Oct 15, 2009
Executives
Timothy J. Donahue – Chief Financial Officer and Executive Vice President John W.
Conway – Chairman of the Board, President and Chief Executive Officer
Analysts
Ghansham Panjabi – Robert W. Baird Chip Dillon – Credit Suisse Peter Ruschmeier – Barclays Capital Timothy Thein - Citigroup George Staphos – Banc of America-Merrill Lynch Claudia Hueston - J.P.
Morgan Alton Stump - Longbow Research Christopher Manuel - Keybanc Capital Markets Richard Skidmore – Goldman, Sachs & Co. Albert Kabili – Macquarie Research Joseph Naya - UBS Daniel Khoshaba – KSA Capital
Operator
Welcome to the Crown Holdings third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Timothy Donahue, Executive Vice President and Chief Financial Officer.
Mr. Donahue, you may begin.
Timothy Donahue
Thank you and good morning to everybody. Welcome to Crown Holdings’ third quarter 2009 conference call.
With me on the call today is John Conway, our Chairman and Chief Executive Officer. Before we begin I would like to point out that on this call, as in the earnings release, we will be making a number of forward-looking statements.
Actual results could vary materially from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings including comments in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Form 10-K for 2008 and in subsequent filings.
I will review the quarter and then as usual I will then hand the call over to John for his comments. Earnings per diluted share were $0.67 in the third quarter compared to $0.70 in the third quarter of 2008.
On an ongoing basis without special charges diluted earnings per share were $0.81 an increase of 14% over last year’s third quarter. As has been the case throughout the year all the operations are continuing to perform well and importantly segment income margins rose across all operations.
Certainly that is a positive result in the context of the global recession and the headwinds faced this year from higher non-cash pension expense and currency translation. When adjusted for currency and pension, segment income performance in the third quarter was up 15% over the prior year.
As we detailed in the earnings release and as has been the case throughout 2009 currency translation impacts comparability adversely throughout the financial statements. Underlying operating performance remains very good through nine months so as we have done for you throughout the year we will again provide the following review excluding the impact of currency.
Net sales in the quarter excluding currency translation were up 2% over the third quarter of 2008. Earning volumes and the pass through of higher tin plate costs offset the pass through of lower aluminum costs.
Global beverage can volumes in the quarter were level to the prior year which is on the back of 3% volume growth in the 2008 third quarter. For the year, volumes were up 1% over 2009.
In the United States third quarter volumes improved 1% over the prior year. Volumes throughout our emerging markets businesses continue to grow the exception being in the Middle East where after several years of double digit growth volumes have slowed and through nine months volume growth is now at 2%.
Food can volumes saw considerable improvement during the third quarter from the first half of the year. While not quite back to prior year levels we are encouraged by the strong seasonal harvest in the United States and the end of de-stocking.
Several of our businesses in Europe, notably those in the Iberian Peninsula in North Africa and Eastern Europe are still feeling the effects of the recession on their export business. Recovery was notable throughout the balance of our European food can and [closures] businesses.
Adjusted for currency Americas beverage revenues were lower than the prior year by 4% which was due to the pass through of lower aluminum costs. Volumes throughout the division were level to the prior year and as described previously in the U.S.
were up 1% in the quarter and for the year are up 2% over 2008. Although industry data is not yet available we believe the industry was down 1% for the quarter and also for the nine months.
There was no currency impact on segment income which remained level for the prior year. Revenues in our North America food can business increased 17% excluding currency year-over-year due to recovering volumes and the pass through of higher tin plate prices.
Segment income improved $18 million due to price recovery, improvements to plant manufacturing performance and ongoing cost reduction programs. The restructuring of the Canadian locations which was announced with last night’s release will allow the company to continue to improve our cost structure and manufacturing performance through increased utilization of remaining facilities.
We expect full-year annual savings of $25 million associated with the restructuring. On a currency comparable basis, European beverage sales were up 1% compared to 2008 while segment income improved 7% x currency with cost reductions and mix offsetting the impact from lower overall volumes.
Excluding currency revenues in food Europe increased by 3% and as the pass through of higher tin plate costs offset lower volumes. Adjusting for currency segment income was up 6% over the prior year the result of cost reductions and price recovery again offsetting lower volumes.
Excluding foreign exchange, specialty packaging revenues were level to the prior year while segment income was up $3 million on volume recovery and cost reductions. Interest expense was $10 million lower in the quarter and $43 million lower year-to-date as we continue to benefit from lower short-term borrowing rates and foreign exchange.
During the quarter the company paid down in excess of $500 million of debt with an average interest rate of approximately 7%. For the full year interest expense is expected to be $50 million lower than in 2008.
The tax rate on income from ongoing operations in the quarter was 22.5% and for the nine months is at 23.5%. Our net debt at the end of September was $2.8 billion or $242 million lower than at the end of June and $414 million lower than at the end of September 2008.
We continue to reduce our net debt and based on the last 12 months adjusted EBITDA net leverage was 2.8 times, down from 3 times at the end of June. We believe we remain very well positioned to improve our financial performance and increase shareholder value.
