Ball Corporation (BALL) Q3 2010 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Third Quarter 2010 Ball Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, October 28, 2010. I would now like to turn the conference over to Dave Hoover, CEO. Please go ahead.

Thanks very much, Jennifer, and good morning, everybody. This is Ball Corporation's Conference Call regarding the company's third quarter 2010 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ in the company's latest 10-Q and in other company SEC filings, as well as company news releases. And if you don't already have our earnings release, it's available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found on our website. Joining me this morning on the call is John Hayes, our Chief Operating Officer and President; and Scott Morrison, Senior Vice President, Chief Financial Officer. And in a moment, Scott's going to talk about our financial results for the quarter and for 2010, and then John will follow with details about the operating performance. While Ball reported strong third quarter results due largely to excellent operating performance and the impact of strategic actions taken during the last year or so. In addition, to improve results, key achievements in the third quarter included the sale of the Plastics business, the acquisition of Neuman Aluminum and announcement about the consolidation of our salmon can production, the acquisition of an incremental 10.1% of our Brazilian beverage can joint venture and an announcement that we were expanding on production of our commercially successful Alumi-Tek bottle to meet customer demand. Also and importantly, Ball aerospace won significant new business increasing our backlog to $852 million at the end of the quarter, up from $539 million at the end of the second quarter of 2010. And after that active quarter, we had significant opportunities in front of us to improve performance and carry momentum into 2011 and beyond. Well I'll turn it over to Scott to talk about the quarter, and then as I said, John will provide color on our operations before I address our outlook. Scott?

Thanks, Dave. Ball's comparable diluted earnings per share from continuing operations were at $1.40, well ahead of last year's $1.21. The following factors contributed to improved results: positive impact from the four acquired beverage can plants, volume improvement that our global Metal Packaging businesses, exceptional operating performance in our various businesses. These positive factors were offset somewhat by a $5 million increase quarter-to-quarter in G&A, primarily due to compensation costs. Purchase accounting and other costs associated with Brazil totaled approximately $5 million, and we had higher interest expense also related to Brazil. During the quarter, the company realized an $80 million gain on the consolidation of our Brazilian joint venture, which is recorded in equity earnings. A 10% weaker Euro negatively impacted diluted earnings per share by $0.07 in the quarter and $0.13 year-to-date. For a complete summary of third quarter results on a GAAP and non-GAAP basis, please refer to the notes section of today's earnings release. Turning to some key financial metrics. Interest expense in the quarter was up as expected due to the acquisition financing from last year's purchase of the four metal beverage plants and two months of interest expense from debt consolidated from Brazil. We now anticipate full year interest expense to be in the range of $145 million on a comparable basis and the full year effective tax rate on continuing operations should be in the range of 31%. At current exchange rates, year end net debt is expected to be approximately $2.5 billion, or roughly $100 million reduction from 2009 taken into account the $250 million outstanding under the company's AR securitization program in 2009. Given the growth opportunities before the company and the consolidation of Brazil, we see full year CapEx approaching $300 million. However, free cash flow is expected to be at least $500 million, excluding the impact of the AR securitization coming on the balance sheet. We continue to be focused on returning value to shareholders. Our plan is to repurchase more than a net $400 million of our stock for 2010, and that's on track. With that, I'll turn it over to John to talk more about the operations.

