Ball Corp (BALL) 2004 Q1 法說會逐字稿

Welcome to Ball Corporation's first-quarter 2004 earnings conference call.

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

Afterwards we'll conduct a question and answer session.

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

As a reminder this conference is being recorded today, Thursday, April 29, 2004.

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

Please go ahead, sir.

Thanks, Daniel.

Good morning, everybody.

This is Ball Corporation's conference call regarding the company's first-quarter 2004 results.

Joining me today are Ray Seabrook, Ball's Senior Vice-President and Chief Financial Officer, who will comment on our financial performance and John Friedery, Senior Vice-President and Chief Operating Officer, North American packaging who will talk about our packaging segments.

Before we begin, I 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 12, 2004 and in other Company SEC filings as well as company news releases.

If you don't already have our earnings release or a copy of it, 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.

Well, Ball Corporation today reported record first-quarter earnings attributable to common shareholders of $46.8 million, or 82 cents per diluted share.

On sales of $1.23 billion.

Now, that is compared to 31.5 million or 55 cents per diluted share on sales of 1.07 billion in the first quarter of 2003.

Sales increased in all three of the company's reporting segments.

Earnings increased in all but the aerospace and technology segment, where margins were lower than last year's exceptionally strong first quarter.

Overall it was a solid start to 2004 and I'll comment about our outlook later in the call but now I'd like to ask Ray Seabrook to go over the numbers.

Ray?

Thanks, Dave.

Financial comparisons for the quarter versus last year are not apples to apples due to the inclusion of 6 more days in this year's first quarter compared to a year ago.

The added number of days in the first quarter will fall out in our fourth quarter, which will have 5 fewer days than 2003.

The 15% first-quarter year over year sales increase is comprised of 5% sales growth, 3% foreign exchange gains and 7% to the increased number of days in the quarter.

First-quarter earnings before interest and taxes were up 22%, due to increased sales and higher operating margins.

Operating margins for the quarter were 50 basis points better than last year.

However, as we look to the full year we foresee operating margin moving to levels consistent with last year.

North American packaging operating margins were up in the first quarter due to strong plant performance and higher beverage and food can sales volumes.

Also, improved operation of the Milwaukee food can line and 2003 plant closure costs not reoccurring in 2004 were factors in the margin improvement for the quarter.

Offsetting those gains somewhat was a 3 million increase in the LIFO inventory reserve due to rising raw material costs.

We currently estimate that the full year LIFO pretax earnings impact could be between 8 million to $12 million in 2004, which would reduce reported earnings but should have no impact on our valuation.

First quarter international packaging earnings before (indiscernible) taxes were considerably better than last year, due to higher European sales volumes, foreign exchange gains and lower than normal 2003 earnings comps.

First quarter earnings last year were reduced by a 5 million Euro purchase accounting adjustment that increased Ball Europe's cost of sales.

A strong Euro compared to a year ago improved earnings per share in the first quarter by 2 cents per share.

First quarter aerospace operating margins are down year over year, as Dave said, in part due to higher costs being incurred on fixed price contract work, and a sizeable gain related to the commissioning of a satellite in the first quarter of last year.

We anticipate that full year 2003, 2004 aerospace operating margins will improve to better than 8% as we progress throughout the year.

First-quarter interest costs of 28 million were 4 million lower than the prior year and the Euro B term loan was repriced during the quarter at 50 basis points lower interest rate.

We can see 2004 full year interest between $13 and $14 million below last year's comparable amount.

Turning to cash flow, our normal first quarter seasonal working capital build was significantly lower than last year, and as was the case last year, we project this increase to be reversed by year end.

We expect 2004 full year free cash flow to be in the $300 million range with capital spending between $175 million and $200 million.

The stock repurchase program is still targeted at $60 million or more for the full year.

Debt pay down should be in the $200 million range which will continue to improve the company's credit quality.

With those comments, I'll turn it over to John.

Thank you, Ray.

North American beverage can sales volumes for the first quarter were in line with industry volumes and financial results were in line with our expectations.

We continue to see good demand for custom cans, including the 8-ounce squat can, 24 ounce cans and our line of trim cans in sizes from 5.5 to 8.4 ounces.