As John commented in the release you can see we have a number of very good opportunities throughout our global footprint. While demand for food and aerosol cans did improve as expected from the first half of the year the global recession continues to impact demand for food containers in some European markets as well as beverage cans in the Middle East.
We continue to benefit from ongoing cost reduction programs and our business platform throughout the emerging markets. In light of the foregoing we now project segment income for 2009 to be more or less equal to the 2008 figure of $808 million.
On a currency and pension neutral basis this is more than a 20% improvement over 2008 and we believe represents a very strong operating result in the context of the ongoing global recession. As for free cash flow, performance continues to be strong and is up $330 million through nine months this year compared to last year.
We now project free cash flow for the year to be at least $440 million after capital expenditures of $185 million. With that I will turn the call over to John.
John Conway
Thank you Tim and good morning. As in the past, I will follow Tim’s comments with more color about what is going on in the market place in each of our three divisions.
First, we would characterize the third quarter as another strong quarter particularly given the general economic environment. The global recession has had an adverse impact on our business in varying ways.
Our growing emerging markets businesses have continued to grow but at a reduced rate. Our mature markets businesses of North America and Europe have been adversely affected by the de-stocking phenomenon combined with the effects of the general liquidities freeze on trade credit which has a direct effect on international trade and those of our customers who export to regions such as Eastern Europe, Russia and the other CIS states and Africa.
Notwithstanding that, Crown’s performance was very solid even after the significant adverse effects resulting from the relatively strong dollar in the quarter and the non-cash pension charge associated with pension asset declines as of the end of last year. As we look ahead we expect the Americas division, both the mature markets of North America and our emerging growth markets of Mexico, Columbia and Brazil will continue to perform well and according to plan.
Our business in Asia is also strong and continues in an upward path. In Europe our businesses have performed well in general but there are some limited pockets of weakness.
We have large food can businesses in Italy, Spain and North Africa which serve customers who sell in Western Europe and those who export significant quantities of their products to Eastern Europe, Russia and Africa. This export business although improving continues to be weaker than in 2008.
Tim mentioned that our beverage can business in the Middle East has been somewhat slower in the third quarter than we had anticipated after a very strong performance in the first half of the year. We attribute this to two factors.
First there has been a recent general slowdown in the Middle Eastern economies associated with the global credit problems and liquidity squeeze. In addition, Western Saudi Arabia typically hosts a large number of religious pilgrims visiting holy sites during the third quarter.
This year the combination of the global recession and fears about the swine flu epidemic noticeably reduced the number of visitors. Let me anticipate questions that are going to be asked regarding raw material pricing.
First, with respect to aluminum as many of you know our beverage can contracts provide for immediate pass through, up or down, of changes in underlying aluminum prices. There have been no changes in this area and we will, as we have in the past, continue to pass through aluminum as changes occur in 2010.
As tin plate steel used in food cans, some beverage cans, aerosol cans and metal [like] enclosures, our suppliers in Asia, Europe and the Americas have announced price increases for 2010. We are still in negotiation with them.
However, our current expectation is that prices for tin plate will increase in Asia and Europe and we fully intend to pass through those increases as required to cover our cost increases. In the Americas the outcome is somewhat less clear.
Although all of our suppliers have announced increases at this point we believe there may be no more than a modest upward move or possibly a modest downward move in tin plate prices in 2010. In either event we will change can prices up or down in the Americas to reflect the tin plate price changes.
Regarding demand for cans in 2010 we generally expect all of the markets where we participate, both mature and emerging, to improve over 2009. In addition the significant new capacity we have been adding in emerging markets will make further contributions to growth and the actions we have taken to reduce costs through restructuring in North America will clearly improve our cost base in 2010 and the years ahead.
In sum, we regard the third quarter as a very solid performance in a very challenging environment and we look forward to 2010 with real confidence. So with that, operator I think we are ready to take some questions.
Operator
(Operator Instructions) The first question comes from the line of Ghansham Panjabi – Robert W. Baird.
Ghansham Panjabi – Robert W. Baird
As related to your updated EBIT and cash flow guidance is it fair to say you are running the fourth quarter for cash more so than normal?
Timothy Donahue
I think if you look at the performance we have had over the last 5-7 years we have been running the company for maximum cash generation. Having said that we have tried to do it without damaging segment income performance.
I don’t think we would want to say we are doing it more than normal.
Ghansham Panjabi – Robert W. Baird
In terms of the profitability in North American food what was the primary variance for the margin expansion? Was it a combination of mix and better than expected volumes or price?
Timothy Donahue
Obviously as John has described, late last year and early this year we did a very good job and a responsible job in understanding what the cost pressures we faced were and adjusting selling prices accordingly to recover or restore margins in the business. Additionally, as you remember late last year we closed the food can plant in Canada so the cost base is obviously much better this year compared to last year.
Lastly, volumes recovered nicely in Q3 with the strong harvest.
Ghansham Panjabi – Robert W. Baird
On FX for the fourth quarter if rates hold at current levels through the fourth quarter what kind of variance should we expect on the EBIT line?