Thanks, Scott. In the third quarter, our businesses performed very well across-the-board with EBIT in every segment up year-over-year on a constant-currency basis. Comparable results for the quarter in our Metal Beverage Packaging Americas and Asia segment were up nearly 10% with EBIT of $112.8 million versus $102.9 million in the third quarter last year. This increase was driven largely by the impact of the acquired plants, strong volume growth in emerging markets and growth of certain specialty can sizes, offset by previously disclosed unfavorable volume comparisons in our legacy 12-ounce business and the impact of purchase accounting and other costs associated with consolidating Brazil into the segment that Scott referenced earlier. In North America, Ball's legacy volumes were down mid-single digits versus a flat overall market. Something we mentioned would happen during 2010 before a step-up in volume in 2011. As we described in the second quarter conference call, the strong promotional activity we saw in the early part of the summer subsided after the Fourth of July holiday, while in the Beer segment, cans continue to take share from other packaging types as consumers focused on value. Ready-to-drink treat teas and energy drinks continue to grow relative to a soft 2009. Given the growth in Specialty Beverage cans, capital will be deployed to meet customers' needs. Our recent announcement to install a second Alumi-Tek bottle can line in North America is an example of the type of projects that will benefit us in 2011 and beyond. We continue to monitor C store trends where certain single-served product categories are growing upwards of 10%. In Brazil, we continue to see strong growth in demand driven by overall growth beer growth and beverage can share gains. We remain optimistic about our growth and future profitability in Brazil. In China, herbal teas and beer demand, as well as packaged share gains by two-piece beverage cans over three-piece cans and glass continue to be the main catalyst behind strong volume improvement. We're expanding output in our recently acquired Foshan plant in order to meet demand for beverage cans in Southern China and have many exciting opportunities in the future. In our European operations, third quarter EBIT was $63.1 million versus $68.8 million in the third quarter last year. Volumes in Europe were up mid-single digits and excellent cost controls and plant efficiencies were offset by lower-than-anticipated export volume and the FX translation headwind that Scott mentioned earlier. On a Euro basis, Europe's earnings were up in the quarter versus last year. The momentum in the German beverage can market recovery continues. Total industry can sales in Germany were up more than 56% in the quarter versus third quarter 2009 and 41% year-to-date versus last year. We remain bullish on recent trends in Germany. And as you know, Ball is well positioned to benefit from the continuing return of the Can in that market. Our Food and Household Products segment had an excellent quarter, given the early end to the seasonal fruit and vegetable harvest in the Midwest. Volumes in this segment were down mid-single digits during the period. Third quarter EBIT of $49.4 million was up significantly versus the $27.8 million recorded in the third quarter of 2009, excellent operating performance. Our plants are doing a tremendous job and better mix contributed to better results. During the quarter, we integrated the Neuman Aluminum acquisition into the segment. The integration went extremely well and the collaboration was excellent. We will leverage this business capabilities as we continue to assess opportunities to broaden our product line within the Food and Household and Beverage segments. Aerospace had a strong quarter with EBIT of $18.4 million versus $16.2 million a year ago on essentially flat revenue. Exceptional program performance and on-orbit completion awards favorably impacted the quarter. While the recent wins in our Aerospace business were contemplated, as you know, we had mentioned that we were ahead a number of irons [ph] in the fire, it is gratifying to see some of them come to fruition, and we still have good opportunities for additional wins in the future. As Dave mentioned, backlog is up significantly, which sets us up nicely going into 2011 and beyond. The recently awarded JPSS and WorldView-3 contracts, as well as others, are multi-year programs that will ramp up during 2011 allowing for more meaningful earnings impact being recorded in 2012. So in summary, our operations are in a strong position as we approach the end of 2010 and continued execution of selected opportunities as we move forward will only add to our strong base. And with that, we'll turn it over to Dave to wrap it up. Dave?

Thanks, John, and thank you, Scott for your comments as well. The company is performing very well, and we've got some momentum going. We expect this positive momentum to continue as we approach the end of this year and progress into next year and beyond, as I said earlier. We're in an incredibly strong position, both in and operations as John described, but also our balance sheet, strong cash flow are good to see. So for the full year, our goal continues to be to post second half 2010 comparable results higher than those in the first half, which were $2.25 per diluted share. And we're going to do what we can to make that a reality. And with that, Jennifer, we're ready for questions.

[Operator Instructions] Our first question comes from the line of George Staphos from Bank of America Merrill Lynch.

I guess the first question I had as we look out to 2011 and the anticipated pickup in beverage can volume you see in North America, are there any things that you need to do in advance of that from an operating standpoint or a staffing standpoint? Or do you think that you're pretty well situated to take that volume as it comes on?

George, this is John. We're pretty well much situated as we move into 2011. We did take a step back and we had a bit of open volume in our legacy plants in 2010. And so as we move into 2011, we're are in the process of various qualifications things and so far so good.

Similar question as far as Aerospace goes. It was nice to see backlog pick up as it did. Do you feel that as you went through this downturn, I know there's a balance between maintaining margins and maintaining flexibility when the business finally did come back. Do you have again the staffing and the capabilities ready to go as that business comes back in?

