Ball Corp (BALL) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation first quarter 2006 earnings conference call.

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

Afterwards, we'll conduct a question and answer session. [OPERATOR INSTRUCTIONS].

As a reminder this conference is being recorded Thursday, April 27, 2006.

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

Thank you, Alicia.

And good morning, everybody.

This is Ball's conference call regarding the Company's first quarter 2006 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 in the Company’s 10-K filed on February 22, 2006.

And in other Company SEC filings, as well as Company news releases.

And if you don't already have our earnings releases, it's available on our web site at Ball.com.

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

Well, joining me today are Ray Seabrook, Ball's Executive Vice President and Chief Financial Officer;

John Friedery, who is Senior Vice President of Ball and Chief Operating Officer of Packaging Products Americas; and John Hayes, President of Ball Packaging Europe.

And you'll hear from those gentlemen in just a few moments.

Today we reported first-quarter '06 earnings of $44.6 million or $0.43 per diluted share on sales of 1.37 billion compared to 58.6 million or $0.51 per diluted share on sales of 1.32 billion in the first quarter '05.

Earnings per diluted share were adversely affected by $0.04 from foreign exchange, 3 of which pertained to prior years, and we had a $0.01 plant closure charge.

We said in January that we expected earnings per share in the first quarter to be flat to down and they were, even though we anticipate further challenges during 2006 including lower results in -- probably in aerospace and technology segments as well as in China.

We think that overall -- our overall results will be better than they were in '05.

I'll say more about our outlook here in a few minutes.

But first, Ray is going to provide some detail on our financial performance.

Then John Friedery will tell you about his part of the business, followed by John Hayes.

So, Ray?

Thanks, Dave.

Diluted earnings per share for the quarter were down by $0.80 compared to last year.

As noted in the news release, prior year's comps were difficult due to elevated food can profits in last year's first quarter results.

First-quarter results were also negatively impacted by a $0.01 business consolidation charge and by a $0.03 out-of-period foreign exchange loss.

Packaging price tops compression that commenced in the second half of last year continued to negatively impact operating earnings in the first quarter.

Operating margins for the rest of the year should improve as packaging volumes are ramped up to meet higher seasonal demand and sales contract price escalators and other pricing actions kick in in the second quarter.

Lower interest cost, a lower effective tax rate, and the sizable 2005 stock buyback program somewhat offset lower operator earnings impact on the quarter.

On March 27th, we closed on our -- on our acquisition of U.S.

Can Corporation, and on March 28th, we closed on our acquisition of plastic packaging assets from Alcan Packaging.

Included in the first-quarter results are sales of $12.6 million, EBIT of $1.3 million, and interest expense of $900,000 from the acquisitions.

It is very early in the integration process, but we are confident that we can meet or exceed our 2006 financial targets for both acquisitions.

In the quarter we expanded our senior secured credit facilities with the addition of a new U.S. $500 million term loan facility due in installments through October, 2011; and issued 450 million of new 6 and 5/8% senior notes due in 2018.

Proceeds from these financings were used to refinance U.S.

Can debt at lower interest rates, acquire the plastic assets from Alcan Packaging, and reduce seasonal working capital debt.

Late in the first quarter, we had a major fire in Haßloch metal beverage plant in Germany.

The fire damage and business interruption losses are largely covered by insurance.

We anticipate for this interruption insurance will cover most related earnings shortfall; however, accounting recognition of insurance recoveries could lag actual results by one or two months initially, and the plant downtime is challenging our manufacturing capacities.

A $34.7 million fixed asset writedown was recorded in the first quarter to recognize the book value of the property loss.

No profit loss was recorded in the quarter as a result of the fire.

Once the property damage is finalized, we expect to record a one-time after-tax gain in the $35 million range based on initial estimates of the actual replacement cost in excess of the book value.

Finally, a word about debt reduction and the stock buyback program.

Our immediate emphasis is on debt reduction.

The 2006 year-end debt paydown is expected to be in the 350 to $400 million range from first quarter debt levels.

The 2006 full-year stock buyback will be less than $50 million.

With that I'll turn it over to John.

Thank you, Ray.

In our packaging businesses, we continue to see unprecedented volatility in costs for key inputs such as metal, energy, and freight.

A chunk of that will be addressed beginning in the second quarter as contract price escalators take effect.

But it is a fact that in a fast-rising cost environment, those mechanisms have a delayed impact, and that lag shows up as it did in the first quarter.

I'll start with food and household products packaging, which includes our metal food cans and aerosol and specialty packaging.

Overall, our North American food can volumes were down 2.5% versus the first quarter of 2005.

This compares to estimated industry volume growth of approximately 4%.

There again appeared to be some pre-buying in the quarter, and we do expect that to take away some from the second quarter, though nowhere near the extent of last year.

As we told you last year, we passed on some business in Canada that we felt didn't make sense.

As a result, you may recall that in the second half of last year we closed our food can plant near Montreal.

As a part of the continuing effort to properly align our manufacturing capacities and fixed cost structure, we've also shut down a food can line in our Whitby, Ontario plant.

As a point of clarification, the beverage can manufacturing lines in that plant are still in full operation.

These kinds of actions are painful, but as we have shown over the years, when we feel business is not sustainable, we will take them.

This part of our business is beginning to show signs of improvement.

Operating performance is improved over last year, productivity improvement plans are underway, and we expect that there will be synergy opportunities from our recent acquisition of the former U.S.

Can plants.

We continue to pursue cost pass-throughs on the customer front, and between the cost recovery efforts on the revenue side and the effect of cost savings and productivity improvement plans in our plants, we are optimistic that we will begin to improve the margins on food cans.

Overall, we expect this business to perform better this year than last year.

In our plastics business, we installed new heat-set capacity in the first quarter and upgraded other lines to meet increased customer demand.

Bottle volumes were up 7%, but outside preform sales were down.

Results in the first quarter were hurt by year-over-year energy cost increases and the timing of resin cost movements.

Since the newly-installed lines are coming on line -- on stream this quarter, and we're confident of year-over-year improvement of earnings driven by continued growth in Heat-Tek bottle demand and productivity gains.

A large portion of the capital program planned for the plastics business is now complete.

We have one more line to install after mid year.

Other than that, we're just going to turn everything on and run product.

