Ball Corp (BALL) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation second quarter 2006 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, Thursday, July 27th, 2006.

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

Please, go ahead, sir.

Thanks LuAnn.

You sound like a TV reporter there.

That was a great intro.

Good morning, everybody.

This is Ball Corporation's conference call regarding our second quarter 2006 results.

The information provided during this 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-Q filed on May 10th, 2006, and in other Company SEC filings, as well as Company news releases.

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

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

With me on today's call are Ray Seabrook, Executive Vice President and CFO Ball, John Friedery, Senior Vice President, Chief Operating Officer of Packaging Americas, and John Hayes, President of Ball Packaging Europe.

I am going to make a few comments about the business, followed by Ray, who will review our numbers, and then we'll all be available to take your questions.

Concerning the business, you may recall at the end of the first quarter that we had some uncertainty about the year, due to the fire April 1 in our Hassloch, Germany, plant, the recent closing on 2 acquisitions, the fact we had had only 3 months behind us to give an indication of volumes for the year in our packaging business, and the prospect of a strike at a major metal supplier. 3 months later, we have greater clarity on those and other issues.

We did announce in June that we would rebuild the Hassloch plant with 2 steel lines, and add an aluminum line in our Hermsdorf, Germany, plant.

We expect to have the Hassloch plant back into production, and the new Hermsdorf aluminum line producing cans during the second quarter of 2007 in time for the busy selling season in the summer.

So far it's been hot in Europe this summer, and the can market is very tight.

Because of our reduced production capacity we lost some second quarter sales and incurred higher transportation, aluminum and other costs as a result of rebalancing our system.

For the most part however, the higher costs and lost sales have been generally made up by our business interruption insurance, price recovery initiatives, and tighter cost controls also contributed to improved earnings.

The acquisition integrations are going well and after owning the acquired business for more than a quarter, just more than a quarter, we are confident of achieving the synergies that we expected.

The initial synergies will be largely composed of G&A, purchasing and plant cost savings.

We've made significant progress on the G&A savings and are well into the purchasing synergies.

We still have a lot do with in the plant cost savings area and we're working on a manufacturing rationalization plan that we expect to have largely ready by the end of this year.

The results from Ball Aerospace are as expected.

We said last quarter that the awarding of some important programs was being delayed by our government customers.

We expect to win our share of this work when it is awarded, and are optimistic that this will happen.

Nonetheless, sales in the first half were down modestly.

Earnings were down about $6 million from last year, and about half that reduction was from higher pension costs.

Ray will tell you more about our recent pension changes, but it helps Aerospace GAAP and government costing to be more in line.

All in all, Aerospace is performing reasonably well given the circumstances, and we expect the second half profit to be above the first half.

Industry beverage can shipments were up more than 3% in the U.S. and 8% in Europe, and in both cases we were up more than the industry.

Our China volumes are up double-digit.

Second quarter food can volumes were flat compared to last year, but margins improved and earnings in our food and household products division were aided by the addition of the aerosol business.

The second quarter margin improvement in plastics is primarily attributable to our first quarter acquisition. 2006 is only half over, and we certainly have work to do.

But here in July, we feel better about where we are, and more positive about the remainder of this year, certainly.

Now I'd like to turn it over to Ray Seabrook.

Thanks, Dave.

Comparable diluted per share earnings for second quarter were $0.83 compared to $0.76 last year, and through the first 6 months were at $1.27, equal to last year.

As was the case in 2005, we expect the second half of the year to be stronger than the first half.

The North America beverage can price cost compression that commenced last year continued to negatively impact operating margins in the quarter.

Second quarter margins were negatively impacted by project start-up costs and high freight costs.

But we expect segment earnings to improve in the second half as cost reductions and better pricing are achieved.

Discussions with our insurance carrier regarding the first quarter fire in our Hassloch, Germany, plant have gone well.

To date, we have received $32 million of insurance proceeds for the reconstruction of the plant, and the timing of business interruption insurance payments are matching up well with the costs -- when they are being incurred.

A 1-time $74 million property insurance gain, $45 million after-tax, was recorded in the quarter.

The accounting gain reflects the amount due from the insurance carrier to replace the damaged property in excess of the property's book value.

Property insurance proceeds of approximately $109 million are projected in installments through the second quarter of 2007 to fund the reconstruction of the Hassloch plant and the new Hermsdorf aluminum line.