George, we are focused like the laser on just that, and the short answer is yes. Many of these programs don't ramp up month one. They will start to ramp up over a series of six to 12 months, and so that allows us some flexibility in terms of making sure we have the right people with the right experience and training in the right position, so we feel pretty good where we are right now.

And you know George as things slow down, we really didn't have to separate that many people. And we've been real careful to maintain careful [ph] capabilities.

Are there any capabilities that you need to recruit for Dave at this juncture? Or again, do you feel you're pretty well situated?

We're going to have to grow our employment somewhat, but I think we were down like a net 28 people this year. So even during the time where you reduce and some cases we've been hiring in others, as you can see from the results in the quarter, I don't think we've got down as much as I was fearful that we might and so this is really good news. As John says, it's not going to flip like a rubber band, but it really, under periods of the next few years of performance for this business.

Our next question comes from the line of Ghansham Panjabi from Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: Looks like steel tinplate prices could be up quite a bit in '11. Are you anticipating any sort of pre-buy in 4Q in any of your Steel-based businesses?

Nothing of significant that would be out of the ordinary. There's all sorts of discussions about what's going on in the steel markets, and we're in the midst of negotiations right now and I don't think it's wise to comment on these things, but we do live in a volatile world and we're going to do all that we can to negotiate as best we can on behalf of our customers. Ghansham Panjabi - Robert W. Baird & Co. Incorporated: And just separately, one of your competitors in particular is having a lot of capacity in Brazil and China. I realize you've added capacity in Brazil as well. But just given your comments and how strong china volumes are, can you share with us your thoughts on how you're manufacturing footprint in China will change over time?

Well I think we're in a pretty good place. The market continues to grow quite strongly, call it, 20% plus or minus and off of a base that's somewhat healthy. So when you just think about what that means, there's a couple of billion cans per year coming into the market. And so we have as you know, our footprint in China is very well situated in the north, the central and the south and as opportunities continue to come up, we're going to take advantage of them in a prudent way.

Our next question comes from the line of Mark Wilde from Deutsche Bank.

Just following on that, is there any chance over the next year or so you might be able to provide us with a little more granularity between kind of North America and Brazil and China?

Granularity in terms of?

Just sort of size of the business, kind of unit volume in the different markets?

I guess the short answer is yes. We can certainly talk about that. As we sit here today, as you know, the North American beverage can market is approximately $100 billion. We have approximately $40 billion of those, excluding the joint venture we have. Down in Brazil, it's, call it $13 million growing quite strongly. And we've got approximately -- remember we're adding a second line as we speak. It will probably up and running by the end of this year, and we're looking at other opportunities, but once that line comes in, we'll have well over $3.5 billion of capacity down there. That's all sold out. And then as you go over into China, it's about the similar size and our position in China is a little bit bigger than that. So we think we're in a pretty good position to take advantage of some of this growth in a prudent way as it comes our way. We're very much customer-focused and so we're talking with our customers and they're talking with us actively about it, and to the extent it makes sense for Ball Corporation to be investing in these regions, we're all at it.

And then John when you look in other markets, like let say, Argentina, are you shipping cans out of Brazil into those markets? Or how do you deal with that?

Not particularly. The Brazil market is so strong right now and the Argentina economy is only fair right now. They have a lot of changes that's going on there and the can market is all not that big there. They do sell cans into it, but our primary focus is into the Brazil market.

Finally, can you guys talk at all about BPA. There was this story out with the Canadian move several weeks ago and just talk to us about what you're doing right now to potentially phase out or move away from BPA in your business?

Over the last -- I won't get into the politics of BPA. I'll leave that to others, but we recognize that at a minimum from our consumer perspective that people have some questions and over the last 18 months to 2 years, we've been actively working within Ball Corporation as an industry and with the coating suppliers to provide alternatives to our customers, relative to BPA. We've had some success in terms of test packs in a good number of different categories, and we're still working on some others. So we're pushing as hard as we can to make sure that we are providing what our customers need. But these things because of FDA approvals and other matters, they don't happen overnight. And one of the issues that the industry has to be mindful of is as we move into alternative coatings, that they fit within the requirements of FDA. And that is a moving target as well, these days.

That Canadian decision, did that have any near term impact on the business?

No it doesn't.

