Ball Corporation Fourth Quarter Earnings
                                Conference Call Transcript
Mr. Seabrook: Thanks, Dave. Overall the fourth quarter numbers came in pretty much as
expected. North American beverage ca...
quarter, mainly to fund our North American pension plan obligations to a 95 percent level or
higher. This incremental afte...
the overall market grew by nearly 10 percent, representing volume growth of nearly 5 billion
cans and ends.

I know that s...
We hit the ground running this month. I am very excited about this year and what we can

With that, we are rea...
Mr. Seabrook: We have looked at our capital structure, we always do that, as you know, we
are picking up strong. Look at o...
am asking is the first half of ’07, obviously benefited significantly from some of the aluminum

Mr. Hoover: What ...
$6 million lower. And the cash, excluding the one-time payment will also be $6 or $7 million

Q: That is great. Tha...
side. Is there anything else going on there or is there anything that might be at all, something
that might pop up over th...
some of the major soft drink customers have done a very good job of executing, it has been
helping us. Southern Europe con...
Mr. Hoover: They have told me they like you too. [Laughter]

Q: Thanks. So, the capX, would you care to, I mean if it is...
you are going to make 10-15 percent margins on the growth, but is there anything I mean the
stock market’s been down latel...
Q: It certainly makes sense. That is helpful Dave. Now, in terms of the question on ’08 and
how it might progress and obvi...
aerospace segment include: funding, authorization, availability and returns of government and commercial
contracts; and de...
Ball management uses interest coverage and net debt to EBITDA ratios as metrics to monitor the credit quality of Ball
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  1. 1. Ball Corporation Fourth Quarter Earnings Conference Call Transcript January 24, 2008 Mr. Hoover: Good morning everyone. This is Ball Corporation’s conference call regarding the company’s fourth quarter and full year 2007 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 are in the company’s second quarter 10-Q, and in other company SEC filings as well as company news releases. If you do not already have our earnings release, it is available on our Web site at Further information regarding the use of non-GAAP financial measures may also be found on our Web site. With me on today’s call are Ray Seabrook, executive vice president and chief financial officer; and John Hayes, executive vice president and chief operating officer, Ball Corporation. Yesterday we announced John Hayes’ promotion in a news release. John did an excellent job running our European business and we look forward to having him as chief operating officer for all of our businesses. Bringing John here was the first of several steps, which together strengthened our overall management team. Mike Herdman, who has been president of our metal beverage packaging, Americas, business is now head of our European beverage can business. Mike has extensive experience in the beverage can industry and the European market. John Friedery has taken on responsibility for both our Americas and Asia beverage can operations. John came up through our North American beverage can business and he knows it inside and out. The end result is an excellent management team, with people in positions where their experience and skills can best help us. Now, turning back to 2007 results, on a comparable basis, our diluted earnings per share were $3.50 in 2007, up 21 percent from our previous record of $2.90 in 2006. This came despite a difficult fourth quarter comparison. While we are generally are pleased with our results, we are taking steps that we believe will lead to further improvement in 2008. I will talk more about that later, but first Ray will discuss our financial performance, and then John Hayes is going to make a few comments. Ray? 1
  2. 2. Mr. Seabrook: Thanks, Dave. Overall the fourth quarter numbers came in pretty much as expected. North American beverage can fourth quarter earnings were lower than last year due to non-recurring inventory gains earned in 2006; aerospace quarterly earnings were lower primarily due to unabsorbed labor and higher proposal costs in the quarter. Corporate costs were down in the quarter also due to lower employee costs. That being said, both North American beverage cans and aerospace produced record earnings for the full year. Comparable diluted earnings per share of 60 cents was the company’s second best ever for the fourth quarter. Full year comparable diluted earnings per share of $3.50 is up 60 cents compared to last year, and that is better than our long-term goal of 10-15 percent improvement annually over time. Higher margins in North American beverage cans and strong sales volumes in aerospace and international beverage cans resulted in record full-year earnings for all of those businesses. Continued strong sales growth in Europe and China–including growth in custom can volumes in Europe and the strength of the euro–were the primary factors in higher international beverage can earnings in the quarter. The higher euro added 2 cents per diluted share in the quarter and 11 cents for the full year compared to last year. Comparable fourth quarter and full year operating results in the food and household segment were flat with last year and we believe we have hit the bottom in this business. We are assertively pursuing price in this marketplace and are implementing numerous cost reduction initiatives. We expect considerable earnings improvement in this segment in 2008 but we will still be a long way from being finished. On our