An important initiative that was approved in the second quarter was a major overhaul of the Corporation's salary-pension plan.

Effective January 1st, 2007, the salary-pension plan will be amended to provide more flexibility for payment of future pension benefits, and a capping of their cost to the Corporation.

These changes are expected to reduce pension expense going forward by $7 million to $8 million per annum, and reduce the unfunded salary-pension liability by approximately $75 million.

Moving on to capital spending spending programs, we have slowed Aerospace capital spending in line with the slowdown of the business.

The capital spending program to upgrade North American beverage can and manufacturing capability is moving ahead, but at [slip].

So to date, very little cost reduction has been realized.

We still project 2006 full year capital spending in the $300 million range, net of property insurance recoveries.

Finally, here are some of the key financial metrics for 2006 as we talk in July.

Net share repurchases still should be in the $50 million range, as we are concentrating this year on debt reduction.

Free cash flow will be a little better than we first thought, and should be at least $250 million.

Interest expense is expected to be approximately $125 million to $130 million for the full year.

Our effective tax rate looks to be approaching the 29% range, and net debt levels are forecasted at $2.2 billion at the end of the year, with an estimated Euro exchange rate of 126.

At the end of the second quarter, pro forma rolling 4 quarters EBIT to interest coverage is at 3.5 times, and total debt to pro forma EBITDA is at 3.5 times.

By year end, we expect total debt to pro forma EBITDA to be less than 3 times.

So with that Dave, I will turn it back to you.

Thanks a lot, Ray.

And just in closing before we take your questions, we did as we said end the first quarter with a number of uncertainties, and since then we have made good progress, really, in all of those areas.

And demand for our products is increasing.

We continue to face challenges from cost-price compression and raw material prices, but we have plans in place to manage those issues, and are executing on them.

And as I hope you can tell from our comments today, we have greater clarity on how we believe Ball will perform in 2006, and a more positive outlook on the year.

So with, LuAnn, I think we're ready for questions.

[OPERATOR INSTRUCTIONS] Ghansham Panjabi, Wachovia Securities.

Can you quantify the impact that the fire damaged plant had on your results?

I assume that you had some inefficiencies and, thus, higher costs during the quarter?

Ghansham, this is John Hayes.

The insurance has largely, but honestly, not completely covered the higher costs in lost opportunities resulting from the fire.

We probably absorbed a couple of million dollars, actually a couple million Euros in the second quarter, that has not compensated.

But we continue to work very closely with our insurance company to ensure all the business interruptions claims are covered.

And I will say that we have actually had very good working relationship with our insurance carrier.

All right.

And the margin improvement in Europe, is it better volumes, price?

Where do you believe the upside came from there?

Really 3 areas.

Volume, price recovery initiatives, and very tight cost controls, as Dave mentioned.

Is it a third, a third, a third, or -- ?

I haven't thought of it in those ways.

But what I would tell you is they all go together and we're making very good progress in all 3 of those.

Okay.

Thank you.

George Staphos, Banc of America Securities.

Ray, I just wanted to make sure I heard something correct.

You said something about North American beverage slipping.

If I heard that correctly, was that related to the investment program?

Or the returns you are getting from the investment program?

Or something else?

And I had a couple of follow-ons.

This is John, I'll answer that, George.

He was referring to just the schedule slipping a little bit.

The returns we believe are all coming in.

We just had some start-up issues and some equipment delays.

But the modules that we have installed are running at this point in time, and we expect to see the benefits moving into the latter part of this year and into next year, just as we had originally planned.

Okay.

Now, North American Beverage profit being flat on higher revenues, was that pretty much in line with your plan?

Or were the margins a little a little below your expectations?

And if they were, was that largely driven by the delays on the new programs?

Yes, there was definitely some delays on the new programs, and if you've looked at North American Beverage volumes for the industry, they are up pretty significantly.

And that's caused us to move a lot of cans -- transship a lot of cans around to keep everybody in cans this summer.

Okay.

So were your margins then in that business a little bit below what you would have expected?

Is that fair -- ?

I'd say a little bit below what we would have expected.

Okay.

So I guess, in conclusion then, what gives you the confidence on the improvement for the whole of the year, in North American Beverage, and therefore the second half?

Is it largely with the new modules in place, or is it something else?