Our next question comes from the line of Chip Dillon from Credit Suisse. Chip Dillon - Crédit Suisse AG: First question is you mentioned that the volume trends in Europe are up about mid-single digits, but that you had lower exports from Europe. What would that have done to the overall segment volumes? Was it still up even including the export decline?

Oh, yes, they were. Yes, they were. We export out of -- from Europe, used as a base everywhere from, to Africa, a little bit in the Middle East, as well as into India and places like that. But that's not a huge component of our business, but it certainly put a little bit of damper on it. But just to give you a context, the overall market was, call it up, 4% or so, and we were right in line with that. We might have been a little bit better if the export had been better. Chip Dillon - Crédit Suisse AG: And then as a follow-up and I think it's been a while since we asked you a question about this, but my goodness, the Aerospace backlog really took off in the quarter. And especially given some of the budget issues, I think that was a surprise, certainly it was to me and good news for you. Can you talk a little bit about what's going on there and how you think that business is going to progress into next year? Because obviously you do have some lead time in terms of how the earnings flow from that business.

Well, as we said earlier, as John said, these programs are hardware-oriented primarily and the WorldView-3 win that we had is from the company [indiscernible] that does imaging of the earth. This is the third in a series of satellites that we've built. It will ramp up starting kind of now and through next year, I don't really know when the peak employment will be, but probably not even next year. And so that gives you an idea of how these work. It's going to take a few years to build at least the initial parts of these. The other thing is that some of the programs that we're getting involved with, like the national weather satellites and so forth, there's a continuous kind of need in their long-term operational programs. And some that we can't talk about, but they're just a real good basic business for our company. We had it on our board meeting yesterday, a discussion about this. And we had a number of pretty good growth years, a couple of years ago then we had a bit of a dip through the last year or so. I think and hope that we're back on the kind of trajectory we were. So I don't know that we would project above double digits or single-digit growth over time, but it could happen. I mean the business, a decade ago, was 10% of the company when we were $3 billion, and it's still 10% of the company when we're $8 billion. And so it is at a pretty good growth trajectory during that time. We think it will continue.

One of the things also is the reason why I mentioned in my comments that we're well positioned not only for '11, but more importantly '12 and beyond, is because each of the programs were in a bit of transition. 2010 has been strong because despite relatively flat revenue, we've been performing extremely well on many of these projects and programs that are completing. And so we've been receiving awards because we've been doing quite well on that. And so as we start to ramp up in 2011, some of these new ones, there's a bit of a mix issue. Nothing to worry about, but that really positions us well for 2012.

Our next question comes from the line of Rick Skidmore from Goldman Sachs.

John, maybe I could just start on the Americas beverage performance. If I look at it on a year-over-year basis, you're up about $10 million in EBIT, but your revenue is up about $300 million. Could you just help us bridge kind of the difference? I know you mentioned there was some acquisition cost in there, but just maybe help us bridge why it was enough, perhaps more?

Yes, this is Scott. From a margin percentage basis, you have to remember that the metal that we told for customers is going to have an impact on margins. So year-over-year, the LME is about up 15%, so just passing that metal through reduces our margin by about 1.5. Up from an EBIT dollar standpoint, it doesn't change, but from a margin percentage it does. And then the consolidation of Brazil -- remember we didn't consolidate Brazil for the full quarter just for part of the quarter. And the purchase accounting cost that we have with that and some other one-time cost kind of dampened the EBIT dollars for the quarter.

And just to make sure I understand that, the purchase accounting is the full effect, but you only got Brazil for part of the quarter?

Correct, and that's why you see on the non-controlling line down below, you don't see anything going out in the future. You'll see dollars going out on that line as the purchase accounting FX go away and we start to a more normalized profitability.

And then can you just maybe just do the similar type of bridge in the Americas Food and Household segment just in terms of that segment was up pretty significantly from third quarter '09 to third quarter '10 upwards of $21 million? Just help us in terms of bridging what drove that meaningful performance?

I'll tackle that one. Two things really drove it. Number 1, product mix. Aerosol was stronger and some other things in terms of value-added, the Food side. And then the other thing is, as I mentioned in my comments, our plans have been performing tremendously well. And the year-over-year improvement despite a strong 2009, tip of the cap to our folks because they've been doing an absolutely wonderful job in the plants of making sure we're focused on the right things and getting after it as soon as practical.

