Ball Corp (BALL) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation first-quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Later, we will conduct a question-and-answer session.

At that time, if you have a question, you will need to press the 1, followed by the 4, on your telephone.

As a reminder, the conference is being recorded Thursday, April 24th, 2003.

I would now like to turn the conference over to R. Dave Hoover, Chairman, president, and CEO.

Please go ahead.

Thanks, Marguerite, and good morning, everyone.

This is Ball Corporation's conference call regarding the company's first-quarter 2003 results.

Joining me today is Raymond J. Seabrook Ball's senior VP and Chief Financial Officer who will comment on our financial results and goals, and also Leon Midgett, Chief Operating Officer, packaging, who will talk about our packaging operations.

Before we begin, we need to say that the information provided during this morning's 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 set forth in the company's 10 K filed on March 27th, 2003.

And in other company SEC filings as well as company news releases.

And if it sounded like I read that, I did.

If you do not already have our earnings release, it is available on our website at Ball.com.

The company reported first-quarter earnings attributable to common shareholders of $31.5 million, or 55 cents per diluted share on sales of $1.07 billion.

That is compared to 27-and-a-half million dollars, or 48 cents per diluted share, on sales of 876 million in the first quarter of 2002.

The 2003 results include an after-tax charge of approximately $900,000, or about 2 cents a share related to the closure of a small food can manufacturing plant in Arkansas which we announced back in February.

As mentioned in this release, or in the release, Ball now reports three segments: North American packaging, international packaging, and aerospace and technologies.

This change reflects the addition of Ball packaging Europe and our resulting larger international operations.

In North American packaging, earnings were $55.6 million compared to 55.3 million in the first quarter of 2002.

Sales were 711 million compared to 718 million.

Earnings in the international segment were 14.3 million on sales of $229 million.

In aerospace, operating earnings were $16.1 million.

On sales of 132 million, compared to 9.8 million in earnings on sales of 123 million in the first quarter a year ago.

We said in our January conference call that we expected first-quarter earnings to be similar to year-ago.

We actually did better than last year, due largely to a very strong quarter from our aerospace business.

It's early in the year but we're where we expected to be, despite some challenges, including the effects of winter weather on beverage sales, and the German deposit situation.

Leon is going to talk a little bit more about that and some other things in a few minutes but now I'd like to ask Raymond J. Seabrook to go over our numbers.

Ray?

Thanks, Dave.

Financial comparisons for the quarter versus last year are not apples to apples due to the inclusion of our newly acquired European subsidiary Ball packaging Europe which was acquired in late December last year.

Operating margins for the quarter were 70 basis points better than last year, and we expect full year 2003 operating margins to be up over last year in the 1% range.

Operating earnings in all product lines were improved from the prior period, with the exception of food cans, which Leon Midgett will discuss.

Selling and administrative expenses were at 5% of sales for the quarter, due to higher one-time period costs and normal lower first-quarter seasonal sales.

However, we expect these costs to be trending full year at a percentage similar to last year or slightly below.

First quarter, as Dave said, diluted earnings per share were 55 cents compared to 48% last year and that's a 15% increase.

And again, that was primarily attributed to a much stronger first quarter from our aerospace business than we originally anticipated.

Ball packaging Europe is performing as expected, and after interest, lost 4 cents per diluted share in the quarter, due to purchase accounting adjustments and the first quarter being seasonally slow and of course the effects of the new German deposit.

However, from the second quarter onwards, we expect Ball packaging Europe to be notably accretive to our earnings per share.

Turning to cash flow, our normal first-quarter seasonal working capital build was higher than last year by 136 million. 51 million of this increase is attributable to the normalcies in our working capital build in Europe and will be fully gone by the time we get to the end of the next -- by the time we get to the end of this year. $85 million of the increase occurred in North America, and primarily relates to lower payables and accrued liabilities from the 2002 year-end.

We expect most of this first-quarter working capital increase to be reversed by the 2003 year-end.

The other item of note in cash flow from operations is the 138 million withholding tax payment.

On closing our Ball Europe acquisition in December last year, the seller paid in the 138 million cash to extinguish this liability, which we paid in January of this year.

So we have been paid for this cash inflow, therefore we speak to free cash flow, we do not include this amount.

We continue to work hard to tighten up capital expenditures in a difficult business climate and have reduced our full-year 2003 capital spending forecast to 175 million from 200 and we are continuing to work on reducing it further.

We are committed to tier leveraging the balance sheet and our 2003 year-end net debt target is now at 1.675 billion up from our previous target of 1.65 billion primarily to our first-quarter $28 million acquisition.

