Ball Corp (BALL) 2003 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by.

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

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

Afterwards we will conduct a question-and-answer session.

At that time (CALLER INSTRUCTIONS) As a reminder, this conference is being recorded, Thursday July 24, 2003.

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

Please go ahead, sir.

Thank you Tammy, good morning, everybody.

This is Ball Corporation's conference call regarding the Company's second-quarter 2003 results.

With me today is Ray Seabrook, Ball's Senior VP and Chief Financial Officer, who will comment on our financial performance; and Leon Midgett, our COO Packaging, who will talk about packaging operations.

First, I need to say that the information provided during this morning's call will contain forward-looking statements.

Actual results may differ materially from those that may be expressed or implied.

Some factors that could cause the results or outcomees to differ are set forth in the Company's 10-Q filed on May 13th 2003, and in other Company SEC filings as well as Company news releases.

If you don't already have our earnings release, it is available on our website at ball.com.

Information regarding the use of non-GAAP financial measures may also be found on our website.

The company also issued two other what I believe to be important press releases within the last 24 hours.

The first reported that yesterday we increased our annual dividend by 67 percent to 60 cents per share per year.

The second release this morning announced our intention to refinance $250 million of 8.25 senior subordinated notes.

Ray Seabrook will talk more about these matters in a few minutes.

The company reported second-quarter earnings of $74.3 million or $1.30 per diluted share on sales of $1.35 billion.

The increases of nearly 50 percent in earnings per share and more than 30 percent in sales from 2002 when second-quarter results were earnings and $49.9 million or 87 cents per diluted share on sales of $1.03 billion.

For the first six months of 2003, Ball's earnings were $105.8 million, or a $1.84 per diluted share.

On sales of $2.42 billion compared to $77.4 million or $1.34 per diluted share, on sales of $1.91 billion in the first half of 2002.

Our operations are performing well despite cooler weather in this country, in the beginning of the season.

And the ongoing German deposit situation.

We benefited in the quarter from the euro and from a lower effective tax rate.

We said in our calls in January and April and again in the news release in May, that we believed that we would make more than 360 per diluted share in 2003, and it is now July, and if anything we're more confident that we will be able to do that.

I'll have more to say that later.

Now I'll ask Ray Seabrook to go over our numbers.

Ray.

Thanks.

The increase in sales in the second-quarter was due mostly to the acquisition of Ball Europe in December.

Our sales in all product lines were ahead of last year with the exception of China.

Operating margins for the quarter were slightly better than 10 percent.

Up one percent from last year, and as we said in our first-quarter call, we expect full year 2003 operating margins to be higher than last year in the one percent range.

Year-to-date North American packaging operations were slightly lower than last year.

Mainly due to poor earnings performance in our food can product line which Leon Midgett will discuss.

Also in the second-quarter we incurred approximately $1 million in costs associated with the relocation of our plastics headquarters to Colorado from Atlanta.

And as we speak that relocation is primarily finished and is on track.

Year-to-date operating profits in Asia are improved from the current year and operating earnings in Europe a little better than expected, despite the loss of approximately one billion cans so far due to the effects of German deposit.

Selling administrating expenses were at 4.2 percent sales for the quarter, due to lower one time period costs offset somewhat by increased employee benefit costs.

Equity earnings in the second-quarter and year-to-date have exceeded last year's level, primarily as a result of improved earnings in Brazil.

While Europe is performing better this year in every country than that business did last year, except Germany.

As a result, the consolidated European tax rate is lower than originally estimated because Germany has the highest tax rate.

This change has lowered our full-year 2003 consolidated tax rate to 33 percent from our first-quarter estimated rate of 35 percent.

Free cash flow excluding the withholding tax payment related to the acquisition and after capital expenditures is forecasted again this year to exceed $250 million.

As Dave said, we announced a dividend increase yesterday, based on the continued strong cash flow outlook for our company.

Recent changes in the tax laws have made dividends comparable to stock buybacks for shareholders, and we continue to look at this as we move forward.

This dividend increase will result in 2003 total dividend payments to be approximately 10 percent of free cash flow in 2003.

Two topics payments are expecting approximately 26 million, including the increase announced yesterday.

We also remain committed to deleveraging the balance sheet and our 2003 year-end net debt target is still at 1.675 billion.

Credit quality continues to improve with earnings growth strong cash flow generation and debt reduction.

They are rolling four quarters EBIT interest coverage rate is at 6 times, and the EBITDA interest coverage ratio is at 5.3 times.

As Dave said, we issued a press release this morning announcing our intention of issuing a 200 million add on to our 2012 senior unsecured notes to replace the 250 million and 8.25 senior subordinated notes that are callable next month.