One last question for Scott just in terms of what the current share count is?

When we filed the Q a couple of days ago, it's 88.4 million shares.

Our next question comes from the line of Chris Manuel from KeyBanc Capital Markets.

Couple of questions for you. First, we got to come back to our favorite business at the 10% of you guys now in Aerospace. Of all these contracts that you've been winning, have they been fixed contracts or they cost plus?

It's a combination, but fair amount of fixed price work here. There are things we know how to do and have done, like the WorldView for example, and so that's the answer to that.

So that probably bodes pretty well then for margins, one would expect?

We touched with, we think so.

Second question was for you, Scott. On the corporate expense side, it really ticked up quite a bit in 3Q. Could you maybe give us a little color as to what happened there? And what a reasonable run rate might be?

If you compare it to the second quarter, most of that difference would be stock price difference and the effect that, that has on our composition plans. If you look year-over-year, most of that has to do with other compensation. We're performing better, so we get paid a little bit better.

If I can ask a question about your recent Neuman acquisition. You mentioned that, that's an area you're looking at to target for other investments or other opportunities. As you look out at the landscape there, what types of opportunities do you think -- which markets look most attractive? Obviously you're big in beverage, but the aluminum, the aerosol market seems to be growing pretty rapidly as well. Could you maybe give us a little color there as to what you see is opportunities and geographic commentary as well?

Yes, I'd be happy to. I don't want to be too specific for obviously competitive reasons, but the reason why we think it's attractive to us because we think there's geographic play. We think we can leverage both our Aerosol and the Beverage side of the business and a lot of the know-how in what we do in terms of forming aluminum, in particular. And those three things have provided us opportunities. As you know, the Neuman acquisition was not a big acquisition, but it allows us to get in to part of the supply chain that we think is important. And we have different options that we are currently considering, with respect to what other things we ought to be doing.

Last question is a follow-up on that one is, from a cost perspective, would it be really capital intensive to build out some of that business?

It requires capital, but it's not like the Beverage business, I would say.

Our next question comes from the line of Philip Ng from Jefferies. Philip Ng - Jefferies & Company, Inc.: Just had a quick question, the Europe Bev Can business. Heading into the year, there were some concerns that there might be some slight capacity, but obviously demand's been really strong. So can you give us a feel for operating rates and just pricing as we head into 2011?

First in terms of, I'll call it operating rates, remember, it is more seasonal than other parts of the world in terms of that. And to be quite honest, we, for a short period of time this summer, we weren't able to keep up with demands of our customers, so we're actively looking at how to treat with that going into 2011. But I think all of our plants are running very well and the industry was reasonably tight during the summer months. What that means, going forward into pricing, who knows it's still early and we're in discussions with our various customers, we've had some raw material increases. We've had some input increases and so those discussions are, as I said, in the beginning stages of them. Philip Ng - Jefferies & Company, Inc.: Do you have any update for us on the Lublin plant?

Nothing other than, as I just mentioned, we're actively looking at making sure that we have the right capacity to fulfill our customer demand, not only in the West, but also in the East.

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

One of your glass competitors are, I guess, one of your rich package competitors, I should say. Glass was talking about the Dead Sea beer volumes get a bit better over the last month or two, heading into the fourth quarter. I just want to get an idea if you're seeing any signs of that recovery on bev cans [indiscernible] as well and beer drastically?

Well, what I would say generally on the beer, I don't think we've seen any meaningful deviations over the last month or two. Many of the beer industry there's a lot of noise about aggressive price taking from the beer companies in a declining beer market. But the reality for us is that consumers don't trade out of beer. They should trade down in beer and that's why the beverage can has actually been performing pretty well during 2010 in the U.S. beer market.

And then just one quick follow-up on Europe. I guess a bit surprised that the Eastern European business didn't seem to do a bit better with a couple of the major beverage guys talking about nice growth there. Are you seeing any rebound yet in that market? Or is it still pretty stagnant?

It's modest increases, but nothing like it was before, and it's actually down very slightly relative to the overall market. I think the Western Europe has been growing at a clip higher than the average. In eastern, it's been a little bit lower than the average.