Finally, a few words on credit quality.

The rolling four quarters EBIT to interest coverage ratio is at 3.7 times and the EBITDA coverage ratio is at 5.5 times.

Longer term these ratios will improve as earnings increase and debt is reduced.

Our publicly traded bonds continue to trade at considerably above par, and we continue to expect to return to our pre-acquisition credit statistics by 2004.

Leon?

Thank you, Ray.

Well, before I start with our packaging review, I wanted to remind everyone that our first quarter in 2003, our fiscal quarter, was a day shorter than our fiscal quarter first year -- or first quarter last year.

Even so, when we'd planned the first quarter of this year, we planned it to be similar to -- to that first quarter of last year, and it was actually slightly better.

It could have been even more improved, had we not had such tough weather.

A lot of Snow and extreme cold in some important areas of the country for us.

CMI data indicates a decline in beverage can consumption of about eight-tenths percent on quarter to quarter comparison.

Our sales on a first quarter -- fiscal first quarter to fiscal first quarter of '02 basis, about mirrored that, showing that we were down about one percent.

If we took a look on a straight calendar month basis, an equal number of days in each quarter, we are up slightly at about a half percent increase, so that day does make an is big difference.

PET was up nicely, about 9.6% from the same time period last year, but again, I think this would have been stronger if not for the weather anomalies that I mentioned earlier.

We had planned a new line going into Chino (ph), to be up and running about four weeks earlier than it actually is.

It's going into startup next week, should be pretty much fully operational by May, and we ought to expect to get about $200 million a year off that line.

Speaking of startup, our food organization incurred continuing costs of starting up and ramping up our new Milwaukee food can line.

We'll likely have a bit more of that startup in the second quarter as we continue to tweak the process, but we ought to be in great shape to meet our customer needs off that line as it comes up to full speed in the next few months.

Volumes in the first quarter versus the same period in 2002 were down in food about mid-single-digit level, but were roughly on plan in terms of volume.

While I'm at a loss to explain the logic because I don't think it is very logical, we also experienced some pricing activity in the food business that net-net is going to cost them some volume and margin for the full year.

With regard to the international packaging segment, I'm sure German deposit issue is on a lot of minds.

Let me just say that this was an eventuality that was expected.

We planned for it.

We planned for it during our due diligence phase of the acquisition.

We planned for it again during the budgeting procedures.

So, yeah, the deposit law in one way glass, one way plastic and cans has impacted volumes in that country pretty significantly, but I am really very pleased with the way our management team over there has responded to the challenges.

I have to say in spite of starting in a -- in a deep hole, they turned in a very credible performance in the first quarter.

Elsewhere in international, both China and Brazil performed quite well in the first quarter.

We believe that the effect of SARS on our business in China so far has been minimal.

So far our employees there are all okay, but of course there's a lot of anxiety, both there and here during this time.

Al Schlesinger, who heads up Ball Asia-Pacific limited and his team have implemented procedures that, at least to the best of their ability, minimize exposure, their exposure, to SARS.

Al and his people over there continue to work well in a difficult environment.

We really appreciate their effort and hard work.

A couple of other items that are probably worthy of note.

Most of you are aware that we acquired a small Denver-based inn maker in late last -- in the first quarter.

We plan to close that facility late this second quarter, after all the metal inventory has been converted to can ends, and then later on this year, as the finished good inventories are sold off, we will absorb production for that customer base into existing Ball facilities where we will have adequate capacity.

And secondly, Ray mentioned this as well, we are continually reviewing and refining our cap -- capital spending plans, and I fully expect that spending will be reduced even further from Ray's numbers as the year progresses.

David?

Thanks, Leon, and thanks to you too, Ray.

The -- our aerospace segment continues to perform extremely well.

As I mentioned earlier, first-quarter operating earnings of 16.1 million on sales of 132 million were driven largely by defense and commercial space business.

A number of our products were used in operation Iraqi freedom, primarily antenna systems, cameras, and displays.

For example, we make a lightweight portable antenna that soldiers can carry and set up in the field.

We also provide tactical displays for M 1 A 2 tanks and some of you may recall we built the Quick Bird satellite for Digital Globe which provided some stunning images of Iraq and its capital on television during this past month.

The news release mentions that commercial space program called ISAT or spelled out the ice, cloud, and land elevation satellite.

We provided the spacecraft bus for that satellite which is gathering climate data.

Completion and milestone fees from the program boosted aerospace performance in the quarter.

