the end of September, it was $2.814 billion, so the difference is $247 million. But your cash flow, you had $233 million of sources, and then you used $247 million, if you include the $168 million you spent on buying out the joint venture, and then you also had $28 million as minority interest. So that is -- and then $100 million on stock buybacks. Okay.

So the cash flow statement shows use of $142 million -- $42 million of those items I just mentioned, plus $100 million on buying back stock. So why is the debt up $247 million when the cash flow statement shows only the use of $140 million? Does that mean that $100 million was foreign -- quarter to quarter sequentially was because of foreign exchange?

No, foreign exchange would not have been that much. But, as you point out, we spent between buying minorities and common stock we spent $270 million, right? (multiple speakers) So, on those two, we did spend a fair amount of money in capital. About $83 million in the quarter. FX certainly has an impact. I don't have that in front of me right now, but --

Well, I can call you back afterwards. But I mean it is on your press release, page nine of nine. At the bottom of the page, it says what your free cash flow was. And then if you subtract the acquisition and the buyback from that, you still don't get the amount of the change in -- (multiple speakers)

(multiple speakers) You have other cash flow items that impact cash, and then obviously foreign exchange impacts reported debt, although it is not a cash flow item. But if we went through every line, and I guess we can do that off-line, we will get back to exactly the dollar the difference between net debt at the end of June and September, which, as you point out, is 250. But it will not be $100 million on foreign exchange, but foreign exchange does have an impact year on year or quarter on quarter, because, if I just pull it out here, I will quickly find it. The dollar weakens considerably in -- I think the average dollar compared to the euro -- I'm sorry the period-end dollar was 136 at September and it was 122 at June. So there was a significant weakening of the dollar and i.e. more euros became more dollars in reported debt. But we can go through that off-line.

Can you -- would you be willing to tell us what you think corporate and other would be for the year? I mean we have the first three months, but since it dropped so much, we have got to figure out whether -- I mean fourth quarter maybe you pay bonuses and things, and it goes back up.

Well, you know, we accrue throughout the year for bonus as we do for all costs in the Company. We are an accrual-based company as all companies are. We are not cash basis. The adjustment that we made here was a reflection, as you can see, through nine months. Some of the European businesses are performing below last year. That is nothing more than taking down what we felt we previously had to provide. We will still provide incrementally for bonus in Q4 in Europe, but at a lower rate than perhaps we did in Q1 and Q2. Currency will have an impact.

It looks like currency, again, will be a headwind. So all costs on the income statement will be -- all revenues and costs will be lower. But I don't think I'm willing to project it until we get there. I think it is probably somewhere between the 43 and the 56 you see for 2010 and 2009 third quarter. It is going to be somewhere between those numbers. I just -- you're asking me to project everything here.

That's okay. And then when you -- do you have any capacity in China that is old enough to maybe rationalize as you put up this new -- these new plants?

Of the plants that we have -- and we have five now in China in operation and one under construction and three to come -- we have one small plant that by the terms of the joint venture will be ceasing to operate, and it is located in a place where the real estate has become far more valuable than a can plant can justify. So we have one small plant that probably will be coming out. But it is quite low volume. So we don't feel there is any need to rationalize capacity in China. We need more capacity in China. So that is -- frankly, we are little sorry that it is coming to an end, but it is going to have to because of the real estate values.

Thank you for that. My last question is, when you put money into your pension like for next year, I mean what is the earnings lift that you get in terms of the return for making those deposits? If you put in -- well, I don't have to put a number on there, but --

Yes, well, what I can say is it looks like contributions to the pension next year will be similar to what they were this year, about $75 million. I think that is more or less we are in that range.

As we have discussed before, we do not think it is prudent to pre-accelerate pension contributions just to boost reported earnings. Our view is that interest rates, as John mentioned earlier, are potentially artificially low and could over the next several years snap back to much higher levels, which obviously changes the pension dynamic.

But having said that, money that is contributed to the pension plan, there is an expected return rate that if you simply take the expected contributions times that expected return rate, you get that component of pension expense. That would be the pension income piece and then offset by service costs and interest costs and then the amortization of actuarial gains and losses. So it is just one piece of an overall pension number.

Was that the last question you said?

That was the final question.

Okay. Well, thank you very much, Shirley. That will conclude our call today. And we will ask you to note that our year-end 2010 conference call will be scheduled for Tuesday, Wednesday -- I'm sorry, Wednesday, February 2, 2011, at 9.00 in the morning. We do want to thank all of you for listening and look forward to speaking with you again in February. Thank you.

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