Timothy Donahue
Through 9 months we have a negative variance on the EBIT line of $55 million. Then you could see that in Q3 it is negative $14 million and was substantially better or less worse than Q2.
We would expect in Q4 today’s rates for the variance to be plus or minus $10-12 million so it will be a benefit.
Operator
The next question comes from the line of Chip Dillon – Credit Suisse.
Chip Dillon – Credit Suisse
You mentioned earlier in the call that you had income up 15% I think you said without pension. Was that in the third quarter or for the nine months?
Timothy Donahue
For the third quarter.
Chip Dillon – Credit Suisse
How about for the 9 months, what would you say the income would have been up without the pension?
Timothy Donahue
In the news release we spelled that out. 20.6%.
Chip Dillon – Credit Suisse
When you look at the volume trends like for example in the North American food can business what was that year-over-year in the third quarter?
Timothy Donahue
North American food cans it looks like although we were improved from the first half of the year down low to mid single digits. As I talked about earlier certainly recovering from the first half of the year but notably still down largely as a result of the closure of the food can plant in Canada and us deciding to walk away from some business.
I don’t think we are too concerned with where the volumes were. We are quite pleased with the volume recovery.
Chip Dillon – Credit Suisse
So with that plant closed do you think the full year volumes in North America food can in 2010 might be a little bit down or could they still hold flat?
Timothy Donahue
I think as John described in his comments we expect can demand to be up next year in all the regions in which we participate versus 2009.
Chip Dillon – Credit Suisse
In food?
Timothy Donahue
Food, beverage, aerosol, every product line.
Chip Dillon – Credit Suisse
If you could just give us an early look into next year, you mentioned CapEx at 180. I know you have a couple of initiatives with the plant in Brazil being an example.
What does CapEx look like right now for 2010?
Timothy Donahue
You are a few months ahead of us on guidance for next year but I would say our capital requirements for next year would be in a range of the number for this year, perhaps as high as $200 million. So maybe plus $10 million from this year.
We have a number of very, very good opportunities. The emerging business platform continues to grow and as John has described previously we are really well positioned in many of these markets where we understand the market and we do see further opportunities.
Chip Dillon – Credit Suisse
I appreciate your explaining what is happening in the Middle East. As you look at that market obviously you had tremendous growth over the last few years and it seems that you have a couple of factors that have certainly slowed it down.
I wouldn’t expect to get back to the double digit levels we saw in the past unless you give us a reason to expect that but do you think it will at least get back to say mid single digits or higher sort of on a run rate basis for the next 2-3 years? Is that reasonable?
John Conway
We think so. To me going back to growth levels of 7.5-10% is something that we think is attainable and reasonable and we expect to have happen.
As I said earlier, we were a little surprised by the deceleration in the third quarter but the Middle East is not immune. Everybody thought that it was in the first half of the year and now we find that their banks and some of their borrowers and lenders have problems similar to everybody else in the world.
It is going to take just a while for them to adjust to all that. We do think the issue in Saudi Arabia which was not insignificant for us; millions and millions of people visit Western Saudi Arabia for the Hajj and that was way down.
We think that is not going to reoccur. We think the growth is going to resume not at the 15-20% level that we have had but we think 7.5-10% is very achievable.
Operator
The next question comes from the line of Peter Ruschmeier – Barclays Capital.
Peter Ruschmeier – Barclays Capital
I was hoping you could help to summarize some of your growth initiatives. You mentioned Viet Nam and Slovakia and looking like coming on in first quarter of 2010.
Can you remind us of the capacity there and the expected learning curve from those additions?
John Conway
Let’s start with Southeast Asia. Viet Nam will be in the order of 650-700 million cans but we won’t sell it out fully we don’t think next year just because we won’t be able to produce that many.
That, as we said, we are in commercial production in a new plant that we bought and we also expect our other Vietnamese plant should be and will be able to produce more than they have this year and follow the market. So I think Southeast Asia looks very good.
The Thai plant staying with that I think at this point we will probably be in commercial production in the third quarter. It will make a contribution late third quarter or fourth quarter and that will be a big boost for us.
We have a one-line can plant and we will go to a two and we start making a lot more money when you are spreading the overhead a bit more effectively in that manner. In China we are looking at some opportunities.
We don’t have anything yet to announce but when Tim talks about CapEx opportunities China is a place we think perhaps needs some more attention and perhaps more CapEx so we are looking pretty hard at that. Coming around to Eastern Europe the Slovakian plant as we said actually is running a little ahead of schedule.
We think now we are going to be making first cans perhaps end of February or early March and commercial cans mid to late March or perhaps even a little sooner. That market we think is going to be very promising.
It is down now. We know that.
Eastern Europe is generally down. We think in a reasonably short time it is going to bounce back and we think that is very, very promising for us.
Then of course in Brazil we have been pleasantly surprised with how easily we sold out our new plant that began production this year in the North of Brazil. In fact we are now capacity constrained in that plant.
At the same time as you know we have announced to build a new plant in the south of Brazil which is due for production probably not until the end of fourth quarter next year. If we do decide to do something else in Northern Brazil we can move pretty quickly on that but we haven’t yet decided.