We've seen a steady rise in backlog the past two to three years in that business.

Currently, backlog is similar to where it was the end of 2002 but we expect it to grow significantly by the end of this year as we book additional business.

Looking ahead for the whole company, we continue to be on track to make more than $3.60 a share, which would be a 30% increase in earnings from 2002.

We reported what we believed to be a good first quarter, due largely to aerospace, but we have a long way to go in the year.

Typically, our performance is weighted to the second half of the year.

The third and fourth quarters are seasonally stronger for our company than the first and second quarters combined.

Our packaging business is more seasonal than before.

We still need to see how weather, crops, and famine turn out as the year continues.

Aerospace is performing well and we expect it to improve on last year's performance but that is a kind of lumpy business as I've described it before with programs coming on and going on from time to time.

You should expect some fluctuations as we had in this first quarter from quarter to quarter, but our goal, as we have said, for the company is to grow earnings from 10 to 15% annually, and I think aerospace will be at the upper end of that range this year.

So barring unforeseen problems, we are comfortable with -- with making more than 3.60 -- $3.60 a share this year.

We plan to stay focused and to continue to deliver improved earnings and cash flow.

With that, Marguerite, I think we're ready for questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press the 1, followed by the 4, on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered, and you wish to withdraw your polling request, you may do so by pressing the 1, followed by the 3.

And if you are using a speakerphone, please pick up the handset before entering your request.

One moment, please, for the first question.

Our first question comes from the line of Ghansham Panjabi with Lehman Brothers.

Please go ahead.

Hey, good morning, guys.

How you doing?

How much did the milestone add to aerospace during the quarter?

A few million dollars.

Probably close to 4, I think it was.

So 4 million.

So without that operating margins were probably eight or nine percent is that --

Yeah.

Does that sound right?

Yeah.

Okay.

And Ray, what's the working capital guidance for the year?

I think we said -- I think the working capital guidance -- you mean the cash flow or -- is that what you're talking about, begun sham?

Yeah.

I think we've said that, you know, generally we think it should be somewhere between 250 to 300, running this business.

I think that we think it's much closer to the bottom end of that range, and the reason is because this business floats $300 million of free cash flow last year.

I think while Europe we owned I think 11 days and flowed 30 million, so I think there's some flip-flop between last year and this year, but I would say that we're looking to generate somewhere close to $250 million.

Okay.

Great.

And Leon, could you give us the volume outlook for the rest of the year for, you know, the various businesses?

You know, we haven't even planted the seeds in the ground yet, gone Shawnee Mission, so it's kind of hard to know, but when we projected -- when we look at our full-year forecast of earnings , the numbers that Dave talked about, we -- we've been pretty conservative.

Okay.

We assumed that the volume loss, even though we were a day shorter in the first quarter in bev, would just be an arithmetic, multiply it by four and that's the volume loss for the year.

I think that's way conservative.

Hopefully it will be, but I guess we'll just have to wait and see what happens.

Okay.

Thank you very much.

Good luck in the quarter.

Our next question comes from -- excuse me, from the line of Daniel D. Khoshaba with Deutsche Banc.

Please go ahead.

Good morning, guys.

Is the new line in Milwaukee, is it -- are you making -- are you currently making and shipping cans from that line or what's the status of that?

Yes, we are.

We're making and shipping cans.

We -- you've heard about trying to get 10 pounds in a five-pound bag.

We -- we budgeted this thing to start in eight months.

I've never seen a line of this nature start that quickly.

I shouldn't let that happen.

Typically they take closer to 10 to 12 months.

We ran 1.4 million cans off of that line on a day shift, day before yesterday, and the line is going to scream here very shortly.

Okay.

So that should be fully operational, profitable, sometime in the second quarter, Leon?

Absolutely.

Okay.

And now, you -- you also said you thought that perhaps food can shipments for Ball were off about 5%.

You said mid-single digits, I believe.

Once this Milwaukee line is fully operational, should we expect food can, year-over-year comparisons, to -- volume comparisons, to improve meaningfully or I mean what will they look like?

Yes, you should expect an increase in our -- in our volumes.

We are taking out a self-manufacturer, so we'll be providing what he had been providing, so, yeah, we're going to -- we're going to go up.

Okay.

So that -- so this is probably the last quarter, maybe one more, where food can volumes are -- are down certainly and perhaps even flat would be conservative?

Probably so.

Okay.

Okay.

Good.

You -- you also said that one of the reasons food can volumes were down about 5% is because you've -- what you had inferred, I think, was some price competition.

