Ball Corp (BALL) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Ball Corporation Second Quarter 2004 Earnings Conference Call. (Caller instructions.) As a reminder, this conference is being recorded Thursday, July 29, 2004.

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

Please go ahead, sir.

Thanks, Jennifer.

Good morning, everyone.

This is Ball Corporation’s Conference Call regarding the Company’s Second Quarter 2004 Results.

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 can cause the results or outcomes to differ are set forth in the Company’s 10Q filed on May 12, 2004 and in the other Company SEC filings as well as in Company news releases.

And 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.

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 of North American packaging, who will talk about that packaging segment as well as our international packaging segment.

Ball Corporation today reported sharply higher second quarter earnings of $90.7m or $1.60 per diluted share on sales of $1.47b.

The earnings per diluted share were a 23 percent increase over the second quarter of 2003 when the Company reported earnings of $74.3m or $1.30 per diluted share on sales of $1.35b.

For the first six months of 2004, Ball’s earnings were $137.5m or $2.41 per diluted share on sales of $2.7b, compared to $105.8m or $1.84 per diluted share on sales of $2.24b in the first half of 2003.

All three of our operating or our reporting segments showed increases in both sales and earnings over the second quarter of 2003.

Additionally, interest expense is down and our free cash flow continues to be very strong.

I’ll comment about our outlook later in the call, but before I turn this over to Ray, I want to call your attention to our news release of yesterday in case you missed it.

Our Board of Directors approved a 2 for 1 stock split, increased the dividend by 33 percent, and approved an authorization to buy back up to $12m of our own post-split shares.

This is our second 2 for 1 split in a little over two years and the third time we’ve increased the dividend in that same time period.

The distribution date for the stock split is August 23, for shareholders of record, August 4.

The divided of 10 cents per post-split share will be paid September 15, to shareholders of record, September 1.

The stock repurchase authorization replaces all previous authorizations and gives us plenty of flexibility to buy back shares in the future.

These Board actions I think can be seen as an acknowledgment of our continued good performance, which really springs from the hard work of our 12,600 employees and our unsurpassed commitment to our customers’ success.

And with that, I’ll turn this over to Ray.

Thanks, Dave.

Let me first start with a word about financial comparisons for the quarter and for the six-month period ended July 4.

Year-over-year second quarter financial comparisons are consistent between both quarters which both contain 91 accounting days.

And as discussed in our first quarter call, the inclusion of six more accounting days in this year’s first quarter compared to a year ago makes the six months not apples-to-apples compared to last year.

The added number of accounting days in this year’s first quarter will fall off in the fourth quarter, which will have five fewer days than in 2003.

Even with five fewer days in this year’s second half, we anticipate our second-half diluted earnings per share will be higher than the same period in 2003.

Our third quarter results should be nicely improved over last year’s third quarter.

However, our fourth quarter numbers could be lower than in 2003, primarily as a result of the five fewer accounting days.

I realize that’s more than anybody probably really wants to know about accounting days, but I think it’s important that everyone realize how these swings in the number of days can affect our quarterly results.

In the end, each year, except a leap year, is going to have 365 days.

Now for what I believe is a more meaningful discussion, through the first six months of the year diluted earnings per share is up by 57 cents, which represents a 31 percent improvement from last year.

Packaging operating earnings for the six months are improved year-over-year primarily due to higher sales volumes, while operating earnings in aerospace are lower in the first half, but up a bit in the second quarter.

Last year’s first quarter included a one-time $4.3m completion payment on a successful aerospace program.

Lower interest costs and a strong euro compared to a year ago have also contributed to our improved earnings per share.

Fourteen cents of the earnings per share improvement year-to-date is due to lower interest costs and 10 cents is due to a stronger euro.

Reviewing the second quarter, sales were up over 8 percent from last year with sales in all product lines ahead of last year.

The packaging beverage can volumes were up in North American, China, and Europe.

Food can volumes are also up due to the acquisition of the Oakdale, California plant late in this year’s first quarter.

A much stronger euro compared to a year ago also contributed to higher European sales and operating earnings.

Second quarter sales in our aerospace business were up almost 35 percent to an all time high.

Second quarter earnings before interest and taxes were up 11 percent, primarily due to the increase in sales.

Operating margins for the quarter were 30 basis points better than last year, up by improved packaging margins offset by higher G&A costs and lower aerospace margins.

Improved packaging margins in the quarter were the result of higher production volumes and improved product mix, improved operations in the Milwaukee food can line, and cost reductions in Europe and China.

Profit in aerospace was the third highest for any quarter in our history and the two quarters that were higher each had larger one-time items in them.

Aerospace margins were down and Dave will talk about this later.

Higher G&A costs in the quarter and year-to-date primarily pertain to increased professional fees, mostly associated with Sarbanes-Oxley work, and higher deposit share expenses.

As we look to the full year we foresee 2004’s operating margin consistent with last year’s.

Second quarter interest costs of $25m are more than $8m lower than the prior year, and interest costs for the first six months were lower by $12m.

We expect 2004 full year interest expense before debt refinancing cost to be $18m or $19m below last year’s amount.

Turning to cash flow, as was the case in the first quarter, our normal seasonal working capital through the first six months is lower than last year.

Free cash flow has been turning stronger than our initial projections and we now think 2004 full year free cash flow should exceed $325m with capital spending in the $175m to $200m range.

The stock repurchase program is still targeted at $60m or more for the full year and debt reduction should be at least $200m.

We continue to operate the Company for improved earnings in cash flow.

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

Thank you, Ray.

As Ray noted, sales were up in all of our packaging operations in the quarter.

We had a good quarter in the plants, too.

In general, all lines in our North American operations are running well.

In beverage cans, sales volumes for the quarter were up around 1 percent compared to the same quarter in 2003.

As in the first quarter, we experienced continuous growth in our custom can business.

We shipped a good volume of the 8 oz. squat can, which has been embraced by CSD consumers.

Additionally, we experienced increased demand for our 8.4 oz. trim can for energy drinks, and the 24 oz. can for beer.

Demand for the 12 oz. beer can was also stronger.

Overall, beverage plant pop rating performance was improved as we did not have to split our focus as we did last year when we had food can line startups and new food customer qualifications in Milwaukee and Findlay.

We are pleased with the year-over-year improvement in our food business, primarily due to putting most of the start-up difficulties in Milwaukee behind us.

That line continues to run well and the fact that we are not talking about it on a daily basis in meetings is a very good indication to me that we are nearing a normal run rate there.

Additionally we are benefiting from a full six months of shipments to our large customer for the Finley food can line while a year ago we were in the qualification and start-up mode for that business.

Sales volumes on food cans in the second quarter were up over 9 percent due to the Oakdale plant acquisition Ray mentioned earlier.

On an apples-to-apples basis, including total shipments from that joint venture facility in the first six months of 2003 and partially in 2004, sales volumes are up nearly 4 percent for the first half of 2004.