We are pleased with the increasing customer interest in using the aluminum can to differentiate new and even existing products on the store shelf.

We have recently seen the e launch of a beer in our 8.4 ounce cans and you can expect to see other beers in our trim package soon.

We are also close to adding another new can to our portfolio and hope to be on the market in the next few months.

Results of our food business are improved over 2003 as a result of the performance of the new two-piece steel can line in Milwaukee.

With my manufacturing background, I do not believe that there is such a thing as a perfect game when it comes to plant performance, so I will always expect that we can improve from where we are in Milwaukee as well as our other plants, but I am pleased with the progress to date, and as a result we will definitely see a positive impact on the financial performance of the food can business this year.

The better results in the food can segment are also due, in part, to a somewhat improved price cost environment.

We saw strong sales volumes in the first quarter, which we believe was due, most likely, to some prebuying activity in advance of any potential further price increases.

In anticipations of questions about the status of any steel surcharges, I will say that we continue to have discussions with the steel suppliers.

In any case, we anticipate the ability to pass along any surcharges that may materialize.

We remain disappointed by the results from -- by the returns from our PET business, driven primarily by what we believe are unsustainable pricing levels.

We face these pressures in both the CSD and water segments although in-house manufacturing by some water companies has provided us additional opportunities for preform sales.

Other than basic maintenance capital, we plan on spending little, if any, capital in these segments of our PET operations without seeing significant changes in the fundamentals of this business.

We continue to focus our development efforts and capital expenditures in the custom arena, primarily in heat set and multi layer, where we have recently had success.

You will be hearing more about that in the future.

Plant operating performance in all three North American divisions was strong as we continue to see benefits from our process control efforts and strict attention to the fundamentals.

We are now focusing our benchmarking activities across all three groups and are uncovering new areas of opportunity for improving efficiencies and performance in all plants.

Our operations in China continue to perform well.

We completed the restructuring of our plants in 2003 and are pleased with the way the operations are running.

Our European beverage can business is humming along in spite of the continued uncertainty regarding the German deposit legislation.

We completed the conversion of one line in Germany from steel to aluminum during the quarter.

This will allow those cans to be sold to fillers outside of Germany, as well as the German brewers for their export products.

In addition, we have mothballed one line and converted another line in Germany to a completely new can size.

These actions have been taken to reduce overcapacity and optimize utilization.

Finally we have a project manager on site in Belgrade and will break ground for our new can plant there next week.

With that I'll turn it back to Dave.

Thanks, John and thanks to you, Ray.

While the aerospace and technology segment had operating earnings in the quarter of 11.2 million on sales of $160 million compared to 16.1 million in profit on sales of 132 million a year ago.

In the first quarter of 2003, that is last year, we recorded one time completion and milestone payments for the ice cloud and land elevation satellite space craft that we provided to NASA's Goddard space flight center.

Those payments contributed to an unusually strong first quarter a year ago.

The margins were lower in the first quarter of this year than we typically expect and, as Ray said, we expect margins of 8% or better over time in the business and we hope to get there for the full year of 2004.

We do expect profit to be up this year versus last year in that part of our business.

Ball aerospace was part of a team that during the quarter won a large contract to develop and initially operate the space based surveillance system for the U.S.

Air Force.

This system will detect and track space objects such as satellites and orbital debris.

We expect Ball aerospace to grow and contribute value to Ball shareholders.

Now, a few comments about what we expect for the rest of 2004.

With nearly a 50% increase in diluted earnings per share in 2003 to $4.02 diluted over 2002, we set a very high base from which to grow this year.

There are always uncertainties, especially when it is only April.

The resolution of the German deposit situation, the steel surcharges that John Friedery mentioned are two examples of things that we are uncertain about at this point.

But where we can, we factored those uncertainties into our forecasts and our own thinking.

With our strong first quarter and the prospects for each of our segments, we expect to see improvement in diluted earnings per share, potentially exceeding our long-term goals of 10 to 15% growth per year.

Barring the unexpected, 2004 should be a really, another solid year for Ball Corporation.

