Ball Corp (BALL) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation second-quarter 2005 earnings conference call.

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

Afterwards we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded today, Thursday, July 28, 2005.

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

Please go ahead, sir.

Thanks very much, Melissa, and good morning, everybody.

This is Ball Corporation's conference call regarding the Company's second-quarter 2005 results.

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-Q, filed on May 13, 2005, and in other Company SEC filings, as well as Company news releases.

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

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

Joining me for the call today are Ray Seabrook, our Senior Vice President and Chief Financial Officer, who's going to comment on the financial performance of the Company;

John Friedery, who is Senior Vice President and Chief Operating Officer of North American Packaging, who's going to talk about that packaging segment, which includes China and Brazil; and also joining us today is John Hayes, who was named Executive Vice President of Ball Packaging Europe in May.

Some of you know John from his prior roles at Ball.

He's been in Europe for the past couple of months, getting acquainted with the operations over there, and since he was here for the Board meeting that we had yesterday, I asked him to discuss Europe today.

Today, Ball announced second-quarter earnings of $79 million or $0.71 per diluted share on sales of $1.55 billion.

That compares to earnings of 90.7 million or $0.80 per diluted share on sales of 1.47 billion in the second quarter of 2004.

For the first six months of 2005, Ball's earnings were 137.6 million or $1.22 per diluted share on sales of 2.88 billion, compared to 137.5 million or $1.21 per diluted share on sales of 2.7 billion in the first half of 2004.

The 2005 second-quarter and first-half results do include an after-tax charge of $5.9 million or $0.05 per diluted share relating to the closing announced during the quarter of a Canadian food can manufacturing plant.

Our first quarter, as we said earlier, borrowed -- we thought would happen -- did borrow from the second quarter, and nevertheless, diluted earnings per share before plant closing costs were up by $0.06 through the first six months of this year.

We started up a new plant in Serbia in the second quarter and we recently completed the conversion of the 12-ounce line to 24-ounce in the our Golden plant, both of which have gone pretty smoothly, though they had normal short-term start-up and conversion issues.

Those steps, plus others that we will talk about today, cause us to be really optimistic as we moved through the second half and begin to look toward next year as well.

I will say more about our outlook in a few minutes, but first, Ray will provide some detail on our numbers, followed by John Friedery and his comments on packaging, and then John Hayes.

Ray?

Thanks, Dave.

Through the first six months of the year, diluted earnings per share before plant closing costs were up by $0.06, which represents a 5% improvement from last year.

EBIT before plant closing costs for the six months is slightly higher year-over-year, due primarily to lower SG&A costs offset by reduced operating margins.

In North America, beverage can volumes were down for the quarter and year-to-date.

The volume decline, coupled with higher freight costs and lower food can results, were the principal contributors to reduced margins and lower operating earnings in the quarter compared to last year.

Both food cans and plastics are ahead of last year's results year-to-date, however.

As previously mentioned, food gave a lot of its strong first-quarter performance back in the second quarter.

Operating earnings in aerospace for the six months were ahead of last year, even with the inclusion of a 3.8 million equity investment write-down, which occurred in the first quarter.

Also, aerospace margins moved to 8% levels in the quarter from the 7% levels experienced through most of last year.

Internationally, our operating earnings in the second quarter were lower than last year.

China was ahead versus 2005, with Europe lower.

Europe logistic costs and slimline start-up costs in our Oss, Netherlands plant were higher than expected through the first half.

Sales volumes continue strong in Europe and we are confident of a better second half.

We also believe final tax clearances for the 2001 China rationalization program will be completed this year, with a small nonoperating gain anticipated in the fourth quarter.

Our large 2005 capital spending program is going well.

As Dave said, our plant in Belgrade, Serbia was constructed within budget, started up on time and is now making commercial cans.

The new 24-ounce can line conversion at our Golden, Colorado plant has been completed and start-up was also extremely successful.

Today's news release mentions an important element of the 2005 capital spending plan.

We're moving forward with a project to significantly upgrade and streamline our North American beverage can and making -- manufacturing capabilities.

The project will begin in the second half of 2005 and will result in reduced manufacturing costs when completed.

The plan details are expected to be finalized in the third quarter, and at that time, an after-tax accounting charge in the range of $20 million will be made to write down option lead manufacturing equipment and provide further costs of the project.

Also in the third quarter, we expect to undertake the repatriation of more than 500 million in foreign earnings and capital in accordance with the provisions of the American Jobs Creation Act.

This action will keep our effective tax rate lower for a longer period, and including the release of amounts provided in prior years on foreign earnings, will reduce the full-year effective tax rate to roughly 31%.

As we look to the full year, we foresee 2005 operating margins slightly lower than last year's, primarily due to lower North American metal packaging results.

Interest costs through the first six months were lower by 3 million, and this trend should continue through the second half of the year, with full-year normalized interest expense below 100 million.

Turning to cash flow, our capital spending program is progressing as planned, and we still foresee full-year free cash flow in the $225 million range, even considering the $16 million repatriation cash tax that we expect to pay.

We repurchased 176 million of stock in the second quarter, and the total stock buyback for the year should exceed $200 million.

When our stock trades below its economic value, we will continue to be aggressive buyers of our stock.

As we stated at the beginning of this year, we don't plan on a considerable debt paydown in 2005, as we have significantly deleveraged our capital structure over the past several years.