Steel continues to be in tight supply.

Through the coordinated efforts of our purchasing, scheduling, and plant personnel, and the cooperation of our suppliers, we have been able to adjust our operations to avoid any disruptions to our customers through this period.

We are passing along the steel surcharges we are receiving and customers are paying them.

We continue to work on improving the returns from our PET business.

Our manufacturing operations in this business unit and running very well and we believe we have some of the lowest cost plants in the industry.

In spite of that, we have not yet been able to make a return equation work.

This points to the need for some better pricing to allow us to consider further investment in the CSD and water segments.

As I said last quarter, other than spending for mold replacements and some cost reduction programs, we do not plan on spending any capital in that part of our PET business for capacity expansion.

On the brighter side, we have been able to pick up some spot sales of pre-forms and bottles in the second quarter due to some tightness of supply in the industry.

In addition, we began to ship heat-set bottles for new contracts in this past quarter, and we continue to look for opportunities to grow this product line as demand for this container increases.

As I mentioned at the top of my comments, plant operating performance in all three North American packaging operations are strong, in part due to the fact that we had fewer major projects in process than in past years and the plants had an opportunity to focus on consistent execution.

Our cross-divisional benchmarking and best practices activities are uncovering more opportunities in fostering even greater cooperation.

We have also settled labor contracts covering five of our facilities in the first half of this year and we continue to enjoy excellent relationships with our employees.

I’ll talk now about our international packaging segment.

Hanno Fiedler, who runs our European operations and is on our Board, was just here for our quarterly Board meeting and gave a very good briefing on the status in Europe.

Overall, our European beverage can business continues to perform well.

Both production and sales volumes were up for the second quarter of 2004, but were from our view negatively affected by what have been generally poorer weather conditions in Europe this year compared to last.

Stringent cost controls and effective operating cost reduction programs have been major contributors to our results in Europe.

The deposit legislation in Germany continues to confuse consumers and to frustrate packaging manufacturers, fillers, and retailers.

There is not yet a clear plan for one generally accepted return system.

The outcomes of the various legal proceedings around this issue remain unclear and the political discussions continue.

Ball Packaging Europe is working to align our strategy with the major players in the beverage supply chain and we are bringing new packages to market this summer in order to get cans back onto store shelves.

Groundbreaking ceremonies for the new beverage can plant in Belgrade were held in May and construction is proceeding with a plan to be in operation there in the second quarter of 2005.

We remain pleased with the performance of our operations in China.

Sales volumes there were strong in the quarter compared to last year.

Overall, we have had a good first half of the year in packaging and we are focused across the board on keeping the momentum going.

With that, I will turn it back to Dave.

Thanks, John, and thanks to you, also, Ray, for those comments.

The aerospace and technology segment had operating earnings in the quarter of $12m on sales of $170.3m compared to $11m on sales of $126.3m in the second quarter of 2003.

For the first half of 2004, earnings were $23.2m on sales of $330.6m compared to $27.1m on sales of $257.8m in the first six months of 2003.

For the full year, it does appear to me now that sales will be up nicely.

Achieving overall margins of 8 percent for the full year may be a challenge, but we are working hard to get there.

We have earned significant new business in recent months adding to our top line growth, backlogged at the end of the first half was $714m (that’s contracted backlog) compared with $644m at the end of 2003, so up nicely.

I noted in the earnings news release that we were very excited about the upcoming Deep Impact mission.

The highly sophisticated instruments and spacecraft we build are undergoing extensive testing prior to shipment for launch.

The launch is scheduled for December of this year.

The mission should make for a very interesting July 4 weekend next year when one of the two spacecraft we built we collide with a comet at 23,000 miles per hour, while the other spacecraft records the event and sends data back to Earth, truly a remarkable achievement and we are keeping our fingers crossed that it all works right.

So now to the outlook for the total Company for the balance of this year.

We really had a successful second quarter and a good first half of 2004.

As Ray mentioned, we will have these five fewer accounting days in the fourth quarter of this year than we did in the fourth quarter of 2003.

But still, we think that barring the unforeseen that we could--possibly our second-half results could exceed the results in the first half.

You know, our sales volumes and forecasts are strong in nearly all areas.

We are bringing new packages to market.

Our aerospace business is growing nicely and we are all focused on improving what was a very good first half performance.

And with that, Jennifer, I think we are ready to take questions from the group.

Okay.

Thank you very much. (Caller instructions.) One moment please, for the next question.

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

Please proceed with your question.

Hi.

Good morning.

Good morning.

Can you give us the breakdown between beer and CSD volume growth for North American metal beverage cans?

In the quarter, our CSD volume growth was a little bit soft due to--what we have seen is a little bit of pricing on the side of our customers.

So in general, I would say that our beer growth was a little bit higher out of that 1 percent.

Beer is higher than 1 percent.

And the metal food can volumes that you quoted.

Were those for the first half of the year or for the quarter?

They were for the quarter.

Well, I quoted two.

I said for the quarter, year-over-year, we’re up 9 percent due to the acquisition of the Oakdale facility and then I said if you look at our volumes on an apples-to-apples basis, including the Oakdale facility, which was a joint venture last year and the first part of this year for the first half of the year we are up nearly 4 percent.

Okay.

All right.

And you mentioned the possibility that you are looking at creative ways to absorb the volume loss in Germany.

Could you just give us some color on those new measures and, you know, apart from what has been done already?

It’s--you say what’s been done already.

We’ve converted line--a half-liter line in Hermsdorf from steel to aluminum and that’s absorbing some of it.

Additionally, we are--have converted or have added capacity for a new can size which will be part of a so-called island solution, a distinctive can that will be able to be sold through a retailer and process deposits that way.

Okay, great.

Thank you very much.

Thank you.

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

Please proceed with your question.

Thanks.

Hi, guys.

Good morning.

Good morning, George.

On the volume question, let’s pick up where Ghansham was.

Food volumes up 4 percent year-to-date suggests, you know, maybe you were down 7 to 8 percent in the quarter apples-to-apples because you were up, what, 17 percent or so in 1Q, guys?

If you look--on an apples-to-apples basis, in the second quarter we were probably off about 2 percent.

Okay.

So maybe just seasonality--?

--That is really, you know, in line.

If you remember at the end of the first quarter we talked about strong growth in the first quarter being possible buy-ahead ahead of steel increases.

Oh, sure.

And so, you’re--that’s the 4--the 2 percent compares to the 4 percent year-to-date.

Okay.

There’s only around a 2 percent decline then in 2Q?

Right.

Now in terms of beverages, with your customers on the bottling side talking about perhaps the industry in total having raised pricing too much to the retail customer and thinking maybe about re-igniting volume.

Do you view that as ultimately a healthy development for the can business because that might mean more volume in traditionally the low price point package, or does it worry you that your customers aren’t doing quite as well as they would have liked otherwise?

What’s your sense?