third quarter conference call we announced a plant rationalization plan to address some of the performance issues in this segment; we will close two aerosol plants and exit the decorative tinplate can business and that resulted in a fourth quarter after-tax charge of $27 million which was recorded to reduction this action. Once completed, this capacity reduction will result in the elimination of 10 manufacturing lines and yield annualized cost savings in excess of $15 million. The cash costs of these actions are expected to be offset by proceeds on asset dispositions and tax recoveries. We are not satisfied with the results in either the food and household or plastics segments and anticipate further actions, which could include more capacity reductions or additional value-creating measures. Turning to taxes, our full-year tax rate of 30 percent on comparable earnings was slightly higher than last year’s rate of 29 percent, due primarily to earnings mix. Our initial estimate for the full-year 2008 effective tax rate is in the 33 percent range. Turning to full-year free cash flow, even with some year-end build-up in food and household inventory levels, 2007 adjusted free cash flow of $440 million was better than expected primarily due to lower capital spending in the fourth quarter. As discussed on previous calls, we made a $45 million–$27 million after-tax–incremental pension plan payment in the fourth 2
  3. 3. quarter, mainly to fund our North American pension plan obligations to a 95 percent level or higher. This incremental after-tax payment is effectively debt pay down and has been treated as such in our free cash flow computation. Full year 2008 free cash flow is still a bit of a moving target due to capital spending and year- end 2008 working capital levels not being fully locked-in as we speak. Notable 2008 free cash flow reductions from 2007 levels will be higher capital expenditures, higher cash taxes and a one-time, after-tax payment of $42 million related to a customer settlement reached in the third quarter of 2007. These 2008 free cash flow reductions will be partially offset by lower working capital levels at the end of 2008. 2008 capital spending will exceed $300 million. We have a number of good growth opportunities in front of us. Approximately 75 percent of capital spending will be in our worldwide beverage can business and more than 50 percent of the spending will be for new top-line growth projects primarily in Europe. Cost reduction and maintenance capital spending is forecast at 60 percent of depreciation expense. The credit profile of the company remains strong with net debt at the end of 2007 at $2.2 billion. The 2007 rolling four quarters adjusted EBIT to interest coverage is at 4.3 times, and net debt to adjusted EBITDA is at 2.4 times. The solid credit profile and continued strong free cash flow will allow for an increase in our stock buy-back program to around $300 million for 2008, including the accelerated stock buyback announced in December. We expect our 2008 credit ratios to be unchanged of slightly better as we get to the end of 2008. With that I will turn it over to John Hayes. Mr. Hayes: Thanks, Ray. I am obviously excited about this new opportunity, and am honored to be given the responsibility as chief operating officer of Ball Corporation. Over the past three or so years, it has been gratifying to play a role in the success we have had in Europe. I am proud of what our team there has accomplished, making some money and having some fun along the way. I look forward to working more closely with Dave, Ray and the rest of Ball’s senior management at the corporate level as well as our individual operating units throughout the world. This morning’s earnings release announced Ball’s plans to build a metal beverage can plant in Lublin, Poland. The Polish can market continues to experience significant growth, up more than 30 percent in 2007. We sell significantly more cans in the Polish market than we produce locally, particularly on the beer side of our business. While our existing plants in Hermsdorf, Germany, and Radomsko, Poland, serve us well for western Poland and central and southern Poland, respectively, the Lublin plant will provide us with good geographic coverage in eastern Poland and position us to serve even better our customers there as well as those in countries further to the east–Ukraine, Belarus, some of the Baltic States and even the western part of Russia. It is important to note that 2007 was a milestone year for the overall European beverage can market, which for the first time overall volumes exceeded 50 billion units. Equally important, 3
  4. 4. the overall market grew by nearly 10 percent, representing volume growth of nearly 5 billion cans and ends. I know that several investors and analysts have inquired about our views of the overall supply/demand situation in Europe. I can assure you that this is a critical issue for us in our growth plans and we believe strongly that the continued growth expected in the European marketplace will more than compensate the additional capacity coming onstream. I am confident that the totality of our European business is in good hands under Mike Herdman’s leadership and the leadership of others at Ball in Europe. Similarly, we are also fortunate to be able to draw on John Friedery’s experience and skills to add to a strong North American beverage can management team. We have high expectations for both of them in their new roles. My focus is to improve the growth and operational performance, the execution, across all of our businesses, and I am eager to dive in deeply into this immediately in order to meet our goals and objectives as a company. With that, I will turn it