Our next question comes from the line of Peter Ruschmeier from Barclays Capital.

Maybe a question for John. I was curious if you could amplify your comments or maybe it was David's comments on Germany, obviously some big growth rates off of a low base. How much of the potential market of pack types do you think cans can take in Germany? Over what time frame and how you think about positioning for growth there?

Let's have a little history, go back in history. In 2002 prior to the beverage can being deposit, there was a, call it, with domestic consumption, call it 6 billion to 6.5 billion units. It got to a low of several hundred million cans a few years ago. We believe we have a shot this year of, as an industry, approaching close to a billion cans. I don't know if we'll reach it quite there, but you see the trajectory when you're talking about what 41% increases year-over-year, that's quite strong. What's driving it is the discount retail chains are starting to lift cans, which are good. I think now if not two, there's three that are listing them currently. The big guys have yet to list them so that could be a lot of up that were to happen. But I think the whole tone and tenor of the discussion about the return of the beverage can into Germany is much better and much more constructive today than it has been in the last 8 years.

And how do you position to do, invest or participate in that growth?

Well we are -- that is what we're actively studying. And that's why when we have something to announce, we will, but we think we're very well positioned relative to our installed capacity to take advantage of that right now. And what we probably have to do is look at our overall footprint and look at the regional supply and demand then make sure we're matching that appropriately.

And shifting to Brazil, certainly very strong market, but we've also seen very significant announcements over the next 12 to 18 months for bev can capacity expansions. I'm curious, how you characterize the risk of potentially getting into an oversupply situation anytime soon in Brazil?

One of the things we talked very closely is what our customers are doing in terms of investing and the filling operations for cans. And that has been growing very, very strongly and so that gives us comfort that the supply demand should not be too far out of whack at all because they continue -- our customers continue to invest in can filling, the can continues to take share as package mix and the overall beer market, which is really driving this, continues to grow at mid to upper single-digit growth rates. So you put those three things together and I think it bodes well in the future.

Our next question comes from the line of Al Kabili from Macquarie.

I just wanted to get your comments on volumes in Western Europe versus Eastern Europe if you're seeing any signs of recovery in Eastern Europe and what your customers might be thinking about growth there next year?

Well, as we talked the Western Europe is growing a little bit faster than Eastern Europe currently. What's driving both West and East, the growth there, is actually not beer, it's more soft drink, which has been a reversal. Back through the most of the 2000s, beer was really driving it hard. And not the down, so to speak, but it's a little bit more muted than some of the things we're seeing in the soft drink side. And so as we look into 2011, I think a lot of it has to do with the economic recovery. The Eastern Europe is a bit behind Western Europe in terms of recovery from an economic perspective. And I think that drives some of the use of our product and the use of beer versus soft drink generally. And so we remained constructive about Eastern Europe. Don't get me wrong, but the economic recovery has to accelerate before we see a strong acceleration of beer and CSD consumption.

Did you indicate what your Eastern European volumes did in the quarter?

Yes, we talked about that before. I said overall market's about 4%. Western Europe's a little bit higher than that. Eastern Europe's a little bit below that, but they're all in growth mode.

I wanted to, also with steel prices going up, I wanted to get your thoughts on how you view the relative competitive profile of your steel beverage cans in Europe versus aluminum?

Well we've had a dual metal strategy for a long time in Europe. And as we talked about before, there is a lot of noise out in the marketplace about what's going to happen with steel versus what's going to happen with aluminum. I think it's too early to tell, but our dual metal strategy has played as well. And when one gets out of whack with the other, we take advantage of that with one substrate over the other and vice versa when those things reverse. So it doesn't overly concern us too much at this time.

Is there a point at which steel rises where you'd feel you need to convert some of that capacity to aluminum? Or are we very far from that right now?

Never say never, but there's always a point where aluminum gets too high. You have to consider moving to steel and vice versa. I don't think we're at that point now, but we're very cognizant of the fact that we have to be competitive in the marketplace and the various substrates we use have to be competitive in the marketplace.

Final question is just CapEx. For next year, if you have any type of preliminary kind of CapEx number for next year?

Not a number, but I think directionally, we're seeing a lot of opportunities that we're looking at pursuing, so I could see CapEx drifting up.