Well, my sense is if they decide to start competing on price they usually go to--the package of choice has always been multi-pack cans for the most part.

So based on what we’ve seen historically, if they were to go to some pricing competition in the retail market place, I would view that as a positive for the can.

You know, that’s--not sure what their plans are or what they are going to do going forward.

They haven’t shared those with us to this point.

But I would say that would be the conclusion you could draw based on past history.

Hey, John, one last question on volume and then I’ll turn it over.

In your--did you comment how much your volumes were up 2Q versus 2Q?

And what was the run rate like coming out of the quarter in July?

Thanks.

Volumes 2Q versus 2Q are up in the range of 2 percent and we still continue to see good growth and good demand in Southern Europe and Eastern Europe and it’s been--the weather really has impacted Northern Europe, you know, kind of Northwestern, if you will--Europe, a little bit more.

And so, that’s the number.

And the run rate is kind of in that same--we haven’t seen a significant amount of change going into Q3.

Okay.

Thanks, John.

Thank you.

Our next question comes from the line of Amanda Tepper from J.P. Morgan.

Please proceed with your question.

Good morning.

On the German can deposit situation you made some comment that you are trying to get cans back on the shelves this year.

What--a couple of questions around that.

What are the odds that, you know, that that actually happens this year?

And then, within the next 12 months, how do you see it playing out?

Is it going to just dribble onto the shelves?

And then, is there any potential earnings impact for you this year and next?

Well, Amanda, we still are--don’t have a clear end in sight for the--what is called the so-called deposit legislation and all of that.

That’s still tangled up in the legislative side in Germany.

We won a victory, if not the battle, a few weeks ago when the upper House refused the amendment to the packaging ordinance which we would have--felt would have been negative versus positive.

So that process continues, the EU court situation continues, and I think there is even another action or two ongoing.

And we, along with other industry people, continue to work very, very hard at trying to get some rational approach to the big picture question.

But as John said, and as you are aware I think, the conversion of the one line to aluminum is helping us this year as we are exporting those cans.

He mentioned a new size that would be an island solution.

We can’t really say more about that at this point.

But that will be clearer or more clear soon.

And so that’s another thing that we are doing to address this situation.

And not in Germany, but in our circumstances, yesterday our Board approved some--a conversion of a trim can line up in Holland in Oss that’s near to Germany which will, we think, permit us to grow in that fast-growing segment better.

We are going to convert that from steel to aluminum and we’ll be selling more cans once that program is completed.

All in all, I think I would say that, you know, Hanno Fiedler’s take on this year-to-date is he’s a little disappointed with those volumes related to the weather and so on.

I continue to be very pleased with how hard all the people over there are working at running very, very tight, at reducing costs, and at looking for creative ways to deal with the situation.

But Germany still hurts our business.

And it’s better this year than last, as we said it would be, but it still is a hurt.

Okay.

Turning to the dividend and buyback increase yesterday.

Could we read into this that the acquisition deal backlog is less promising than maybe you had thought?

And could you comment what you are seeing out there?

I don’t think that I would interpret that that way.

As a matter of fact, John Hayes, who we look to to sort of round things up is of the view that there may be more things coming down the pike here in the next period of time than we’ve seen for awhile--you know, made a list of 15 or so that he thinks might be coming available.

You know, we are disciplined buyers and we are looking all the time.

But the only thing I would say is that I think there is a fair amount of LBO money out there, private equity, chasing deals.

Some of them are selling to each other and financing is very readily available and most folks are typically willing to take on a lot more leverage than we are.

They are also looking typically for returns on their small equity stakes relatively speaking higher than us.

But what we’re about is digging really hard and looking all the time.

And I think that people that are out there that have things to sell know that, I hope they do, and that our balance sheet is very strong.

We’ve probably got our debt down about as far as we want to get it.

And what we are going to do is look to this cash, keep looking for things to acquire, either as add-ons or otherwise, and that we know that we can make a good return on, and failing that, we’ll be turning up the gain on our share repurchase.

Paying a higher divided, you know, I mean, the dividend even though it increased 33 percent is still probably on the order of 12 to 14 percent of what Ray Seabrook will now admit to as our cash flow.

So we don't think we are overdoing that.

But we are doing it conscious of the fact that taxes on those dividends are only 15 percent now.

So we want to be shareholder friendly.

We are all shareholders.

And that’s sort of a summary.

But I wouldn’t read into, you know, we’re not going to just put the brakes on any acquisitions because of this situation.

Okay.

And then in the U.S., with 1 percent volume growth pretty solid for--I think what you need is a very mature market.

Where are you on capacity utilization?

And do you have room to continue to grow at this rate as your capacity creeps, keeping up with what you are seeing on the volume side?

Especially U.S. beverage cans?

Yeah.

I would say we’re in the kind of mid-90s, low to mid-90s range, or mid-90s, I should say, range on capacity utilization.

And the answer would be yes.

If the industry continues to grow overall, we do have the capacity to increase production as needed.

But we certainly are not going to do that until--unless and until we see that long-term trends dictate so.

Okay.

And then one last housekeeping question.

You said for EPS, Q3 for this year could be above Q3 last year, Q4 might be below because of the five less days.

But does that, even if Q4 is below does that--year-over-year, would you still say you think it’s likely or possible that the second half all in could be above the first half, like you put in the press release?

Yes.

Okay.

Thank you.

Thank you.

Our next question is from the line of Chris Manuel from KeyBanc.

Please proceed with your question.

Good morning, gentlemen.

A couple of questions for you.

First of all, on a pricing perspective, what do you think the pricing environment looks like right now net of raw materials?

Do you think that over the next 12 months, do you anticipate getting some pricing actions in food can and in beverage can?

And now that I saw this morning that Graham bought OI’s plastics business, do you think that the pricing there will get a little more rational?

Well, I’ll speak first of all to your first question, which is what do we see for pricing net of raw materials.

And if you are talking about net of steel, net of aluminum, and net of resin, there are still plenty of other inputs that we are facing inflationary pressures on.

Labor, medical benefits--specifically there, energy, coatings, things like that.

And so as we see those, we would expect to at least be able to recover the cost increases that we see in those areas.

But you know, we’ve seen pretty good increases in steel and aluminum and in resin.

And we do have mechanisms to pass those through.

But all in, I would say that pricing is going to continue to rise kind of in the mode of what we see with the inflationary pressures that we see on our input side.

As far as the OI/Graham combination, that is--they compete in markets that we are not necessarily in, so while it’s overall for the industry a sign of consolidation in an industry, a macro industry that needs it, it will be interesting to see how that plays out for the areas where we play.

Okay.

So if I read into the first part where you talked about pricing up to accommodate labor, health care, etc., so that’s probably a net 1 to 2 percent a year?

That’s probably fair.

Okay.

And then, switching gears, if I could ask a few questions about the aerospace business.

I know you indicated that you are hoping to get to about 8 percent for the year.

And the last two quarters, margins have been around 7 percent.