over to Dave. Mr. Hoover: Thanks, John, and thank you, Ray, for your comments. Our aerospace and technologies segment is coming off of a remarkable record year that will be difficult to duplicate. Still, we expect strong results in 2008. Last year, if you recall, we enjoyed an exceptionally strong first quarter in aerospace and in the metal beverage, Americas, segment. This year we expect them to be a little lower, but we are also working harder throughout the rest of the company where operations are expected to perform better, and that will partially offset, we believe, a challenging first quarter. I think the organizational changes that we have just made really position us to get the most out of our businesses. John Hayes has been working at Ball now for more than nine years, but he and I have actually worked together for more than 15 years. The first six of those or so were back in the 90’s when he was a banker and I was CFO at Ball. We made substantial and significant change in the company during those years and it really changed the game around our company, and he was heavily involved in the acquisition of our European business. He and I together basically worked that. So, I have great confidence in his abilities and I know him and I know his character and I know his energy level and I know he is going to do a wonderful job for the company. Our board carefully considered this; we spend time, energy and effort on succession planning around here and we actually do it, we just do not write about it, and I had the pleasure really of meeting one-on-one with each director last summer through 2007 to consider what we should do in this regard. We are all delighted and we have great expectations. One of our investors, I think, asked Ann Scott yesterday if I was sick, and there are probably a lot of different opinions about that, but I do not think I am and I am not planning to do anything but continue working here and trying to build Ball. I am, as I said earlier, delighted with John Hayes’ new role and I think with Mike and John Friedery in their roles we are going to make some noise. As we said in 2007, while we believe achieving last year’s first quarter results will be difficult, I believe we have the opportunity to exceed the full year earnings of 2007 this year. 4
  5. 5. We hit the ground running this month. I am very excited about this year and what we can accomplish. With that, we are ready for questions. Q: Hi everyone, good morning. I guess to start, congratulations to John, John and Mike in their new roles and good luck in the upcoming years. The first question I had may be for John. John, what do you think you and the team will be able to do most quickly in terms of improving the performance in the businesses that have been struggling a bit over the last several years, food and household and PET. Obviously you have a restructuring program, what else could you fill in around that program that you have not already discussed that you could discuss and around the businesses in general? Thanks. Mr. Hayes: Well, let me start with food and household products. I think we have a very clear line of site with what needs to be done. We need to be looking at pricing; we need to be looking at product mix. We need to be looking at our costs and we need to be looking at purchasing and we have specific plans focused on all four of those activities and if we are able to execute successfully on that, it is going to take a little bit of time but we feel confident that we are going to be able to significantly improve the performance of that business. On the PET side we all know it has been difficult over the years. We have a very large customer; we have contract negotiations ongoing with them and we have to get price. And that is the near interim objective on that. Once we get through these contract negotiations we will have a much better sense of where we stand and from there we will be looking at various things to make sure that we are in the short- and long-term maximizing the opportunity for Ball. Q: John, on the contract negotiations, those could be concluded in one way or another sometime this year but they also could extend it to ’09. From what I recall, aside from our press release which I am not sure necessarily you would put out, what else should we be looking for in terms of you reaching milepost with those contract negotiations? Mr. Hayes: Well, we have quarterly earnings calls and I think generally just providing an update on where we stand relative to that. But we have contracts coming up for renewal all the time in all of our businesses. So, I do not think we would expect to have any special press release. Q: Well, no, I understand, that is why I asked the question. So, when do you think the larger contracts should be addressed one way or another? It is an ’08 event. Mr. Hayes: I think it is a ’08 event. Yes. Q: Alright, then one quick one for Ray and I will turn it over. Ray, if I heard you right, you said the leverage ratio should be relatively unchanged or improved as we look out to 2008. You also mentioned, in total the company hopes earnings per share anyway to be inline or better than the 2007 level realizing that share repurchase is going to play a little bit of a role there. Do you expect that you will be able to pay down any debt in terms of improving those leverage ratios or is it truly just the earnings that EBITDA growing that will allow for those ratios to come lower. 5