That said, however, with a significant decline in euro and if the stock buyback program stays at around 200 million, year-end net debt level could be slightly lower than last year.

Our credit quality remained strong, with the rolling fourth quarter's EBIT to interest coverage ratio at 5.3 times and total debt to EBITDA down to 2.3 times.

Now, I will hand it to John Friedery to review the packaging operations.

Thank you, Ray.

I first want to thank our packaging employees for staying focused on running the business while we continue to implement capital projects.

I'm excited about what these projects mean in terms of growth and improved performance in our packaging business, and I will say more about that in a few minutes.

In terms of our second-quarter performance, our North American packaging results reflect a significant increase in our freight, energy and coatings and chemical costs.

Combined, these factors have cost us over $24 million more year-to-date in 2005 versus the same period last year.

In some instances, we had extra freight costs as we supported our custom can growth and had to ship cans farther than we would normally like.

Some of the changes in our operations we're talking about today will help address that.

We also expect to recover some of those cost increases through annual contract negotiations and through cost index provisions in our multiyear contracts.

But as many of you know, those adjustments occur on a lagging basis in a fast-rising cost environment.

In terms of our product lines, metal food did give back some first-quarter gains due to the prebuying activity that we said back in April we expected would occur.

We announced in May the closing of a small food can plant near Montreal.

That plant will cease production in August of this year.

The closure will be cash-positive by approximately $3 million following proceeds on sale of assets and tax recoveries associated with the action.

And we expect to reduce average working capital in our food can operations by $15 million.

This action better matches our capacity to demand, and we now will supply Canadian customers primarily from our large Burlington, Ontario plant.

Volumes in PET containers are up 8 to 9% year-over-year and our operations are running full-out.

We're shipping barrier PET containers for beer to a large customer who is experiencing good success with the package.

Shipments of our heat-set hot-filled bottles are also increasing, and we're configuring our production base to keep pace with this growth opportunity.

As Ray mentioned, our 12-ounce beverage can volumes are down versus 2004 and are down at a greater rate than the industry based on CMI data.

However, our custom can business continues to grow at double-digit rates.

The shortfall in 12-ounce volumes is due in part to some customers needing to satisfy existing firm contractual volume commitments while we were finalizing our contracts going forward.

We've concluded those negotiations and are confident that our 12-ounce volumes will return to a more normal level beginning in 2006.

On the custom can front, we continue to see strong demand and have approved a project to convert another line -- this time in Monticello, Indiana -- from 12-ounce production to custom sizes in order to stay ahead of this dynamic market.

This is in keeping with our strategy of helping our customers provide the broadest range of new products to the consumer and will better position our production capacity to reduce freight costs.

The new end project mentioned in our news release represents a major change in our beverage and manufacturing operations.

We make more than 32 billion beverage can ends each year in North America and this new program will have a significant beneficial impact.

It will increase our output per module and will automate the packaging portion of the process.

By the end of the year, we're on schedule to complete about 35% of this multiphase program.

We expect to complete the balance of these activities through 2006 and 2007.

Moving to our international segment, I will leave comments on Europe to John Hayes.

In China, we continue to see strong market growth.

Ball Asia-Pacific is experiencing strong sales and our operations there are continuing to improve their output and cost performance.

In Brazil, the overall can market continues to exhibit growth in the mid- to high-single-digit range through the first half of the year.

Should the market continue to grow at the current pace, we will look to expand our operations down there.

As I said at the top of my comments, I'm excited about the capital projects we are implementing in our North American packaging business.

I'm optimistic about 2006 and beyond.

We're taking steps to grow our packaging business through new products such as our custom cans and heat set PET bottles and by improving the cost structure of our operations.

These steps will begin to pay off next year.

With that, I would like to turn things over to John Hayes.

Thanks, John.

As Dave mentioned in his opening remarks, I have been spending the past two months transitioning to my new role in Europe and have spent the majority of my time visiting the various facilities and people that make up Ball Packaging Europe.

I'm excited to be part of such a dynamic part of our business and look forward to working closely with the management of this well-run business operation.

As we mentioned in the press release, in Europe, we, as well as the industry, have experienced unseasonably strong volumes in a historically strong quarter.

For the first six months, our volumes have grown slightly more than the overall industry, due in part to the successful introduction of our new sleek can by both the major CSD and their customer in several countries in Europe, higher volumes in Eastern Europe and stronger slim can sales out of the Netherlands after our conversion from steel to aluminum there.

We expect these volume trends to continue into the second half of the year.

One of the particular bright spots among my travels was to see for the first time in 2.5 years that every plant and every line within Ball Packaging Europe is currently running full-out, including those in Germany, and we are challenged to meet customer demands.

While this is putting a bit of stress into the system in terms of fulfilling our customers' requirements, it is much better than planning for rolling work stoppages in our facilities to adjust to the deposit situation.

These positive events have caused near-term costs to be somewhat higher due to the start-up costs associated with the Belgrade and Oss capital projects, higher freight costs due to more shipments across Europe in order to meet these customer demands and the sale of higher-cost inventories carried into this year.

However, we expect such costs to moderate as we move through the balance of the year and into 2006.

The senior management of BPE has also been intimately involved in industry discussions regarding the German deposit situation, and hopefully we see some light at the end of the tunnel.