We're consolidating Brazil so by definition, it's going to be higher as well.

But you still think $500 million of free cash is a sustainable number even with the drift up in CapEx, it sounds like?

I think it's a little early to pin it down next year, but we expect to continue to have real strong cash flow even with an increase in CapEx? I don't know Scott if...

No, that's exactly right. Our cash flow this year will be very strong, and we don't see anything in the future that would dramatically change our free cash flow number. But obviously, we spent a little bit more CapEx. We think we're going to make more money next year too.

Our next question comes from the line of Dan Weather [ph] from WHV [ph].

Could you talk a little bit more about in the Aerospace? Is nature the revenues there? Can you talk about the mix between the contracts and projects? And I'm curious, do you expect with the investment going up in '11, that we'll see an operating margin shift downward temporarily?

In the Aerospace business? I think David mentioned earlier, historically we do the full spectrum, everything from cost plus to firm fix price and sometimes cost plus with the success fee and it goes everything from one end to the other. I think as we look forward to some of the projects that we've won, they are a little bit more biased towards fixed price and they are cost plus. Typically, when we perform well, that bodes well for us. You had mentioned investment. I don't think we anticipate much investment, if you will, in that business. Yes, we're making sure we have the right skill set of people, but as many of our successful programs are rolling off this year and we're building the ones next year, we are going to have higher sales in that business. Most likely, are going to have higher profits in that business, but the margin is probably going to be a little bit more muted just because there's mix of starting programs versus finishing successful programs. But again, nothing to worry about it. And as we go into 2012, as we execute on these programs, we feel very good about where we stand with that business.

We've said this before, I don't know how long you followed the company, but we also make antenna and other hardware and that business has been growing nicely and continues to. And we have a tech services part of the business for our software people that work in DoD. And both of those are well above $100 million of sales for each of them, so out of the total. And even through this period where the Hardware business was down a little bit, they've been continuing to grow and certainly contribute to the success. We contract both the civil and DoD and some commercial work, but that's sort of the mix of business. I think we used to talk over time if we're when our game and sort of the cost-type work, we should be able to make 8% or so. In the fixed price, we're going to make a little more than that because it would take a little more risk. And you can look at the numbers and see that, that's kind of the year we're having.

And our next question is a follow-up from George Staphos from Bank of America Merrill Lynch.

I wanted to food cans. Questions came up earlier, I guess, from Mark on BPA and of the things I understood about the alternative coatings that you've been working on is that, there was some application obviously in success with certain products, but there were other, perhaps more aggressive products, where the alternative coatings your suppliers were working on hadn't quite been able to deal with them. Is that still the case, if I'm remembering it correctly?

Yes, generally speaking that is the case. I'll also remind you though of some of those more aggressive products, certainly the one's high in asset and other things. It's not a big proportion of the food can market.

I guess to the extent that your customers are willing to experiment with these coatings, is there a view that the ultimate consumer is willing perhaps to contend with less good performance from these coatings and perhaps, after taste and that sort of thing? Or they haven't even gotten that road yet?

I think it's pretty mature to talk about that. There's trade-offs with everything and with some of these new coatings, the shelf life might be a bit shorter, but so our conversations with our customers they're certainly aware of that. And they are factoring into that, into their plans as they go forward.

John, two last questions on Food. On the one hand, the margin that you're putting up are terrific by historical standards and everyone in the organization should be congratulated about that. I guess perhaps the negative is, do you think that you could sustain this level of performance now with an Food and Household into the future? What do you see as the key risk to that performance? The related question is, with steel pricing having gone up quite a bit into 2008 and 2009, do you worry at all about conversions out of food cans and to other substrates over time?

To address the first question, the answer is a bit like Scott was talking about aluminum. What we endeavor to do is pass forth all the price increases on the steel side of the business. So it's always tough to talk about margins in a business in which that's a business model. But in terms of absolute EBIT dollars, we, the guys have been doing a great job. We've gotten to the targets, we think, we can achieve. Is there some upside? There's always some upside. You're never perfect, but it is where we think it should have been when we made the U.S. can acquisition. As we go forward in terms of steel, it remains to be seen. What happens there, one of the issues around processed food is the Steel Food Can has a big installed-base in terms of processing. And for our customers to recapitalize that, that is a significant capital throw. And so yes, we always are concerned about substitution and talk with our suppliers all the time about being penny-wise and pound-foolish. But on the other hand, we haven't seen to date any meaningful change in package share mix in the food can market or in the Food market, I should say.