It's cost containment, the effect of the modules coming on, and better pricing in the second half from the first half.

John, why would the pricing have an effect here?

Is that more related to the PPI inflators, because obviously, aluminum, I would imagine, is just a pass-through no matter what?

Correct, the PPI inflators that we talked about, as well as discussions on unusual cost items that we've got.

We're having -- we out after price with all of our customers right now.

Okay.

That is great.

I will turn it over.

Edings Thibault, Morgan Stanley.

Question for John Hayes, and just a reminder, I think the European seasonality on the beverage can side has historically been fairly equal 3Q to 2Q.

And number 1, is that correct?

And number 2, as you just think about the kind of possibility, expectations for the third quarter, how much do you think the World Cup may have driven some of the volume gains you are seeing there?

And do expect as Germany ramps up, that offsets the lack of the World Cup, if you will?

Or do you see inventory restocking?

How should we think about the impact of the World Cup as it moves through your results 2Q to 3Q?

I will try and be brief, because there's a lot of questions in there.

Number 1, I think second quarter to third quarter obviously depends on weather and other things.

Last year, third quarter was below second quarter because starting in the beginning of August, the rainy season came in, and we never recovered from that.

As we look at this year, there was certainly positive impact across Europe related to the World Cup.

Germany put on a terrific program around the World Cup.

But it wasn't only we had the final 4 teams.

They were all European teams.

The Eastern European market growth continued to go quite well there.

We have had a very hot summer there, as well.

As we go into the third-quarter, quite honestly, the weather continues to do quite well there.

From our perspective, we're still very hopeful about the third quarter, but one of the issues you have to remember is because we don't have the capacity, you know we had inventories going into the summer season, we expected a very good showing out of World Cup.

We expected to come back into Canada and Germany.

So for the industry we see the trends continuing, and if they do continue, remember on the first quarter, I told you that if it was a very hot summer and if the World Cup did generate the volume growth that we were hoping and anticipating, that we may have to end up shorting customers.

And as we speak right now, unfortunately, we have not been able to fulfill 100% of the demands of our customers.

We're working quite closely with that.

But if the summer continues to go and with the heat, I think that will just put more pressure on an already tight industry.

Great.

And then perhaps you can update us on kind of your plans to maybe address some of those European capacity issues on a more permanent basis.

What's your thinking right now in terms of replacing lost capacity?

Well as you know, and as Dave mentioned, we announced in June our plans to replace the $2 billion in lost capacity.

We are going full bore right now ahead, and we expect it to come onstream in the second quarter of next year.

However, due to the stock builds going into the summer, which we won't have because of that, we'll probably miss some of the busy summer selling season, which will lead to continued very tight supply and demand in 2007, not only for us, but also for the industry.

Great.

Thanks very much.

Chris Manuel, McDonald Investments.

A couple of questions. 1, can you help us quantify a little bit potentially what the impact was here in North America for -- you talked about some extra freight and some shipping products around and delays in modules coming on, and things of that nature.

I don't have those numbers directly in front of me, but they were meaningful year-over-year.

And you are anticipating that as we move into the back half of the year, that some of those will improve, 1, because of -- some of the freight will improve as you get past the PPIs that you were alluding to earlier.

But the second half is that you'll have these modules online, therefore, you won't have some premium freight as well?

Yes, the freight is not so much on the modules, but certainly just the absorption of getting those volumes up and running.

But yes, we see it weighted into the latter part of year.

Okay.

And can you talk a little bit about timing as you see those modules coming on, or how -- is it still anticipated to be on track by the end of year?

Is it just that we've moved a little bit quarter to quarter?

It never was going to be on track by the end of year.

For the whole program, it's like 3 year plus operation, 8 modules, I think.

Yes, it was a total of 8 modules, I think, when we originally talked, or it is.

But I think we originally talked about that, and it is -- was planned to be through '05, '06 and '07, and now we'll probably stretch it out into '08 a little bit.

Okay.

And the last question I had was on the Aerospace side of the business.

Any updates or thoughts there with respect to timing of when some of the business may pick back up?

I think the thinking before was maybe towards the end of year?

And can you also give us an update on where the backlog is?

You know, the trouble with trying to predict what our Federal Government is going to do is difficult.

The backlog, I think, is 760, 761 just to answer that question, as Ann Scott is waving it at me.