Metal beverage packaging division volumes in North America were up over 4% in the quarter, a little above the industry numbers reported by CMI.

Margins were pressured by higher energy and energy-related costs, a lag in cost pass-throughs, and by higher cost inventory working its way through the system.

Custom can volumes were up 8% in the quarter versus the first quarter of 2005.

As normal seasonal demand growth comes on line and pricing adjustments take effect, we expect that North American beverage can margins will return to more normal levels for the rest of the year, and I expect good things from this division in 2006.

The capital projects in the beverage can division are progressing well.

We completed the custom can line conversion of the line in Monticello, Indiana, in the quarter, and our major project to revamp and streamline our end capacity remains on track.

The integrations of the former U.S.

Cans and Alcan operations got off to a good start and are well underway.

The plant and human resource managers from these operations were in Colorado two weeks ago for orientation to Ball.

There is a lot of excitement about these two acquisitions, which broaden and diversify our product portfolio, as well as our customer base.

We like what we see, and we continue to believe these acquisitions will be accretive to earnings in 2006.

We work closely with our customers on promoting all of the packages that we offer to grow their markets.

We have already begun that process with our new aerosol and plastic packaging products, and are seeing cross-selling opportunities between these new product lines and our existing ones.

In China, volumes were strong in the quarter, but the rapid and unprecedented increase in the price of aluminum, which is not currently indexed or automatically passed through in the price of our products in China, is expected to cause margin compression for the balance of this year.

We have gotten price increases in the marketplace, but not to a great enough extent to offset the current LME conditions.

We are securing longer term contracts with indexing provisions for the price of metal for future years, so that while we expect this will reduce earnings from this small part of our business in 2006, we do anticipate a recovery in China in 2007.

The marketplace in Brazil continues to grow in the range of 6%, and our projects to increase capacity incrementally are allowing us to grow with the market.

Aluminum is largely a pass-through in the Brazil market, and the strengthening of the Brazilian [AI] is offsetting the high LME for our customers.

And with that, I will turn it over to John Hayes.

Thanks, John.

In Europe, volumes for the first quarter continued a healthy pattern for both us and the overall industry, despite an unseasonably cold winter throughout most of Europe.

Overall volumes for the industry were up in the high single digits, driven primarily by continued strong growth in eastern Europe.

Our volumes were at or slightly above industry growth rates, driven in large part by our presence in Poland and our new Belgrade facility.

As we look out for the full year, we remain optimistic about the prospects for continued growth in Europe, driven by the World Cup Soccer Tournament being hosted by Germany in June and July of this year, and the reintroduction of the beverage can into Germany.

The price cost compression that we have experienced in the U.S. also affects us in Europe.

As you recall from our conference call in January, Ball Packaging Europe management has focused on several areas, but the greatest emphasis is on the price cost compression.

To that end, we have implemented cost recovery surcharges with our customer base to help cover the unprecedented increases in metal, energy, and other cost inputs.

These discussions with our customer base have been constructive, as many recognize our pricing policies in the past several years have insulated them from cost input increases.

And they recognize the need by us to now recover some of the costs.

While it's difficult on our customers as well, we are finalizing these discussions and remain confident that we will be able to recover a large portion of these costs in 2006 and into 2007.

Beginning next Monday, deposit legislation in Germany will require that all retailers showing one-way packaging will be obligated to take back such containers.

Over the past year or so, much planning and work has been done by various constituents to implement a return system for one-way packaging, and we are encouraged the system will now be in place and operable.

While retailers have begun to order and install reverse vending machines for all packaging types, not all machines will be installed immediately, so throughout the balance of this year there will be both automatic and manual systems in place to receive the return containers.

As we discussed in January, we remain optimistic long term about the success of the beverage can in this deposit environment due to its favorable economics and efficiencies for beverage fillers and retailers.

Although given the continued installation of automatic systems to redeem the deposits, there will be -- there will undoubtedly be a ramp-up period throughout the balance of the year as consumers and retailers become more familiar with this system.

Our long-term optimism is also due to the fact that in virtually every country or geography where deposit systems have been implemented, in the long term one-way packaging became the preferred choice.

We also continue to focus on our innovation efforts.

Our Sleek Can continues to grow and develop in the marketplace, and during the first quarter, several of our CSD and beer customers launched this innovative package in sizes ranging from 25 cl to 33 cl.

In addition, our new waterless printing technology has continued to attract interest for from many of our customers as a way to accentuate the specific promotional graphics with the can.

We have and will continue to explore other new product development areas, and you should expect that this will remain an important area of focus for us in the coming years.

Lastly, an update on the Haßloch fire situation.

As we've mentioned, early in the morning of April 1, we suffered a significant fire in our Haßloch, Germany, steel beverage can facility.

Fortunately, none of our employees suffered any injuries.

However, it is clear to us now that our production capacity will be unavailable until well after the end of the busy summer period, and we are currently evaluating our future capacity options.

As one could imagine, this creates significant issues for our business across all of Europe.

Our Haßloch facility's production capacity was nearly 2 billion 33 and 50 centiliter containers, and the inability to access this capacity as we enter the business summer selling season requires us to significantly rebalance our overall capacity.

At this time, we believe that we will be able to support our customers' needs in the very near term, but it could become quite tight in Europe during the summer months, and it is simply too early to understand completely all of the disruption this may have on our business.

Our sales force has been and will continue to be in touch with our customers to ensure that effective planning occurs in order to maximize our output and minimize any disruption.

To date, the response we have received from our customer base has been very supportive of our needs, but much work needs to continue in order to ensure as smooth of a summer selling season as possible.

In summary, while there are many challenges facing the Company in Europe, Ball remains well-positioned to participate in this growth region of the beverage container industry, and continues to look forward to further developments at Ball Packaging Europe.

Dave?

Well, thanks, John Hayes and John Friedery and Ray Seabrook, for those comments.

We appreciate them.

I might comment a bit on -- on our aerospace and technologies segment performance.

The -- the performance here in the quarter reflects the fact that we did complete some important work during the quarter, and government funding in some projects as we look forward is apparently slowing down.

What that means is that new starts, projects that we've bid on and that we want to bid on, may not be awarded quite as quickly as we thought.

And I think what the government contracting people talk about is that things are moving to the right a little bit.