Over the past several years, cans have effectively been delisted by major retailers due to the lack of clarity regarding the German deposit legislation.

Cans are beginning to reappear in some of the major retail chains through the so-called island solutions, and the overall climate for cans has improved.

These reintroduction by such retailers are, we believe, a positive sign going into 2006.

As the law is currently written, such island solutions are required to be replaced by a permanent return system by May 2006, which just happens to be at the time of the World Cup soccer championships in Germany.

German fillers, retailers and packaging suppliers have begun to work together to build a permanent nationwide redemption system.

We're cautiously optimistic regarding these positive developments, particularly because we believe the can will be favored over other one-way and refillable containers due to the overall attractive economics of the can throughout the supply chain, including the recycling value of the container.

All in all, while we have our challenges ahead of us, we believe that moving into the second half of 2005 and 2006, we are well-positioned to continue the strong performance we expect from BPE.

With that, I will turn it over to Dave.

Thanks, John, and thank everybody for their good comments.

Repeating a little bit of what Ray said about the aerospace and technology segment of our business, in the second quarter, sales were $180.7 million and profits 14.9.

That's compared to 170.3 million in sales last year and 12 million in profits in the second quarter of 2004.

The first half, aerospace earnings were 23.8 million on sales of 362.7, compared to 23.2 million on sales of 330.6 million in the first six months of 2004.

The first-half 2005 results do include the write-down of this small equity investment of $3.8 million.

So, aerospace had a really good quarter.

I'm sure it's a record ever for them, and so we're pleased about that.

We couldn't be more proud of the success of Deep Impact -- the mission that occurred over the Fourth of July weekend.

The Ball Aerospace built both spacecraft and the scientific instruments for the program.

Just as we did when we fixed the Hubbell space telescope's vision in 1993, we plan to build on the success of this groundbreaking and high-profile program.

I should note as well that the Deep Impact mission will be highlighted in a one-hour Discovery Channel documentary airing this Sunday night.

The television crew spent several weeks filming on the Ball Aerospace campus in Boulder prior to the spacecraft's shipment to Cape Canaveral.

So for those of you who want to know more about Ball Aerospace and Deep Impact, this will be a good opportunity.

Also, in June, we broke ground on an expansion of our aerospace manufacturing center in Westminster, Colorado.

That building is a key part of our aerospace capabilities, and this expansion will allow it to make and test a wider range of products for our customers.

Turning to the outlook, our first-half results excluding the plant closure costs were up slightly from a year ago, which was, as you may recall, sharply higher than we -- the performance through the first half of 2003.

As it said in the press release, we're working hard to do at least as well in the second half of 2005 as we did in the second half of 2004, when we made $1.31 per share, excluding business consolidation costs.

Looking ahead with the increase in North American beverage container volumes, we now have contracted for next year, as John Friedery commented on, the improvements resulting from our capital expenditures and the cost containment programs, which we regularly develop and refine.

We're optimistic about our prospects.

In Europe, as John Hayes mentioned, we continue to see encouraging developments on the German deposit front and certainly significant upside there when a solution is in place.

We will continue to look at acquisition opportunities and will remain disciplined in that process.

We also believe, as Ray said, that we will buy back more than 200 million of our stock in 2005, because at current prices, it makes economic sense for us to do so.

Now, with that, Melissa, I think we are all ready for questions.

(Operator Instructions).

George Staphos, Banc of America Securities.

I guess the first question I had, was the quarter basically in line with your expectations at the bottom line, Dave, or did the start-up costs eat into your results more than you had anticipated in 2Q?

And then I want to go into that a little bit.

No, I think that the quarter actually turned out to be just slightly better than we expected when it began.

I don't think that people listened well in our first-quarter conference call about the food can business having a very strong quarter and then into the second.

So if the pattern there would've been more normal, we probably would've had increases in both quarters.

I got you.

Well, you know, we probably didn't listen as well as we should have, either.

Can you help us quantify what some of those start-up costs looked like, both in North American and over in Europe?

Well, I don't know that I can.

More than -- I think you are headed down the path of saying we're having some kind of problem.

It's just that when you're commencing production in a new plant, you really don't make any money in the first few months that you operate, typically.

And the other part of the problem is that in Golden, when we took the line down to convert it, we couldn't make any cans with that line.

So, those kinds of things are the things that have a lot more do with hurting the profitability than any issues, and in fact, the things that we've done are running pretty well.

I think in Oss also, you know, the new slimline over there, it was a similar situation.

We didn't make any cans.

We shipped some cans from America, actually, to help fill that void for a while, at a high cost.

So, things like that are more troublesome than -- I don't want to leave the impression that we're having any difficulty in any of those places.

I've got you.

Ray, can you comment at all -- what was the impact in total of the LIFO charge, if you will, in his quarter?

I don't have it right in front of me, George, but I think it's around 4 million.

Okay, so a little bit less than what perhaps you were thinking about in the first quarter?

Yes, I think we said in the first we thought it would be like $10 million for the whole year, and I think we are still on that track.

Okay, I got you.

Last question, then I will turn it over.

As we think about the -- really the metal packaging business over the rest of the year, I think you said percentage margins should be down year on year.

Do you expect that dollar profits will be down in this segment for the reasons that you mentioned in the second half, or do think you will be able to catch up and at least be as good as you are saying on the EPS side within North America in metal packaging?

Thanks.