  6. 6. Mr. Seabrook: We have looked at our capital structure, we always do that, as you know, we are picking up strong. Look at our capital structure. We think we are above where we want to be so we think the improvement comes from the improvement in EBIT and EBITDA. We are not looking for a lot of debt pay down this year. Remember, some of that depends on the euro. If the euro loses a little bit of its strength then we are going to get some debt paid down because we still have 600 million of debt denominated in euros. So, I am not looking for a lot of debt to pay down in 2008. We are going to use the money and we are going to go buy back our stock. Q: But that suggests that you will get free cash flow, even after the settlement payment of $300 million? Is that right? Mr. Seabrook: Yes, we are looking to have free cash flow around the same amount as our stock buyback, give or take. Q: Thanks. That is excellent. Q: Hey guys, good morning. Congrats to everyone and more importantly Dave, I am glad you are feeling o.k. [Laughter] Mr. Hoover: Thanks a lot. Q: On the European beverage can side, I was hoping you could give us a breakdown of volumes and I guess I am a little bit surprised because margins seem to have tracked quite a bit lower than last year. Could you just give us some color on that please? Mr. Hayes: Yes, actually the fourth quarter started out slow. Remember in the third quarter I talked about a horrible summer and it was catching up. I think overall though it did finish strong. The overall market was up about 10 percent and we were right in that range as well. I think on a margin basis, I would not read into that too much. Similar to what we did in North America, we took some maintenance. Cause remember we have been running flat out for about 18 months or 20 months after the fire and we need to prepare for what we think is going to be a very strong 2008. We have the European Cup coming, we have the Olympics. Hopefully we will have a more normalized summer. And all the trends we see in growth in the European marketplace continue. And so we took a little bit of downtime in terms of maintenance over the Christmas holiday so we did not have to pay additional labor to run it and that is what partially looked at lower margins. And then again, I would not worry about that going forward. Q: Another question to just clarify, the 10 percent was the fourth quarter year-over-year or was it the full year ’07 number for volume? Mr. Hayes: That is a good point. It was both. The fourth quarter was just about 10 percent for the full year was just under 10 percent. Q: And just in terms of Americas bev, looking at the margins for Q3 and Q4, is there any reason to expect significant improvement beyond those levels in 2008 because the reason I 6
  7. 7. am asking is the first half of ’07, obviously benefited significantly from some of the aluminum impact. Mr. Hoover: What I was trying to say and what Ray was trying to say is that we did have that benefit in the first quarter of ’07 and what our game plan is is to offset part but probably not all of that. But if you look at what we recorded last year, I think we were up in EBIT $100 million. A chunk of that was in these areas that I mentioned including some metal gains and aerospace having an exceptionally strong first quarter and so on. So, if you integrate two years here, technically we are up 21 percent last year. That is enough. We do not have to be up this year to hit our long-term, bottom end goal. But, what we are trying to convey is, it is really early in the year but we have a good shot we think of having a full year better than last year and from all factors, including stock buy and improvement in performance so it looks pretty good in here from where we are. Q: Great. Thanks so much. Q: Hi, thanks very much. Good morning. I was wondering if you could just talk a little bit about the Aerospace business. There was a little bit of a downshift in the margins in that business for the fourth quarter. I was just wondering what was going on there and then how we should think about them in going forward into 2008. Obviously, ‘07 was a really good year in that business. Mr. Hoover: Yes, two or three things in the fourth quarter. One, we adjust rates to reality or to actuals after the government’s fiscal year starts and we are at the conclusion of it in September. So, in the fourth quarter that contributed to some of the decline. Technically, that was a part of it. The other part is these programs run at different rates when you are doing them in the fourth quarter, just slowed down a little bit. We also had higher than normal unreimbursed bid and proposal costs that we took in the fourth quarter. So, those were the things that occurred. By the way, congratulations . . . Q: Thank you very much. Mr. Hoover: On becoming married. I did read your piece and you used the words that you have heard us use in that the business is somewhat lumpy. We get large programs and they run at different rates and we are sort of in that mode. We just completed reviewing our business plans with our board yesterday and as we look out over the next few years we see substantial opportunity in this part of our business but we, as I alluded to earlier, think this year of ’08 might be a little softer than last year. So that is where we are. Q: That is really helpful. And then I maybe missed it, but did you give any guidance around pension for 2008? Sorry if I missed it. Mr. Seabrook: Are you talking about P&L or are you talking about cash? Q: Both, I would like, actually. Mr. Seabrook: P&L will be slightly lower because obviously we have our pension plans funded up so that helps the P&L charge. Let us say the P&L pension expense will be $5 or 7