And I think this is related to budgetary pressures and -- and issues within certain programs.

But overall, the business is still pretty healthy.

We said back in January that we -- we have in -- this year, we were expecting I think a total of about a $12 million pension cost increase, and that practically two-thirds of that, or around $8 million was going to occur in aerospace.

And most of that had to do with GAAP accounting versus government accounting.

It's not really cash.

But that that was going to have an impact on aerospace profitability as we entered 2006, with this situation with some of the new jobs that we're hoping to win not being awarded as quickly, that may put more pressure on profit in the aerospace business.

That's what we were talking about in our press release.

On the other hand, backlog actually grew a bit between year end to the end of the first quarter.

I think it was 773 here at the end of the first quarter versus 761 at year end.

And this slippage, to the extent it happens, assuming that we win our share of the new work, which I have no reason to believe we won't, may actually help us in '07.

Our business is 50 years old this year.

The Company had its 125th anniversary last year.

And here at aerospace it's now 50.

It's hard to believe.

But -- and, no, I was not there at its founding.

But the -- celebrating 50 years in the business, it's a quality business.

It's been on a real tear in growth over the last years, and it is a lumpy business as you've heard me describe before.

So we're just saying that that business might -- might have a less of a good performance than we would like.

I would remind everyone that it's only about 10% of Ball Corporation, and not that that isn't an important 10%, and it certainly is, but the magnitude of this on the total Company is not as great as it is to the individual segment.

Well, turning to our outlook for the future, we did say in April of last year that our first quarter was unusually strong in some areas and -- and that would affect us later in 2005.

And that really -- and it did happen that way.

We think sort of contrary-wise, the first quarter of '06 may be unusual, but in the opposite direction.

You've heard the guys talking about some of the reasons for that.

And we do expect the balance of the year to be better.

And that we should have a full year that will be better than last year.

We are working through the cost input volatility that you've heard about from John Friedery and others.

But we will begin to benefit from contractual provisions that allow us to implement cost escalators to where we can gain price increases.

And certainly the acquisitions and other actions that are beginning to have effect as we begin the second quarter here in April.

There's really still a lot of work ahead of us, including managing the aftermath of the fire that John Hayes has talked about in Haßloch, Germany.

And really that one-year situation in China that we need to work with.

But there really are many positives, as well, like the integration of the recent acquisitions, the expected return of the beverage can in Germany, our capital project’s beginning to take hold, and really fully realizing the benefits of North American beverage can volumes rebounding to pre-2005 levels.

Really, as you think about Ball Corporation, our strategy remains the same.

We're well into a three-year capital program that positions Ball for continued growth, in addition to the acquisitions we've talked about.

We're executing that program successfully.

And we're managing in a period of volatility.

We like the progress that we're making, and we feel particularly good about that and feel good about the rest of this year and beyond.

So with that, I would like to open the forum for questions.

[OPERATOR INSTRUCTIONS].

George Staphos, Banc of America Securities.

Thanks.

Hi, everyone.

Good morning.

Ray, first question for you.

Can you explain how the currency charge actually [inaudible] in the quarter, and what's the $0.03 of prior year impact mean?

Thanks.

Yes, George.

The -- the $0.01 of the -- the exchange for the $0.01 primarily is -- the Euro last year's first quarter was like 131.

And this year it's like 120.

So the conversion of our European net earnings was $0.01 below where it was last year.

The -- the other $0.03 relates to a situation we had in Canada whereby we had made some sales of some receivables in Canada -- some U.S. dollar denominated receivables that were incorrectly -- incorrectly coded as Canadian dollar receivables, and had an impact of about $0.01 in -- in 2004 and $0.01 in 2005, and a little bit in 2006.

So it was really an out-of-period adjustment that we really didn't pick up until the first quarter of this year.

And we made it all in the first quarter.

Okay.

So there's nothing left from that going forward?

No.

No, it was a situation where we had some U.S. dollar denominated receivables in Canada coded as Canadian, and had a little bit impact in those years I talked about.

But we really had to catchup in the first quarter to get it right.

Okay.

Question for John Hayes.

John, you mentioned in your comments that you're working hard obviously on pricing.

And you said that you -- I'm paraphrasing, you're working hard to recover some of the costs.

If I heard you correctly, why would you not be able to go after recovering all the costs?

Is it purely the lag mechanically in your contracts, or are there other issues at work?

Or am I being too -- too pedantic?

Well, you may be a touch too pedantic.

We're going after as much of the cost increase as we can.

There is some lag, and there is some -- because we are operating in such high volatility, it's -- with many customers we're working very closely with them.

Our intent is to recover all these costs.

And we fully expect that we'll be able to do that through 2006 and beyond.

Okay.

Haßloch, do you think you'll have that actually running next year, or is it too early to call it?

Well, to be honest, George, it's too early to tell.

We're looking at all of our various options.

And probably within the next several months, we'll be making -- making a decision.

The -- we do know that we will not be able to be producing cans out of that facility or any other facility for that matter if we were to get started even today until 2007.

And so our goal is probably to be prepared for the summer selling season in 2007.

Okay.

Last question for Dave.

Dave, you mentioned that you expect this year to be an up year, which is positive.

On the last call, it seemed like from your commentary that you felt the Company would be more in line with its traditional growth goals of 10% to 15%.

Is that still obtainable, or given maybe the slower start in the first quarter and some head winds that that might not be quite attainable this year?

How would you help us think about that?

I think that the comments are made in the context of the volatility and the circumstances that we described, George.

I think saying that we expect to be up is about as far as I want to go here in April, only because you heard Ray talk about fires and -- and accounting and we're going to get a gain from that.

There's going to be a lot of things in the numbers this year.

I think the basic business is -- is on a good track.

I mentioned aerospace and China as being negatives.

I think everything else is positive.

But as you know, I don't like to give guidance.

And every once in a while you guys force me into it by saying things like -- you'd like for me to say again.

But as the year goes on we'll have a better understanding of all that.

I just think as we're all awake and alive and you watch $72 oil and things rolling around, we don't want to get aggressive and make statements that we have to retract later.

So that's really the only context that I'm using that in.

I understand.

So obviously a lot more volatility.

Perhaps too early to call.

Not necessarily off the table, though, either.

Although you're not guiding us to that either at this juncture.

Would that be fair?