And with that, operator, I think we're ready to take questions.

Thank you.

Ladies and gentlemen, if you would like to register for a question, please press the 1 followed by the 4 on your telephone.

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

If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3.

Please lift up the hand set before asking your request.

First question comes from the line of George Staphos from Banc of America Securities.

Hey, guys, good morning.

Good morning.

Hey, Dave, a quick question regarding guidance, a quarter ago you talked more about the longer term growth rate without specifying anything regarding 2004.

Now you're giving us a bit narrower range, thanks very much for that.

Aside from just having one quarter, you know, under the belt, what else has resolved itself in terms of your outlook that you feel more comfortable giving us again what looks like a guidance towards a real good year this year?

Well, certainly having the first quarter under our belt is important and actually we're nearly through four months or one-third of the year, but as you know, George, the second and third quarters are the two large quarters for the business, but I think that, you know, while as I mentioned there are some uncertainties still, we are more confident so therefore we are trying to say what we believe we can deliver and give you a little better idea of that, I guess.

Sure.

Have any businesses firmed relative to where they had been, say, in January or February relative to your expectations for the whole year?

On the one hand certainly the certainty of a quarter is in that direction, and on balance, you know, notwithstanding some problems I think we probably have more positive ideas about the various parts of the business than we would have in January.

Okay.

I'll come back to that.

Can you give us a feel for how volumes were year on year in each of your major businesses?

You already said that North American Bev was pretty much in line with industry data but can you give us a little bit more color on the other businesses?

Our food business in North America was up significantly on the range of 17%.

As I said, we expect some of that is prebuying and we don't expect to see that kind of increase full year, but PET is up in the range of 6 to 8%.

And, John, were any of the North American packaging businesses actually down in profit dollars year on year or was every business up?

Well, we were up -- we are disappointed with PET.

PET continues to be a very difficult area of operations for us and apparently for others in the industry.

So your profits were down there in PET and therefore up pretty nicely in the other two businesses?

Yes, down a little bit would be safe to say.

Okay.

I will turn it over to the other folks.

Thanks, I'll be back.

Next question comes from the line of Ghansham Panjabi from Lehman Brothers.

Please go ahead.

Hi, guys, how are you doing?

Good morning, Ghansham.

Can you give us a break down of what drove the 19% sales growth in metal food containers in North America?

I just mentioned the volume that we had as well as a little bit of price.

And Ray mentioned earlier there were 6 more days in the first quarter which has some impact.

Okay.

And there is just a little tag of ConAgra in there as well.

They close on that acquisition in a couple of weeks.

A couple of weeks of sales of ConAgra.

Given the problems I guess the PET business is having, can you give us a flavor of what else is being done in terms of maybe restructuring, maybe one of your competitors talked about restructuring some pricing contracts in this business, and I would be interested in your comments on that.

Well, I think the competitors that announced the actions that they are planning to take a week ago are not unexpected under the circumstances.

The PET business is not for anyone as near as I can see by reading the reports, performing in a way that would make anybody excited about investing in it right now and it is growing.

You are seeing volume growth, so at some point those two things can coexist.

Our idea is that actually this year we're disinvesting in the business.

We're not spending nearly as much as depreciation, any spending that we are going to do there in the future will be, you know, with certainty around getting a return on it.

It is 8% of our sales so, you know, it is not something that tips us over sideways.

We like it.

We like making the containers.

We feel comfortable with the customers that buy them.

We're working hard, then, in addition to that on developing our capability in heat set.

We've had some success at selling in to customers who previously have been in glass and so forth, but, you know, and so our R&D efforts are there and toward the beer side of the business, but I think it's maybe – I don't know, when you can pick the bottom but I think the – and the actions announced by a very large player to do some restructuring I think is a step in the right direction.

John, would you have anything to add to that?

No.

Probably not, other than just to repeat a lot of what you just said so I'll leave it at that.

Okay.

Fair enough.

Thank you very much.

Our next question comes from the line of Mark Connelly, Credit Suisse First Boston.

Thanks.

Just a couple of quick things.

Can you remind us how the ConAgra volume that you are picking up will kick into profitability over the next several quarters?