So I guess my question, Leon, is: Is pricing having any positive effect right now in the U.S.

Food can market?

It sounds like it might not be having any, and then the second thing is, have steel costs, increased steel costs, have they stuck?

Increased steel costs have stuck.

Probably not at the level that was announced, so, yeah, we have seen some increase in steel.

And pricing has not helped Ball.

I don't know about others, but it certainly hasn't helped us.

On the food can side?

Right.

Of the business, yeah.

Yeah.

Okay.

Right.

Okay.

One last question.

I apologize for all these questions.

What was pension -- what was the delta on the pension -- the pension line in the quarter?

Well, to give you a sense of it for the year, Dan, and then just probably divide this number by four, last year's pension expense was 10 million.

This year, it's going to be 23, 24 million.

So there's the delta.

And then really that -- that expense is pretty much incurred evenly through the four quarters, so ...

Okay.

So there's a 13, $14 million --

Right.

Different divide bid four.

And we divide that by four.

Yeah.

A bit over 3 million.

Yeah.

Okay.

Guys.

Thank you.

Our next question comes from the line of Mark Connelly (ph) with Credit Suisse First Boston.

Please go ahead.

Thank you.

Just two things.

First, with respect to the weather, I mean obviously this is a slower part of the year, but is there anything that -- that you can already start to predict, based on having gotten off to such a rocky start in terms of your, you know, change to typical seasonality?

I think -- I think it would be premature to do that.

You know, one of those bad winter weather situations was right here in Colorado for which we're greatly thankful because we've been in a drought.

It's actually raining out here today, but it's still early days.

Right.

I think the -- you know, the business is such that during the warm months is when we sell a lot more than we manufacture, and, you know, there are always anomalies, but clearly there were some severe storms up and down the east coast, here in the Rocky Mountain region, and the weather has been a factor, I think, as many companies have been talking about.

Nevertheless, as Leon said, you know, our volumes were down modestly.

If -- if our total can sales are, I guess including the coarse business, what, 35, 36 billion?

And we're talking a couple hundred million in the first quarter, so this is not enormous.

It just has an impact of curtailing the profit a little bit.

But I would say I don't see any -- you know, I'm not a tea leaf reader but I wouldn't necessarily say that we should expect a bad season because of what happened in the first quarter.

Can you guys add anything to that?

No.

I -- I haven't looked at the farmer's Alma knack this year.

And a quick second question.

Your cut to the capex, should we assume that that's just delays, rather than a change in specific plans?

Pushing out some spending?

A fair amount of that is coming out of BP -- Ball packaging Europe.

We had a couple of projects there that speed up or line additions that we'll probably push back until this deposit law sorts itself out.

We have some capacity that is underutilized in Germany, perhaps a more efficient way to utilize the capital would be to figure out ways to use that capacity in Germany instead of speeding up in other areas of Europe.

So items of that nature.

Okay.

Thanks very much.

Our next question comes from the line of Steve Thibault with Morgan Stanley.

Please go ahead.

Interesting new name.

Good morning, gentlemen.

It's Edings Thibault.

Yeah.

Who is this?

Well, you know, when you have a bizarre name, sometimes it helps to just normalize it a little.

Wanted to ask you, Ray, about some of the positive comparisons year over year.

I think you had some inventory issues in the first quarter of 2002 that helped some of the comparisons this year.

I was wondering if you could quantify those by any chance.

Well, yeah.

If you go back and -- if you go back to -- if you go back a couple of years, you know, at the end of 2001 was where we had too much beverage can inventory.

We took out in 2002.

And that made -- we had some higher-cost inventory going through our first quarter in 2002.

So obviously even though sales were a little lighter in beverage cans, beverage cans comparisons the year before were, you know -- were easy comparisons because we had some high-cost inventory go through.

So -- so that's true, so beverage is -- you know, from a -- from a product line point of view, is -- did relatively well in the quarter, compared to the year before.

Right.

And I'm just trying -- I think it was something on the order of -- I mean it was -- it wasn't insubstantial, right?

It was something on the order of 6, $7 million, is that right?

Or am --

Yeah, it sounds -- it's on that order.

Okay.

And then a question, Leon on Europe.

I was wondering if you could quantify sort of the impact of the -- of the deposit law, if you will, or perhaps a better way to look at volumes year over year in the European business and as a total.

We've had one of our plants in Germany has been down, I believe, something like 4 weeks in this first quarter, so it is a big -- significant impact, you know.

That German market is, I believe, 4 billion cans, something like something that have nature, for us.