We have a lot of good opportunities and things that we haven’t even discussed with any of you around the world particularly in the emerging markets I would have to say. Although we are beginning to look at some other small acquisition opportunities in Europe and of course we may have something here in North American beverage but we will see.
Peter Ruschmeier – Barclays Capital
You mention in the release that 72% of sales are generated outside of the U.S. Do you have a vision for us looking forward?
It sounds like the emphasis in growing emerging markets is only going to boost that number looking out 3-5 years.
John Conway
Yes but honestly we don’t have a vision that we can quantify. Our idea is let’s get into all the emerging markets that we think are truly effective with good economy, good governments, growing middle class with more disposable income and then follow those markets in a natural way but don’t force anything.
We aren’t trying to accomplish a grand [inaudible] we are just trying to make money in the growing markets. We know the international business is going to continue to grow.
Exactly at what rate and where we are a little uncertain but we are hopeful and we believe it is all going to be profitable growth.
Peter Ruschmeier – Barclays Capital
Tim you mentioned net debt to EBITDA has obviously come down nicely. At the rate you are generating cash that is going to continue to the point you are going to be under-levered I think in 12 months.
I guess that is a high class problem. Aside from the growth opportunities can you share with us your priorities for free cash flow, to the extent you consider eventually dividends and buybacks or is it really just kept for de-leveraging and for growth?
Timothy Donahue
I think obviously we do have significant free cash flow and we are very confident in our free cash flow and our ability to continue to generate that. We will obviously as we always do continue to look at the appropriate uses of that cash flow for not only the benefit of the shareholders but all of the company stakeholders.
Nothing is off the table. I will say that at 2.8 times leverage and I think clearly by the end of the year as we have previously described we think we are going to be at 2.3 or 2.4 times that leverage.
In the context of the environment we are in and the global banking situation, whether you believe that is better or not, I don’t know what the appropriate level is but we certainly would feel better moving down closer to 2 times and trying to approach some ratings upgrades but obviously we are well aware of the fact that there are other shareholder enhancing uses of the cash. We will continue to review those.
Operator
The next question comes from the line of Timothy Thein – Citigroup.
Timothy Thein - Citigroup
A couple of quick questions around your commentary in Europe. First, we have been hearing from some of your peers that what has been a pretty rational pricing environment may be getting a little bit sloppy particularly in the French markets.
Have you been seeing anything along those lines in either the food or bev can side?
John Conway
No we have not. As far as we can tell pricing continues to be disciplined and rational and we have not seen that.
Timothy Thein - Citigroup
With regard to your adding capacity in Spain, the line in Seville in particular if that is up and running given your comments regarding some of the weakness in the Spanish market particularly on the exports where are you seeing that volume from those capacity expansions going? Is that just placing domestic volume and going to the export markets?
How are you seeing that sort of play out?
John Conway
When we were talking about difficulties in the Iberian Peninsula and North Africa it was associated with demand weakness and exports we were really referring to the food business. Largely fish but also olives and tomatoes.
The beverage situation has not changed over the course of the year. It is true the Spanish beverage market has been down pretty much throughout the year but nothing adverse happened in the quarter.
If anything the third quarter was a little better in Spain than it has been so it seems to be coming back. What we were describing does not refer to the beverage business and doesn’t refer to capacity utilization in Seville.
Timothy Thein - Citigroup
I saw during the quarter you took out some of those Euro secured notes but it has sort of been providing sort of a natural currency hedge to some of your European operations. How do you think about your currency hedging position going forward?
Would you look to establish something more on the side or switch some of your financing more into the European market or any other strategies along those lines?
Timothy Donahue
We obviously always look at the capital structure not only in terms of how much leverage we have but in what currencies. As we continue to de-lever and reduce overall debt it will only be natural that some of the Euro debt comes down with it.
We are well aware of the currency mix in a rising currency environment or a weakening dollar environment that we seem to be entering right now we are not overly concerned about that. If and when we see or forecast the dollar to re-strengthen we may be more willing to explore placing more Euros in the capital structure.
Operator
The next question comes from the line of George Staphos – Banc of America-Merrill Lynch.
George Staphos – Banc of America-Merrill Lynch
If we look at the increase in the free cash flow guidance and also look at the trend in the EBIT growth guidance which are the one or two key factors behind each of the changes? For example, on EBIT is it an issue that you are having in Europe or is it some other factor?
Timothy Donahue
I think obviously we came into the year and in the face of some very big headwinds as it relates to currency and pension. We tried to establish a market that we felt was demanding for our operators and managers who have done a phenomenal job this year.
It was also a fair number to give our stakeholders, shareholders, bond holders, etc. We did not try to put a number out there that was a low ball number and beat it.
Obviously while the extent of the de-stocking that many companies have described was far deeper and the recession seems to be far deeper than perhaps anybody anticipated at the beginning of the year. Having said that we are still doing quite well and volumes have recovered although it is clear to us as we sit here today at the end of three quarters that volume is not going to be at the level for the full year that we thought so I think it is appropriate that we not in a large way bring the number down.