Are there any large projects that will be coming to completion soon, such as Deep Space, in 3Q, 4Q, somewhere in there, that could give you some of those big completion bonuses, things of that nature, that would cause an incremental bump in margin?

I wouldn’t necessarily look for that kind of thing, Chris, the balance of this year.

Although, in the second quarter we had a few programs that the profitability wasn’t as much as we would have liked as we were drawing near the completion of some cost type work.

But on the other hand, we had some other programs where--that were fixed priced where we’ve been accruing, and as we begin to see them draw to a conclusion, you know, we picked up something.

What I would tell you is that with the top line growing as it is, we’ve hired, I think through June, 350 net new people into that business.

That’s over a 10 percent growth in employment.

We’ve got open requisitions of, I think, around that number given the backlog that we’re building.

I’m personally very pleased with the conduct of the business, but I think that keeping the margin as you are growing at that rate is a bit of a tough trick.

We also are starting some large multi-year new programs and we are just conservative.

We tend not to accrue profit.

We do it the same way all of the time.

But with new starts we tend to be accruing at a lower rate than we will as they get on and probably the mix of that kind of business is a little up.

All in all, though, the people in that business are performing very well to be growing at the rate they are.

It is very much a people business and we are happy that we are attracting the kind of people that we need to conduct the work and that the government and our other customers are seeing fit to award us this business.

So I wouldn’t expect huge one-time bluebirds like we had in the first quarter a year ago.

But if you take that out, I think we’re up a little bit in profit on the first half and the sales growth, I would say, it would portend our capability over time to bring those margins at or above the 8 percent level.

And we really like the way that business is performing right now.

Okay.

So longer term, get back above 8 percent, but in the near term as you are adding people and getting on with new projects, then that low 7 percent range is probably a good run rate.

Yes.

I think all--what I was trying to say is that for the full year it’s going to be hard to make 8 percent this year.

But that also implies that we are hopeful that our margins improve during the second half.

I would say we expect them closer to 8 than 7.

Oh yeah.

Okay.

And one question for you, Ray.

If I take present share counts and I back into what the numbers that Dave just gave us, 12 to 14 percent for cash flow, that gets me to like a 320 to 370 range for free cash flow.

Is that--are you comfortable with that as like a normalized ongoing sort of thing?

I’m very comfortable with the 320 and I would say 370 may be a little high, but I would say definitely above the 320.

Okay.

Thank you.

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

Please proceed with your question.

Thank you and good morning.

A couple of things.

We are starting to get a sense from the beverage producers that July wasn’t so hot either.

Wonder whether you’ve got any perspective--and I don’t mean that pun, but that July was a little bit slow on the beverage side.

Are you getting that sense, too?

We’ve seen a little bit of softness in the first few weeks on the PET side.

But cans, our beverage cans side, is still running pretty much on expectations.

Okay.

That’s helpful.

And can you quantify the FX [phonetic] impact this quarter on the European business?

I thought it was 10 cents for the year.

I don’t have it.

I actually don’t--I think it is 4 cents for the quarter.

If you look at the euro year-over-year, it was like 16 percent higher in the first quarter this year versus last year’s first quarter and the second quarter it was only 6 percent higher.

For the full year it’s like about 11 percent.

So obviously you earned a lot more in the second quarter than the first.

So I think it was something like 5 or 6 cents in the first and 4 in the second, I think.

Okay.

And in terms of seasonal patterns, Q3 is typically your strongest quarter.

Does that look like it’s going to play out that way this year?

Yes.

Very good.

Thanks for your help.

Thank you.

Our next question comes from the line of Dan Pushava from KSA Capital.

Please proceed with your question.

Morning, guys.

Good quarter.

Have you guys reduced your CapEx to any significance in your plastics business as a result of pulling back a little bit on the commodities side?

Yes.

I suspect you are spending less than depreciation in that business.

Yes.

Okay.

All right.

Guys, I seem to recall from some notes I was looking back from prior years’ conference calls and you guys have a fairly significant amount, and maybe I’m wrong, correct me, of beverage can business that expires I think it’s this year.

Is that correct?

We’ve got some business that expires at the end of this year, some of that has already been renewed, and we have some that expires in future years.

Okay.

So you’ve secured most of what’s already expired or you certainly plan to.

Do you anticipate getting any additional price on those cans?

We will see.

We would love to, but again, we need to make sure that we don’t push ourselves out of the marketplace and that we don’t entice people to look for alternative packages.

Right.

And what do you believe the operating rates to be in the U.S. beverage can business right now, if you have a number?

I’m guessing kind of mid-90s.

Okay.

And the--really, the only other place they could go for all practical purposes is PET, right?

I mean, glass is no longer--the infrastructure for glass isn’t really there.

That’s correct.

Okay.

All right.

Thanks, guys.

Appreciate it.

Thank you.

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

Please proceed with your question.

Thanks, operator.

Good morning, gentlemen.

Great quarter, by the way, continuing to execute and particularly in Europe.

As you know, I sort of suspected that currency had played a large part in those margins, but with flat currency it appears as if the cost cutting is real and you guys are doing a great job.

So, kudos to you on that.

But I was wondering if you could talk about the recovery in Germany.

Are you seeing volumes recover there year-over-year?

I mean, recognizing that it’s still very much unsettled.

But is there--are you starting to see volume creep back in Germany?

Well I think the volumes that we are getting, Edings, are really from the actions that we took, including the conversion of the aluminum line, so that’s really for export.

You know, there are cans that we sell to brewers that are filled across the border that people drive over and get and bring back.

But frankly, there hasn’t been much recovery.

I think one of our competitors did team up with a retailer earlier for one of these island solutions.

You know, we indicated we are contemplating that here pretty quick.

So it helped a little bit, too.

But what we really need is some sort of rational way forward, if you will, on the basic deposit regulations that exist and try to figure out how to do that in some reasonable way and in a systematic way.

I am optimistic that we’re going to get there, but with politics it’s really hard to predict the when or the exact what of all of that.

Good news is they are not in an election year like some people.

But in getting on to your North American business, John, if you can comment on the percentage of that mix that really is the specialty cans and how should we start to track that?

And if you could comment on potentially what portion of the volume improvement--excuse me, the profitability improvement year-over-year in that business was driven not by your base business, but by incrementally higher margins from the specialty side.

Well the specialty business in total represents less than 10 percent of our total volume, but we are beginning to approach that plat--that level, I should say, not plateau.

But we expect to break through that level if we continue to see the kind of growth we are seeing.

So it’s small, but it is increasingly meaningful for us.

And what would that have been a year ago?

Probably two or three points--percentage points lower.

So it’s grown about 50 percent?

It’s not that high.

It’s probably in the range of 25 to 30 percent.

Got it, 25 to 30 percent.

As you look at your plastics business, in the past you guys, you know, this has been a frustrating business for you in terms of your desire to hit cost of capital returns and you’ve indicated that the pressure continues.