So if we're talking about 2 billion cans coming out of Germany for this year until this whole thing gets sorted out and properly directed, it's not a big huge piece of 50 billion bev cans we make annually but they certainly notice it in Europe.

And can you talk about maybe some of the steps?

It sounds like the European team, despite, you know, what -- what sounds like, you know, sort of put an order of magnitude on your numbers is Germany is roughly a third of the European business and half of that apparently seems to be amounted a standstill or was at a standstill in the first quarter, that implies something on the order of 15% reduction and yet you were still able to generate, you know, positive EBIT to the tune of 12 million, or roughly, given some of the numbers you're talking about, which -- can you talk about some of the steps that they were able to offset some of these higher -- you know, the relative fixed cost nature of the business.

Well, there have been a lot of people who ordinarily would be in our can plants making cans who are home watching television.

You know, we're doing some rolling shutdowns.

We'll shut down the Hermsdore (ph) plant for three weeks and the folks go home.

Then we'll start them up and the Viccenterm (ph) plant shuts down for two or three weeks.

And those people go home.

We're trying to spread the pain around that system the best we can.

The social system there is such that those folks that are going home are getting help from the German government on their pay, but that does help us as well, by the way, so we're -- we're -- we've really put a lid on any kind of spending there, to any extent at all, and really, the guys there have done a great job.

I just can't say enough about that.

The other thing I would say about the -- about Europe, without the purchase -- purchase accounting adjustments to their numbers in the first quarter, they would not have been -- they would not have been dilutive.

So remember, we had to -- as part of purchase accounting, you have to write the inventory up to fair value and then you sell that inventory with much less profit in it than normally would.

If I were to back out that adjustment and then do the calculation, Europe would not have been dilutive in the first quarter.

Right.

But didn't you also extend the useful lives of the assets depreciations a little bit longer than they would have been?

Yeah.

I mean mix mix --

Even I did that all again.

Hardly an offset.

Yeah, it would not have been dilutive.

Right.

Okay.

And just wondering on a comparable basis, international packaging a year ago, just (inaudible) businesses?

Correct.

Okay.

So they're in line.

And then finally, I was wondering if just, again, spending some time on Europe, the general season altogether of that business historically?

In an average year, what kind of pickup would you expect in the second and third quarters on volumes?

As I recall -- as I recall, Edings, I think the first quarter over there historically accounts for something like 20% -- 20 or 21% of their annual take, and the second and third are something like 27 each , so --

So it's fairly balanced in the second and third there?

Yeah, fairly balanced.

I -- I wouldn't --

Yeah, I think the middle two quarters are 70% taken in total, and the first two are -- the first and the last are 20% and the last is higher than the first.

So obviously the first quarter is seasonally the lowest quarter.

The middle two are significantly higher.

And the last quarter is better than the first.

To give you some sent of the seasonality.

Great.

Thanks very much and nice quarter, guys.

Our next question comes from the line of Tom Sykes with AB and Emeril.

Please go ahead.

Hi.

Yeah, I just had two or three questions.

One on the German beverage can.

Thanks for the detail you just gave, but as the seasonality is sort of due to pick up now, do you think the year on year is going to get worse for you?

And can you just sort of elaborate a bit more on how the German government is helping out on the pay of employees?

And then I've just got a couple of others as well.

Well, I'll start and you fill in, Leon.

I think your first question was are we expecting to continue to have year-over-year declines.

Is that Europe at large or Germany or --

Well, it was in Germany in particular as the seasonality sort of picks up.

Okay.

Let me suggest that the whole of the European business for us, I think last year, was something above 13 billion cans, so if we lose 2, that would be -- you know, if everything were just the same, that would be something over 11, so it's -- it's a serious problem but it isn't going to kill the business and obviously it's been profitable in the first quarter.

Our-- our notion now is, we hope, conservative, in that we would -- we would lose that many cans.

But there are -- there are ongoing efforts and discussions about just how to work with, you know the deposit.

The problem with the deposit is that it's not a new law.

It's been around a long time.

Yeah.

No one believed that the government of Germany would implement the requirement for a deposit without some system to deal with it.

And that is exactly what has happened.

So the government and -- and various parts of the industry, from the fillers to the can makers to the retailers, have been working hard on determining a way to go here.

It would appear that that may -- may turn out to be a reverse vending situation, which we would expect to have significant installation of as we get toward the end of the second quarter, third quarter of this -- or third quarter to the end of the fourth quarter of this year.

I was going to say, is that still on-line for -- yeah, targeted for October?

Yeah.

And, you know --

Or did that slip a little?