I don't have that in front of me, but one of the factors that hurts the margins a little bit is that all the raw material costs that we are endeavoring to pass through as much as we can make sales go higher -- sales dollars, you know, on smaller units.

That's the case in the beverage can business, for example.

So that's one phenomenon.

But in terms of just volume of profit, I don't know that we'll be able to be higher than we were a year ago, but I really had not looked at that specifically.

Do you think you guys have a thought on that?

As Dave said, costs, or I should say, raw material costs, raw material price-through or price on the pass-through will be higher, so obviously that squeezes margins, as you understand.

And in addition, as I said, we've got some pretty good headwinds and we've talked about this earlier in the year as well, in terms of rate freight and energy and coatings and chemical costs going up and going up, in some cases at higher rates this year even than we anticipated, which will be a lag before we're able to recover those.

Yes, we are two-thirds a beverage can company, and we've got softer volume in the States, as we said.

We've got stronger in Europe.

So I haven't looked at this, but I would guess that all told we're probably selling as many cans this year, if not more than we did a year ago.

But when your biggest business is short a little volume, that has an impact.

And then as John said, the cost pass-throughs or the increased costs are everything from freight to coatings and so forth.

It's difficult to get it all back all at once.

(Operator Instructions).

Ghansham Panjabi, Wachovia Securities.

It seems like there's a bit more volume moving around in the metal packaging industry, at least to the extent that it has been disruptive to your operations.

I guess my question is whether we should be concerned that the price rationality that has sort of defined the marketplace over the past three years is starting to come at risk.

Well, I certainly hope not, and I don't think so.

I think that as John Friedery described -- maybe I should call on him to talk a bit more about this -- but we've been carefully reviewing our total product portfolio and the people that we do business with, since we sell about one-third of the cans here in North America.

We are pleased with I think the progress that we've made over a two- or three-year period here to get ourselves repositioned in certain ways.

And I fully expect since our contracts are long-term, as you know, they are not to be the kind of disruption that you're talking about.

John, do you--?

Yes.

Ghansham, I hear your question, and I would say that there is a little bit of volume movement, maybe a little bit more -- every year there's a little bit.

Maybe this you're we're seeing a little bit more in our portfolio than we've seen.

But we at this point are feeling that prices if anything will remain up and maybe even go up -- be a little higher next year based on raw material costs.

Okay.

And how much in savings should we expect from your plans to rationalize the beverage and manufacturing facilities?

Those projects are double-digit return.

Dan Khoshaba, KSA Capital Partners.

The prebuying that took place in the first quarter in the food can business which negatively impacted the second quarter -- has that basically played itself out so that we can expect kind of more normal volume trends in the second half of the year in that business?

Well, if you look at our full year, we are still up a little bit year-over-year.

So we kind of did see a reversal in the second quarter, and our anticipation is that it has played out.

But one thing that's happened is that the customer ordering pattern are a little bit different than we've seen before.

And so we're just watching that.

Right now, reports on the fish business, reports on crops in the fields, all have continued to be good, so we're expecting a normal trend over the second half of the year, based on what we know today.

Okay, so that should be pretty much back to normal in terms of volumes.

We would expect, yes.

Ray, have you said what you're going to do with the $500 million that you are bringing back from Europe?

Think about that 500 million.

Well, under the -- strictly under the terms of the Repatriation Act, we'll be using it in accordance what the regulations are to use it for.

Since moneys is fungible, Dan, it doesn't stop us from doing anything that otherwise we might decide to do.

So debt repayment, stock buybacks -- it's all on the table.

All those things are on the table.

A dividend -- really everything.

Right.

And then lastly, if I could, John said that the volumes were actually quite good in European beverage cans and that it was more cost issues that kept profits down there.

Are you guys expecting any stronger second half in the European beverage can business in terms of profits?

I think we would hope so.

Dave mentioned earlier, and I said in my comments, in the first half we did have -- if you want to call them or associate them with start-up costs related to Oss, where we actually -- it was a running facility.

We took it down to convert it from steel to aluminum.

And then as well as Belgrade, as that gets up, one of the issues with -- as Belgrade gets up, that reduces some of our freight issues that we've had to transport cans across Europe to fulfill customer demand.

So, as that starts to settle down and some of those start-up costs start to settle down, we would hope that the second half we have some tailwind.

When does Belgrade actually start up, John?

Well, it actually started making its first commercial cans in early June.

But as you know, with any line getting going, you're not making the full capacity day one that you turn on the line.

Edings Thibault, Morgan Stanley.

If I could just start off by congratulations to you, John, on your new position.

I hope you're enjoying it.

I haven't talked you since that appointment.

But I was hoping -- it sounds as if you -- I don't know if the plant in Belgrade, speaking of Europe, actually addresses your problems.

But it sounds as if you're running -- you said you were running full and you're expecting better volumes in Germany next year as the beverage can situation there works itself out.

How do you plan to bring on additional capacity, or do you need to bring on additional capacity?

That's a good question.

I said currently, we're running full-out.

That doesn't necessarily mean in the first quarter of this year that we were running full-out in all of our plants.

And so, as we stand now, because demand is so strong as we sit here today, everything is running.

What it really gets to is we need to do some very good planning going into the winter months, so we can anticipate what the volumes are, what the labels are, working with our customers so we can balance and take advantage of that, quote, downtime during the off-season.