I think you said it very well.

All right, Dave.

Thanks.

I'll turn it over.

Ghansham Panjabi, Wachovia Securities.

Guys, good morning.

Back to the surcharges in Europe on the pricing side, are they fluid enough to adapt to the aluminum volatility we're seeing?

Well, that -- without going into great detail, that's part of our discussions with our customers that really what we're talking about here is we're seeing unprecedented volatility.

And in volatility comes risk.

And it's a transfer of risk.

There's a variety of ways you can do it.

You can do it through just passing through the aluminum as it goes up and down, not to mention energy and other things.

You can do it through hedging mechanisms.

So we're -- it's on a case-by-case basis.

We're working with all of our customers, and moving forward with it.

Well, I guess my question is whether 2Q will be a benefit of those discussions?

That's our expectation, yes.

Okay.

And just back to the custom can volume growth of 8%.

Was that in line with plan or was it a little bit lower?

No, that's about in line with plan.

That is -- obviously, that base has grown so that the -- the actual numbers are still growing nicely.

Okay, great.

Thank you.

Amanda Tepper, J.P. Morgan.

Good morning.

And, Ray, congratulations on your new title.

I don't know if it -- what it means or not, but congratulations.

Thank you, Amanda.

On the -- can you give us a little color on your two acquisitions in terms of how the earnings and cost savings ought to roll in over the course of the year, and is there any seasonality to either of these businesses?

And can you also talk about perhaps some examples of those cross-sell opportunities you mentioned?

Yes, that'll be fine.

Let me see if I can -- let me start with the cross-sell opportunities.

We -- that's -- that is showing up in the very early weeks simply in customers in one of our segments saying -- or one of our -- one of our product lines who we happen to have salespeople in, saying, Gee, can Ball do something for us with this package?

Whether it's with an aerosol container or whether it's with a PET or polypropylene container.

And those types of things have popped up.

Even before we've kind of gotten ourselves set up to really pursue them in a -- in a very focused manner.

So those are the types of things that we're seeing.

Obviously we've got -- as we said when we were looking at these acquisitions, it gives us access to a broader customer base.

And we're seeing that, and the push is coming from the customer side even before we kind of get organized around attacking that systematically.

Amanda, could you go back to your first question because I think I got -- I focused on the second one first.

Sorry.

How will the earning from the two acquisitions roll in over the course of the rest of this year?

Is there any seasonality to it?

Will the savings be more back-ended on the synergy side?

Well, we're starting to capture some of the savings.

At least with -- we're executing on our plans.

We announced the closure of the U.S.

Can headquarters immediately after closing on the transaction.

We're in the process of notifying people of what their -- what their futures look like, and some of that will be phased in over time.

People -- we've executed against that plan but some people will be on for a period of months as the functions transition over.

So I would say it's a little more back-end weighted.

And as far as seasonality, there's not a significant seasonality to these businesses.

There's some seasonality to various parts of the -- of the product line and various parts of the customer base.

But it's not -- they're not totally in -- in sync with each other where you get a big peak in the summer or big peak in the fall in the business as a whole.

Okay.

And then can you comment on the price environment in U.S. beverage cans?

As you mentioned, as pricing sticks, is there a lag going on here?

Or is it getting more competitive do you think?

No.

I think -- I've mentioned as we get our contractual, most of our U.S. business is on long-term contracts.

And those contracts contain provisions for pass-throughs based on various cost indices.

And they usually -- they're a lagging indices -- index, and they come into effect typically in the second quarter of the year.

So as those things come in, that's the lag that I'm talking about.

Okay.

And then, Dave, not to force you to give any guidance, but I understand you're saying the full year will be up year-over-year.

You had said Q1 would be down year-over-year.

Can -- should we expect Q2 -- it sounds like we're looking at a more back-ended year.

So could Q2 be down again on an EPS basis year-over-year before it starts to turn positive?

Yes, anything's possible, but that's not what we expect.

Okay.

Thank you.

Mark Connelly, Credit Suisse.

Thank you.

Just a couple of philosophical questions, and following on what Ghansham was asking about the price pass-throughs.

When you look at various markets like U.S. food can and the European market, are you pursuing or are you looking to pursue a fundamentally different kind of contract, or are you just trying to wiggle a little bit what you've got?

I mean, we're in an environment where inflation is a much bigger deal than it was presumably when those contracts were first structured.

I think I'll start.

And philosophically, I think -- philosophy, I think long term -- we're in a kind of a short-term period where we're seeing volatility in all kinds of things that we haven't seen for a while in the country.

But we've lived through other periods of higher inflation.

In one sense, without any increase in input costs, there's hardly any reason to ever talk about increasing prices with anybody.

So what our challenge is just as you're saying.

And I would say in general, taking risk on big cost elements within the kind of a business model that we have is not good for us.

So as -- as a point of philosophy we will try to move some people more toward to the extent that they are.

But contracts like we've had for a long time including the kind John Friedery was just talking about where there are contractual provisions to help recoup these kinds of things when they occur.

Usually, though, you're looking backward at what happened to an index, and then making a prospective judgment -- or adjustment.

But at the same time, as John Hayes was talking about, we're implementing surcharges, and increases when the cost gets to -- short-term cost movement gets large enough that you have to do that.

What will that evolve into?

Only time will tell.

I don't know -- John Hayes, do you want to say any more about what your approach is in Europe?

Well, yes.

I could -- there's many different ways of approaching it.

But as we've said repeatedly, we are in an unprecedented time of volatility.

And I would just ask you all to go back and look at just the price of aluminum on December 1st and then on January 31st of this year.

It was a huge increase.

Given that, there's a variety of ways you can deal with it, as I mentioned before.

You can -- I think we are taking a -- working closely with our customers to try and make sure that they win and we win in this.

And that the risks and opportunities are shared equitably in that.

Whether it's -- entering into pass-through agreements with them.

Whether it's entering hedging agreements with them or on their behalf.

There's a variety of ways you can approach it.

And I think on a case-by-case basis that's what we're doing.

That’s helpful.

Thanks both of you.

Just one more question, and again, a little bit philosophical, but just as we look forward on the specialty can business, in terms of the different sizes rather than the true custom cans, how long do you expect these smaller, shorter, taller, skinnier cans to command a premium?