I guess I'm skeptical of trying to put a particular date because, you know, various kinds of things have to happen.

Those machines have to be built and installed and work, and -- but that is the direction that this coalition that -- as I described it -- I don't know if it's a coalition but it's -- you know, it's various industry groups and the government, seem to be heading in.

We are, at the same time, looking for a home for some of those cans in other places, and we're having some success.

You know, the short-fall.

And you asked I don't recall, I think the government pays a little over 60% of the wages that these folks would have earned, had they been working.

Does that cover what you -- your question?

Yeah.

That's excellent.

Thank you.

I just had a couple of others.

One is the potential for price rises you might have, and whether you can elaborate any more as to -- in the bev can industry in Europe and the U.S.

And also, just can you just repeat what you said about the volumes in North America at the beginning of the conference call because I just missed that slightly.

All right.

About where the volumes had moved in the first quarter, yeah.

Yeah.

You probably missed me saying also that our fiscal first quarter was a day shorter this year than last.

Yes.

On the same number of days, our volumes in Bev can were actually up about a half percent.

Volumes in PET were up about 9.5, 9.6%.

And again, that's with a shorter quarter.

And food can volumes were down mid-single digits in North America.

Okay.

Excellent.

Pricing?

Is there anything more to throw out on that at all.

We -- we have some price increases built into some extensions we did a year-and-a-half ago.

Yeah.

That are helping us somewhat in Bev this year.

So I think we've --

But as far as the outlook goes for, you know, a potential for there to be any more, we're not going to know any more about that till the end of the year.

Well, I'll tell you what, we've got -- most of our business is multi year deals in place.

If we have -- we give people an option a couple of years ago, you can extend at a stepped-up price increase or you can keep your low price, and when the -- when that contract runs out, your low-price contract runs out, when it comes time to renegotiate, you'll probably have a one-time bigger increase.

We have relatively little of that occurring.

We have, I think, one contract that I'm aware of that expires this year.

Everything else is larger term.

And the contracts typically provide for pass-throughs of various kinds of costs, including to the extent they occur changes related to price indices and that sort of thing.

Yeah, sure.

Okay.

Thank you.

Our next question comes from the line of Tim Burns (ph) with Cranial Capital.

Please go ahead.

Good morning, gentlemen.

The -- I think I just wanted to clarify that PET increase of 9.6 was unit and not sales?

That's correct.

Okay.

And the food can pricing, you sounded a little frustrated, saying that it seemed -- that there was something illogical going on.

Is there -- is -- I mean is there anything you can say that would help us better understand that illogical pricing?

When you have any kind of a -- a business -- I almost said "marketplace" but our attorney is here and he hates that.

Any time you have a business that has flat to declining volumes, and the folks in that business decide that they want to take business that belongs to someone else currently, the only way that occurs is with lower price.

And when one guy gets a lower price, everybody gets in line.

Gotcha.

It makes no sense to me.

Gotcha.

Okay.

That's -- that helps explain it.

And then the Chino line, is that -- you said 200 minimum bottles.

Is that primarily aimed at your core carbonated soft drink and water business?

It is.

Okay.

Any progress on the custom front?

Some.

We're -- we have some bottles that we think we might make some headway with here in the near term.

Okay.

And Dave, do you -- do you feel confident with this whole deposit legislation?

In Germany?

Yeah.

No, I wouldn't say I feel confident.

I think it -- we understand it, and we are working very, very hard to -- with these other groups that I was talking about, including the government, to try to get a reasonable system in place.

I think that that will progress.

You know, I hedge a little bit on exactly when it's going to all turn around.

I think that, you know, we've said this, and I -- I believe that people will see it and understand it as we go through the year.

The business over there, you know, to do as well as it did in the first quarter with all the issues, is kind of remarkable, but it's going to get stronger.

Yeah.

Through the year, and so we're going to -- you know, the business that we bought is sort of unfolding as we expected that it would this year, although some of the details of just what's happening around deposits are -- are hard to understand.

You know, our experience over here in the states that put deposit requirements on is that after an initial decline in sales, I guess, of all returnables, but in particular beverage, once the learning curve starts, people begin to like the metal container.

I don't think that this is the death nail of it, but, you know, and there are parts of Europe still that are growing quite nicely, so as Leon was saying earlier, you know, we may have to -- depending on how the German situation evolves -- consider some changes to the productive capacity there to maybe send some of it out-country and some other things, but we're looking at all those options, Tim, and I think importantly, we're still pretty happy to be there.