Okay, so you'll have to carry a little more working capital, I guess, to fund that growth.

And just Ray or John Friedery on the North American business, I think you said that in fact, when you looked at the cost of opening -- of starting up the new Golden line, it was effectively because you were not producing anything for a period of time.

Do you anticipate that that project over the second half of the year will become sort of cash-generative in the sense that you will be able to sell and you won't have kind of start-up problems or continuing hiccups along that line?

How is the start-up coming is probably a good way of asking?

Well, I wouldn't even call it a start-up.

It started up very quickly.

It's running very well.

And we're in normal production there and selling those products.

And in fact, some of the freight costs we had was associated with even brokering some cans from other manufacturers to cover our orders as we -- while we were getting that plant up and running.

So 'sit up and running and contributing today.

Great.

And any planned disruptions on the end business as you start to put in your restructuring plan in place there?

No, we don't anticipate any there in terms of major disruptions on -- obviously, as a plant is going through a construction phase, that plant will be working hard and working harder than they normally do, but we've got the capacity in the system to be able to avoid any disruptions in terms of supply.

Great.

And then one final question to you, Ray.

Can you quantify the FX impact in the quarter relative to last year with the dollar reversing course here?

Well, remember, it's reversed course from where it was at the end of the year, but in the quarter, it was still $0.055 higher than it was in the quarter last year.

So, it's $0.02 to $0.03 positive still in the quarter.

So in other words, the second quarter in 2004 versus the second quarter in 2005, the year, it was still up $0.055, so it contributed a couple -- $0.02 to $0.03.

I guess John Hayes is going to have to work a little harder in the third quarter to make up for that flattening line there.

Thanks very much and good luck in the quarter, gentlemen.

Mark Connelly, Credit Suisse First Boston.

Just two things.

First, when we look at the plastic container pickup in revenue, you mentioned a number of reasons.

I appreciate that.

Can you tell us if the mix there is starting to change in any material way, or I'm trying to figure out whether we should assume that there is a meaningful change in profitability ex-the resin issue.

We are picking up some steam in our custom container part of that PET business.

But it's off of a small base, so we're gathering momentum, but it's still off of the small base right now.

Okay.

So I shouldn't assume that there is any big mix shifts going on yet.

Yes, not up to this point.

Okay.

And just one other question.

When we look at the new can sizes, whether they are tall, big or whatever, do you have a decent read on customer interest that's out there for, say, the next six months?

I'm just curious how well you can read the pipeline to get a sense of whether the growth in that category is still continuing at the same rate.

That's a good question.

We do spend an awful lot of time with our customers and talking to our customers and trying to understand -- spending time with their marketing groups and getting an idea to the extent they will share their plans with us, where they're headed, and we feel comfortable, very comfortable with the continuing trends.

Customers are looking for differentiation, something to make their package or their products stand out on the store shelf.

And can sizes is one way to get that differentiation.

It fits well with their existing selling capabilities, distribution capabilities and what the consumer is looking for and looking to find.

As the market for those sizes grows, and as we convert lines out of 12-ounce, we are effectively heightening the 12-ounce capacity in the industry.

And much of the time, we're not necessarily cannibalizing 12-ounce when we do that, because as you wander through stores and supermarkets, etc., you see things on the shelves in different sizes of cans that were not available before -- energy drinks, etc.

Amanda Tepper, J.P. Morgan.

On the beverage can volume losses in North America, was it more beer or more CSD, and can you comment about what you're seeing in beer trends for the second half and beyond, and also beer in Europe, where I'm hearing consumption may be down a bit as well?

I will talk about North America -- this is John Friedery -- and then turn it over to John Hayes.

On the North American volumes, we're seeing a little more on the CSD side.

Beer trends, though, are -- they are hanging in there, but obviously as we look and read and see what's happening out in the marketplace and with consumer trends toward spirits, we are looking at what happens there and where it goes.

So, we're watching that very closely.

I don't think I can make any predictions at that point.

I will say with our custom container business, we're actively talking with people who are putting spirits and mixer-type packages out on the store shelves and talking to them both in our PET and our beverage can business.

And I will turn it over to John to talk about Europe.

I think in Europe, you can't generalize as one instance, but I think it's -- while you are right that overall consumption may be flat or declining slightly, I think it very much favors the can.

For example, you look in the UK and everything is going from on-premise in the pubs to off-premise, which is the takeout market, which cans play very favorably there.

In Germany, we've talked about the benefits of the one-way packaging in the cans, in particular with beer, relative to refillable containers.

You look at Eastern Europe, and as those economies continue to grow, whether it's Poland, whether it's down in Serbia and other places that we serve in that general region, the economies are getting better, beer growth is going strong and we are participating in that.

So, it's pretty much all over, but it does favor the can.

Okay, and then back in North America, with the CSD being weak, do you think part of that is fridge packs that I think gave the whole industry a fair amount of help last year with the rollout in CSD that was in cans?

Increasingly this year, fridge packs are converting to PET.

Is that part of the problem?

I don't necessarily think it's package mix as much as it is consumer preference.

Soft drink companies are seeing growth in their non-carbs, in their non-CSD product lines -- water, juices, teas and isotonic drinks.

So I think it's a little more consumer preference for the liquid than it is a package preference at this time.

Okay.

And then on the plastics side, you gave the volumes.

Net of resins, was price positive at all or was it still negative?