I think the guidance adjustment we have given you here is about $25 million on segment income. That is just a reflection of volume which while recovering are not going to be where we thought they would for the full year.
George Staphos – Banc of America-Merrill Lynch
That’s fair. That is not a complaint.
I just wanted to get the color.
John Conway
In a nutshell it is what we already discussed. We had expected food can demand in Europe across the board to come back more strongly than it did.
It came back in a number of segments and a number of geographies but it didn’t come back in the ones that we mentioned earlier. As to beverage we saw extremely strong, relatively extremely strong demand in the Middle East in the first and second quarters and the slowdown in the third has been a surprise.
What we are really doing is we are taking those two trends in food and beverage and we believe we are not going to get a bounce back in the fourth quarter. We think we will in 2010 but it is going to take a few more months to right itself.
George Staphos – Banc of America-Merrill Lynch
I understand. One question regarding cash flow.
Cash flow went the other way and went higher. Within the business where are you getting the best cash conversion relative to what your expectations would have been?
A related question, was there any kind of inventory charge in the third quarter that makes for lower EBIT but better cash flow?
Timothy Donahue
On the cash flow side we bumped the guidance at the end of Q2 and we further bumped it here. That is really largely on the back of two things; the tin plate reduction we experienced on July 1 which obviously will result in the carrying cost of the inventory to be a bit lower at the end of the year than we would have thought at the beginning of the year.
Obviously we have a lot more confidence at this point with nine months behind us and a fairly good performance for nine months versus nine months last year. On your comment as it relates to cash flow out performing relative to segment income, we didn’t have any inventory charges but I think it would be fair to say in the context of the recession we are in and some of the challenges that are faced by many industries and certainly some of our customers in the markets that John described; southern and Eastern Europe, we have been fairly prudent and cautious and we have made a couple of provisions for receivable collection but that is just something that you do in the ordinary course of managing your books.
George Staphos – Banc of America-Merrill Lynch
Realizing that again you have already covered this to some degree the volumes are improving but you won’t get back to where you had been say a year ago, what does the fourth quarter tail look like on harvest from your key regions? Should it be pretty normal versus year ago?
John Conway
I’m sorry I am not sure I understand. Tail?
What do you mean by that?
George Staphos – Banc of America-Merrill Lynch
October you are still harvesting. Not you but your customers are.
Presuming there isn’t some sort of weather related complication.
John Conway
I see. There is nothing unusual.
We had a relatively strong pack in the third quarter in North America. It carried into the first couple of weeks of October.
We think the pack is essentially over. A little bit of filling but not much left and there was a good pack in North America.
Generally speaking aside from demand in Europe the same was true of France and Britain with packs over there as well. We would expect to see generally speaking a fairly normal demand quarter around the world with the exception of the food business we earlier mentioned and we don’t see a bounce back in the Middle East in the fourth quarter.
George Staphos – Banc of America-Merrill Lynch
On the Middle East there was a pickup I want to say with Pepsi in the third quarter with some of their Middle East volumes. Now I realize it can be very local but should we read from the positive bottler comments that we have seen to be ultimately a positive view demand wise if not fourth quarter but into next year?
John Conway
I think as a general description of what we believe the soft drink, carbonated and non-carbonated, will do in the Middle East it is reflective of the fact we can demand a generally strong and so on. Keep in mind we have about a 75% market share through the region so Pepsi may be doing relatively well and somebody else could be doing relatively poorly and we are directly affected by it.
I would have to take a look at Pepsi’s numbers in real detail to understand their apparent out performance.
Operator
The next question comes from the line of Claudia Hueston - J.P. Morgan.
Claudia Hueston - J.P. Morgan
On the restructuring in Canada and how we should think about those savings coming in as we look to next year. Generally how would you assess your North American food can, aerosol footprint at this point?
Timothy Donahue
I think as we said in the release the full year expected savings are around $25 million from the activity or the actions we took and I would say that we get close to 2/3 or ¾ of that next year. These are fairly easy changes to implement.
In fact we are going to be moving most of the volume back into other facilities in the United States so we will convert those savings very quickly. As it relates to the footprint I think we feel pretty good about the remaining footprint.
We have essentially four aerosol can facilities in the United States and taking out two higher cost, underutilized Canadian facilities in food really sets us up well for the future.
Claudia Hueston - J.P. Morgan
I am wondering if you could comment briefly on the trends you saw in Asia. You talked about the Middle East and some of the other emerging markets but not as much about Asia and what you saw there in the quarter.
Timothy Donahue
Well as John has described activity continues to be very strong throughout Asia especially Southeast Asia. Beverage can volumes were up 4-5% again in the quarter and for the year are up over 5%.
Importantly we have while it is a small business it is a very important business for us, the food can business in Thailand and volumes were up about 10% in the quarter there so we are doing quite well throughout Asia.
Claudia Hueston - J.P. Morgan
I don’t know if you have any read yet on how we should be thinking about pension next year? I know it is really early.
Timothy Donahue
You can see the markets and whichever index you look at whether it is something as narrow as the Dow or some of the broader indexes, the Russell 3000 or the S&P. All the indexes are certainly performing extremely well compared to March.