In accordance with Federal Security laws we cannot comment further on this offering.

With that I will hand it to Leon for his read on the packaging operations.

I will give a rundown on volumes in a minute.

I have just one point that I really want to stress today on this call.

In spite of the weather issues, that you have seen in eastern U.S. this year, cold and wet through much of the first six months and in spite of an enactment of an ill-conceived German deposit law, the locomotive of this committee, beverage cans is doing really exceptionally well.

I will talk about that in a bit.

But start with PET.

Our PET business has probably seen a greater impact on volume than any of our other businesses because the preponderance of their capacity is in a region of the country that has been impacted by bad weather.

We've got plants in Delran, New Jersey, Baldwinsville, New York, and Watertown, Wisconsin that are all in regions of the country that have been impacted.

Nevertheless, we are roughly in line with the year ago performance and look to be ahead of last year, but for the cost of relocating our offices and labs from Atlanta to Colorado.

Going forward, we're hopeful that weather for the balance of the year will be an improvement over the first six months, and also we're seeing some of our customers doing some discounting at the retail level which will be helpful to both PET and North American bev cans.

Overall, our PET volumes are in the up 7 percent range.

Next, our metal food businesses that has had a difficult first six months.

Some of it has been the result of industry pricing activity, some of it is self-inflicted from our new Milwaukee can line.

Nevertheless, volumes for the second quarter were up about 2.5 percent over the previous year.

And going forward I suspect that there be some questions about this year's crop in light of all the weather back east.

Our best intelligence is we still expect reasonable harvest, assuming decent weather returns to the heartland.

It may be a little late, the harvest may be little late but we should still get one.

And as to Milwaukee, we have our best technical people from the food business business from the North American bev business, and the European bev business collaborating on , we're making progress.

Don't misunderstand, we are making cans in Milwaukee and we're making progress, but it will probably be fourth quarter before we have this line running the way we really want it to and we know it can.

Now to the beverage can piece of the business.

In China, SARS had a modest impact on the second-quarter volumes, but we are doing much better this year than last.

Probably three ex last year's performance through the first half.

Brazil too is having a nice year, bettering last year's performance.

We have been getting some help from that EFEX in tax, but our operations there are certainly doing better as well.

Certainly I will admit that the China and Brazil differences aren't huge bottom-line movers because they come from a small base for the minimum, we are very pleased the direction of that movement.

Now the big guns as everybody knows are North American bev and European bev, and I really want to stress the performance of both today.

In North America in spite of the eastern weather so far this year, our volumes last quarter were up versus the year ago quarter.

Up a little less than one percent.

Our performance however is showing a much more significant improvement.

In the new and custom beverage products area we are seeing considerable interest in the 8 ounce. squat can in recent weeks.

We have been aggressively marketing the Daiwa new bottle can here in North America.

We're optimistic about the opportunity for our award-winning spill less can.

The Coors joint venture is running smoothly with both party's satisfied with results.

That plant is looking and running great.

And overall, North American beverage is having a very nice year thus far and I might say that July is also off to a nice start as well.

In bev can Europe, as everyone knows were working in an environment of some frustration as a coalition of some retailers, soft drink, brewers, packaging manufacturers wrestle to come to grips with the German deposit law.

All packaging Europe is deeply involved in all of these efforts.

As you can imagine I'm sure that this is taking a lot of our European management's time, I think it is a testament to the depth of that team that in spite of the turmoil and distraction, that for the first half of the year, Ball Packaging Europe has exceeded our expectation and earned in excess of its cost of capital.

Yes, we've gotten some help from a stronger euro and we have taken advantage of that, and also a lower tax rate as Ray mentioned, but the folks in Europe are posting a great year in the face of all this adversity.

You need to bear in mind that what we paid for this business the deposit would be put in place in Germany this year.

All of Europe will earn as much or more than our modeling projected for the first year.

I'm sure there will be more about this in Q&A, so I'll just stop talking about it now.

People sometimes think I'm overly optimistic, but in spite of the issues we've had to deal with during the first half, total packaging operations earnings are up nearly 40 percent and I still see great upside for next year.

Certainly we can't change the weather and I won't try to predict it, but we can fix the line in Milwaukee and we will.

I'm also confident that a solution will be found in the German deposit issue.

Solving both those problems gives us great upside for next year.

Maybe I am overly optimistic, but that is what I believe is going to happen in Germany and what I know is going to happen in Milwaukee.

So I will turn it back now to Dave.

Thanks, Leon, and thank you, Ray, also for your comments.