And where are the returns versus hitting your internal cost of capital in that business?

Well, I'd say that in terms of price, they were not negative, and with our improved mix was a little bit more custom in there, I'd say we're probably positive on that if you exclude the resin.

Okay, and returns?

And returns are better, but I think Ray would characterize them as (multiple speakers)

We're not quite there yet.

But getting closer?

Absolutely.

Okay, and finally in aerospace, how is that backlog looking?

Is it picking up?

The backlog, I don't know if I know the number.

In our performance review last week, I think it was probably down just a little from the quarter.

But, you know, we had a huge sales quarter in the second quarter.

So it's in the 700 -- in excess of $750 million.

That number will be in the Q when we file it in a week or so, but I just don't have it right here in front of me.

But it's in that neighborhood, Amanda.

Okay, and then when you talk about buying back the stock as long as it's below its economic value, where do you peg that economic value?

Well, Amanda, we actually have a stock -- an EVA stock valuation model, and that produces an economic value for us, and we don't buy it unless it's below that number.

I can't tell you what that number is.

And we've been buying it all year.

You've got a lot of headroom after today?

Absolutely.

We might.

Chris Manuel, KeyBanc Capital markets.

A couple of questions for you, first question with two parts, actually.

Along the lines of -- you talked about how you may have lost some volume temporarily while you were renegotiating some contracts.

First, can you tell us what volume numbers were for bev cans in North America and in Europe in the second quarter, and then can you talk us through a little bit about why you may have lost some volume in relation to -- as new contracts came through and how that's going to pick back up?

As I said, we're down year-over-year, probably about 5% right now on 12-ounce volumes in North America, and I will let John talk to Europe.

And regarding that, ours was the open contract and there was some firm commitments, and so we're kind of the swing producer this year.

Obviously, if we get some pickup in the market -- general marketplace due to price promoting, etc., in the second half, we would benefit from that.

And then our volumes we expect to return to a more normalized 2004 type of level going forward in 2006 and beyond.

And then Europe, as I mentioned in my comments, we're up a little bit ahead of the industry.

We're roughly up about 5%.

That's driven in part by some of these innovations, these new products, including the sleek can, some of the slim cans coming out of our Oss facility as we converted to aluminum, and then as I said, in Eastern Europe, that is growing very strongly and we are well-positioned there.

Okay.

And then with Coors and Molson combining, any anticipated changings, i.e., maybe an opportunity to buy the rest of your venture out there?

I don't know that we would have a comment on that.

Okay, well -- okay, that's fine.

And then the last question I wanted to ask you was in regards to -- with the aerospace.

Were there any bonus payments or things of that nature that may have taken place in the quarter from your deep space impact success or anything that may be coming in the near future?

No.

That was a cost reimbursable contract, and as we conducted it, it actually -- and of course it's been done and delivered for most of this whole year.

So, as far as impacting Ball, there hasn't been much of an impact all year from Deep Impact.

I think we still are being paid something to do the work that we were doing in terms of the launch and so forth.

But the big dollars were spent already.

And frankly, that was one of the programs that our margin wasn't so good on.

I don't have the exact number, but we've talked about as time was going on, we had a few things where they were quite difficult.

And when that occurs, you're doing something that's never been done before, if there's a need to add activity, often the margin on the added activity just isn't as good.

Sometimes the customer even wants you to contribute a little bit.

Fortunately, we didn't have to do that.

But, that all being said, it isn't -- the way that we contracted to build it doesn't provide for continuing income from it, save if the vehicle that observed what happened is kept alive in some fashion, that might be a small activity.

It may go looking for another comment, we're being told now, but that would not be a large activity.

And then margins in the aerospace, you're back up in that historically, that 8.5% range from a period where they've been a bit below that.

Is this sustainable from here, or should we continue to see some pickup, would you anticipate?

I think 8 is a number that gets talked around a lot.

We have a mix of business.

In the fixed-price area, we would expect to make more over time.

But what you do there is you take on a project and say I'm going to deliver it for an amount of money.

So, as long as you perform those very well, we ought to be able to do better than that in that area.

On cost-reimbursable jobs, the expectation would be about that.

So we're not satisfied at 8%, but whether and when we're going to get there, stay there and so on, I don't know.

Historically, our mix of business has probably shifted a little bit more toward the fixed-price than it used to be.

I think it used to be 75, 80% cost-reimbursable.

It's a little less than that now.

So that's another factor that if we perform well, ought to help.

But this is a kind of a lumpy business.

When you do very large programs, when you're dealing with the government as your customer, they speed you up, they slow you down, they award contracts when they are ready.

And so we like the business and we see parts of it very strong right now.

That's why we're spending some money to expand some of our facilities.

But it's not a straight line or a backward-bending curve, that sort of thing.

Chip Dillon, Smith Barney.

Just a quick question in terms of the currency shift, just to hit back on that.

You were, of course, putting out that the second quarter you benefited -- and we've seen other companies, of course, benefit.

But the third quarter -- and I'm especially concerned about the fourth quarter -- we're going to see it swing quite dramatically, perhaps.

Do you do any hedging, or have you done any hedging, or should we just merely extrapolate from what we see in the foreign exchange markets in terms of what we would think the impact would be on your results?

We do hedge that.

We have basically majority of our third-quarter projected earnings from Europe hedged at a rate that's significantly higher than the current exchange rate.