What we just -- we had our performance review with our Aerospace folks a few days ago, and the decision points that we thought were going to be stretched into August, there are still a couple of things that we're looking at that we think are going to be decided then.

So we'll just have to wait to see if we win or we don't.

A couple other things are turning up as good opportunities.

I think our feeling is that next year could be -- we could see a rebound in Aerospace based on projects getting awarded, as we're expecting them to right now, Chris.

But it's an election year.

You probably follow, as we all do, events in the world and so forth, and I don't know how distracting that is.

We did get some encouragement around money that would be spent on science, which is certainly important to the civil side our business.

This is something that we're confident that we're going to do lots of business.

We expect it to rebound, but to strictly pick a day or month is difficult at this point.

But we do expect the second half of the year to perform better on a profit standpoint than the first half.

Okay, and I know that the crystal balls are always hazy, particularly with this stuff as you're pointing out, but would you anticipate that '07 would be back to more normalized types of levels?

That is what Dave Taylor was telling us earlier, but his crystal ball is cloudy as well at this stage.

But I think the expectation of business is that if things progress normally along as we expect, that we'll see a better year in '07 than in '06, certainly.

Thank you very much.

Alton Stump, Longbow Research.

Just had 3 questions, but they are all pretty brief, so hopefully I can move through them quickly.

I guess just first off, and I apologize if I might have missed this during your introduction, but could you break out what the insurance proceeds in second quarter, how much of that was business interruption, and how much was money to rebuild the plants?

Well, we received $32 million to rebuild the plants.

And the next question along that line would be, when do you expect to see the rest of it?

And we expect to receive the rest of it as we spend it.

So as we get issuing purchase orders for equipment and stuff to rebuild the plant, we expect to receive the insurance proceeds from the insurance company.

So that is the capital side of it.

On the business interruption side, as John mentioned in his comments, we've had some real good cooperation, meeting with our insurance company.

And we are going to settle up on business interruption insurance, but they are sort of, if you will, advancing us money on that as we go, and they are pretty much meeting our cost.

I think we got -- we got some money in the second quarter that pretty much offset our cost.

John said it was a couple million dollars less than we think that ultimately they are going to owe us.

And was that $32 million, was that pre-tax or after tax?

That was a pre-tax number.

But remember, the tax -- it's not taxable.

To replace the property that burned down, that is not taxable.

Sure.

I'm trying to figure out what the rest of $74 million total.

Is it safe to assume -- ?

The $74 million is a gain.

So I said in my comments, that we're going get $109 million in total.

So if you kind of go through that math, it says the book value of the equipment that burned down, the building and the equipment was $35 million.

Replacement cost is 109.

So therefore the difference is the gain.

Okay.

Thanks.

And then here in the U.S. just kind of looking at the numbers, I'm getting something like a 6, maybe 6.5% increase in bev can volumes in your North American business.

Is that relatively in line with what you guys think?

We're kind of in the mid-5% range.

Okay.

And then just the last thing, and I will hop back in the queue, looking at Germany -- this is probably a somewhat difficult question.

But if you strip out, of course, the World Cup event being a strong positive, but then also strip out the hot weather, are you seeing the market in Germany come back maybe a little more quickly than expected?

Obviously, with the May '06 deadline, does it appear that maybe consumers are coming back a little bit sooner than what you might have thought?

To be quite honest, I wouldn't say it's coming back more quickly than we expected.

It's probably along the lines of what we expected.

Remember the can really hasn't been on the market in 4 years.

And as of May 1st, the law changed that said anyone who is selling one-way packaging has to take it back.

That doesn't mean a flip was automatically switched on, and people are rushing.

It just takes time.

There is a system in place, a clearing system, that started May 1st.

The good news is it's worked extremely well.

And as retailers get used to that system, and as consumers get used to not only that system, but then also drinking out of cans again, we are seeing good growth, albeit it off a very low base, but good growth.

And we expect that going into the second half of this year and into 2007, that we're going to expect to see that growth.

If you were to ask me, are we going to get back to that 7 billion-can market that was in Germany in 2002, I would say yes.

The question is just timing.

And I can't tell you if it's going to be 1 year, 2 years, 3 years.

But I think our decision on the rebuilding of Hassloch is a case in point that we have strong belief that the German market will come back.

Okay, great.

Thanks, guys.

[OPERATOR INSTRUCTIONS] George Staphos, Banc of America Securities.