Because it looks like just about everybody is rushing headlong into that market.

Is there any precedent in your mind for how long you can expect to -- to earn a premium for making those cans?

I don't think there's a precedent as to how long.

Certainly with all these longer, taller, skinnier, shorter, fatter, squatter cans as you say, there are additional costs in our manufacturing operations.

They're typically shorter runners.

They require, rather than simply changing the label on a can actually physically changing equipment over on can lines that -- that takes a lot of work.

And a fair amount of expense to make happen.

So that there's a -- there's a cost justification for the -- the pricing that's in those cans.

The -- the challenge will be -- and we figured all along as this has grown that this will be at a marketplace that will attract other people, and that as volumes grow and you're switching lines over less, that costs should come down.

And that would potentially put some pressure on pricing, although margins should remain in good shape.

And so we've expected this.

We feel very good about our custom can system.

We have eight plants across the U.S.

So we're well mixed geographically as well as size-wise across the country to service our customers.

Outstanding.

Thank you.

Edings Thibault, Morgan Stanley.

Thanks very much.

And good morning.

John, I was hoping you could discuss the European situation there.

In particular, you said you're working with your customers in the wake of the fire.

And maybe it's too soon to talk about, but what kind of fixes are you suggesting?

I mean, it doesn't sound as if you know what your capacity situation is going to be like even at the beginning of the year.

I think in reference to your answer to George Staphos' question before.

What -- what are you talking about?

I'm not completely sure I followed you, what you're saying.

But let me just give an example.

We just lost 2 billion containers on an annual basis in our system.

The European market was reasonably tight, even prior to that.

Now the good news is we had spent the first quarter building up our inventories and working very closely with our customers to get what's known as authority to manufacture, ATMs, so we could lay down stock with them in anticipation of the World Cup and in anticipation of the comeback of the can into Germany.

And then April 1st happened and we had the fire.

What that requires us to do is many of our customers that were taking steel cans, we're now going to have to ask to take aluminum cans.

And -- and we're going to have to work with them on that because it's not as simple as just running an aluminum can down the line that was running steel cans down the line.

So when you go through -- and we run our business as a Pan-European business.

So this was not just a regional issue, it's a Pan-European issue.

So we're working closely with our customers, rebalancing our supply-demand capacities to make sure that our customers are fulfilled throughout 2006.

Now, I guess what I mean is do you have -- do you have volume commitments to your customers that you're now on the hook for that you may not be able to meet, given the loss of this kind of capacity?

No.

As I said, at this time it's going to be very tight.

But we believe that we can supply all of our -- our needs of our customers rights now.

If the summer gets extremely hot, and if Germany plays the UK in the World Cup, it might even be more tight than that.

But-- and we can speculate all we want on it.

But right now we feel reasonably confident that we'll be able to manage through the summer, even if it is a little hotter than average and the World Cup demand is a little higher than average.

Okay.

Got it.

And just looking at some of the contract situations in the U.S., John Friedery, I was hoping you could talk -- you said the price indices kick in.

Historically, what kind of -- I realize this is a broad brush given the number of contracts you have, but what kind of price recovery do you have contractually built in there?

Is it based on -- my understanding it's based on PPI and certainly shared pain.

Is that accurate?

It's based on typically a producer price index or some sort of an immediate materials index.

And you're right.

There is some shared pain there.

But you should expect to see, given the surge in PPI over the last year, several points of price, being percentage points?

I don't -- yes, the exact numbers are -- are -- what I would say is that -- yes.

We expect to see some price there and recovery on our costs.

Right.

Absolutely.

Great.

Thank you very much.

Mark Wilde, Deutsche Bank.

Good morning.

Not to beat a dead horse, but I wondered if we could come back to the German plant for just a minute.

Do you have any sense of what the incremental cost may be for you over the next 12 months of having to service people out of different locations?

Well, we're still in the process of evaluating that, but I think what you all should assume is that our business interruption insurance should cover most if not all of that.

Okay.

And now, in the release you mentioned some changes that you're making in aerospace in terms of staffing and capital spending targets and everything.

And I wondered if you could give us a little more color on that.

Well, the -- the capital spending is just, we were in -- we're in the midst, for the whole company, of a three-year expansion program in -- and one of the places we're spending money is aerospace.

We are probably about two-thirds of the way through in the expansion of a manufacturing facility.

I was just by it yesterday.

That is putting in a new range to test in.

And that part of our business continues to grow and be very, very strong and -- is making good margins.

It does things like all the antenna for the Joint Strike Fighter.

It makes the antenna for the new Tomahawk missiles, electrooptical, electromechanical devices.

And as I say, so with that -- that -- I guess we broke ground for that expansion in June of last year.

And it will probably be occupied as we get into the -- sometime during the third quarter, early fourth quarter.

Just the expansion.

And it's about a 60%, 70% expansion in space.

That's going along fine.

We had certain other things that are -- like a large test chamber that we're putting in up in Boulder.

With the contracts being delayed a little bit, we can delay the spending that's associated with those things.

So we're basically, in aerospace, just -- just right-sizing that or I guess putting it in pace with where the business is.

Again, that's 10% of Ball, and the -- the total amount of additional spending versus the total amount that we're spending as a Company is not a huge thing.

It's just that that will dampen our capital spending.

Ray, do you have any other comments on that?

No, but I think -- I think the only comment I'd make about capital spending, we said that we thought we'd spend around $300 million before the acquisitions.

And I think we've pushed some stuff to the right on capital spending.

So I think barring the amount we have to spend vis-a-vis the fire, which will be reimbursed by the insurance company, our capital spending we still think will be around 300 million.

Even with the acquisitions.

Yes.

And part of that reduction, if you will, including the new businesses is in aerospace.

Okay.

Last question, just on the indexes that you've used historically to try and keep up with costs or help keep up with costs.

Any sense of -- of whether you've really been focusing on all the right cost elements, or will you have to go back and rethink how you index business going forward?

I think that's a good question.

I think we've got to study what's happened in the last nine to 12 months in terms of the volatility and the run-up in certain components.

And to see whether -- and there's a couple of questions there.

One is to figure out is this a pattern that's going to continue into the future, and if it is, is this the right set of indices, is this the right indexing mechanism.

And if it's not, then what do you do -- which way do you go?