Even if you go back to January 1 they are still up. We are doing really well on the asset side and the pension.
What we don’t know obviously is where the assets are going to end up for the year but assuming they don’t give anything back the big wild card right now is the discount rate which we will mark off with a 10-year treasury and that currently is lower now than it was at the end of last year so it is a bit early. I think we need to wait to see where the discount rate goes.
Operator
The next question comes from the line of Alton Stump - Longbow Research.
Alton Stump - Longbow Research
I am sorry if I missed this but could you give us an idea of what exactly volumes were down in both food and bev cans in Europe in 3Q?
Timothy Donahue
Beverage cans in Europe, Western Europe was essentially flat and the Middle East was off a few percent. So overall we were down a couple of percent in our European business.
In food cans it looks like we were down mid to high single digits, again in the quarter.
Alton Stump - Longbow Research
As a follow-up, with the cost moderation that was announced at the first of July and I think you made the comment you think we could see pricing go higher in Europe at the first of next year, wow has that back half of the year price decrease, has that been passed on fully? Is there any potential margin pressure or benefit potential from that in the fourth quarter?
John Conway
No. You are right.
Steel prices have generally adjusted downward during the third quarter and we reduced our food can prices as we ran through the inventory on both sides of the Atlantic. So we think we adequately protected margins and we anticipate as prices move back up in Europe and Asia and we are quite convinced they will we will have to make adjustments in food can prices again.
We think they will be successful. As I mentioned in the United States and Canada we are seeing a little bit of a different situation and there we are a little unsure whether there might be a slight upward move or slight downward move but in either even we are going to adjust food can prices.
Again, we won’t see any margin erosion in the fourth quarter as a consequence of any of those.
Operator
The next question comes from the line of Christopher Manuel - Keybanc Capital Markets.
Christopher Manuel - Keybanc Capital Markets
First, as we think about the restructuring that you announced today, the 25-ish million, can you give us a sense as to timing of when we will start to see that? Is that a 2010 event?
Will some of that come this year? Does some of that leak potentially into 2011?
Can you give us some more color there?
John Conway
You won’t see any this year and you will begin to see a fairly substantial proportion next year and then all of it in 2011. We have been looking for some time at our Canadian facilities and when you take a look at the currency disadvantage and some of frankly the labor cost disadvantages we have had, we have been hanging on there thinking that for the Canadian market it would be useful to continue to have Canadian manufacturing plants and Canadian customers would like to see that.
Now what we have seen over the last couple of years is maybe that is not as true as we would have hoped and we are just going to have to regroup and as Tim said move production to lower cost U.S. facilities and ship more.
So that is how we came out on it. It took us awhile.
We hoped we wouldn’t have to do it but we have had to do it. It is going to lower the cost base and we think it is going to be fundamentally very positive but it is always a shame to shut plants.
Christopher Manuel - Keybanc Capital Markets
So I don’t want to get too granular but let’s say approximately half then next year and half in 2011?
Timothy Donahue
To a previous question we said about 2/3 of it next year and we would get the full amount in 2011.
Christopher Manuel - Keybanc Capital Markets
If we turn a little focus to the European bev market for a second, it sounds like overall industry volumes remain a bit soft there. It sounds like your plant is coming a little ahead of pace.
Is there any thought as to I believe your plant was scheduled to be sold out as it came on line in Slovakia. Just to keep supply and demand remaining tight and in good balance there is there any thought to maybe slowing some of the ramp up to that plant or how do you think about that?
John Conway
Well the Slovakian plant as we have said is sold out and we must start and produce in accordance with our plan or we are going to have problems with some customers. So we are proceeding with Slovakia.
We think it will be one of the most modern plants beginning as a high speed one line plant but with the capability to go further. So we are committed to that.
We have to go ahead with it. We don’t frankly know what the impact on the region is going to be but we do know there are a number of small one-line can plants dotted around the region that in some cases were installed as much as 10-15 years ago.
Some of them are a little bit remote in terms of location so there may need to be some adjustments but we are not going to be able to slow down the Slovakia plant. We have to go ahead.
Christopher Manuel - Keybanc Capital Markets
It sounds like from your dialogue and given you borrowed about $400 million earlier in the year and it looks like you paid off a little over $500 million of debt here in the third quarter. Would it be fair here to assume now the focus primarily you are working on is on internal growth oriented projects, adding lines to different areas of the world, adding a few new plants.
What I would consider more internal view stuff as opposed to acquisitions on the outside. How should we think about what that focus is?
John Conway
We think the focus hasn’t changed which is that as Tim mentioned our geographic spread and product spread in growth markets is so extensive and fundamentally sound, we are not in any stinker countries or economies. So the opportunities as a general proposition for very good return growth projects are sufficiently extensive that does remain our focus.
That and a combination of strengthening the balance sheet by paying down debt somewhat further. Now we are getting to the point here obviously where we have some flexibility we haven’t had before.
If we could see some very good, reasonably priced, good return consolidation opportunities in the mature markets we have a higher level of interest than we have. We have been looking at them now.