Hey, Ray, when we think about CapEx, I know it's a little early, but should we be expecting $300 million now through 2008, given that some of the program has been pushed out then?

Or should we see maybe a somewhat lower level the next year or 2, and then a more normal level in 2009?

Help us understand how we should model your CapEx.

It's such an important -- .

George, I think CapEx will be high again next year and it will start to come down in 2008.

Unfortunately, it won't get as low as I was hoping it was going to get to.

I thought we would get back down to sort of maintenance capital by 2008.

You just heard John talk about that some of the programs are slipping a little bit.

So 2008 will certainly be less than 300, but it will be higher than I would have liked, and by 2009 we should be back down to our sort of minimum capital.

Okay.

And so next year then, you said it's high, so it's $300 million then ?

As we're sitting here today, that is probably a reasonable estimate.

Understand, understand.

As we think about the opportunity to consolidate in food and aerosol plant network in North America, will you be outlining what the additional benefits to return might be, as the year progresses?

Or will we just see those in the numbers as they are ultimately implemented?

Well, we're hoping either late third quarter, early fourth quarter to announce a rationalization plan for that business.

Okay.

Fair enough.

Longer term, do you think the volatility that we have seen in aluminum pricing over the last 6 months to a year has done anything to detract from the attractiveness of the can in your traditional markets?

Your customers say, you know, I can't deal with this volatility.

I'm going to switch to glass or I'm going to switch to plastics.

Or do you think really it's not had much of an effect at all?

It would be hard for me to say that anything that is going on with aluminum is affecting demand right now, except given that it's so positive.

You know, the percentage increases in North America and Europe are quite high and better than a year ago.

So apparently this year it's having not a negative effect, at least.

And nobody is paying these high prices, or very few people are.

And as they begin to, that is an increased cost.

The other side of it is though, George, and maybe you understand this better than I, but I suspect aluminum won't stay where it is, as we get later into this year and get into next year, I think it is going to come off some.

And then you have to think about what are the substitutes?

The glass industry has been experiencing huge cost increases, particularly on the fuel side.

Resins have been high-priced.

PET, maybe it's expected to go down some, but look at how much it had gone up.

So I think generally, all of these things have moved up.

And we, as a country, have got to get used to some inflation again, and we have got to react by increasing prices.

Our customers need to do it, we need to do it to them.

And that is what we're set about doing.

So somewhere in that, Dave, would be that this year, you are not seeing an effect.

Obviously, the acid test will be more in future periods when aluminum resets, and so far it sounds like your customers really haven't told you anything that would make you concerned, would that be fair?

Yes, I mean, I don't think that anybody likes to see this where it is, but I don't think it's going to stay there.

John, do you -- ?

George, I was just going say, we've had, of course, discussions with our customers around next year and beyond, and what things looks like.

Certainly this year, with the promotion of the can, it's a tight market, and everybody is taking a look, what do we do for next year.

The can is a very efficient package, very efficient means for our customers to get their products to the market and into the hands of the consumers, and it fills some very key channels better than other packages.

They have packages that are 4 different channels.

The can fills one, the PET bottle fills another.

In beer, glass fills another.

And so I think the answer is people will adjust to -- you talked -- your word, the volatility in the LME, by looking at what they have to do and thinking about it differently after a long period of relatively stable aluminum and commodity prices.

But I think that they are still looking at fact that the can is a very important package for them in their go-to-market strategy.

Okay, I hear you on that. 1 quickly, I apologize.

The -- back to the synergy -- the rationalization program that you will announce maybe later in the year, rough rule of thumb as I recall, used to be perhaps several millions of dollars per plant closing.

Is that still -- if that was a correct recollection, is that a decent benchmark for the future?

You say several millions of dollars per plant closing, I am not sure what you are asking, George.

Let me try this, George.

It really does depend on the plant.

Larger plants, obviously are more.

It depends on the status of the pension plan in the plant.

That can also have a big impact.

But what I will tell you is, most -- pretty much every single time we do that, they are always fairly significantly cash-positive.

Okay, guys, thanks.

Good luck in the quarter.

Myles Allsop, UBS.

A few quick questions.

I was wondering in Europe whether you had time to change the contract structure to have more pass-through agreements for the aluminum cost with customers?

Yes, you know, for us at Ball, it's not as straightforward an answer, because we have a dual metal strategy, both steel and aluminum.