Hey, Mark, it is Ray Seabrook.

We're not expecting a huge profit pick up from ConAgra in the first year.

I think somebody said that in their comments or it was said in the press release.

You said it is going to be mostly next year but – (multiple speakers).

I think the way that thing was set up is that there is not a lot of profit in the first year just by the dynamics of how it was set up and we expect obviously that things start to kick in next year.

I would add that there was obviously uncertainty around what the future was going to be for that operation over the last 12 months, and we slowed down on some activities that we would otherwise do to help the cost structure of that plant.

So that we're kicking back up in that area.

And I think also there are some cans that can be sold in the general market but we're not going to do that willy nilly, it's not a huge number, but also we sort of missed the season for that, maybe not entirely, so there will be a pick up from that, and finally I just remind you, you know, we did have a joint venture and we did make some money there so what we're talking about is not a pick up from the amount that we made.

It is not like we're not making anything.

Sure, no, that's fair.

Okay, that helps.

And just one second thing.

You mentioned the FX impact on profits.

Can you tell us what it was on sales?

I think it was 3% of sales was FX.

Okay.

Thanks very much.

Sure.

Next question comes from the line of Amanda Tepper from JP Morgan.

Good morning.

Good morning.

On aerospace, I was a little surprised when you said the margins were pressed a little bit with the fixed cost contract work.

I had thought fixed cost contracts generally you were able to get a better margin.

Is that not true?

Yes, I think it is fixed price.

I know what I meant, sorry.

I know, and I know you meant it.

Let me try to help that a little bit.

On the front end of a program like that, when you are starting a job, the way we are is very conservative.

So, you know, you are making estimates all along during the period of performance of one of these about, you know, where are you on the schedule, the cost and so on.

You know how much money you could ultimately be paid and so we tend to accrue profit at low rates in the beginning of those kinds of activities.

That was one factor that pulled the margin in the quarter down a bit, although the sales were up.

As we get through the programs, we tend to begin to pick up and accrue more, assuming things are going well, and then as we had last year with the ISAT, although I think that wasn't fixed price but it might have been but that was performance related payments which typically come, you know, at the very end and we just don't try to estimate and pick up any profit in that way, so, you know, we say from time to time that the business can be, quote, lumpy and also, you know, quarter to quarter is, you know, you possibly have these things.

We had no fundamental issue in the business or issues, you know, year over year.

We had 4 million or so last year of that payment that didn't occur this year, so if you had added that or taken that away from last year, the difference would have still been there and most of it is explained by the kind of thing that I'm talking to you about.

The business is very healthy.

I started my day down there today, and, you know, we're seeing it perform very well.

Okay.

And I don't know if I somehow missed this earlier.

You did not comment on volumes in European beverage cans.

Can you give us any color there?

Yes, they were up and we're looking for the percentages.

2.5%.

Okay.

Or we could just have Ray tell us.

He had it at his fingertips.

And then on the PET side, disinvesting is understandable.

How long could you do that before you would have to put in at least some capital for maintenance?

How long can you hold your breath?

It is not like we're spending nothing.

We're keeping the plants running well and we're spending some money.

It's just that the depreciation in that business is well over $30 million I think and we're spending nothing like that this year.

So net-net the investment comes down.

We are spending maintenance capital.

We're simply not going to expand our capabilities in the softer CSD and water segment.

The real answer is for a fairly long period of time.

Yes.

Remember, we got into that business in the mid 90s and we have really top quality assets, we have state of the art plants and we are depreciating those assets over a fairly short period of time, and we can, you know, it is not as if we're starving the business for capital.

We're just not investing in new stuff so I will tell you that in my opinion we can do that for another three or four years if we have to.

We were in CHINO last month with a performance review and I hadn't been there for about a year and a half and it is remarkable how much better that place is running and when you look at an operation like that working as well and running as well as it is, we should be able to make more money in that kind of an operation.

So the industry is going to have to get itself structured so it can meet the market in a way so we can make fair return or I don't think, you know, people will invest in it, you know.

Okay.

And can you give us any more color on you mentioned other plastics that you are looking at getting into, like multi layer plastics?