We wish that the government would have behaved in a little more rational manner, frankly, but they didn't ask us, so, you know, we're -- we're dealing with what -- what we have there.

Maybe you can get Don -- maybe you can get Don Rumsfeld to talk to them.

You know, that old Europe.

Yeah.

I think that would be probably just a -- just the ticket, huh?

But you're looking at -- you're arbitraging, basically, plant utilization versus freight and shipping costs maybe north and east, that type of thing?

Absolutely.

Okay.

Well, listen, good quarter despite all the problems, and good luck in the rest of the year.

Our next question comes from the line of Andy Fineman with (inaudible).

Please go ahead.

Thank you.

Ray, I heard Leon call you Ray Jay at the beginning there.

Is -- can I call you Ray, or shall I call you Jay, or should I call I Ray Jay?

He doesn't have to call me Johnson. (Laughter)

I wanted to know if you had any -- at the end of the year, your receivables sold were 123 million?

Right.

Could you add to that or is it about the same?

Well, at the end of this year?

Well, we're actually in the process right now of redoing our receivable program, and we've sort of added to it, and I really don't have a forecast for the year-end, but I think -- I think it could be a little bit higher, but I -- I'm not sure.

We're --

Do you know what it was at the end of the quarter?

Well, what happens to us at the year-end, Andy s that receivables are paid down to a level where there's really -- we don't have anything to sell, much more than sort of 122 million.

That was -- and so that's -- I expect the number to be similar to last year, but I really don't have a forecast yet because Scott Morrison, our treasurer, is redoing the -- is redoing that program.

What was it at the end of the first quarter?

Oh, it was -- at the end of the first quarter, it was 131 million.

Okay.

And based on your year-end debt, you know, goal guidance, that would mean that from the end of the quarter to the end of the year, your free cash flow would be about 420 million.

Is that correct?

Mine, to get from 2 billion -- or 2.1 billion net debt to, I think you said 1.675.

Yeah.

I'm sorry, that would be right, if that's -- if that's -- that's the math.

I mean, a lot of that -- a lot of that seasonal build you're looking at, that 200 and -- $251 million increase in working capital, a lot of it -- not all of it, but most of it or a lot of it is coming out.

Right.

Okay.

And did you buy any stock back in the first quarter?

We didn't -- we bought some, but not enough.

I mean, I've talked to Scott, our treasurer.

Our goal is to have sort of around a $10 million net buyback, by the end of the second quarter, so that would mean that we'll have to buy $16 million net of stock back, because it looks to me like we actually increased it by 6 million.

Some of that was everybody was busy doing a lot of things and we probably, you know -- it wasn't the fact that we -- we didn't want to buy it back.

We probably just had -- we were looking at some other things.

But our target right now is at the end of the second quarter is to be somewhere around net 10 million bought back.

Okay.

And the -- I got confused.

I heard two different things when you were talking -- when -- Dave, when you were talking about aerospace.

At one point I thought I heard you say something about profits being up 30%, and then 15%, and I probably just wasn't listening carefully, but maybe --

Well, the -- the first quarter, you know, was up from 9 and change to 16.

As we said earlier, probably three or four of that wasn't necessarily one-time but it was related to the -- the -- a milestone situation with the performance of the ISAT satellite, so that's not -- that's kind of like a one-time thing.

Uh-huh.

So the profits were still up.

What I also then was saying, toward the -- toward the end of the call, is that, you know, it was to say don't expect a change from 9 to 16 per quarter.

Think about our -- our -- if you think about what we say we're trying to grow earnings, 10 to 15% a year, that for the full year, we think the aerospace profitability could be up toward the high end that have range.

So what was 30%?

Was that including the milestone, jobs for the quarter?

I think so, but I'm not sure I said 30, but --

Okay.

Maybe I heard it wrong.

(inaudible) more than that in the first quarter.

And the last question was -- that I had was: Can you tell me, not including aerospace, how much your full-year spending on R&D is?

I think you told me that once, but I just wasn't sure I heard it right.

It's not a huge number.

It's bigger now than it used to be.

Probably today we're in the range of 12 to 15 million, I would say.

Between here and Europe.

Which is -- which is -- and that's exclusive of normal engineering, plant engineering and that sort of thing.

That's right.

That's the RD and E side.

Thank you.

Good quarter.

As a reminder, ladies and gentlemen, if you do have a question, please press the 1, followed by the 4.

George Jonas with David L. Babson, please go ahead.

Good morning, guys.

Hi.

I just have a few questions, and if I could actually just piggyback off the gentleman that just spoke.