I'm going to discuss our aerospace segment a little bit and then I'll wrap up this part and we'll go to the Q&A.

Our aerospace business had a record first quarter and record first-half performance.

Segment results in the second quarter were earnings of 11 million on sales of 126.3 million compared to 11.7 million on sales of 121 million a year ago.

And as I said, for the first six months the operating earnings were 27.1 million on sales of 257.8 million, compared to 21.5 million on sales of 243.6 million in the first half of 2002.

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

It is currently at a record 680 million for funded backlog and includes new business in the defense, civil space and commercial space business segments.

Aerospace is actually hitting on all cylinders, and while it is a relatively small part of our company, about 10 percent of sales, it is making a significant contribution and doing very well and has a bright outlook.

Speaking of the outlook, looking ahead for the entire company, the second half of this year, Leon said that we can fix the issues with the Milwaukee line and I know that will happen.

Weather has improved lately somewhat, and if it continues, food crops may be late but should be there.

Early indications are that the salmon catch will be a good one.

Europe has experienced a very hot summer and that is helping drive demand for beverage cans there.

Some things we can control, others we cannot, but the company is performing well and looking at significant upside.

As I said at the start of the call, we continue to be on track to make more than 360 per diluted share in 2003.

We first said that in January and we've reiterated it, which would be more than 30 percent of an increase in earnings versus 2002.

We also said that we expect the second half of the year to be better than the first half and that continues to be the case.

As we said earlier, we yesterday did announce a dividend increase and we're hoping to be able to successfully execute the refinancing that we talked about.

All in all, things are really good at Ball and we are working hard to make them even better for our shareholders and our company.

I think with that, operator Tammy, I think we are ready for questions.

Thank you. (CALLER INSTRUCTIONS) George Staphos with Banc of America Securities.

Good morning.

I wanted to ask firstly a question of PET.

You mentioned that I think volumes were up 6 or 7 percent versus the prior year quarter, yet it sounds like your earnings were down and you were attributing that to the relocation expenses of the headquarters to Colorado.

It seems in doing some rough math that you would have done a little bit better given that volume trend.

If that is true, what else has been impacting you quarter on quarter in the PET business.

And I have a couple of follow-ons.

The delta between this year and last at this time is roughly the 1.2 million that we have spent thus far to relocate some of the offices from Atlanta to Colorado.

What we've been doing is slowing down our PET operations as the Eastern plants are not getting the sales that we had in our operating plan, in spite of this percent increase.

Did you build inventories earlier in the year, Leon?

To some extent, and we are slowing down to accommodate that now and try to keep it where we need it.

Directionally in packaging in North America, could you give us some trends for the major businesses; in other words North American beverage profits, PET we know is down and food we know is down.

Was North American bev up?

North American bev is up, yes.

I think if you look in the press release, we indicate that the food business, the Milwaukee line itself, if you take a look at the operating profit was the net total difference in operating profit, George.

Did you say that 6.1 was all in that quarter, or was that for the first six months?

I forget from the release.

Actually, some of it you're right, was probably in the first quarter, but the bulk of it is in second in terms of what we had forecast versus what we had planned.

We knew that it was going to cost us something.

Most of that delta I believe, Leon, is in the second quarter.

Leon, could you elaborate on what you're doing in Europe in terms of steps which -- it sounds like you are expecting a decent ramp next year in overall performance, which I guess is related to what you're going to do in Germany.

Could you give us a few more details there?

In Germany, sooner or later this issue is going to resolve itself.

Certainly it won't be quick enough to suit us, but in spite of what's happened there, they are turning in a stellar performance.

I just feel like when the German issue does get resolved or even partially resolved, it gives them a chance to start running their plants more fully, gives us tremendous absorption and upside going into next year.

You mentioned steps that you are taking; could you elaborate on that?

Steps that we're taking we're taking in conjunction with the other industry participants there, retailers, soft drink and beer fillers, competitors.

We're trying to work with the government there to get some systems in place that well make everyone happy, that will allow us to run these facilities full out once again.

Thanks guys.

Daniel Khoshaba with Deutsche Banc.

Good morning, gentlemen.

Leon, can you tell us roughly how much can shipments were down in Germany in the second quarter?

You know by quarter, I'm not sure I can.

It's a billion year-to-date.

One billion year-to-date?

Yes.

The Schmalbach typically sells about 2 billion cans annually in Germany?

No, they're selling more like 3.5, 4.

About 3.5 to 4 billion.

Right.

So do you still anticipate that Ball will ship a couple of billion cans in Germany this year, or do you see the base of decline accelerating second half?