  8. 8. $6 million lower. And the cash, excluding the one-time payment will also be $6 or $7 million lower. Q: That is great. Thank you. Q: Good morning, gentlemen. First, let me echo an earlier response. David, we are excited to hear that you are not sick. [Laughter] Mr. Hoover: I am never going to get over that one, I can tell. Q: I am glad to hear that and congratulations all on your promotions. A couple questions for you. First, when we think about the extra capacity that is coming on in Europe; John Hayes I know you mentioned that the growth will be more than there to offset extra capacity and it looks like even for this year the markets will be extremely tight. Has there been any pre- selling of that extra capacity coming online or anything of that nature that might impact yours or the industry’s ability to get some sizeable net price increases this year in relation to the fact that the market is still so, so tight for ’08? Mr. Hayes: No, the short answer. We have seen, obviously when, I will speak only on behalf of Ball but when we go out there we know very clearly with our customers and working core customers that there is no prebuying ahead. And so we had plans in place to get, recover our costs through price increases and net price increases in 2008 and again our sales staff has done a very good job of meeting the targets that we set for ourselves. Q: Very good. So, I am going to go back to a question that I know nobody likes, but when we think about 2008 versus 2007 and normalized or your long-term goal being 10-15 percent improvement [EPS] and we kind of think through the pluses and minuses of ’07 going into ’08, you have pluses of, again a very tight market, potentially some upside in Europe; you have got, I think you just mentioned earlier some lower pension expense. You talked about pretty explicitly some improvements in metal food and aerosol, what would be some of the puts and takes that might help or prohibit you from, in fact, being able to do a normalized 10- 15 percent year looking into ’08? Mr. Hoover: What we said here, is that the first quarter, and we have been saying this for a year, the fourth quarter of last year and the first quarter of this year are going to be tough comps and we still fell that way but we are also implying that we think we have a real shot in exceeding last year’s earnings per share. So, for the full year of ’08 which would mean that we would overcome sort of one time good guys by some amount and it is the 24th of January. You have heard me say that before, so, it is early days, but what we have been discussing the last couple of days here with our board and so forth would indicate that we think we can do that. So, that is sort of where you find us. Q: Thank you very much. Q: Good morning, guys. I just had a quick question to go back to the European bev can business, obviously you have already discussed the fact that there was some maintenance in the last part of the fourth quarter that caused margins to be so low and I guess just looking at that performance, it looks like it is about as low as it has been in several years on the margin 8
  9. 9. side. Is there anything else going on there or is there anything that might be at all, something that might pop up over the first couple of quarters in ’08? Mr. Hayes: No, we do not see that. Obviously all of our businesses continue to have higher costs related to that but nothing material happened in the fourth quarter that should concern any of us. As I said, I think the month of October was pretty slow in terms of volume. We did pick it up in the late November and December it started picking up again and I think all of that is just a washout of the summer. And then we took some down time and really that is the only difference that has been occurring. Q: And thank you. And then there is one other question. Here in the U.S. on the bev can side, I just wanted to maybe get your overall take and in terms of market demand for soft drinks. We had a difficult year this year on the can side and it looks like we are going to see some pretty hefty beer cost increases heading into ’08. I just wanted to get an idea of how you think the overall market demand might shake out over the next maybe 12 or 18 months in bev cans in the U.S.? Mr. Hayes: Well I think you should look for . . . let us first quickly review 2007. The overall market was down a little over 1 percent. Beer was up. Soft drink was down. And as you go and you take those and you look into going into 2008 the question is, “What is going to happen”? I do think and I think all of us believe that the economy will play an impact into this and it actually bodes well for the can because it is much more of a value pack in North America, both in the beer and the soft drink side. I think with recessions people generally stay at home more, which is take-home packages, which is the can and so we have not heard anything explicit from our customer base that says there is a meaningful change but I think that at the end of the day, it will be driven by consumer demand. Mr. Hoover: I would just add the specialty can business as it is so-called or sizes other than the standard 12 ounce continue to grow at good rates. We have a large position in that market and we are about equal parts beer and soft drinks even though the market is about two-thirds soft drink and one-third beer in North America. So those are other things to keep in mind. Q: Great, thanks guys. Q: Good morning, thank you. The first question just for John Hayes with regards to Europe, can you just elaborate a little bit more on the confidence with regards to the growth in the European bev can market in 2008 and looking forward? And specifically in which region are you seeing the growth? Mr. Hayes: Well, we expect the growth to continue. I think 10 percent is a very strong growth. It was the strongest growth in Europe in a while so we are not anticipating that. But I think over the next several years we have pretty good visibility call it 6-8 percent growth across Europe. Obviously, if you break that down and a lot of that growth is coming from Eastern Europe. Western Europe, which is much more of a mature market was still up 4 1/2 percent; however, in 2007. The can business, you are seeing a shift from two-way refillable bottles to the can on the beer side; you are seeing some shifts, I believe, from PET to the can. And as 9