Yes, this would be just barrier technology, multi layer in the PET market.

We're not talking about outside of that at this point.

We're simply talking about other forms of PET and other technologies within the PET area, if you will.

Okay, thanks.

Ladies and gentlemen, as a reminder to register for a question, please press the 1 followed by the 4.

And our next question comes from the line of Chris Manual (ph) from Keybanc Capital Markets.

Please go ahead.

Good morning, gentlemen.

Good morning.

A couple of questions for you.

One is after your conversion is complete in Europe, can you tell us what the new mix will be between steel and aluminum there?

After the conversion is complete, the mix will be closer to 50/50.

Okay.

And do you have an idea of when Serbia will be on line?

We would expect it to be on line by this time next year or a little bit later.

Okay.

And then --

In the second quarter.

Can you give us any update on expansion, your thoughts on expansion into Egypt or Russia or other places?

Yeah, well, we're looking, you know, at eastern Europe which does include Russia up to the euros and trying to see if there are opportunities there.

The market over there continues to grow at a higher rate in Europe than the average of the total European market which continues to grow, so those are places that are interesting to us.

We're continuing the -- to look hard at, you know, in Egypt, also as we had announced earlier and a couple of other places as well.

Just for opportunities, you know?

Okay.

And, Ray, I missed earlier when you said what percent of the sales were attributable to I think you said 3% FX and then there were a couple of other things you talked about there.

What I said was the 15% increase in sales year over year of a little under 7% is due to the number of days. 3% is FX and 5% has got to do with just sales growth.

Okay.

Thank you very much, gentlemen.

You bet.

Our next question comes from the line of Richard Holohan from Smith Barney.

Go ahead.

Good morning.

Good morning.

I had two quick questions.

One was on the custom can business.

Could you give us a little bit more color there on how that is contributing to growth?

Has it become meaningful or just give us some sort of idea there?

Well, it is obviously a small base and that's part of the challenge of that business is that they are very small runners in the beverage can business which has been primarily a 12 ounce business in north America is predicated on long runs, large sizes, even large sizes on a particular label, and not significantly swinging line.

When you're talking about label change-overs and conversions, you're talking in a matter of minutes, when you're talking custom cans swinging from one can to another you're talking shifts or even days, so it is a challenging business but we continue to put flexibility into our system to allow us to make more of these and to ease kind of the scheduling conflicts that we've run into as we see the growth so it is coming off a small base, but it is growing nicely, and it is one benefit as well is simply that it is raising the level of the consciousness of the aluminum can in the eyes of the marketing departments of our major customers which we are very excited about, so there is a side benefit, if you will, or a drag on the rest of our business.

An upward drag on the rest of our business we hope to see just based on getting the aluminum can back into the main stream of the marketing departments of our customers.

I got you.

And the second question I had was on the PET business.

It sounds like the feeling out there is that, you know, that people are fairly depressed over the state of the industry there.

Are there assets that -- do you think that consolidation is what's really necessary in that business, you know, over the longer term and would you guys be interested in playing a part in that in some way?

Well, I think that, you know, broadly consolidation is what you read about in the announcement by a competitor, who is quite large, who must have concluded that continuing in the mode that they were in was not in their best interests, so, you know, that is helpful.

The fact of the matter is that there are few customers for these containers and you can't blame the customers, because there are too many competitors selling at too low a price, you know, so in the end, the consolidation that you -- as you refer to it or restructuring or changing, you know, is important, but, you know, our rational reaction is we're not going to expand any more until the economics get better.

It doesn't mean we're angry or whatever.

In terms of acquiring anything that we buy, we've got to be able to make a return on it, but, yeah, we'd do that if we could find something that we could make a return but, you know, we're going to look real long and real hard before deciding that.

and in this environment I see that hard to figure that out.

We've got to get it by Ray, too, so, you know.

Got you.

Thank you.

Okay.

Our next question comes from the line of Christopher Miller from JP Morgan.

Please go ahead.

Good morning, guys.

Hi.

Just a couple of follow-up questions in Germany the conversion of a line from steel to aluminum, just give us a sense of the cost involved in that and are there other lines in Germany that you would consider doing that for over the course of the year?