Well, they've shipped a billion in the first six months, so it would seem to me that they are probably on pace to do roughly twice that.

So you'll ship to which means you will have lost somewhere between 1 and 2 billion, probably a result of the deposits lost.

That would be the high level math, yes, I think that's pretty close.

If you look at, however, total shipments year-to-date for Schmalbach, I know they're doing very well and you're also having a nice, warm season in Europe.

What are total can shipments, taking into account the billion fewer cans first half of the year in Germany that you've shipped?

How much are cans down or are they flat; where are you in Europe?

If we exclude Germany, we are probably about flat with last year.

Everything else is in pretty decent shape.

We're having a nice year in Great Britain, having a nice year in Poland; had a couple of issues early on in France in the first quarter.

With the Iraqi war there, people there decided they didn't want to drink Coca-Cola for a little while.

It seems to be coming back.

So you are about flat excluding Germany?

Roughly.

So you must be down -- if you include Germany, you must be down in the high single digits?

As a percentage basis?

Yes.

Yes, that would be about right.

About 8 percent, I think.

Good.

Now, I had heard that there was a movement recently by the European Community to petition the German government to either rescind this law or do something with it.

Could you give us a little color on what activity is happening in that regard?

Well, if you're talking about the developments in the last they or two, I don't think we've got much that we can add.

I understand from reading the newspaper, which is where I have gotten this information that a letter was sent by the EU.

I just think this whole situation is one, Dan, I'm not pleased with the pace of the progress on the things that are being worked on, but I certainly am pleased with the effort and with the results that we are getting.

I can't tell you exactly when or exactly what at this stage is going to get the situation in much better shape.

I'm confident that that is going to happen.

My belief is that perhaps we will yet this year have some more specific ideas about exactly what is going to happen.

There are all kinds of things going on from suits in court to government laws being passed to the EU's involvement.

All of the people we're working with are working proactively and constructively on trying to put in place a system that will accommodate the deposit.

I do try to stick pretty close to that.

But as to what has happened in the last day or so, Hanno Fiedler is our person on that in Europe and we talk frequently, but it's sort of like there is a little bit of news every day on this thing.

So I think if you can step back and take a look at it, we are confident that the European business -- well, certainly it's performing very well versus what we thought we could do in the face of the deposit now, and I feel the probability is very high that next year we're going to see higher volumes and higher profits in the business.

As soon as we can, we will try to be a lot more specific with this.

But when you are dealing with all of those various parties and developments, I think to try to be definitive now is just looking into a crystal ball.

Last question, very quickly.

Leon, July we've had some pretty reasonable weather I think.

Those plants in the Northeast that produce PET bottles, have you seen a pickup thus far in the quarter in unit volumes?

Not as much as we would like.

Bev can seems to be doing very well about everywhere.

The PET guys, I don't know if the customers are making some kind of conscious decision about how they're going to market their package or not, but we haven't seen the pickup yet.

But as I say, we're three weeks into this month.

But hopefully, that will turn itself around here shortly.

But you are seeing better performance on the beverage can side?

Absolutely.

Thank you, guys.

Before I let you go, I missed this decline in volume in Germany.

That is going to impact us somewhat, over 10 percent so far this year.

Over 10 percent.

So far this year.

And in spite of that, they're turning a heck of a first six months.

I don't see it stopping either.

Thank you, guys.

Mark Connelly with CS First Boston.

First, following up on the German issue, are there any costs that you're avoiding now with the lower volumes that are going to come back in?

I'm trying to calibrate how much we're really going to get back and how quickly.

We're avoiding some of the -- as we go through rolling shutdowns of our various plants in Germany, the three can plants in Germany, people get sent home and the government is taking care of a lot of their unemployment costs.

That goes on for, I think, 18 months and can be reinstituted for a second 18 month period after a restart.

So while labor is not a big piece of the fixed cost of any business, that is one that you won't see having a big impact, but everything else, the clock keeps ticking on depreciation and taxes.

So there are no other system or maintenance costs that you are able to avoid now that you're going to have to layer back in.

No, not really.

Looking at Milwaukee, the more time you spend dealing with that can line issue, would you characterize the problem any differently than you have in the past in terms of mechanical versus design questions?

Some of both, and we've got most of the equipment in place for Milwaukee now and in the process of installation.

We have some other equipment.

One piece of equipment that is not available that is going to help us is coming in, I believe, late October or early November which will allow us to run one of these lines at a higher speed.

In November?

Yes, late October, and should be running in November, which gives me certain belief that we are going to be running all of this stuff full tilt for the next year.

On the aerospace side, you obviously had a big bump in the first quarter that you had talked to us about.