  10. 10. some of the major soft drink customers have done a very good job of executing, it has been helping us. Southern Europe continues to grow quite nicely and then as you go even further to the east in terms of Russia, places like that on a base of 5 billion cans is growing 30 percent per year as well. So there are a variety of factors that are affecting this, but we see the fundamentals being pretty robust over the, at least as far we can see which is probably two to three years. Q: And would you expect if the European economy slows down generally that it is the same phenomenon that you would expect in North America? That it would not impact the can market and more people would stay home and consume more cans? Mr. Hayes: I think the outcome would probably be the same. The reasons might be a little different because refillable bottles are a take-home as well. But what people are looking for is becoming more western, becoming more convenient and at a price that is not taking more out of their pocket. So I think all those things combined and we can talk country-by-country because it does vary so much by country, but overall a decline in the economies in Europe should not have a significant negative impact on us. Q: And anything new happening in Germany or is Germany just gradually coming back still? Mr. Hayes: Yes, consumption within Germany, consumption within Germany grew at double- digits. I do not have the exact number, but 10-15 percent in 2007. So, again, it is step-by- step. We have talked about this marathon versus a sprint in the past and it indeed is, I think 2008, I know that a lot of European customers and those in Germany are going to be doing a lot of promotions around, particularly the European Cup and to a lesser extent, the Olympics. So, it is just getting the consumer re-educated about the can that was off the shelves for a while in Germany and I think all the signs point to say it is going to continue to move forward. Q: And then a quick question for Ray with regards to the $300 million in share repurchase in ’08, would you expect that to be back-end loaded or can you be participating in the market currently and taking advantage of the current share price? Mr. Seabrook: We, you may have missed it, but in December or early January we announced an accelerated share repurchase program we put in place. I think it was the 7th of January and that was $100 million program, so on the 7th of January we purchased $100 million of the $300 million shares. So it is front-end loaded. Q: Great. Thank you. Q: Thanks. You know the press release here says that all five of Ball’s operating units will report to Hayes. He will report to Hoover. Who is Ray going to report to? [Laughter] Mr. Seabrook: That is a good question. Mr. Hoover: I am not sure who he reports to now. I think it is me. But not all the time. [Laughter] Q: Well, I am a big fan of them both, so. 10
  11. 11. Mr. Hoover: They have told me they like you too. [Laughter] Q: Thanks. So, the capX, would you care to, I mean if it is going to be over $300 million, does that mean it is going to be $400 million? Mr. Seabrook: No. Q: Can you narrow that down at all? Mr. Seabrook: Well the reason I did not want to get too specific because we are going to relocate some equipment. So the timing of that can tend to change the numbers. We also know that timing can also change that. If we decide to do something in March versus July, you are going to get a different CAPEX [capital expenditures]. But it is not a huge secret. Fundamentally it should be, give or take, around 350 million, give or take and when we get through the first quarter I will refine that number for you. Mr. Hoover: We also, I think, exceeded even our estimates on last year’s free cash flow and $20-$25 million of that, Ray, is money that did not get spent last year . . . that will get spent this year. Mr. Seabrook: Some of that is carryover. Mr. Hoover: So, if you look at the two years together that is probably a good way to do it. Mr. Seabrook: The important part of the capital spending as I tried to indicate, it is all going for top line stuff. This is not sort of cost reduction planned stuff; this is for top lined stuff that has got 10-15 percent margins on it. So, it is to follow the growth that John’s been talking about. Q: Can you give us an idea of what depreciation and amortization will be for next year? I guess it will be up a little, this, so just as long as I am doing CAPEX. Mr. Seabrook: Let us just see, it was like, what was it this year? Q: $281 [million]. Mr. Seabrook: Yes, $281 [million] and it is going to be up about $10 million [in 2008]. Q: And the, my favorite question every call. At the end of the year, can you tell me how much the securitized receivables were? Mr. Seabrook: I just happen to have that number. I am glad you asked. They are down by $33 million from where they were last year. Last year [2006] we finished at $203 million and this year [2007] they are at $170 million. Q: And that is flat with the third quarter, so that is good. I guess the last question I have, is when you look at this capital spending, I mean I understand these markets are growing so 11