It was about in the range of 10 million Euro, I believe, and that has been completed.

It is a matter of changing some equipment and reconfiguring conveyance, et cetera.

I'm sorry.

The second question was do we see that happening more?

Yes, is it something you would consider for other lines in Germany and if the deposit situation gets resolved is it something that you would then switch back?

I'm trying to get a sense with the overall flexibility for doing this.

It sounds like it is a pretty straightforward situation.

It is pretty straightforward.

Of course, if there is anybody out of our plants listening in they are going to kick me as soon as they can see me because we say it's pretty straightforward but obviously it is a lot of hard work for the plant.

The question of whether we or will we do any more conversions in Germany, largely will rest on the outcome of whatever happens with the deposit legislation, and that's a very dynamic situation and at this point in time we feel that the steps we've taken in Germany allow us to move forward successfully in the current situation.

Should that get resolved, I think will also depend on how it gets resolved and what the structure of that resolution looks like as to whether there are more conversions or switching back from aluminum to steel.

We really do like the way these guys are able to make steel cans.

There is no need to do it, except that these cans on this particular line, which I think a full year's production would be 700 million or more, so we had this 2 billion can hole last year and we've been able to take up 700 million of that on an annualized basis for export, and, you know, the market further east wanted aluminum and that's why we did it, but, you know, we've done something with another can line with another size and that we did not change the metal and we like the idea of the two metal capability over there, so --

and the money that we spent to convert this line was money in part that would have been spent for upspeeding of other lines in Europe so we just moved the monies over and better utilized the assets based on our current situation.

And then switching gears a little bit, any conversations coming off this quarter with the rating agencies and from your sense in talking to the rating agencies, what do they kind of laid out for you?

What does it take?

You have a stable outlook from both of them.

What are they telling you it is going to take to move you up from a ratings standpoint because certainly the credit metrics are headed in that situation.

This is music to my ears, because I agree with you.

The simple answer is, you know, Scott Morrison our treasurer and I visited with both agencies earlier in the year and as you said they've, you know, they've kind of moved their outlook on us.

Those meetings were very, very positive, and we're putting together some material to go back to potentially talking again to them later on this year, but our anticipation is those ratings to move up to reflect the true credit quality of the company.

You know, on the other hand, the proof of the pudding is how our bonds trade, and they are trading just fine, you know, and we've been able to do good financing and I think our focus is to be sure that what you said you understand is what the market does and apparently it does, and we feel we've got great access to capital if we need it at very good pricing, so, you know, as you read in there our treasurer, Scott Morrison was able to take 50 basis points off the Euro B loan here in the first quarter, so, you know, things in that regard are okay, but you, you know, you can't make everybody love you or whatever, but we communicate well and Ray and Scott do a good job and we've got good relationships with the agencies so as long as we have got good access to capital we'll be just fine.

Thank you so much.

Nice quarter.

Our next question comes from the line of Andrew Fineman (ph) from Aridian (ph).

Go ahead.

Thanks.

Can you tell me, Ray, did you have any -- can you tell me how much the securitized receiveables were at the end of the quarter, please?

Just a tad under 150.

It was 148 or 149 if I remember right.

Okay.

And thank you.

And the -- what you said about paying down $200 million worth of debt this year means that from where you are now your debt is going to drop by about $6 a share in the next nine months; is that correct?

I mean, that's, you know.

I just did the math.

Let me see something here, right, because it is 200 plus the 150 so it is $350 million of debt paid down between now and the end of the year.

Depending on what the Euro does, remember, because we've refinanced the European operations in primarily Euros, we also have some Sterling denominated debt but assuming the Euro stays where it is and it and even if it weakens a little bit you would expect year over year debt pay down to look like a couple hundred million dollars or maybe even more if the Euro weakens a little bit.

Great.

And you don't have to educate me on this.

I can find out myself, but you're talking about Dave a large competitor in PET made an announcement and I guess I didn't hear about it.

Has some capacity been taken out in that business?