Can we expect the second half of the year to keep up the second-quarter pace?

The second-quarter pace, certainly probably maybe even a little better than that.

As you look at the business and you see the backlog growing, sometimes the backlog is three years, five years, two years, whatever.

But it is that growth steadily that is a good indicator that the underlying business is growing.

The management there is doing a super job of managing and controlling the business in an improved way.

So when you combine growth with better management all over, we see top line and bottom-line improvement continuing.

It is a situation where in one quarter versus another because of the nature of the long-term contracting, and we're typically quite conservative in terms of how we accrue profit on programs.

That was an example of what happened in the first quarter.

We received a fairly substantial payment which we've not accrued against.

I think if you keep looking at it sort of on a rolling four quarters basis, you should continue to see growth in the top and bottom-line.

Has the mix of that business been materially affected by all of NASA's issues?

Not really, although we've probably grown -- no doubt we've been growing more on the DOD side of the business.

The situation with NASA is that we are hopeful as everyone is that we can figure out how to fly the shuttle again.

But in terms of the kinds of things that we're involved with, the business that we have in the short-term, we had nothing that is being delayed at this stage in the game.

We're working on the programs, and often they are many years to completion.

At the same time, we have concerns I think going forward as to what funding levels will be in the various markets that we serve.

And on the civil side, the NASA side, a lot of our market is in the science and technology area, and we certainly hope that as the government thinks about what to do that they'll keep that part of the budget in mind and continue to fund it.

Thanks very much.

Edings Thibault with Morgan Stanley.

Good morning.

Two questions, I want to focus Leon, if you will, on the North American bev can business and just try and understand the 1 percent volume growth that Ball is generating or roughly 1 percent, I think you said, given what we are seeing in terms of the industry data on can shipments in the second quarter and kind of the historic tilt or the historic importance of SAB Miller and Coors to Ball's business, i.e. beer rather than soft drink.

Where are you seeing the volume gains in that business and how much of that may be coming from the continued rollover of the Coors joint venture?

Well, certainly some of it has come from the Coors joint venture.

Not the joint venture so much because those numbers aren't considered in this 1 percent -- less than 1 percent actually number that I was talking about.

But we did pick up a nice piece of business from Coors on the East Coast.

We had a rather slow ramp-up getting qualified in the first probably four or five months of last year, so we have an easier comparison perhaps.

So I would suspect that that is where the majority of the gain has come from.

All told, it has been a pretty sight solid second quarter.

We had a pretty tough first quarter in beverage.

We were down some in our volumes, and our guys, as David said, are pretty conservative.

We assumed that that would maintain throughout the year, down at that rate.

That has not turned out to be the case in the second quarter, at least.

So Dave's number of 360 that he was talking about a quarter ago probably looks a lot better these days because the second quarter has turned out to be a decent one for the bev guys, very nice performances this quarter.

We expect as we think about the second half that qualification on the core side was a largely completed by the middle of last year?

Well, it makes the comparison a little more difficult.

We have picked up a bit of volume in Puerto Rico this year.

The first three or four weeks, three weeks of July, we're still running ahead of our reforecast numbers from the quarter ago.

So it still looks pretty good.

And would SlimFast be a contributor to that as well, I think that's another sort of new contract side that was rolling into the bev can business this year versus last year, is that correct?

One of these days SlimFast will help us but it hasn't happened thus far.

Switching gears to try and you know focus a little bit more on Europe.

I was wondering if you to help us understand what sort of Schmalbach Ball's shipments were in Europe in 2002 to give us a rough number of what to expect, is that 12.5 billion or so or -- Yes it was in the 12.5, 13 billion range last year I think.

And that would be down 10 percent year-to-date.

I'm just wondering historically Schmalbach did not hedge out metals costs.

I think one of the reasons margins were very high in the Schmalbach business in 2003, excuse me 2002, is for the same reason and you guys are posting again a strong margin in that business as well.

Would it be possible to try to quantify how much of that is coming because of implicitly lower raw material costs as the dollar cost of the metals declined?

That is pretty hard to quantify.

But you are right, the fact that the euro has strengthened against U.S. dollar has certainly helped that business some.

When we bought the business in December 19th, we did start initiating hedging tactics on both the euro and the dollar.

But to date, I know it has helped us some but I don't have the exact number.

I guess my -- assuming volume stays flat, which is not a real assumption concerning what could happen or may or may not happen in Germany for next year.

Would a margin that the company put together in the first half of the year, and just focusing on the margin percentage rather the amy dollar terms, be a good measure to be using for next year no matter what happens with currency because you're going to be of effective hedged or have been effectively hedged?