How long will you stay in this business if the margins don’t improve, or conversely, would you consider perhaps being more proactive in leading industry consolidation in order to try and fix it?

I think that for starters it’s about 8 percent or less of our total Company.

So even a significant improvement in its profitability doesn’t swing the needle very much for us.

Now we’re kind of the view at least, Edings, that there are some signs that the supply situation is tightening.

We read a release by Amcorp earlier in the year where they commented that returns are not acceptable in the business.

They are undergoing some sort of restructuring, which usually is a euphemism for closing some plants.

You know, we continue to indicate in our public statements that same thing in terms of the commodity side of the business.

I think in Constar’s call yesterday they said something like the same thing as I read this morning--their public utterances.

So it’s an industry that’s recognizing that that’s the case and I think everyone who is in it is kind of disinvesting, which means that we are not spending depreciation and we are not adding capacity.

Things are getting tighter.

Rationally, that would tell me that in some way both in terms of the positive effect of running at higher volumes and we continue to push and gain cost reductions at some level, we also need for our customers to understand that we probably need to widen the price a bit if we are going to stay in this business.

So I don’t think that we have a current intention, I know we don’t, to lead any sort of wild consolidation activity.

At the same time, we are focused heavily on, without trying to gain business necessarily from others, but looking at the higher value-added applications that John was talking about earlier.

You know, we’ve been selling and we’ve had news out on these things, barrier containers for flavored alcohol beverages, some heat-set and so forth.

And we are looking hard at trying to, within our business, grow new business opportunities there to try to help the overall situation.

But you know, as--what we see is the investment in that business is declining because we’re not spending as much as depreciation in it.

And I guess as a percentage of the total Company it’s going to get smaller because we are growing overall.

We see a few signs of some positive developments and we’re going to stay disciplined, and if the industry will, I think the overall situation is going to get better.

Got it.

Now you mentioned trying to push up into the higher value-added applications.

That’s one of the areas where OI and Graham compete with one another.

Given your cash situation and your history as a consolidator, I’ve got to presume you at least thought about or were considered for that transaction.

Can you talk about why either the economics or the strategy didn’t make sense for Ball to acquire OI’s business?

Well I wouldn’t say that we did or didn’t look at it.

But I can tell you that what we would look at is the risk of doing such a thing and the kind of return, the way we would finance it, that we think we can get.

We do that in every, you know, in every case.

And if we did or didn’t look at it that would have been why we didn’t do it.

So it wasn’t that it didn’t fit strategically?

Oh, I wouldn’t say that.

I think that I would assume that Graham has consolidation savings that they can get because they are already large in the states.

WE would not have had that to anywhere near the degree that they do.

And then they are kind of different, you know.

They are private equity.

They are facing very friendly debt markets.

I think they have funded the whole acquisition with debt.

We probably could have done that on our balance sheet, but I don’t think that we would have had the consolidation savings that they do.

So we’d have been at a bit of a disadvantage in looking at that, I think, versus those folks.

Got it.

Thank you.

And final question, Ray, you referenced that $60m in buybacks in 2004 even with the--just trying to reconcile that with the new $12m authorization from the Board.

Is that a hard number in terms of your plans to buy back $60m?

Would you look to be more opportunistic?

Could it be $90m?

How do we fit those two data points together?

Could be.

I think we’re still, Edings, we are still trying to drive out balance sheet down to a point where we kind of really like where it is and we looked at this year, you know, kind of 60 was kind of the number, as obviously our cash flows are stronger than we first anticipated.

So it will probably a little higher than 60.

But generally speaking, we still want to de-lever this year to get us to the point where we like it and then what you’ll see next year, barring acquisitions or anything like that, you’ll see that the numbers switched.

You’ll see the buyback in the $200m range and you’ll see the debt paid down in the $60m range.

Got it.

Good luck in the quarter, gentlemen.

Thank you very much.

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

Please proceed with your question.

Mr. Miller, your line is open.

Going once?

All right, then.

The next question comes from the line of Scott DeBrano from Fort Point Capital.

Please proceed with your question.

My question has been answered.

Thanks.

Thank you.

The next question is a follow-up question from George Staphos from Banc of America Securities.

Hi, guys.

I just wanted to get back to the PET business.

We talked about it last quarter.

You were talking to Edings about your strategy, as well.

I guess the question I had, if you are successful with broadening out the product line into custom PET at the rate that you would expect, would the business actually become a better than cost of capital business?

My sense is not, you really need prices to move higher in your traditional business.

Would that be fair to say?

I think we need both.

Ray, you want to comment?

Yeah, we definitely need prices to move higher.

Okay.

Ray, what over let’s say a three-year period would you need to see inflation net of resin move by to get over that hurdle?

I don’t know the answer to that, George.

But I know that the--us and all our competitors in that industry are--can’t invest because the prices aren’t high enough.

We are, as John said and Dave said, we are changing the mix and that’s helping some.

But I think the prices have to move up somewhat in order to encourage everybody to invest for the growth that that business demands.

Okay.

Another question and I’ll move on.

What kind of benefit do you think you could get percent margin wise in terms of the total business from moving up the curve in custom PET?

Well, it’s a slow go, George, so currently while we are pleased with the results to date we are selling a few hundred million containers this year in that field and, you know, versus the total volume it’s not big yet.

So you have to be able to secure new business at rates that would move the total margin.

We are just saying that that seems to be a place that we’ve got good technology.

We are focusing our R&D efforts there.

We are gaining some business, not at the expense of competition at this point as far as I know.

Yeah.

We’re growing with the growth--.

--Yeah.

We’re growing with the growth and--.

--So it’s a slow climb--.

--And it looks like that’s a good place to be.

We can make good returns doing that.

Okay.

Fair enough.

Now in terms of cash flow, Ray, just remind me.

Last year six months in the second half, your free cash flow, I think it was north of $400m.

This year just doing some rough math, it will be like $300m.

Last year in the first half, you had a slow start to the year.

But can you remind us why there is the variance in the second half and we realize obviously that you--.

--Remember, the sales are a lot stronger so our inventories in our beverage businesses are down from what they were and what we thought they were going to be.

And when you look at the second half, remember, the food can business has huge builds in it because of the seasonality of it.

And that’s got to do with, you know, when we’re still fairly heavily weighted for the crops in the food can business.

And when the crops are harvested and put in the cans, that’s when we get paid.

So I think we [float a loan] in our food can business, $130m or $140m [of loan], in the month of December--is the movement in that working capital number.

So--.

--Yeah.

Right now, I know that.

I guess, last year in the second half it was like $400m in free cash flow, this year around $300m.

Really, there were some distortions last year and you are doing great on cash flow this year, so I am not critical of that.

I’m just trying to remember what--second half versus second half what some of the swing factors were.

George, off the top, I don’t know.

I don’t know what they were.

I think it was just across the board.

If you recall, we all--we talked about it at the time.