  12. 12. you are going to make 10-15 percent margins on the growth, but is there anything I mean the stock market’s been down lately so is there anything you can buy that might be even better? Mr. Hoover: Well possibly. We look all the time; as you know, we do not often do things but we are conscious of the change in the credit markets and sometimes sellers do not understand that valuations have changed as fast as buyers. But I think you will see a more rationale marketplace for those kinds of things. We are not, we do not have a long shopping list but there are a few things that we continue to follow and look at that might make sense. Q: It does not sound like there is anything imminent. I mean it does not sound like this decline in the market has necessarily brought any of these things into active mode yet anyway. Mr. Hoover: Yes, and of course I could not say one way or the other, but. Mr. Hayes: One of the things that I will say we made some acquisitions 18 months ago or so and we need to make sure those are operating correctly. So a lot of what you are going to hear this year, particularly from me is about execution and making sure that we have a strong backbone because from there you can grow. Q: Right, thank you very much. Q: Three questions. First of all with Aerospace, from the last quarter it was pretty clear there was going to be a bit of a down shift fourth quarter into the first quarter as you were, as you said earlier in the call not absorbing as quickly some of the fixed costs that were inherent in the business. My takeaway, perhaps incorrect though, was that ‘08 would be an up year. Has anything else fundamentally changed in terms of timing of the programs or is the outlook the same as it would have been a couple quarters ago? Mr. Hoover: I think as we assess the marketplace, we have bids outstanding on programs. One bid is going to be delayed in its award by a couple of months. That is not helpful necessarily, but I think we heard in our plan review that we have 500 active contracts in Aerospace. Many of them are fairly small but they are solid and they undergird the business. You win a $200 million job that they spend $100 million all in one year and then it tappers off and you spend $25 million for two years and then you deliver it, kind of thing. There is more of that that ratchets around. I think you saw a nice improvement over all, full year in margins in the business. Practically when you understand how these rates are adjusted one time a year I think we, you are accumulating this variance and then you make an adjustment in the fourth quarter, theoretically some of that really happened in the first three quarters almost, not exactly. We did the accounting correctly but I would not overdo the negative message that you see in the fourth quarter results but I would say again that I do not necessarily expect Aerospace to be up and in ’08 versus ’07 which was a remarkably good year. And a lot of it had to do with a large, fixed-price WorldView-2 space craft they were building for DigitalGlobe. And by the way, WorldView-1 that was launched in the fourth quarter is just performing in an exceptionally fine manner. The images are great and this is an area that we have developed over the years that we are hoping gets traction, not only on the civil side but also within the DOD and the national security markets. 12
  13. 13. Q: It certainly makes sense. That is helpful Dave. Now, in terms of the question on ’08 and how it might progress and obviously the difficult first quarter comparison, to the extent that I can try to frame this question such as you will comment on it. This year you did $3.50 [EPS], if we assume first quarter is your only down quarter and the subsequent quarters grow more or less inline with your traditional target which is 10 percent or better, it would suggest that the first quarter could be down anywhere from, pick a number, anywhere from 15 cents to 25 cents. Is that the type of message you want us to takeaway? I realize I just put words in your mouth, but help us think about the progression. Mr. Hoover: No, I did not say that. Mr. Seabrook: It is not anywhere near that much. It is [1Q EPS] going to be down, but God the wheels are not coming off here. Q: Oh, I understand but I went through my methodology because that is all we can go off of, but that is very helpful as well. Mr. Hoover: That was Ray Seabrook who answered that question. [Laughter] Q: I understand. And then last, can you remind us what kind of performance threshold do you have to hit for the Cliffvest restricted stock that you granted last year to be actually vested by your employees. I noticed there were a couple of years; three years but what kind of performance would you have to make? Mr. Hoover: We have to earn our cost of capital or better. And of course that changes over time. Currently I think it is running a little over 6 percent, weighted average cost to capital. We think we add value when we earn in excess of our cost of capital and we can pretty much demonstrate that historically. So that is the performance criteria that was associated with those restricted stock unit grants. Q: Thanks guys. Good luck in the quarter. Mr. Hoover: Well, thank you very much and thank you everyone for joining us today. We will look forward to speaking with you again in April. Forward-Looking Statements This release contains quot;forward-lookingquot; statements concerning future events and financial performance. Words such as “expects,” “anticipates,” “estimates” and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those expressed or implied. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Key risks and uncertainties are summarized in filings with the Securities and Exchange Commission, including Exhibit 99.2 in our Form 10-K, which are available at our Web site and at Factors that might affect our packaging segments include fluctuation in product demand and preferences; availability and cost of raw materials, including recent significant increases in resin, steel, aluminum and energy costs, and the ability to pass such increases on to customers; competitive packaging availability, pricing and substitution; changes in climate and weather; crop yields; competitive activity; failure to achieve anticipated productivity improvements or production cost reductions, including our beverage can end project; mandatory deposit or other restrictive packaging laws; changes in major customer or supplier contracts or loss of a major customer or supplier; and changes in foreign exchange rates, tax rates and activities of foreign subsidiaries. Factors that might affect our 13