We have shifted our attention a little bit to the extent we are now analyzing those opportunities but the fundamental focus has not changed.
Operator
The next question comes from the line of Richard Skidmore – Goldman, Sachs & Co.
Richard Skidmore – Goldman, Sachs & Co.
First, the new capacity you are bringing on is there any reason that capacity would have a significant difference in margin relative to your other businesses?
John Conway
No.
Richard Skidmore – Goldman, Sachs & Co.
Second, with regard to North American beverage what are you seeing out there with regard to pricing in the North American beverage market?
John Conway
Very stable. We are not seeing any activity that we think about adversely affect margins and if anything perhaps they could improve somewhat.
We are seeing stability.
Richard Skidmore – Goldman, Sachs & Co.
Do you have any business up for contract renewal coming up at the end of this year?
John Conway
No we do not.
Operator
The next question comes from the line of Albert Kabili – Macquarie Research.
Albert Kabili – Macquarie Research
A question on the European food business, the sequential decline in operating margin there typically with the seasonal strength that expands. Can we conclude this is really driven by the low cost inventory benefit that you had in the first half of the year with respect to tin plate?
Timothy Donahue
I think it is a combination of that and as I previously responded to George’s question earlier we did make some provisions for receivable collectability in Southern and Eastern Europe. So it is a combination of both.
Albert Kabili – Macquarie Research
How much did the receivable provisions negatively hit EBIT in that segment during the quarter?
Timothy Donahue
We provided around $5-6 million in the quarter in Europe food.
Albert Kabili – Macquarie Research
So in other words from a sustainable margin perspective we could add back kind of that $5-6 million as we think about on a go forward basis what those margins might be.
Timothy Donahue
I am going to be careful how I answer that but you can add back what you like, yes. You are the analyst.
Albert Kabili – Macquarie Research
The other question is on Europe’s food did you get pinched at all in terms of with tin plate prices decreasing in July does that hurt your margins on inventory losses in the third quarter in Europe food?
John Conway
No it does not.
Albert Kabili – Macquarie Research
I wanted to switch to North American food you mentioned walking away from some business there. Could you talk about how much of an impact in terms of year-over-year growth in volumes the walk away from business was?
John Conway
It wasn’t substantial. There was some business in Canada we just could not continue to enjoy given our Canadian cost base but it wasn’t substantial.
Albert Kabili – Macquarie Research
Was that new in the third quarter or was that business that at the beginning of the year event or is this kind of incremental and happened in the third quarter?
John Conway
It happened at the beginning of the year.
Albert Kabili – Macquarie Research
Two quick housekeeping questions. On the restructuring cash expenses related to the closure, when does the timing of those cash expenses occur?
Timothy Donahue
Maybe a little bit this year. The majority will be next year.
Albert Kabili – Macquarie Research
The tax rate was lower than I would have expected this quarter. What do you think about the full-year tax rate this year and any initial thoughts on what the tax rate might be looking like next year?
Timothy Donahue
As we said earlier from an ongoing perspective we are at about 23.5% for nine months which is a little bit lower than the 25% guidance we gave you at the beginning of the year. Some of that has to do with country mix.
That is, where we are making money and the tax rates in the countries where we are making money versus our initial forecast. Certainly as John described in the Iberian Peninsula some of the food can volumes were lower.
Therefore profits are lower but the tax rates in those countries are generally higher. That really kind of goes hand in hand with the operating income.
I think 25% for the year. I don’t have a basis to change the estimate for the tax rate this year.
It is far too early to give you an estimate for next year.
Operator
The next question comes from the line of Joseph Naya – UBS.
Joseph Naya - UBS
Just curious, thinking about volume and food cans for the fourth quarter obviously last year we saw some pretty significant buy ahead that kind of increased volume in the quarter. Do you think the price increases pending out there could drive additional buy ahead this year or just how would you suggest thinking about volume trends there?
John Conway
I think in North America the answer is no because of our estimate with what may happen with tin plate prices. If there is an increase it is going to be sufficient and modest.
I don’t think it is going to change anybody’s behavior. Frankly I think the same thing in Western Europe and Asia.
The price increases are going to be more significant but again we do not think they are going to be such that customers will want to carry excess working capital going into the year.
Operator
The next question comes from the line of Daniel Khoshaba – KSA Capital.
Daniel Khoshaba – KSA Capital
Assuming the dollar stays in the range it has been in, it has weakened considerably over the last several months, when would FX no longer be a headwind but actually be neutral to positive for you?
Timothy Donahue
It will be a tailwind here in Q4. I think I said earlier segment income it could be as much as $10-12 million positive in Q4.
Obviously for the first three quarters next year based on the rates today the first three quarters next year will be a tailwind as well.
Daniel Khoshaba – KSA Capital
So for the fourth quarter it is expected to actually go to a tailwind?
Timothy Donahue
Yes.
Daniel Khoshaba – KSA Capital
It was a negative $14 million this quarter?
Timothy Donahue
Yes.
Daniel Khoshaba – KSA Capital
That is $24 million. Then let me ask you this.