We had a close last year in December, George, where everything that could happen seemed to be good.

Right.

And I know we had a positive move in aerospace.

We finished the year strong in the beverage business and any collections were good, and food had a good close.

So it was just one of those--and Europe did very well.

You know, Europe had a real strong year last year.

Weather was hot in the places where it’s cool this year.

And all of that just kind of came together.

And with a $5b plus total sales, an extra $50 or $100m in cash flow isn’t so big.

I’m not predicting that, but--at this stage.

But I would say if we keep running like we are, you know, Ray has been willing to raise his estimate of free cash this year to an excess, I think, of $325m now.

And you know, what really does help, George, is that everybody, you know, we drive those incentive plans down very deep in the organization and we’re on an EVA basis and the amount of invested capital does count.

And so it usually happens when people start looking at how much money they are going to get paid they drive real hard.

And then you end up being able to bump the dividend, too, so it’s a win-win across the board.

I guess the last question I had, if we look at fourth quarter, last year it ended at 95 cents.

You’ll have five fewer shipping days this year.

I know it’s hard to project out that far, but at a minimum, should we be looking for something almost 5 percent lower than last year for the fourth quarter?

Now George, we can’t--you know, I can’t predict the business that carefully.

But I mean, with the five fewer days in user days and when we commented last year’s fourth quarter everything went about as good as it possibly could go.

So with five fewer days there is a pretty good chance that we may not be able to make quite as much as we did last year.

But, you know, we’re hopeful.

If the business keeps as strong as it is, it’s possible we could, but you know, there is a chance that we may have a quarter that is a little lower than last year.

But the second half, you know, will obviously be stronger than the second half last year.

No, that’s understood.

Great job, guys.

Good luck the rest of the year.

Thank you.

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

Please proceed with your question.

Good morning.

Hi, how are you?

Richard Holohan.

I have a couple of questions on some of the earlier questions that were asked.

The first is on the PET business.

I’ve heard what you went through.

My question is, is that a fixable business or is it an industry that’s going to have problems over--for years to come because the barriers to entry are so low and the rate of efficiency improvements on the machinery side always makes the last new entrant the most efficient player in the business.

Well I was going to say that--Dave, I’ll take this one if you want and you can chime in.

But you’re right.

Barrier entries are low, have been low.

But there are some countervailing tendencies, complexity with the number of proprietary shapes and sizes for different customers creates increasing complexity and the law of diminishing returns applies to the speed of the latest technology.

There has been a tremendous ramp up in speeds and outputs of machines, but at some point in time you begin to reach the point at which that doesn’t--that begins to peak.

So I would say that’s a very good question, one we are studying hard, but I’m not ready to say that what we’ve seen, the dynamics we’ve seen in the past, are going to apply from here on out based on those facts that I just stated.

Yeah, I think the other thing that I would just say is that, you know, the industry has too many participants now given the number of buyers particularly of the commodity material.

And I believe that that is going to get rationalized.

You know, I think that some of the things I commented earlier are moving in that direction. [break in tape] I think the fact that all of the people that are making these things are saying, “I’m not happy,” is a signal that it’s likely that this can get some better.

I don’t think that we are going to be able to hit home runs in this business, you know, because of all those characteristics that you said.

But again, it’s 8 percent of our gain [break in tape] advantage here and there.

And some of what I was talking about earlier [inaudible] and you know, we’re in business to make money.

Everything that we do is hard in this Company.

It’s difficult to make money, to keep it going.

Our customers all expect us all of the time to deliver cost reductions.

You know, we’re focused in that way.

The comment that I made earlier about trying to make our customers successful is something that we take damn seriously around here because we know if they are not happy, we are not going to be happy.

We don’t want them to be exceedingly happy all the time, but right now, this industry, this plastics thing is just a bit out of kilter.

You know, we don’t need enormous amounts of price increases to make this a much better business.

What we need is a recognition, you know, on the part of the--and hey, I don’t blame the customer.

If he can get it for less, as long as he can why wouldn’t he?

But if the industry gets a bit more rational here, I think that we are going to get to a point where this is an okay business for us, you know, and we’re going to like it.

Gotcha.

I have another follow-up on the custom can business.

Is there anything in terms of the rate of--the level of interest from your customers and looking at that.

Have you seen changes in that?

Is that leveling off or is it still increasing?

I’m thinking specifically of what Molson did earlier in this quarter.

Are you seeing that from other customers at an increasing rate?

Our customers are interested in finding ways to get their products out in front of consumers in a new and different way that attracts attention.

And so as we look for--part of the allure of the custom can is that if they--a new size, a different size, a different shape, whatever it may be, that is exciting.

And in addition, we have in the past year or two, in fact, earlier this year, brought a person on board specifically to get out and get into looking for opportunities where cans aren’t even being used.

Never mind the beer customers and the soft drink customers.

Other beverage companies, food companies, other companies out there where our package may be something that helps them sell their product through to the consumer.

So I would say we continue to see good interest and we continue to work hard to generate that level of interest.

Great.

And the last quick question on aerospace.

The 8 percent margin sort of target level for this year was that, or the year as a whole and you’d have a higher than that margin stops at what you had in the first year?

A higher than 8 percent margin in the second half to offset the first half or is that where you’d hope to be in the third and fourth quarters?

Well initially in that business we would target that.

We would hopefully target that in excess of 8 percent.

Our target is probably 8.5.

Last year if you looked, it was 8.

At the end of the first quarter we said we still think we’ve got a shot to get back to 8.

That’s a full year number.

As Dave talked about, second quarter we’ve won so much work we’re just having a hard time keeping up with it all, so we think we potentially could get back to 8, but probably it may be just slightly less than 8.

For the full year?

For the full year, yeah.

Gotcha.

That’s kind of where we’re sitting now.

Terrific.

Thank you very much.

Thank you.

Our next question comes from the line of Timothy Burns from Craighill Capital.

Please proceed with your question.

I’m at the end of the line here, huh guys?

Hey, Tim, how are you?

I’m very good.

I’ve got an idea for you guys.

What you need to do is--you talk about specialized cans.

You should make a can for your customer that will literally jump off the shelf and collide with a can of a competing customer so that your customer wins.

Just bring it down to earth, you know?

You guys would win a lot of market share that way, I think.

I’m stifling the desire to comment on that.

Hey, remember those days when you guys had 30 business units, David?

Yeah, I do, I do.

I mean, it just looks like you are doing well in beverage cans, certainly there is some upside in Europe.

You are doing well in food cans and back on track here in North America.

The rest of the international markets continue to be above average growers.

PET is what it is.

It may never work out.

It could turn around.

I mean, are there other markets in packaging where you guys can deploy your cash flow or is it better to just, you know, continuing to chew on your tail with your cash and buy back in the Company?

All of the above.

I think we’ve recently added a person to work with John Hayes in the sort of overall strategic and M&A area.

I think that we’ll take a look at some markets that maybe we haven’t been in, but very, very carefully.