So that's -- they're all questions that we are studying as we go forward.

One thing I might just add.

If you look at what we do in -- in large part, with very few exceptions, we pass along the base raw material, and that's always a very big piece of what we do.

So we're in pretty damn good shape from that standpoint.

But it's all the other things.

Diesel fuel, which we've -- we're looking at, how do we manage -- maybe hedge that, collar it, do some things to reduce risk in our business.

And -- and that's what we're looking at.

When you get around to what do you get to pass through, I think that everyone would like to be able just to stop on a dime maybe and pass it through immediately.

Of course, sometimes we get in discussions with customers and all these talks about supply chain, open books and all that, that's just fine.

But the way to get a real open book is just go into the business yourself.

We do have some customers who make some of this stuff.

And of course they're getting it right away.

But if you're a supplier, to be able to turn on a dime with what is a huge part of our cost base, that is to say, take no risk, puts us in a pretty good spot to start with.

The other thing is that our Company has -- really does have long-term contracts and long-term relationships.

And when we are involved in passing these costs along, it's -- it's not like we're sending out 9,000 letters to customers.

These are deep, long relationships, and we sit down and talk about, look, I can't deal with this anymore.

You're going to have to take some of it.

What are we going to do about it?

And how do we together get costs out of this system and those kind of things.

I don't mean to sound soft about it.

But we're not by nature -- what we want to see is our customers succeed.

What we want to see are markets where all the products that we make are growing and are healthy.

And we got a situation right now with unprecedented inflation and volatility in a few of the cost inputs that we got to manage through.

But I really like our position versus -- vis-a-vis some others I think in this regard.

Understood.

Thanks, Dave.

You bet.

Alton Stump, Longbow Research.

Thank you.

Had two quick questions.

First off on your food can business here in the US, one of your two major competitors I think noted on the first quarter call that they were gaining share.

And then the other competitor said that they were not losing it.

And is it implied at all that you guys might have lost a bit of share outside, of course, of tough comps that you faced in food cans here in the first quarter?

Yes, I think the -- in my prepared comments, I talked about the fact that we did talk to you last year about losing some business up in Canada, walking away.

And that was -- resulted in the closure of the plant outside of Montreal.

And we're continuing to look and -- and make sure we've got a good, rational type set of facilities to manufacture the business and make the business that we have right now.

Okay.

So in other words just in Canada, and not here in the U.S., that U.S. saw some share loss?

Yes, primarily Canada.

Okay.

Then I guess just second question briefly, with the fire in Europe, I guess at this point, nobody knows exactly how many cans will come back and how quickly in Germany.

But is it safe to say that if we were perhaps to see more cans come back to the overall market than expected, with the mandates that you guys probably wouldn't be able to supply that?

I think that's a fair -- that's a fair point.

It's a -- there's a variety of factors.

And like I said, if we get a hot summer, the -- the World Cup is strong in Europe, the deposit can in Germany comes back strongly, we could be short, yes.

Okay, great.

The market's growing in Europe, across Europe.

And this obviously puts a hole in our capacity.

We also have the new plant in Belgrade, however, which is going to have a full-year of production.

And we're going to do all we can to make all the cans we can in our existing equipment.

There are ways to run faster, speed up, and do things in the short run.

And we'll be doing all that we can and meet our customers' demands.

Yes.

I might just tack on to what Dave was saying, as well.

This is where long-standing, good customer relationships really help because we're going to need some help from them in terms of getting orders a little bit earlier than they would have normally given it to us, or orders in batches that are a little bit larger than they'd normally do.

Thing like that.

And the relationships that we have built over the years with the people here in Europe.

This is where we can help each other out.

Okay.

Thank you, guys.

[Andy Seaman], Meridian Asset Management.

Thanks.

First of all, Ray, can you tell me the securitized receivables at the end of the quarter?

180, Andy.

And so when you talk about paying down 350 million to 400 million, does that number stay about the same?

Yes, that will stay about the same.

May go up a little bit.

But yes, when I talk about that, that's what I'm talking about.

It will go up -- it will probably go up a little bit between now and the end of the year.

It will probably be closer to -- be 200.

Okay.

The other thing that has an impact on that, of course, is the value of the Euro.

If the Euro's at 135 or something at the end of the year, we won't take that much debt paydown out because our Euro denominated debt sitting in Europe will be high.

I see.

Okay.

The -- all right.

And when you said the 350 to 400 million from the first quarter level, does that mean the end of the first quarter?

Yes, that means that we're looking for like 2.2, 2.250.

That's the number we're trying to get to.

Okay.

And you mentioned indexing metal, Dave, in China.

And so the question is, is there any shot you could do that also in Europe?

This is -- Andy, this is John.

Yes, that's one of the things that we're exploring with our customers.

Okay.

But at the moment it's more of a surcharge that you're implementing?

Correct.

All right.

Okay.

And then in the -- the aerospace business, the -- for 2006 -- well, for 2005, you had revenues of $695 million.

I mean, so -- the year before, it was 653.

So I mean, could we guess that maybe you're going back to where you were the year before, if we want to try to do some modeling here?

Yes.

At this particular moment, I doubt it will go that low.

And that's making assumptions -- in other words, if a decision that we thought was going to be made in August has now been delayed until October, once you get pretty much through the year, you -- you pretty well factored in the effects of that.

So even if it slipped to November, for example, when we get the start, that won't have a very big effect on this year.

Okay.

So I -- it's hard to say right now just because of what's going on.

This is also an election year.

Right.

You know that Congress is typically late in doing about anything.

And they can't seem to do much in my opinion these days.

So -- we're fiddling with all those kind of things.

But I think we're -- we've actually had some -- in some -- a couple of our existing programs, we expect them to actually be -- the sales go up somewhat this year.

That are large programs, not -- not so much in the overrun area.

So that's pretty healthy.

But one or two programs that we were expecting to start sooner were fixed price, where we typically make better margin.

So that hurts our profitability a little bit.

I'm just alerting everybody that it's a little harder to predict this year.

It's been kind of a real nice ride for three or four years.

We're going to have to take a pause here it looks like.

And -- and I just don't know right now.

Okay.

My last question is -- if you -- well, I guess your cash flow guidance does not -- I assume that it doesn't include things that you might sell from your acquisitions, and also proceeds that you might receive from your insurance company.