At what point, I know you have been making great progress in de-levering the company. You just raised your free cash flow target.
It is a pretty big number relative to a lot of things. When do you start just thinking about other potential uses for some of your cash?
Maybe some modest stock buybacks? Or is it really just continue to focus on debt for now?
Timothy Donahue
We always think about it and certainly we have five board meetings a year and we discuss it with the board and the board discusses it with us at every meeting and we are very committed to trying to use the cash to enhance shareholder value in whatever form that may be. As John described earlier we have not had in the past as much flexibility as we now have to consider other opportunities.
There are a number of opportunities including potential share buybacks that we will continue to review as we go forward.
Daniel Khoshaba – KSA Capital
Lastly, just a little kind of discussion about you said maybe some acquisitions in North American beverage. I think everybody knows North American beverage can only mean the piece, the smaller piece that is left of the AB business.
[Inaudible] got a pretty good deal I think it is accretive by $50 million to cash flow and accretive to earnings and by my estimate people like that deal. I would expect that because the business has now been cut in half so to speak that the buyer of the assets that are remaining would get at least that kind of deal if not better or why do the deal?
Right? Because the value of the business to some degree from the sellers perspective has probably decreased a little bit right?
It is not as big. It is more regional.
How do you think about potentially doing a deal in that space?
Timothy Donahue
I will let John comment on the second. Obviously we look at all of the opportunities we have.
As we have described throughout the year and previous years and today we have a number of opportunities around the world so we look at the return characteristics of any potential transaction whether it is a Greenfield site, adding a second line to an existing facility, an acquisition in Viet Nam or a potential acquisition in Europe or the United States. So while it may be good we don’t have unlimited uses or unlimited capital available to us and all of these opportunities may be positive.
Having said that we obviously review the opportunity.
John Conway
I don’t have that much to add. As Tim said we are in the fortunate position of being able to prioritize frankly at the moment a lot of very attractive opportunities and as you pointed out metal container, what is left of it, is one but it has got to get up towards the top of the list before we think is actionable.
Daniel Khoshaba – KSA Capital
In terms of your pension there is a big headwind this year because of expense of the market compared to last year. When do you actually flip the switch on pension?
Is it at the end of the year in terms of making the adjustments which ultimately determine whether or not it is a tailwind or a headwind? I would imagine there is a significant potential change there as well.
Timothy Donahue
Everything is mark to market. As you know we don’t smooth assets.
We mark to market everything based on the closing values of not only the assets but also the discount rate. We will select the discount rate effective as of December 31st.
So to use your term, the switch gets flipped January 1, first quarter next year. As we previously described the assets are doing extremely well this year, certainly well above our expected return rate and we are probably doing well above even the market, whatever index you want to use, just based on the managers we have in place.
What we are unsure of at this point is where the discount rate is going to fall out. As I said, currently the 10-year is lower right now than it was at the end of last year so we don’t know how much of a lower discount rate, if indeed it stays lower.
That could also move between now and the end of the year. We don’t know how much that will offset the asset gains that are above our expectations.
Daniel Khoshaba – KSA Capital
Pension this quarter was negative 20 what?
Timothy Donahue
Negative 120 for the full year so roughly negative 30 each quarter.
Daniel Khoshaba – KSA Capital
These are sizeable potential moves if you were to flip the switch on it to where you are now?
Timothy Donahue
Yes.
Operator
The next question comes from the line of Chip Dillon – Credit Suisse.
Chip Dillon – Credit Suisse
Did you mention the volume changes in both European beverage and European food in the third quarter?
Timothy Donahue
We did. European food mid to high single digits down.
On European beverage the Western European businesses were largely flat. The Middle East was down a few percent so overall we are down a couple of percent in Europe.
Chip Dillon – Credit Suisse
I guess getting back to the potential, I know it is early and we are not trying to pin you down, but your stronger free cash generation it looks like obviously that is going to have some impact on interest expense next year. While we wouldn’t necessarily expect it to be $50 million lower if you look at what you expect in the context of $440 million in free cash flow and let’s just say for a moment you don’t buy back stock next year would it be reasonable to expect your interest expense to maybe be down another $30-40 million in 2010?
Timothy Donahue
There are two things that led interest expense to be lower this year compared to last year. Obviously lower short-term borrowing rates.
That is the Fed funds rate which our rates are based off of. It is hard to see those going any lower than they already are.
So that we benefited from. Currency has also reduced interest expense.
That will flip around and go the other direction next year. Having said that, if you look at the actions we took late in the third quarter to reduce fixed indebtedness we will get the full benefit of that next year.
So those two bond repayments I think save us about $25 million next year. We will see what we do with the cash flow we have for the full year and with currency but in general terms if you had to guess a number right now $30-40 million could be reasonable if Fed funds stay where they are at today.
Operator
At this time I am showing no further questions.
Timothy Donahue
Thank you very much. That concludes the call today.
We thank all of you for joining us. We will speak to you again early next year.
Thanks very much.
Operator
Thank you. This does conclude today’s conference.
We thank you for your participation. At this time you may disconnect your lines.