We are not likely to go far afield.

As John Friedery was mentioning, and we actually put some legs under this starting a couple of years ago and it continues to bear fruit.

At our Board meeting yesterday, we had a number of new things, either modified--modifying what we’re doing or some new things that we were able to show them that are coming out of a very good process, I think, which is first centered on the customer and the markets versus the lab.

I think in our history and some of this we’ve learned ourselves, some we’ve seen from the way our European brethren are doing their R&D.

But in our history, new products usually were developed by the laboratory first, and you know, they’d be kept in the dark until they were done and then they’d come out and say go sell this.

You know, I remember Touch Top was one of those that was--you may recall a few years ago.

Now we are going to the market and to the consumer and certainly to our large customers with some success and working hard together.

And that’s why you see, you know, things like the little cans for Molson and some of the other things that are in the market.

You know, that’s not going to necessarily double our sales overnight, but I like that--what you see there.

So then, it’s existing products to existing markets.

It’s modified products to existing markets.

It’s existing products to new markets and new products to new markets and existing markets, if you followed all that.

Sure.

And that’s an element of our Company that exists today and has some momentum that we weren’t doing two or three years ago.

And I think that will help us, you know, determine where to go.

We know lots about pouches, for example.

We haven’t figured out any way to make any money doing it yet, but boy do we know about it.

And it used to be it was just the old guy sitting in the corner saying, “Well, I don’t think I want to do that.” You know, it’s just a different place, a good place.

And I’m really excited about the potential for our Company.

I can’t tell you exactly where or what, but I think you should expect us to take this money that we generate and return some of it to our shareholders in years where we don’t have things that we want to spend for in our existing businesses or that we don’t find things to buy, there will be more of that return.

The major way we are going to return it is to buy shares.

We also, you know, when we’re comfortable we are going to bump our dividends, I expect, as we did yesterday.

And you know, I’m just very, very pleased with the state of this Company, where we are, where we’re positioned, and what we’ve got in the bag going forward.

And it’s just a delightful place to work.

You know, I say this sometimes to people in the community and so on and, using the sports analogy, when you have the best athletes you get to win.

So I’ve watched the improvement is what I would say.

And we’ve always, I think, had great people in this Company.

But just of the people that we have here, the team that we are fielding, and the way we all work together and our focus is like nothing that I’ve seen in this Company in the years I’ve been here which is over 34.

And so, you know, you want--we want to do our talking on the court, really.

But we’re encouraged and we’re well positioned.

I’d put it that way.

Well, it’s been a great five-year ride and I know you are patient and you know, the rentals of the world, the small bev cans of the world, I mean, those things, they don’t show up every year.

So, but it’s interesting to see that you are looking broadly and it’s not strictly a slow LBO, if you will.

Well good luck on the third quarter, the second half.

Thanks, Tim.

Our next question comes from the line of Wayne Cooperman from Cobalt Capital.

Yeah.

Congratulations.

My question, and if this was asked before, I apologize.

What’s your position with Coors and Molson and I think those guys cited savings on cans as synergy from the merger and I wondered if you could comment on that.

Well, I’m not sure how specific they got in terms of their synergy savings, but Coors and Molson are both good customers of ours.

We have good relationships with both companies and as this thing goes forward we look forward to being a valued supplier to that organization.

Do you have a deal, I mean, do you charge more to one than the other and if they merged you might give the lower price to one of them?

I mean, any comment at all if it might be meaningful or completely unmeaningful?

I don’t think I have a comment on that.

Thanks.

Thank you.

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

Please proceed with your question.

Good morning.

Sorry about the technical difficulties earlier.

I wanted to follow-up on some of your comments about possible acquisitions and leverage.

It sounded as though you are very comfortable with the level of leverage that you are now at today.

As you look down the road out two to three years, where would you think about a comfortable level to be from a leverage standpoint as you run this business and you look to grow particular segments of the business?

I’m going to ask Ray Seabrook to talk about this a little bit.

Frankly, in our Board meeting yesterday, he and Scott Morrison, our Treasurer, spent the last few months doing a really good, I believe, study of this.

You might want to talk about that, Ray.

Yeah, we --that’s a good point.

We have been explaining this because we have been de-leveraging the Company pretty fast from our acquisition of [Small Buck].

As a matter of fact, I think the acquisition is pretty much paid for.

So we bought it and we pretty much paid for it in a couple of years.

So we’ve looked at what do we want to do, continue to de-lever or where we are at, and basically we think by the time we get to the end of this year, we are pretty close to our optimum debt structure from a weighted average cost of capital point of view.

That doesn’t mean that we are not prepared to push it up, to make another acquisition to a reasonable amount because, you know, as we’ve been talking about here, we do have predictable steady cash flows.

This kind of business can take a little bit more debt in it very, very easily and then you can de-lever very, very quickly.

So we see ourselves in a capital structure kind of remaining kind of looking a little bit like it does at the end of this year--kind of, we can see it getting a little stronger.

You know, we are obviously going to continue to pay down debt and we have the maturities to take care of.

But I think where we end up at the end of this year looks kind of where we feel very comfortable with that debt structure.

We’ve given our lowest weighted average cost to capital.

And if the right opportunity comes along, we will push the structure up a little bit to look a little bit more like when we bought Small Box.

And if you do the math, you will find there is a fair amount of room to make a fairly substantial acquisition in that and still be very, very comfortable--with all debt.

Did you have anything to add to that, Dave?

I think as I was saying earlier, what are we going to do with the cash once we get the debt kind of where it’s now in, and it’s going to be to invest in the businesses where we’ve got chances for organic growth like we’re doing in Serbia right now--will be to make acquisitions across the board in the business and to return the money that’s left over to our shareholders, either in the form of dividends or buying back shares.

Yeah.

The other thing I should mention about the capital structure.

If you look at what we’ve done in the last two or three years, we get questions from time to time saying what’s your maintenance capital.

And we usually say, with Europe and everything else it’s probably about $130m as we sit here today.

And you remember my comment saying we’re spending $175m to $200m of capital.

So that $70m to $75m additional capital is going on--we think is capital that generates a return in excess--far in excess of our cost of capital.

So, you know, with the growth in our aerospace, the opportunities in Europe, you know, we have opportunities to spend money on our base businesses that generates nice returns.

And Dave talked about R&D efforts.

We have some products coming out that we think have got great potential.

So there is a chance for us to spend money on things we are currently doing that generates nice returns for us.

So look for our capital expenditures to be a little higher going forward because as we look at our businesses, we found some nice opportunities.

So that $175m to $200m in CapEx probably is going to be here for a little bit because, as I say, we kind of look forward--we’ve got some nice opportunities in our current businesses.

Even with that level of spending, Ray is talking about cash flow in excess of three and a quarter this year.

Okay.

And when you think about some of the expansion and maybe from a geographic perspective, clearly you have talked about Europe as an opportunity.