  14. 14. aerospace segment include: funding, authorization, availability and returns of government and commercial contracts; and delays, extensions and technical uncertainties affecting segment contracts. Factors that might affect the company as a whole include those listed plus: accounting changes; changes in senior management; successful or unsuccessful acquisitions, joint ventures or divestitures; integration of recently acquired businesses; regulatory action or laws including tax, environmental and workplace safety; governmental investigations; technological developments and innovations; goodwill impairment; antitrust, patent and other litigation; strikes; labor cost changes; rates of return projected and earned on assets of the company's defined benefit retirement plans; pension changes; reduced cash flow; interest rates affecting our debt; and changes to unaudited results due to statutory audits or other effects. Non-GAAP Financial Measures Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Earnings Before Interest and Taxes (EBIT) - EBITDA is earnings before taxes excluding interest, depreciation and amortization and EBIT is earnings before taxes excluding interest. We use EBITDA and EBIT internally to evaluate pre-tax cash flows prior to financing and capital spending cash outflows. Twelve Months ($ in millions, except ratios) Ended Dec. 31, 2007 Earnings before interest and taxes $ 513.9 Add legal settlement (A) 85.6 Add business consolidation activity (A) 44.6 Earnings before interest, taxes and above items (EBIT) 644.1 Add depreciation and amortization 281.0 Earnings before interest, taxes, depreciation and amortization $ 925.1 (EBITDA) Interest expense (Interest) $ (149.4) Total Debt at December 31, 2007 (Debt) $ 2,358.6 Less cash (151.6) $ 2,207.0 Net Debt EBIT/Interest for the year ended December 31, 2007 4.3x Total Net Debt/EBITDA 2.4x (A) The company agreed to a legal settlement with Miller Brewing Company in the third quarter of 2007. The business consolidation activity consists of a net charge of $44.6 million in the fourth quarter of 2007. For detailed information on the above items, please see the respective quarterly filings and/or earnings releases, which can be found on our website at 14
  15. 15. Ball management uses interest coverage and net debt to EBITDA ratios as metrics to monitor the credit quality of Ball Corporation. The above items related to the legal settlement and business consolidation activities are segregated to evaluate the company's performance of current operations. The above is presented on a non-U.S. GAAP basis and should be considered in connection with the unaudited statement of consolidated earnings. Non-U.S. GAAP measures should not be considered in isolation. A presentation of earnings presented in accordance with GAAP is available in the company's earnings releases and quarterly filings. Net Debt - Net debt is total debt less cash and cash equivalents, which are both derived directly from the company’s financial statements. Free Cash Flow - Management internally uses a free cash flow measure (1) to evaluate the company's operating results, (2) to plan stock buy-back levels, (3) to evaluate strategic investments and (4) to evaluate the company's ability to incur and service debt. Free cash flow is not a defined term under U.S. generally accepted accounting principles (a non-U.S. GAAP measure). Non-U.S. GAAP measures should not be considered in isolation or as a substitute for net earnings or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures of other companies. Free cash flow is typically derived directly from the company's cash flow statements and defined as cash flows from operating activities less additions to property, plant and equipment; however it may be adjusted for items that affect comparability between periods. An example of such an item excluded in the year ended December 31, 2007, is the spending for the replacement of the fire-damaged assets in our Hassloch, Germany, plant, which is expected to be covered by insurance proceeds. Because the insurance proceeds have been used to pay for equipment to rebuild the plant, we have netted the proceeds against our capital spending forecast. Another example of an item excluded in the calculation of free cash flow is the $45 million ($27 million after tax) of additional pension contributions the company made in the fourth quarter of 2007. Taking into account the insurance proceeds and excluding the additional pension contributions, the company's free cash flow in 2007 was approximately $440 million. Based on information currently available, we estimate 2008 cash flow from operating activities, capital spending and free cash flow to be in the range of $650 million, $350 million and $300 million, respectively. Cash flow from operating activities is the most comparable GAAP term to free cash flow, and it should not be inferred that the entire free cash flow amount is available for discretionary expenditures. 15