We never hedged 100 percent anything, because we are never confident we know all the answer answers.

We are hedged through some of next year but certainly not anywhere near 100 percent.

So it will have some impact or what we're trying to do is make sure whatever happens, the impacts aren't mild swings in our earnings.

What we are trying to do is take a prudent approach, as Ray is saying, and at the same time remember a couple of other things that we make both steel and aluminum cans, and the aluminum is really the metal that you are talking about so that is roughly half of it, I think somewhere in the neighborhood.

Also the pound and the Polish zloty have been devaluating against the euro, which goes a little bit the other way, so we have to worry about all those other things.

But net net the strong euro has helped our dollar results, there’s no doubt about it.

Thanks very much.

Ghansham Panjabi with Lehman Brothers.

Good morning, good quarter.

Does North American beverage can volume number, does that include metal packaging?

The can manufacturer you guys acquired?

Yes it does.

What I was talking about there was can volume, up a little less than one percent.

Certainly the ends that we've been selling out of MPI, that has helped.

So what would price mix in that business be then?

Ask that again.

With volumes being up one percent in North American beverage can, I think reported sales number is up a percent and a half, and then you have the acquisition, I'm just curious as to what the reconciling difference is?

I'm not sure I can answer that question for you.

I can help Leon a little bit with the acquisition, because we bought the business with inventory.

Most of the inventory had the run off in the second quarter and we won't see the benefits of that acquisition, it will start to show up in the 3rd and 4th quarters.

But we really haven't seen much benefit of that acquisition in the second quarter.

That helps.

What is the status of the retailers in Germany instituting their recovery system?

Well, as Dave said, it changes about once a week if not more frequently than that.

There have been a lot of ideas promoted and put forward.

Some of them are in place, they is a small convenience chain outlet that had a system that's being implemented, but that's probably 8, 9 percent of the German market.

There are a couple of other ideas out there too soon to talk about them because there have been a lot of ideas put forward.

Finally, do you guys have any exposure to coffee cans in your metal food can business?

Oh Lord, I would guess that we probably have a few.

It's not a huge bit of that business trade.

Procter & Gamble and Folgers are switching over to plastic --

If we make coffee cans, I haven't seen any.

I've seen a number tin cans of things like tomatoes and corn and that sort of thing, but I don't recall even having seen a coffee can floating through the system here.

Ray, what was the foreign exchange on the EPS line for the quarter?

You mean where was if for the quarter?

Help me with the question.

The foreign exchange benefit from the euro --

Against what?

Against our budget, against what?

I guess --

I can tell you what we thought it was going to be against budget, we think it is three cents.

Thank you.

(CALLER INSTRUCTIONS) George Staphos with Banc of America Securities.

A couple of questions.

In terms of the food line, what is the additional piece of equipment that you are bringing on in October, November.

I remembered there was one piece that you had expected sometime by the end of this month that was fairly important.

Is this the same piece that has been delayed or is the something additional?

This was a different thing.

Actually it's just tooling, believe it or not that is holding us up, a second beater on the line that will allow us to make cans at a faster clip.

Right now would it be safe to say, Ray, that you are running half speed and therefore your incremental cost there are doubled what they would normally would be?

Give us a parameter.

No, it's not that slow.

We had hoped to able to, we needed to be able to make 2.4 million cans at day, this month off the line in Milwaukee, we're hitting about 2.3 million.

Of course what we are trying to get to is 1.2 billion and that certainly more than 2.4 million a day on a seven-day operation.

We're not far off of where we need to be right at the moment but we can ramp this thing up and are ramping it up as we go down the balance of the year.

Guys, some of the other beverage can makers have talked about potential price hikes for 2004.

I don't know if this is a form where you would like to talk about that and it is probably too early to comment on it anyway.

But you have any observations of this juncture about the potential for increases in '04?

The only think I can tell you is that we are working real hard to keep our cost down, but I can tell you, things that are somewhat out of our control, our employee medical costs are going up so we are going to have to have a mechanism to recover some of that cost.

We have various kinds of contracts, many of them do permit past due of some of the things that Ray is talking about, indirectly some are tied to price movement, etc.

There hasn't been much inflation in some of those things for a while.

I believe that if we think that the economy is finally beginning to turn and get a little hotter, that you will see some pressure more so moving toward raise in prices.

We're still in some of the contracts we negotiated a year or two ago, we are still going to see more price (technical difficulty) next in any event.

We don't much, we don't have any contracts that are winding down of any significance toward the end of this year that would allow us to do much.

We do have some utility cost increases that we absorbed, some of those do get passed through as Dave has mentioned.