We have very little hedge in the fourth quarter because our business in Europe is very seasonal.

Most of the money is made in the middle two quarters.

So these earnings in the first and fourth quarter are not that large, so we're not hedged in the fourth.

Okay, and then, I guess it's too early to have done anything for next year?

It's too early, yes.

Mark Wilde, Deutsche Bank.

I wanted to just come back to something you said early on, which you said that customer order patterns are a little different this year.

Can you give us a little color on what that translates to?

Well, on the food side, because of the heavy prebuy in the first quarter -- I was speaking about our food can business in North America, specifically.

And in the first quarter, we've obviously had heavy prebuy.

And so as customers use those inventories through the second quarter, obviously they weren't ordering, and they weren't ordering on a historical pattern, so it's been a little different.

And we have just been trying to understand what that means, if they're going to be ordering starting now exactly the way they have been, or if they will be ordering in a slightly different pattern in terms of waiting to see a little while, managing their inventories a little tighter than they have in the past.

But what it really comes down to is just how the pools go month to month and how our production planning works.

And it's just been a little more difficult for us with this odd pattern we've had this year through the first two quarters.

Second question.

I guess there have been some examples of soft drinks moving into plastic in smaller sizes, like 12-ounce.

Can you talk about that at all?

Yes, there are some smaller multipack -- I think there was an earlier question concerning soft drinks moving into fridge packs -- soft drinks and water in PET moving into fridge packs, the six-by-two-type configurations.

There are shelf life considerations.

There are some technologies being worked on within the plastics industry, including within our PET division, to provide barrier technologies to increase that shelf life.

But the can still has long -- obviously much better long-term barrier properties than what is out there.

So they're being -- they're moving that way in small quantities, but we haven't seen, as I said earlier, significant changes in package shipped based on those smaller sizes to this point.

Is there any way to give us a handle on sort of what the cost differential might be, maybe just even in percentage terms, for somebody who would look at doing plastic versus a 12-ounce metal?

I assume plastic is more.

It's a hard question to answer because you've got resin prices moving around fairly volatile, you've got higher aluminum prices over the last few years, you've got differential line filling speeds.

Even if you ignore kind of the package costs to our customers loading -- incoming loading dock, you've got differential line speeds, you've got different costs for distribution, getting out to the marketplace.

So I'm not sure that -- that's a question we talk about a lot, but I don't think we can answer it.

Our tendency is to believe at this time the cost for that product is more, but -- that being plastic higher than cans fully loaded on the store shelf, but that's with an awful lot of swags and estimates on our part.

Yes, okay.

And then finally, just a question for David Hoover.

You guys have talked repeatedly about looking at acquisitions, and I wondered if you could just give us some kind of general parameters about the types of things that you might look at or might not look at?

Yes, we would like to buy businesses that are consolidating in nature, if we can find them.

If not, we would like to find things that are close to what we're doing.

A really important criteria for us is if we acquire a business, can we operate it, can we run it?

If you go back to the two large ones that we've made over the last few years, Reynolds Metals was one of those consolidating acquisitions.

In Europe, it's something we're familiar with, that as a beverage can business, but there are obviously limited consolidating savings, because it's a different place.

So the other factor that's quite important is can we make a return?

And we're looking to make more than 9% after-tax right now, even though we think our cost to capital is less than that.

If we were looking at a business with some growth, we wouldn't necessarily have to get to 9% right away, but we would want to see it pretty soon, within a couple-three years.

And the closer to us -- or that is, a business that has some characteristics -- for example, a business that made metal packaging but wasn't necessarily a beverage can or food can business, but where there were similarities in terms of process, in terms of materials, in terms of management systems, perhaps customers, perhaps not -- those are the things that we're looking to add to our business.

The thing is that we don't set in our minds and in our Company necessarily growth objectives.

I think that's a good way to blow yourself up -- to decide right now that by 2010 we want to be a $10 billion company.

We could probably get there pretty easily.

But we might not like the stock price that resulted from that.

If you look at us as a group, we're significant shareholders in this venture and we think a lot about the share price, and we think we understand what drives it.

So the moves that we make are I guess calculated to create value.

I think that's a good answer.

Thanks, David.

(Operator Instructions).

Adam Weiss, Chilton.

I just have quickly -- this was already asked, but I wanted some more clarity than is in your press release about volume loss as contracts were being negotiated.

Can you just explain that again, please?

Yes, think I mentioned it a little earlier, but when we -- this year we're working on a few contracts.

We were the opening contracts in the customers' universe, and they had some firm volume commitments, and with the general industry being down a little bit, those -- the loss in volumes flowed to us.

We have since finalized those negotiations and expect that in 2006, we will return back to more historically normal 12-ounce volumes for Ball.

Okay.

And secondly in Germany, if and when the beverage can comes back into the market, what's going to be the response by the packagers of the containers that have been substitutes for those cans?

At the end of the day, what happens in any market, let alone Germany, it gets down to consumer preference.

And what I'd point out to you is over the past two or three months since I've been there, there have been numerous favorable articles about the beverage can in Germany.

Two years ago, when the deposit was implemented, you did not see that.

So, as the retailers go and move towards a permanent solution, and as consumers are feeling much better about cans in the overall packaging mix because of the ability -- John had mentioned this earlier -- the ability to compete against PET in terms of shelf life, it's still difficult to put beer in cans, issues like that -- or I'm sorry, beer in PET -- and issues like that, overall, I think we're in pretty good stead.