Your debt target of reducing are -- you know, reducing total debt to about 1.675 billion, is the strategy to do that through free cash flow or is it -- what do you guys see there?

No, the -- remember, that -- that debt target, that's net debt, so that's -- when I look at that, that's net of any cash we might have, so that's -- that's the target.

This year-- and of course what happens is it's a very seasonal business so you can see in the first quarter, we've had a -- a build of working capital, and most of that's normal.

And as we work our way through the year, we get, you know, hopefully all of it back, but this year, because of because of what I said before, we had some -- probably some -- some overlap between last year and this year, we're probably not going to get it all back, but we're going to get a majority of that number back.

Plus the additional -- the additional earnings and -- and -- we expect to have during the year, so, yeah, free cash flow plus the reduction of working capital between now and the end of the year.

We certainly plan no equity issuances or any of that kind of thing to get our debt down.

This is generating cash out of the business.

Okay.

That's good to hear.

If we can step back for a second on a more broader scale and I had to step out for a second so I might have missed this, but if you could talk about, excuse me, resin prices in PET and what you're seeing there just on a more general scale.

It's been up pretty steep so far this year.

I think it's about 18 cents, or thereabouts, to date.

Or in the recent past.

I'm not sure all that happened this year, but it's up.

It's all gotten passed through.

Certainly no one likes it.

We think there will be some more capacity coming on stream later this year.

Perhaps there will be less pressure on resin pricing.

Okay.

I guess also, what's the availability under your revolving credit right now?

Facility.

I think we still have 200 to 250 million availability, and this is -- this is at the peak -- peak draw periods.

Okay.

Okay.

And, you know, I'm still -- and I -- you know, I don't really need you to go over this on the call but I'm still a little confused about the German deposit situation and the -- the $130 million holding tax.

Really, is it -- is it talked about on the last -- on your 10 K?

The -- they don't have anything to do with each other, you understand that.

Right.

No, I understand that completely.

Okay.

The withholding tax is simply ^ a liability that existed for a small (inaudible) company that we acquired.

It was funded with cash by the sellers, so the company we bought had 138 million of cash in it, and had the liability for the payment of the withhold -- of the tax of an equal amount.

During January, we paid the tax.

What we're saying is, take a look at us as if that didn't exist at all.

You know, go back and think about the first of the year without 138 million on both sides of the balance sheet, and then use that as a baseline and go forward and our CFO is nodding his head so I must be getting this right, so ...

Okay.

As far as the German deposit situation, you know, the -- we never stop talking about it and it isn't simple, but I'm not sure where to start, if you're --

No, no, I really don't want to take up your time here on this call.

I mean I can -- I'll just read about it more on the K, if it's --

We're happy to help you and point you in directions and if you call Ann Scott, our manager of investor relations, she can get you pointed in the right direction real quick.

I appreciate it very much.

Our next question comes from the line of Chuck Peterson with Lehman Brothers.

Please go ahead.

Had a quick question.

I just wanted to focus on the payables and accruals for a second.

Can you give a little more detail as to why they were down as much as they were from 12/31/02 this year?

Yeah.

There's a couple of things in there.

We had done some -- some metal pre-buys at the end of last year so the payables were a little higher than they normally would have been, okay.

That's number one.

Number two, last year we had a very, very strong year from -- from a lot of perspectives, and of course our -- our incentive compensation accruals were very high compared to the year before.

And those -- that money always gets paid out in the first quarter.

So we had --

You know, if you kind of know the history of our company, we -- we run it with -- we've run it with a fairly high direction to variable pay.

We -- we push our incentive plan right to our plan floors, and when we're doing well, it means we're paying our employees more money, which is good.

Our shareholders are making more money, our employees are making more money, and the accruals year-over-year for that incentive comp was up significantly higher than it was the year before, and that was all paid out in the first quarter.

Those are the two primary drivers.

Okay.

Okay.

And then just the last thing, what was the balance of accrued payable -- or excuse me, accounts payable at the end of the first quarter?

You know, I don't -- I'm not sure I have that.

Let's see.

Accounts payable?

Looks like it was $419 million.

419.

Great.

That's all I have.

Thank you.

As a reminder, ladies and gentlemen, if you do have a question, please press the 1, followed by the 4, on your telephone.

I show no further questions at this time.

Please continue.

Thanks very much, Marguerite.

Thanks, everyone, for joining us.

We hope you'll have a good rest of the day and we'll talk to you again in July.

And with that, I guess we're complete.

Ladies and gentlemen, that does conclude your conference for today.

You may all disconnect, and thank you for participating.--