What about Asia?

Is that something you would put at the forefront of your thought process or is Europe more the focus?

They handed that back to me, you know.

Right after I got to be CEO here we took a little charge in China.

So we have long memories, although China is actually performing real well for us now as it’s currently configured.

You know, one of the things that we do look at is growth, and some of the things that we do is going to be in places that present higher risk, but it’s where there are lots of people and no containers right now.

And those places typically bring with them greater risk.

But between ourselves and now Ball Packaging Europe, we are looking at opportunities in some riskier parts of the world.

Asia.

You know, if the beer industry consolidates and China continues to, as we are seeing that trend, that may present some opportunity going-forward, I think, for the can business over there.

But at the present time, I think there is ample capacity--John, you might comment on that--in China.

Yeah.

China has plenty of can plants right now.

And as Dave said, we are watching with interest the foreign investment and right now, that’s all it’s been.

It has not been consolidation.

If you look at a place like Brazil, when consolidation occurred and local breweries were replaced by regional breweries, it changed the economics and favored packages like the can over the returnable glass bottle.

That has not yet begun to occur in China, but we certainly watch that closely.

And should those kind of dynamics happen within that market or other markets around the world, we will be watching closely and looking to take advantage and opportunities.

We want to stay just real close to our customers in this regard because they really call the tune.

Sure.

To go build a Greenfield plant in some country and wait for the soft drink or the beer guys to arrive is not going to make us rich and famous.

So we’ll be following, kind of following their lead in this regard.

Okay.

And just a final follow-up on that.

When you talk about, you know, obviously going into potentially slightly riskier geographies, do you think more and more about potential joint ventures as opposed to outright acquisitions?

Is that something that you are considering?

Well we consider all of the above.

Joint ventures are hard to make work well.

We have a good one in Brazil.

We’ve got great partners there.

We see the world kind of the same way and we’ve been able to get that business finally turned and it’s cash flow positive and making money.

But often, when you have partners--we had a bunch of partners in China.

And what Ray Seabrook our CFO here says is that when he comes back in his next life he wants to be a minority partner in China.

You don’t have to bring any money and you paid all the time.

So I think that, yeah, that may be a way to mitigate risks, but it brings attendant issues and problems with it.

I think what we’d rather be is in control of our own destiny usually.

But there are circumstances where joining with another party is a good thing.

You know, we’ve got one right here in Golden, Colorado with Coors that’s working great.

Thanks so much.

And I appreciate your patient with the questions.

Sure.

Thank you very much.

Our next question comes from the line of Andrew Simon from Radiant Technologies.

Please proceed with your question.

Thanks.

First of all, all these questions about your PET business.

I just want to say, that if you decide it’s time to spend money there, you can spend mine because you guys know how to make investments.

And, you know, you are buying your stock back at 12.5 times cash flow, free cash flow, until you’ve got something better, and so, I trust you.

And I think that business looks like it is rationalizing and consolidating and you are going to do okay.

But I also want to ask a couple of quick questions.

The receivables--can you tell me what the securitized receivables were at the end of the quarter, Ray?

Yeah, I think it was $200m.

You should be used to me asking you that since I do every quarter.

The tax rate for the full year that I should use?

Yeah, we’re still looking at 32 percent.

Okay.

Because it looks like the first half of the year is 25.

No, the first half should be 32 percent.

Okay.

I must be doing something wrong then.

You have $62m on--okay, you’re right.

And then, the--let’s see, the free cash flow that you’ve given, can you tell me approximately how much of that is from reducing working capital, you know, the $325m?

I have a number, Andy, but you know, as you can see, these are big businesses and that number can change.

But here’s what I will tell you.

If we--we do think we are going to take--reduce working capital a little bit again, which wasn’t necessarily the case when we started the year.

So we think that when you look at the free cash flow statement for the full year you’ll see a little bit of gain in working capital.

How much depends on how the year-end closes.

But I expect that number to be slightly positive.

Okay.

In Brazil, you know, you just talked about your joint venture.

I guess there has been--what, [Rexom][ph] announce they are going to close a plant in Brazil now that they’ve taken over [Latasa][ph]?

I mean, are we seeing some rationalization in that market that will benefit you?

Well we would expect--Brazil has been challenging.

Volumes have been flat to down over the last couple of years as they kind of struggle through their economic woes and I think that when Rexom put their system together with Latasa they said we can make the same number of cans and adequately supply the market out of fewer facilities.

Let’s go ahead and do it and reduce our fixed costs.

That would certainly be my assumption based on the way that we would look at the world.

And with a tightening of supply it certainly would auger well for our ability to continue to sell and to get prices that will give us an adequate return down there.

Okay.

Well I’ll just end by saying there is no hurry for you to spend any money on anything, but when you do, you’ve got a blank check from us.

Thanks, Andy.

Thank you very much.

Our last question comes from the line of Scott Merv from Newcastle Bear Stearns.

Please proceed with your question.

I’ll be quick.

Good quarter, guys.

On the--do you have a backlog number for aerospace and defense?

Yeah, I said it was $714m at the end of the second quarter and I think that was versus $633m at the end of the year.

Okay.

That’s where I’m told.

At the end of the year.

Okay.

And I’m trying to remember--in one of our discussions, Dave, did you mention that you guys were on the GD team for the JTRS Cluster Five?

I don’t know that we said anything about that.

Do you guys--were you guys involved in that program?

Say it again.

The JTRS Cluster Five program?

Yes, oh yes.

Yes, now I’m with you.

Yeah.

We are on the--you are talking about the [Joint Striped Fighter][ph] right, for those who don’t know?

It’s the--that’s the radio tactical communications program.

Yeah, and you know, that would come out of our antennae group.

Does that--I mean, that was awarded recently.

Is that a big--some of the guys who wanted [inaudible] have been estimating big numbers in that program.

Do you guys have any estimates yet on that?

I really don’t have any information on it here today.

The programs that we are involved with lately that are a pretty good size for us that we are pleased about is again, the Joint Striped Fighter where we are making, I think, all of the antennae for that.

And I can’t recall the total number, but I think it’s maybe six or seven.

The--and that’s, of course, assuming that program goes forward that’s a long time and lots of hardware.

We also are making two antennae for the new Tomahawk missile and that is working very, very well.

This is one that basically replaces the one that was used in Iraq and it’s quite a piece of equipment.

It’s steerable and can fly for two hours and turn on a dime and you can run but you can’t hide.

So that’s also another long-term opportunity for us.

We are getting more and more of that kind of business.

I am sorry I am not up to speed on that and maybe we’ll get you an answer and get back to you, okay?

I appreciate it.

Thank you very much.

Mr. Hoover, there are no further questions from the phones.

At this time I will turn the Conference back to you.

Thanks, Jennifer.

And thanks everybody for being with us today.

We appreciate your interest in the Company and we are going to get back to work.

Ladies and gentlemen, that does include the Conference Call for today.

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

Thank you.