From a steel perspective, steel is negotiated annually, as you may know, and many of our contracts provide for an annual price adjustment, based on the steel cost inputs.

With aluminum, we're giving our customers a choice of either fixed price where the fluctuations are taken out, but the pricing reflects the metal price that we hedge on their behalf.

Or we're flexible to go to a floating price, where they take the movement of aluminum based upon an agreed base level of aluminum cost.

Have you increased a portion of floating contracts, and what is the proportion of floating versus fixed?

Well, it's -- every contract and every customer is different.

What I would tell you is, it really has to do with what the customer wants.

Because what we're doing is saying we need to recover those cost and we're not taking the risk.

So if you have a view, you customer, have a view that aluminum is going down, it's your call whether or not you want to take that.

If you don't, we'll fix it on your behalf.

If you do, then we can put an appropriate adjustment mechanism in place.

As a percentage right now, I would say -- I don't have the information in front of me, so it's probably too early to say, but as we go in, not only now, but as we go into 2007, a vast majority of our customers will be given this opportunity to either fix it and we'll hedge it on the back end, or they can go floating, and they will take the risk.

Okay.

Just wanted to check as well with the Hassloch rebuild.

Are you sort of on a net basis, going to be increasing capacity in Europe, or is it sort of one for one?

It's one for one.

Okay.

And then just on Germany, as well.

Could you give a sense as to what your expectation in terms of the increasing cans this year and next year will be from the 3 billion can base?

Well, what we see as each day go on, acceleration of the trend.

Because as that 3 billion base that you talk about, a fair number of those cans are actually shipped outside of Germany.

So when you look at just the consumption in Germany, it's much less than that.

As cans get on the shelves of retailers, that continues to increase.

The world Cup, as I mentioned earlier, was a terrific vehicle for many of our customers, particularly on the soft drink side, to promote their product.

On the beer side, we see each day go by that the German brewers, as well as many imports, are putting cans on the shelf.

And so we see that trend continuing.

Maybe just finally as well, I mean one of your competitors was saying that they thought aluminum was just an issue for this year, and not concerned at all for next year with the European business.

Would you agree with that?

Well it's -- I think when when you are in a business such as ours, aluminum is our biggest cost, so it is always something that needs to be considered.

Dave had mentioned, if we had a crystal ball seeing if aluminum is going up or down, but the key takeaway here is, that risk has to be absorbed by the customer.

And if they want to take a fixed price, fine.

We'll hedge it for them.

If they want to take a little bit more speculation thinking aluminum is coming down, that is fine, too.

We can work with them on those things.

Okay.

Thank you.

Tim Burns, Cranial Capital.

I wanted to talk a little bit about the European Beverage can business.

The performance on a profit basis, was very, very good.

Of course, we know that is largely due to new management.

But I was curious, there is a lot of sizes, there is some shaping, there is some extravagant graphics, somewhat different openings.

Beyond the volume question, it seems that these specialized services enable you to charge more for the can.

Is that true, John?

I think generally speaking, that is true.

You have to remember, we talk about Europe.

But Europe is made up of many, many different countries with many different preferences, many different cost structures, many different supply chain structures.

And so it varies country by country.

But as a general rule, you are absolutely right.

And I think it's not only in beverage cans, but in many other industries, as well.

On par, there is more innovation in Europe than there is in the U.S. and innovation comes at a cost.

Got you.

And I guess what does this mean for the U.S.

Beverage can business, because we see to be going increasingly down that plant with slim-line cans, 24 ounce cans, shaping, decoration.

Is Europe kind of co-mingling their talents with North America, David ?

Well, certainly.

And I'm not sure I could totally agree with your comment about the management over there, but we'll keep a good eye on it.

No, we're pleased with our entire management team, and have been, and continue to be.

We are, I think, in an accelerating mode.

When we got together, Hanno Fiedler made the comment I think, and I don't know if we can attribute it to him, but that we would steal shamelessly from each other, tongue-in-cheek, but we are cross fertilizing in many different directions.

And certainly our Company is focused on innovation, product development, and so on.

And we have turned up the gain on that a lot in the last 3 or 4 years.

And I think we're working very well together.

There are some things that will be coming out in the future, have already.

As you've mentioned, I think this industry needs to improve the imagine of the can, get more uses for it.