I think too, John, I'd add, and I don't know if you know quantitatively, but the other fact is that although there were substitute containers, our customers haven't been selling as much stuff.

So they've lost volume and because the can hasn't been available.

And if you take 2002 as an index for CSD of 100, that's how many units they were selling of CSD.

Forget the package type.

Today, they are selling in the range of 91, 92.

So they've lost 8%, largely because the consumer didn't have the preference they wanted on the shelf.

And have you quantified in the past kind of what the earnings impact has been from that legislation or the (multiple speakers)

Well, it's certainly been material.

When you have plants down and not running for half the year, it's been very difficult.

And I give the management team at BPE and the people working in Germany a lot of credit for managing through a very, very difficult situation.

We're not -- I'm not going to go and quantify exactly for you, but it's significant.

George Staphos, Banc of America Securities.

I just want to clarify this contract issue in beverage cans.

This is the issue from earlier in the year.

This is not new.

Right.

We mentioned earlier in the year that we were working on finalizing some contracts, and that's what we're talking about.

Our contract situation going forward is we've got virtually all the stuff that we have under multiyear contracts, we're contracted out for 2006 and beyond.

John Hayes, how certain should we be that by May of '06, the deposit infrastructure will be in fact in place, or the system will be in place, or could that be pushed out for any reason?

You know, to be honest, we've had many false starts before.

And so, I said in my remarks we're cautiously optimistic, and I would stress that because it's not done until it's done.

The industry is moving towards a permanent solution, but also in Germany, there's an election coming up at the end of September.

We don't expect where we sit here today now for that to change anything, but it's politics.

You never know.

Do you have to start the machine grinding now to be in a position by May for the system?

If it's not moving now, does it make May less likely?

No, there are some short-term solutions.

I think decisions ultimately have to be made and actions have to be started towards the fourth quarter of this year.

But, having said that, there are interim solutions.

They are not the best for the retailers.

They are more manual recollection systems that they could put in to take advantage of the World Cup if they had to.

I don't think it is their preference, but it is a backstop.

Do the island solutions have to go away by May, or do they go away when the system is in place?

No, as the rule is currently written, they are outlawed as of May 2006.

Okay, so could you end up with a gap, i.e., you lose the island solution and you haven't gotten a system in place?

Yes, but that means all one-way containers that are not allowed on the shelves.

And as I mentioned five minutes ago, the retailers have been hurting significantly because the volumes of beverages being sold are down as a result of not having one-way containers.

I appreciate you going through that, John.

It's helpful.

Can you tell us -- you said double-digit returns, I think, to Ghansham's question on the productivity investment.

Can you tell us what in fact you are investing in that line productivity investment and what the savings might look like?

You're taking a $20 million after-tax charge.

Could it save you roughly 30 million pretax annualized once you're done?

See now, George, you're asking that same question that we didn't want to answer earlier.

If we told you how much capital we're spending, you could get the floor, couldn't you?

It's not an insignificant thing.

It's a three-year program and it's a fair amount of money, but I don't know if we --

Well, I think the way we've just characterized in terms of what we're doing is the industry -- beer industry is moving from 204 to 202 diameter lids, and this is a good -- this was a good genesis for us to take advantage of that move and reinvest in our end-making operations.

And we are going to consolidate from five down to fewer than five end-making facilities, as well, as I said, as I believe I said in my comments, that we're going to automate some of the packaging processes so that there are savings both from fixed costs and from operating costs perspective.

If we bundle all of the activity this year that's represented in the roughly incremental $100 million of CapEx relative to last year, how double-digit is your double-digit return?

It's more than 10 and less than 15.

What was that, Ray?

It's more than 10 and less than 15

Wonderful.

But could it be closer to the midpoint of that?

I don't know, George, you will have to (multiple speakers)

Okay.

Thank you.

Good luck in the quarter.

Andrew Shirley, Ivory Capital.

I was wondering if you could comment on what is driving lower SG&A costs?

Yes, we did this in the first quarter -- first-quarter conference call as well.

As most people that have followed our Company for a long time, it knows that we are an EVA-based company and we drive our EVA incentive plans throughout the Company, right down to the manufacturing floor.

And as we don't do as well, we don't -- those plans don't pay out as much.

So some of the cost is the fact that our incentive costs are going to be lower this year than the last few years.

We also have a deposit share program to help -- to assist in buying stock, and in fact, the cost -- the way the accounting works for that, it's a mark-to-market cost, so as our share price has gone down, the cost for that program is also a lot lower.

So fundamentally, it's got to do with lower incentives and lower deposit share costs.

Okay.

And in terms of back to the restoration of volumes that has been talked about quite a bit, did the restoration of those volumes involve more -- a more competitive pricing environment?

Is that safe to assume?

No, I don't think that's safe to assume.

We have been pretty straightforward in our ideas to make sure that we are achieving an adequate return on the capital that we have invested, and I think we've shown where we can't get that return, we will not go pursue business.

Gentlemen, I'm showing no more question at this time.

I will turn the conference back to you.

Please continue with your presentation or your closing remarks.

Thank you, Melissa, and thanks, everybody, for joining us.

We will look forward to talking to you again in October and along the way.

And ladies and gentlemen, that does conclude the conference call for today.

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