What I read was an announcement by Amcor that I think was within the last couple of weeks and I can't recall exactly but I think they talked about up to 6 plants and, you know, it was aimed at, I think, this soft drink and water business but I'm sure you can find the release.

Yes, I will.

That's great news.

I'll see if I can get Ann Scott to send you a copy.

Great.

I'll find it but thank you.

Those are the only questions I had and you're doing great.

Thanks, Andy.

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

Hi, gentlemen, just one follow-up question to I think something that Richard had asked.

John, can you give us a feel for what percentage maybe on a volume basis custom cans represent in North America?

You said it was a small amount.

I'm trying to get a feel for how much.

It is less than 10% of our volume.

Okay.

And is it similar in Europe?

I don't know that there is a broad a range of offering sizes in Europe, but it is probably about the same in Europe.

Okay.

Thank you very much.

And we have no further -- actually we have one last question from the line of George Staphos from Banc of America Securities.

Please go ahead.

A few last questions.

Hey, guys.

Ray, can you give us a breakdown of the volume that's reported in food?

How much of that was shipping days or is that the actual number in shipping days was added to that whatever 17 or 19%?

I forgot what you said.

I think it was John that said it but I think it was year over year 17% increase.

And that's exclusive, that's exclusive of the shipping news.

That's apples to apples.

So it is like 25% if you take the year over year increase.

Okay.

So I mean second quarter we should be expecting a decent size drop in food can volumes, 2%, 5%, somewhere in that range?

You won't see if it from us because the second quarter is going to include 100% of ConAgra.

We didn't close that transaction until mid-March, so it had little volume of ConAgra in the first quarter so I don't think you will see that drop at all.

And again the first quarter is usually not a big quarter to begin with.

Right.

As John said, we really believe a lot of that was prebuying because, you know, as you know that the steel companies have announced all of these surcharges so I think people are trying to get their product before these surcharges kick in.

When do the surcharges kick in?

Well, you know, Dave, do you want to comment on that?

We don't, you know, I might say a couple of things about that.

It has been talked about a lot.

We've tried to communicate with great clarity and fidelity with our customers what we're being told, you know, by the steel companies.

Essentially they've gone a long time and had a lot of trouble.

They've consolidated down to where there aren't many of them.

They've faced, you know, fires in mines that hurt the supply of coke, China is soaking up all of the scrap.

I mean, there are all of these things goin on.

We keep pushing back hard and saying what are you doing?

What are you doing?

And as it stands right now, you know, I don't know exactly when or what.

What we've told our customers is we can't bear there this, you know, you've got to pay it.

Of course, they're real happy when they hear that.

Nobody is happy about it, but my guess is the way the world usually works, is that there will be some sort of calming and settling down and there may be surcharges.

If there are we are going to pass them along everywhere that we can in the context of good customer relations and fight hard to try to get the price lower as soon as we can, so I mean that's sort of the way it is and you read the papers and hear what other folks say.

Just the sports sections, though, Dave.

Okay.

Well, I don't think it has made that part yet.

on cash flow rate, I mean, it looks like you're going to run over your $300 million target.

I realize that is your target and therefore you are probably not going to move off of it but how do you feel about your confidence level in making that?

As every day progresses I feel more confident.

I mean, (indiscernible), as you know, George, this business is a cash flow business and as Dave gets more confident and we look at our business, it is just generally, you know, it is going to flow a lot of cash.

Okay.

You know, there is a lot of discussion on PET and a lot of good questions, I guess, one question ultimately, I guess everyone would have is we're ten years past, more or less, the time that you decided to go into this business.

There may have been one year, but (indiscernible) I don't remember if you've ever earned cost of capital in this business.

It doesn't sound like you're doing it again this year.

Not necessarily your fault, you know, as opposed to disinvesting why not just get out?

You want us to turn the lights off and let it rot?

We've got a business and we've got to run it.

We're going to make it better and we're going to participate in a positive way and if we get to the point, George, where we think there is no hope then we will probably do what you are talking about.

We don't give up on things.

We're going to do all that we can with every part of our business to improve it.

Remember, it is only 8% of the company.

No, I know but it is diluting your return you could probably do something better with your cash flow.