And we're certainly gratified to be seeing that.

Got you.

Seems like malt liquor and energy drinks are a big thing these days.

I'm going start both of them immediately.

The other question I had for you, unless I'm missing something in the footnote, the operating profit for the metal, food and household packaging businesses rebounded sharply.

Is there something that I'm missing there?

I don't know what you are missing.

It has.

Remember, when you acquire a business, and Ray commented on this generally, we had some costs in this quarter, a few million dollars related to write-up of inventory and one-time kind of things, that won't be repeating.

The food product line is a bigger contributor year-to-date, in the turnaround than the addition of the aerosol business.

The other thing, Tim, you remember, last year in 2005 we made about 75% of our profits in the first quarter in food, which was really unusual.

Mostly you are going to make your money in that business in the middle 2 quarters, and not too much on each end.

So it was a very unusual year last year, and that is why food is going to do a lot better as we look to rest of the year, because it's more of a normal year for that business.

Got you.

And last question, and I'll bop off here, but the traditional food appears to be improving, I guess.

And then, could you make a comment on plastic packaging, you know, the PET business, and then the integration of Alcan.

Sure.

Our PET business, actually, the uptick in cans with the heavy promotion by the beverage customers has us not as robust in our volumes on the PET side through the first 2 quarters, as we would have otherwise expected.

But we're getting indications that they are going to be promoting PET packages through the back half of the summer from our customer base.

So that is coming along.

Also, we invested in heat-set lines to produce our Heat-Tek bottles for a large customer.

And the first one was installed in the first quarter.

There's a fairly lengthy qualification process, and we have just gotten fully qualified and began shipping.

So the impact of that will be seen through the third and fourth quarter.

And the second line will be coming up in the fourth quarter of this year.

The integration of Alcan is going very, very well.

We have essentially completed a lot of the headquarters-type integration.

That has all been absorbed into our of the former Alcan offices.

We're moving away from the majority, Ray, if not all the shared services of the provided services that we were leasing from them.

We are moving the R&D center from Neenah, Wisconsin, to Colorado, that's out of leased facilities into our Innovation Center here in Colorado.

We'll be ceasing operations in the North California-leased plant, that was leased from Alcan in their flexibles business, in August, and we'll be absorbing that capacity into our existing facilities.

So we're moving ahead very well on all of that.

That's nicely on track.

Well, thank you, and I hope that Hanno is not listening.

Tim, me too.

Mark Wilde, Deutsche Bank.

Dave, could you just give us a little update on that new plant that you put into Belgrade, and how that is loaded at that point?

Well, if you let me, I will defer that to John Hayes, but that is a source of some our growth year-over-year, because it didn't open up until last May -- a year ago May.

But John, you want to comment on that?

It's running full out for a couple of reasons, not the least of which is because we lost 2 billion in capacity, and we need every can we can get out of every one of our plants.

That market generally continues to grow, and I say that market, it's not only Serbia, but that whole region down there.

Can lines continue to be installed there, and we're quite pleased to date with a plant where, quite candidly, some of the people in the plant 18 months ago, didn't even know what a can was, and it is very quickly coming up to speed.

And we're quite pleased with not only from a manufacturing perspective, and also from a market development perspective.

Okay.

And then just a detail question on your inventories.

They didn't come down quarter-to-quarter quite as much as I might have expected, given the fact that we didn't have an Alcoa strike, and then just seasonally.

Can you comment on that?

Well, I'll just give you a general call.

You've got to remember, we made the acquisition at the end of the first quarter.

So all of the acquired businesses, the aerosol business and the plastic business we acquired, were not in our numbers.

So that in total, is in the numbers in the balance sheet in the second quarter.

So a lot of your increase is the fact that we acquired those 2 businesses.

In fact, inventories did come down a little bit.

And, in fact, are those aluminum inventories back to normal for you?

No, I think they are still higher.

We did acquire in anticipation of the potential strike, extra aluminum.

And I have been in the Golden plant a couple times in the last 3 or 4 weeks.

We have got more metal over there, than we normally have.

So I don't know John, it's probably got to be worked out by the end of third quarter, fine.

At second quarter, we probably had some extra.

Absolutely, because that settlement was very late in the quarter.

And so, I think there was an announcement May 30, but I don't think that everything was ratified until later in the quarter.

So we are working it down, but we didn't get to pull the pin too quick because of the timing.