I guess the last question I had and I'll turn it over. You mentioned perhaps you added some capacity -- that you will have capacity in Alumi-Tek and Golden. Do you see, perhaps, a need to add capacity on trim cans? Are you pleased with what you have right there?

I think we just have to watch the market in our written comments, in John's comments, we talked about specialty cans continuing to grow. And we intend to meet the market there. And so once in a while we're going to be doing that. I think we talked about what we're doing in California.

Was the demand where you thought it would be, Dave, on trim cans this year?

I think that part is -- really we're not surprised by the market performance this year. It's a little stronger in mid-year [ph] with some of the promotions on 12-ounce, but especially we're in constant contact and it seems to still be doing well.

George, not only the slim but also, 16 and 24 has been growing. I had mentioned that we were seeing some double-digit growth in the specialty can side. And as Dave, we monitor that very carefully and very closely. And if it makes sense to invest, we certainly will invest and we're prepared doing that.

Our next question comes from the line of Andrew Feinman from Iridian.

So your free cash flow so far is $371 million and you're saying it's going to be at least $500 million for the year. So that means you're going to get another $130 million in free cash. And then you said your net debt is going to be $2.5 billion. Right now, it's $21 million less than that. So you got $130 million in free cash flow and about $20 million increase in debt. So that's $150 million of cash in the fourth quarter that you're going to spend. So can I assume that's how much stock you going to buy back during in the fourth quarter?

I think that's directionally right. I said -- we said we'd buy at least $400 million of stock. So I think your numbers are directionally right.

Our next question is a follow-up from the line of Chris Manuel from KeyBanc Capital Markets.

Just a quick follow-up. A lot of the growth that you're seeing in Brazil and in China and in Europe, is it predominantly weighted towards any -- whether it's beer or soft drink or other teas or things of that nature? Could you maybe get us a little help as to what's been the big growth engine in the different regions?

I think they're different by each region. In China, what you're seeing is beer.

Recall we've talked about this before. Can is a search package mix and the beer segment is low single-digits, 4% plus or minus across the country, which is a large country obviously but there's a lot of room for growth in that, we're seeing it. We're also seeing verbal teas convert from 3-piece tinplate into 2-piece aluminum. And I guess to a lesser extent 2 piece steel with some of our the competitors doing that. So that's what's really driving in China. In Brazil, it's beer. And as I said, beer's growing strongly. Our customers are investing in it strongly and the Canada's taking market share mixed gains, which is good. And then in Europe, it really, at least, this year has been driven more by CST than it has been by beer. And it has to do more than most than Western Europe than Eastern Europe.

Can you remind us what the mix is in Europe for the soft drinks and beer?

It's approximately 50/50, just off the top of my head, I think it's 50/50. Maybe a little bit more, not about 50/50, maybe a little bit more CSD than beer, but not much.

And our last question is a follow-up from Chip Dillon from Credit Suisse. Chip Dillon - Crédit Suisse AG: I think I caught you -- and tell me if I was wrong that you said CapEx for the year would be about $300 million. Is that right?

It's approaching $300 million. Chip Dillon - Crédit Suisse AG: I was just curious because I remember back in, I think in July or August, it was supposed to be something close to, say 230. When did that change? Or is this something that you're changing today?

Well a change in part with the consolidated of Brazil and we're putting a second line in our Tres Rios plant. And then we announced the Alumi-tek line in Golden, so that bumps it up a bit. And there's some other smaller things, but those are the two big drivers of that number. Chip Dillon - Crédit Suisse AG: But you really hadn't updated the market really specifically on this number until today just so I make sure I didn't miss it?

That's correct, you didn't miss anything.

I'm showing no further questions from the phone lines at this time.

Okay, Jennifer, thank you so much for being a great hostess, and I thank all of you for tuning in to our call. And we'll look forward to speaking with you in January.

Thank you. Ladies and gentlemen, that does concludes the conference call for today. We thank you all for your participation, and we ask that you please disconnect your lines. Thank you, and have a good day.