Some of them will wait until we renegotiate contracts and it will be a part of that while equation.

Last question.

In Europe, Leon, when you consider incremental margin on the cans that ultimately come back and if one represents your margin on your average business on that incremental margin would you be at 1.25, would you get a 50 percent further increase in margins.

Help us understand how that additional volume might actually level your earnings?

I don't know if I can get this to you in terms of margin, I can talk to you in terms that I normally think about this stuff.

We would certainly be getting a margin on the sale to begin with, we would be getting absorption on the increased production secondarily, and the absorption is somewhere between $5 and $10 and I probably shouldn't define it much more than that.

Thanks guys.

Good luck in the quarter.

I should also should mention that's $5 and $10 per thousand units for people who aren't inside of my head and knew what I was talking about.

Edings Thibault with Morgan Stanley.

Just a few quick questions, Ray, noticed the corporate overhead cost was down substantially.

Is that an allocation issue, have there been costs that have come out of the business and how should we think about that number in the third and fourth quarters?

You know, it's funny, our board meeting was yesterday and one of our directors mentioned that the earnings numbers in financial statements are liable to get more volatile going forward and I kind of agreed with him.

Of course the reason is that the general accounting principles are that everybody marks stuff to mark all the time, and ask you know the market is volatile and goes up and down.

Some of those costs are, we have a deposit share program that Dave instituted a couple of years ago, and we have -- those deposit shares are mark to market of course our stock price has gone down a lot lately, so therefore as we incurred those costs from previous quarters, because the stock price is down, those costs come back.

So it a mark-to market issue.

A lot of our deposit share program we had some slight gains in our company on life insurance program and that was offset by some of the costs I talked about a minute ago, some of the cost increases in some of our employee medical and those kind of costs.

But fundamentally a lot of it is the deposit share program.

That would be the big swing.

And two other questions, on the CAPEX budget for the year, I'm sorry if I missed it in the press release if it is there, but --

I think it might be there.

I think we started off the year somewhere around 200 with the situation in Germany the guys have done a good job of calling down CAPEX.

The guys have looked at CAPEX here and we are tightening it up and I think right now we think it will be under $170 million.

Finally, any comments on pricing in the food can business, I heard some comments that a clown talking about not getting the price increases there, looking for, arguably some price competition.

I think you had mentioned that as well on your previous call last quarter.

I was wondering what you are seeing today on pricing in the food can business?

People tell me I'm perverted or warped or something, that I think this is a that is going to go and frankly this gives us an upside again.

It seems to have calmed down, I think we are at a trough and I believe that this thing needs to go up next year.

If it does, certainly that is going to be a large, large help to our food business.

What is the way to think about it, is that for metal food can, or at large or do you see price competition in individual segments, just help us understand how perhaps pricing works a little bit if you don't mind.

Do you look at all soup cans, or salmon cans, or vegetable pack or is it more standardized than that?

No it is large, Edings, it's pretty much across the board.

Some segments have probably taken more pressure than others but it's impacted pretty much the gamut.

Thanks very much.

Karl Green with C.K.W.

Good morning, gentlemen, just a quick question on the French business.

You talked about some impact in the first quarter from an aversion to Coca Cola, can you just say what the run rates, or how the run rates progressed going into the second quarter what proportion of your European volumes France constitutes?

France is, let me see, we're looking at something like 3 billion units in France.

For all intense and purposes it is capable, able to run full tilt.

We were actually looking at doing a speed up and earlier this year, but have opted not to do that.

We're trying to export as much as we can out of Germany into the French Serb markets.

Holly Gilcheck with UBS.

My question has been answered.

Thank you.

Timothy Burns with Premium Capital.

Leon don't worry, I know a lot of people in the packaging business who are perverted, so it is not a big deal.

Even some who are perverts, but that is another story.

Some of these new can products you talked about, the 8 ounce squat can, which I think I've seen the spill less can, the Daiwa aluminum bottle, when you add all of those up is it really just bunts and singles?

I guess the aluminum bottle is looking for a main line application, how far are we away from that?

Well, we are pushing that one really hard.

Thus far the only thing I think it is in North America at the moment is Kraft's Capri.

And they are doing pretty well with that.

We are showing this to quite a few folks and there seems to be a lot of interest.

Nothing has borne fruit yet but we're pushing hard.

Certainly I don't think the 8 ounce squat can is going to be a bunt single, I think it might be a double or a triple.

What is the application for that particular product?

What is the application?

Yes.

It's traditional CSDs .

That helps.