And you have not only premises insurance but also business interruption insurance.

So if we were to add those things in, could you possibly get another $0.5 billion?

Andy, you alluded on a couple of things.

The -- and there was a reason I didn't give a free cash flow forecast.

It's -- it's because there are too many moving piece right now.

I mean, they're going to reimburse us for cost.

So if we spend an extra -- we spend an extra EUR60 million rebuilding that plant in some fashion, we're going to get reimbursed by the insurance company, but it's a wash.

Capital expenditures go up by 60 million, and reimbursed by insurance company is 60 million.

Right.

But I mean -- but your 350 to 400 million debt paydown I assume doesn't include what they're going to pay you for business interruption insurance.

Is that accurate?

Remember, what they're going to pay us for business interruption insurance is the added cost we're going to incur -- or the profits that we're not going to make that we otherwise would have made.

So it -- yes, it's -- it's looking as best I can at where I think the debt's going to end up at the end of the year.

So, yes.

It's got that in there.

Fortunately, Andy -- this is Dave.

We haven't had much experience with fires of this magnitude in the Company's 125 years.

In my experience several years ago, we had a fire in a Golden, Colorado, warehouse.

It wasn't a conflagration, but it basically ruined all the inventory.

It took many months to finally get to the very last nickel of who gets to pay what to who.

Some of this is that -- you heard John Hayes talking about earlier.

Sometimes you make lemonade out of lemons.

We've got some options in what we do, where we do it, what kind of material.

And we're checking all that out so that when we come back, we'll field the best -- the best set of assets that we can to hit the markets.

But right now, we're still making some of those decisions, and we'll be letting people know as we do.

We're -- we're going to try to advantage ourselves there where we can.

And then just a final comment on the whole insurance thing.

Ray did mention in his earlier comments timing on some of this.

For example, the way the accountant expects you to account for even the business interruption, as I understand it, we could find ourselves at the end of second quarter with sort of claims to get paid that haven't been paid, and we might be able to book the payment yet.

So we'll try to explain all that to you as we go through.

But it's big enough that it could have an impact on us.

So we're just trying to be candid about that.

But I'm -- I'm not really -- we've dealt with -- are dealing with the business aspects of the interruption that this is causing.

We've got great -- great coverage in terms of the insurance that we have.

And we're going to work all those angles.

But that's sort of the summary of -- of what I would tell you about it.

Okay.

Thank you.

Kean Marden, Merrill Lynch.

Good morning, gentlemen.

I've got a few questions regarding the European beverage can business, if I may.

Just picking up some information from the industry, it seems that generally the beverage can producers are looking to introduce about an 8% price surcharge at the moment in Europe.

I was just wondering if you could confirm whether that's the sort of scale and that Ball is looking to implement.

And also a sort of theoretical question to help us with sensitivities.

If the aluminum price stays at $2,800 per ton, what additional price surcharge would you need to introduce to pass that through?

I'm not sure exactly.

I couldn't hear completely.

I think you said you heard through industry sources that it's an 8% surcharge.

I'm not going to necessarily comment on what the amounts are because we have various confidentiality agreements with our customers, and I don't think it's the right thing to do.

What we're trying to do and we attempt to do is to pass through all those costs that have been increasing at a rate faster than what has typically happened.

To address your second question, if LME stays up at 2,800, remember, we're in Europe so there's also a Euro to dollar element of that as well.

But our intent is to the extent that LME stays up there, is to pass it along.

Okay.

But you don't have a feel for -- for what degree of price increase would be necessary?

Well, like I said because of our relationships with our customers, I don't think it's appropriate necessarily to talk about that.

Okay.

Just a few other quick questions, if I can.

Are you fully hedged now for your European aluminum exposure for 2006, or is there still some residual?

Well, there's a little bit of residual because our business, remember, much of our business is not long-term contracts.

And so as we enter into contracts, there's still a little bit of exposure.

But what I would tell you is that this is where we're working with our customers on.

Okay.

And just a final one from me.

I'm intrigued by your comments, potentially moving towards the full pass-through model in Europe.

Historically my understanding has been that because the beverage can manufacturers do take raw material price risk is that the margins are a little higher in Europe to compensate for that.

I suppose therefore the question is, if you do move away from having to take the raw material risk onto your own book, would you, therefore, expect trend to margins to actually fall in Europe, basically, to -- in terms -- it's good to compensate that risk being passed through to customers?

Let me -- I don't think we said we're moving towards necessarily a a pass-through model.

What we said is we're working with our customers, and there's a variety of different ways you can address it including a pass-through model.

Again, case by case, some of our contracts allow for pass-throughs already, some don't.

It's taking a look and working with the risk profile of our customers, as well.

But what I would say is in terms of margins and things like that, we're -- we're trying to grow our business, and we're trying to -- as Dave Hoover mentioned earlier, we're trying to help our customers grow their businesses, as well.

Because when they win, we win.

And sometimes I think in the very recent past, we've actually absorbed some costs.

And in 2005, for example, because we wanted our customers to grow.

But it's gotten to the point where we no longer can absorb those costs and now we're passing them on.

Okay.

Thank you very much for your comments.

George Staphos, Banc of America Securities.

Hi, guys.

It's late in the call, I'll try make it quick.

Dave, a question really for you.

Over the last 10 years, the Company's created a lot of value for its shareholders, coming off of some tough times in the mid 1990's.

In the late '90's you focused pretty heavily on cash, on control.

You focused on beverage in particular.

At least that's my recollection in terms of where you spent a lot of money.

And certainly in the last year, there've been a lot of exogenous factors that have hurt the results, whether it's aluminum or fires in Europe.

So that you can't control.

But you also have a lot more irons in the fire these days.

You've grown some of your non-beverage businesses.

How do you ensure that Ball keeps its edge, keeps its focus which was so successful and creating return value for your shareholders over most of the last 10 years, and don't lose it given everything that you've got going on right now?

Thanks.

Well, I think that we begin with -- with the way that, as you described it, the way we run the business, the way we motivate our people.

The fact that all the people talking to you on this call today are significant Ball shareholders, and it matters to us what happens to share price.

And then we have real serious discipline about making returns in excess of our cost of capital in our business.

None of that's changed.