Okay, very good.

Thanks.

Edings Thibault, Morgan Stanley.

Just a quick follow-up to John Friedery, and thanks to John Hayes for talking about the European contract structures as they go forward.

And I was just wondering, John, if you can talk about -- I think you referenced being in discussions with North American players on how they might deal with it.

Are you pretty much going to be approaching the aluminum issue using the same approach that John Hayes was talking about in Europe?

And how are your customers thinking about that, the guys that don't already purchase their own aluminum?

That is exactly the model we use in North America.

And people are looking at it and trying to determine how they are going to -- how they want to proceed going forward.

Every customer has a little different approach as to what they want to do, in terms of their risk management and how they deal with it.

But short answer is yes, we're dealing with it the way John described.

And I mean, I guess some folks might be somehow worried that you guys would suddenly start absorbing aluminum price volatility, and you are not seeing any push back from that?

Your customers understand your position as a converter, is that an accurate characterization?

Our position is very clear and firm.

Crystal.

Thank you.

Chris Manuel, McDonald Investments.

I wanted to ask you a quick question about accelerated share repurchases, and things of that nature.

I know in the past you had engaged in some activities, I believe back in, I think it was '03, where you had another party on your behalf purchase some shares that you took delivery of a year later.

Is that anything that you would consider or have considered doing this year?

When our stock price was 35 or 36, we were very highly considering that.

But not something you're engaged in?

We put a small program in place, but it's -- yes, we would consider that.

Okay.

So that is a yes, you have put a program in place, or a no?

Obviously, we have blackout periods where we can't buy the stock.

And so when we go into those periods, sometimes we put a program in place that runs through the periods when we are not allowed to buy stock, so we continue to buy it.

But we have thought about that program we had in place a couple of years ago.

Because we thought the stock was at an unreasonably low price. [inaudible]

And then the question I had concerned the volumes in North America.

With the industry up a little north of 3%, I think John had mentioned earlier, you were up in the mid 5s.

Has the additional volume that was supposed to come online with the restoration of a certain contract, fully kicked in in the second-quarter?

Or is there still a bit more to go?

It's fully kicked in.

Okay.

Thank you very much.

George Staphos, Bank of America Securities.

I thought of 2 last ones.

Quickly, are you seeing any demand from Canada that is above and beyond what you would normally see this time of year, that -- and demand for U.S.-manufactured cans, that is maybe in some of these shipment numbers that we have seen?

No, the shipment numbers -- the industry shipment numbers are for U.S..

And so they would exclude a U.S.-manufactured can shipped to Canada, is that right, John?

Correct.

Okay.

And the other thing, just in North America, excuse me, in North America, do you have any larger beverage can contracts coming up for renewal in the next 2 years?

Thanks.

No, there is very little, if anything on the horizon over that period.

Okay, guys, thanks again.

I might just comment on the volume.

The whole industry, North America as well as Europe, is obviously up smartly this year.

We're probably, if we look at it, and John, you correct me here if I'm wrong, but our standard 12-ounce volume this year is probably going to be back at levels that it was at in '04.

Maybe a little stronger with the uptick in volume, the strong uptick in volume.

And also the speciality can market business continues to grow.

So some of that nice 3.5% year-over-year growth is attributable to sizes other than 12-ounce.

The base 12-ounce is having a good year, as well.

The whole industry is running pretty full.

I mean, we're, I'm sure, there just aren't any cans around, and both here and in Europe, we're having trouble keeping up.

So -- and I assume that our competitors are, as well.

And so this is a healthy time, and one where we need to be focused on making sure that in the economic bargain, we're not getting hurt.

That is to say that we need to be sure and recover all that we can from these customers.

Thanks, Dave.

Mr. Hoover, there appears to be no further questions at that time.

I will turn the call back to you for your presentation or some closing remarks.

Okay, LuAnn.

I appreciate very much your help on this call, and thanks, everybody, for joining us.

As you can tell as we get into the second-half of this year, I think we said at the end of the first quarter that we expected this year to be greater than last year.

We certainly still think that.

We saw a better second quarter.

We expect to see a better third and fourth quarter than a year ago.

And I think that would mean that our second half of this year would be the best second half the Company has ever had.

And so we're stoked, but we're very, very busy.

And we're working hard.

And thanks to all of you for joining us.

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

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