In terms of PET, has there been any migration of the business to -- you guys have been really focused on battling it out through lower costs in the commodity sector at higher productivity, mind you.

Does that still remain the focus, in other words do you think the custom business eventually becomes commodity and comes to you that way so it's not worth chasing?

No, we are working on that pretty hard.

We are getting in line to get qualified for a big hotfill customer.

Which should help us if we can achieve that.

Hotfill remains -- I remember having toured one of the facilities that hotfill was going to be one of the focus areas I guess.

It remains so.

And that is kind of a -- I guess you pick up a lot of food in that category, and beverage?

We are focusing on beverage right at the moment, but it is possible that we could get to some food at some point.

Dave, big picture.

The balance sheet is somewhat full given the Schmalbach deal.

Are you guys going to kind of keep your head down here and focus on paying down debt and driving cash for a while, or if an opportunity popped up would you take a look and step it up?

If you look at the credit statistics of the Company, which I won't quote here, they are pretty strong.

Much stronger than say post the Reynolds acquisition.

To flow enough cash in this year to pay down debt to less 1.7 billion, as Ray was talking about earlier, we certainly have developed credibility, access to markets, the financial markets and I don't believe that financing of a reasonably sized acquisition would be very difficult for us at all.

But as we have talked, we've got a really well performing situation here.

Were flowing a lot of cash, margins have built, the total margins for the company in the quarter, I think were about 10 percent.

One of the things that we always look at and that we have been doing over the last few years, Ray was talking about the dividend earlier and the increase therein, we've been returning well over $100 million a year to our shareholders, primarily through share buybacks.

With about 20 million in dividends.

We are shifting that a little.

We think we can do all of the above, we have money to reinvest in the business, to grow the business, to pick acquisitions, to pay down debt and to pay down a solid dividend and do some share buybacks.

And, you have known us for a long time, this circumstance is quite good and looks good going forward.

Listen guys, good luck on the rest of the year.

Andrew Sineman with Uranian Asset Management.

Did you say, I apologize if you did, what you have to pay to regain the 8 1/4 notes, whether there is a premium?

No I didn't say, but unfortunately what the securities law I can't say too much about because it would be sort of pre-shelling the issue.

But fundamentally I guess if you look at our indentures, they are callable and as since you are calling them pre -- their bullet date -- there is a premium.

What is the call price?

I guess I can look it up if you want me to.

I think it's basically, we've been cautioned by attorneys and so on about not commenting about this particular thing at this moment.

If we do it won't be too long until we will be able to disclose this in some detail.

Were not going to do anything that obviously doesn't give us a net present value advantage so --

That is no problem.

I appreciate it.

I understand.

Let me just ask one more.

That is, on food cans, I apologize if I'm trying to pen you down but I'm trying to pen you down.

Basically, what Crown said last week in their conference calls they specifically, Conway said, we will look at leading a price increase in food cans in 2004.

And then he said we will take steps to dramatically improve food can product pricing.

And my question to you it is, will you go along if he does that and follow his lead?

Certainly, let me not answer that question directly.

You just heard Leon talk about the fact we believe there's a need for increase in food can prices.

I think we probably shouldn't comment on what Crown may or may not do.

But I believe that we certainly see it from our perspective that that is an appropriate thing to do.

We talked in the first-quarter, we lost some price and that sort of baffled us, because clearly it puts a squeeze on the margins.

We certainly think that is an appropriate thing to get a pricing up.

Thanks very much.

I appreciate it.

You are doing great.

Holly Gilcheck with UBS.

Thank you.

Coca-Cola recently indicated they'd seen European can volumes up around 6 or 7 percent.

I wonder if you could let us know if you'd seen in increase in volumes and Europe in that sort of range in Q2?

And whether or not it accelerated or deceleration coming out of the quarter?

We see in volumes differently in different parts of Europe.

As I indicated earlier, Holland and Great Britain and UK were both very strong for us in the second quarter.

France as kind of so-so, it was kind of holding it's own.

I couldn't tell you frankly if it was Coca-Cola driven or beer driven.

Have you seen that trend accelerate or decelerate coming out of the quarter in any of those regions?

What we are finding what is interesting I think, a pretty decent sales early in this month.

What I was going to say, is people in Germany who live anywhere near the border have found where the one-way packages are just across the border and they go across the border and get them and bring them home.

Selling a lot in border towns.

Thanks very much.

I'm showing no further questions at this time.

Please continue with your presentation or any closing remarks.

Thank you Tammy, and I thank you all for being on our conference call today.

We will look forward to speaking with you again after the third quarter.

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

You may all disconnect and thank you for participating. (CONFERENCE CALL CONCLUDED)