The two things that we just acquired, one is a great addition to our business as it, on the one hand, as John Friedery said adds some new markets and new customers to us, and some technology that we think we -- we can improve upon.

But at the same time it's a great fit with the food can business.

I talked about this when we first acquired it.

Secondly, the -- the business in plastics is a nice addition to our plastic container business.

I think that we thought long and hard about it, are we getting over our [skis]?

Can we run all this stuff, and I think that we can.

I'm highly confident that we can.

And I believe that we're not so far afield.

When -- we didn't go into the car business or something.

These are three-piece containers and plastic bottles.

We've been doing both for a long time.

So I'm not concerned about that.

When you say ensure --

Well, there are no guarantees, I understand.

Yes.

Basically, what we've been talking about on this call this morning is we've got circumstances in -- in input costs in our industry right now, or the industries that we participate in.

In packaging, which haven't been at these levels in some cases ever.

A lot of things are moving around.

Like everybody else that does what we do, or does similar things, we're adjusting.

I think we're making real good headway.

I think to be able to sit and talk about how the rest of this year's going to be better than last year is pretty good in that kind of situation, but rest assured, our eye is on how do we make the stock price go up.

We're going to keep pulling all the levers that we can.

And I -- I feel pretty confident in our ability to do that, and I don't believe that we are losing any focus.

As a matter of fact, I think we're a lot more focused today than -- or as focused today as we ever have been.

Dave, when do we see the CapEx and spending throttle back, 2008?

Would that be kind of the right time and --?

Yes, that of the original -- sort of three years, '05, '06, '07.

We may have a little of it now.

Go out into 2008.

But again, the magnitude of that versus the Company in total is not -- is not enormous.

Last year we bought back $350 million worth of our stock, we paid down some debt, we made 700 and -- close to $800 million worth of back position, so as you say, you add all that up.

But if you look at us, what we've been able to do is do that, repay debt, flow a lot of cash.

That's still our model.

The businesses that we bought we think are very cash generative.

And it's a way to create value.

We get it, and we're going to keep doing it.

Well, every little bit helps, Dave.

So anyway, good luck this quarter.

Thank you.

Andrew Shirley, Ivory Capital.

Hi, I apologize if I missed this.

But could you reiterate or can you reiterate your cash flow guidance of 250?

We didn't give any free cash flow guidance.

And -- and in -- in -- and one of the reasons is, is that we've got -- we've got the fire in Germany that's going to impact it.

We got -- as a result of that fire and result of supply situation in the U.S., we'll carry more inventory than -- than we expected.

And so I'm not going to give the free cash flow guidance other to say that I think we can get the debt down to 2.2 billion, 250 kind of at the end of the year.

Okay.

And one other thing.

When you refer to 2006 being better than 2005, are you referring to the 262 of EPS that adds back certain charges?

Yes, that's correct.

Okay.

Thank you very much.

Chris Manuel, KeyBanc Capital Markets.

Good morning, folks.

Couple questions for you.

If I could zero in on the North American beverage market for a moment.

You indicated in there would be a 10 million of extra costs in the quarter that -- that were incurred due to miscellaneous items.

With the pass-through that comes through in the second quarter, is it your anticipation that you should recover those costs?

Yes.

We expect by year end that we'll see -- that we'll have a better year in North American beverage this year than we did last year.

Okay.

Well, that's -- that's actually linked into my next question.

If you told us that your volumes in '06 are going to come back to volumes where they were in '04 from actually in January you told us that, why wouldn't the -- and your pass-throughs are going to cover some of these extra costs as this goes on, why wouldn't you go back to more of a -- the operating income number, on a dollar basis go back close to where it was in '04, as well?

You've done an awful lot with productivity and -- and improvements that would help offset some of the other inflation costs, right?

Well, we've offset as much as we can.

We've always said it's a lot of these things when you look at sharing the pain.

And we're running a full system.

We can't offset everything.

So there has been -- and especially when you look at -- our operating numbers will be up.

When you look at margins, margins will be a little bit compressed because metal costs are higher.

So going back to '04 is kind of a hard to -- '04 we had an awful lot of favorable things go on for us.

And we still believe we'll be getting back into that range.

But it will be -- it will be a little bit before we get back there.

Particularly as our custom can business has grown, we spent money in those areas to improve that.

We like what's happening there.

But we had a very -- a lot of things going in our favor in '04.

I would say '05 was probably more typical of what we'd see.

And we believe we'll be better in '06 than in '05.

Okay.

Has anything changed structurally to pricing environments in North America that -- that have -- well, for lack of a better word, maybe deteriorated such that it's more challenging now to get higher costs and inflationary things back?

Well, one of the thing that's changed is that our customers are all looking at metal at LME at $2,800.

Their real -- their real costs, regardless of what happens from the canmaker perspectives, are up.

And they're staring at them being up significantly.

So I think that makes it much harder to talk about being able to get everything, and even margin expansion, just because of that plain fact.

Okay.

Another question for you for -- I guess for Ray.

In the quarter, your SG&A costs were up pretty sharply.

And my impression was there was there was only a little bit of -- of the two acquisitions involved in there.

Is that where the -- the currency was at?

Correct.

The currency -- most of that's the currency thing -- that out of period adjustment I talked about at the beginning.

And you remember, this is the first year we're expecting stock options.

So there's a little of that in there.

But by far, most of it's currency.

Okay.

And maybe a question for John Hayes.

Is there any reason in Europe that as you rebuild -- you had two lines I believe in the Haßloch plant.

Would there be any reason why you'd have to rebuild both lines there, that maybe one of those lines couldn't end up in the extra spot you've got sitting in Serbia or something like that?

Well, your thought process is similar to the thought process we're going through.

I look at less at two lines because it was really two very high-speed lines, which means it was 2 billion output.

And what we're doing, candidly, is looking at a variety of factors in terms of where the future growth is going to be, what the metal choice is going to be, where our costs are most effective.

And we -- we intend to make the best long-term decision, factoring in all those issues.

Okay.

Thank you very much, gentlemen.

Thank you.

[OPERATOR INSTRUCTIONS].

It sounds like we're out of questions, which is just fine.

We've been at this for about an hour and a quarter.

Thank you all for being on the call.

We look forward to talking to you again come July.

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

We thank you for your participating.

And ask that you please disconnect your lines.