I don't know.

It depends on how much you are willing to pay us for us, whether it is diluting our return or not.

If you sell it and you get cash, do you know how much, I just bragged on our treasury, you know, if we got money and we pay off debt with it, we save like 1 plus%.

That isn't near as much as we're making in PET.

True, but in the other businesses it would appear you have an even stronger competitive position and you're less susceptible to competitive threats and the market remaining fragmented.

Would you agree with that?

Sure, but my point is every day when you get up you have choices about what you are going to do and if there was a better choice than doing what we're doing the way we're doing it in PET, we would do that.

Okay guys, good luck in the quarter.

Thanks very much.

Our next question comes from the line of Kevin Stanley.

Please go ahead.

Sorry, my question has been answered, except for one.

Ray, did you comment at all as far as SG&A as a percentage of sales going forward?

It looked a little high in the first quarter.

I didn't comment on that and that's a good question because it is high.

Let me give you a little flavor on that.

I think I said before, we really -- we really like to run these businesses if we can closer to 4% than the current, you know, 5 and change.

Actually, the percentage for this quarter is 5.8.

There is one of the anomolies in that percentage.

It's hard to know what everybody else puts in G&A.

One of the things that's in our G&A number is remember when we acquired the European business last year, we acquired some unfunded pension plans and a lot of those, a lot of that pension expense from those unfunded plans ends up in our G&A because it is for retirees of the old [Schmalback Lebeckitt] company that we acquired, so when you back that number out, you start to get a lot nicer looking numbers compared to a percentage of sales and so that's the first point.

The second point, the increase year over year we don't like, but it is for things like this [SOCS] is not inexpensive.

All of these Sarbanes Oxley things, we have to do our audit fees and our fees to do all of that work is a lot more money than year over year.

It is like $2 million dollars more.

Those kinds of fees are falling in there.

Foreign exchange quarter to quarter it is like 17% higher in the second, you know, this year's first quarter than last year's first quarter so that's having some impact, but all in all, I think, when we really dig down and look at our G&A, we're relatively comfortable and we like to run it as lean as we can.

It is not near as high as that percentage looks.

Does that help you out?

That does, and I guess if you look at the corporate expense line on the operating profit at $11 million, it was kind of up and down.

Yes, things are in there like that's where the [SOCS] fees are, all of the extra audit fees to do all of this work that Sarbanes Oxley wants us to do.

That's where those kinds of numbers fall in.

Last year in '03 the number was kind of lumpy especially in the second quarter.

Would you expect that same kind of volatility there or can we use what you reported in the first quarter as a good run rate number?

I think that's a good run rate number.

Okay.

Thanks for the help.

Our next question comes from the fine of -- line of Andrew Fineman from (inaudible).

Please go ahead.

Thanks.

I was wondering how many shares of stock you bought back in the quarter.

You have on the press release a net number, $14.6 million, but I guess, you know there, is some coming in and some going out, so maybe anything else you want to tell me about that?

Andy, I think it was over, you know, 115,000, 120, 115,000 shares net.

115,000 shares net?

Yes.

Remember, we have -- that's a net number, so what happens is, you know, if that number says 15 million, of stock buy back we could probably buy $18 million of the stock buy back and there's $3 million of issue with our 401-K match and some of our benefit plans we issue stock, so it is like Scott is just pointing to a number it is like 22 minus 7.

Okay.

Perfect.

Thank you very much.

And we have no further questions at this time.

Please continue with your presentation or closing remarks.

Okay.

We'll continue with our closing remarks.

Thanks, everybody, for joining us on this call.

We're off to a great start this year.

Keep in mind, I'll say this now instead of at the end of the year, the 6 extra days in the first quarter, one of those is because it is leap year and we get to keep that, but five of those are going to come out of the fourth quarter, and so, you know, as you are thinking about us think about that, but we are again off to a good start and another year.

I would say, you know, from my perspective we've got more potential Easter eggs than land mines ahead of us for the rest of this year so stay tuned.

We'll talk to you in July.

Ladies and gentlemen, that does conclude our conference call for today.

We thank you for your participation and ask that you please disconnect your lines.