Ball Corp (BALL) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation first quarter 2007 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 26th, 2007.

I would now like to turn the conference over to Mr.

Dave Hoover, CEO of Ball Corporation.

Please go ahead, sir.

Thank you, Sharon, and good morning everybody.

The sun's shining out here in Colorado this morning.

Just thought you might want a weather report.

This is Ball Corporation's conference call regarding the Company's 2007 first quarter 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-K report filed on February 22nd, 2007, and in other company SEC filings as well as company news releases.

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

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

With me today on the call are Ray Seabrook, EVP and CFO, Ball, John Friedery, SVP and COO of Ball Packaging Americas, and John Hayes, a newly minted SVP and he's also President of Ball Packaging, Europe.

Our Company reported strong earnings for the first quarter led by improved performance in our metal beverage businesses in the Americas, Europe and China and by Ball Aerospace.

We continued the momentum built up in the second half of last year and I'm generally pleased about our results.

Parts of our food and household products and plastics divisions are struggling and we'll talk about how we're addressing that.

I'll address Ball Aerospace and our outlook for 2007 in a few minutes.

But first, Ray's going to go through our financial performance, followed by John Friedery who will discuss North American packaging business.

And John Hayes then is going to cover Ball Packaging, Europe.

Ray.

Thanks, Dave.

Diluted earnings per share for the quarter were $0.78, up $0.36 compared to last year.

An outstanding first quarter by any comparison.

But last year's comps were weaker, due to compressed North American beverage can margins, a $0.01 business consolidation charge and a $0.03 out-of-period foreign exchange loss.

Contributing to the higher earnings were improvements that started in the fourth quarter of last year, in worldwide beverage cans and aerospace.

High single-digit sales volume gains in Europe and China and the year-over-year strength of the Euro were the contributors to increased earnings in international beverage cans.

Higher raw material inventory levels carried through from 2006.

Positive results from the new end technology project and lower energy and manufacturing costs improved America's beverage can first quarter operating margins.

As we look to the remainder of the year, we foresee continued strong beverage can sales volumes internationally and America's beverage can margin easing as we work off the metal inventories.

Aerospace had an outstanding first quarter.

Higher sales, improved contract mix and execution along with lower pension costs were the key factors in the better earnings performance.

As we look forward, we estimate operating margins for the remainder of the year in that business to be in the 8% range.

First quarter operating results in plastics and food and household segments were disappointing.

Higher than planned integration costs, high inventory costs carried through from 2006 negatively impacted the food and household business.

In plastics, the Alcan acquisition is on plan, but first quarter results were reduced by underutilization cost and legacy PET bottles.

The good news is that these problems look to be behind us and we should see better results from these businesses for the remainder of the year.

And I know John Friedery has more to say about this in a moment.

Interest expense is higher in the quarter compared to a year ago due to higher debt levels resulting from the acquisitions we made at the end of the first quarter last year.

We expect full-year interest expense to be in the $144 million range.

The first quarter 32% effective tax rate is a little higher than originally planned.

The expiration of a tax holiday in Poland and changes in earnings mix should maintain the full year effective tax rate probably in the 32% range.

Turning to full-year free cash flow, we still expect adjusted full-year free cash flow levels be better than $350 million in capital spending and had property insurance recoveries in the range of $275 million.

We anticipate elevated U.S.

beverage can raw material inventory levels to be lower, at closer to historical levels by the third quarter.

The 2007 elevated free cash flow will be primarily used for stock buy back and debt reduction.

We're planning on a full-year stock buy back program of more than $175 million and have purchased $90 million in the first quarter at an average price of well under $45 per share.

As part of the overall debt reduction plan, we anticipate contributing an incremental $70 million or $43 million after tax, to our North American pension plans; probably will make these payments in the fourth quarter.

We expect this incremental pension plan funding to fund North American pension plan obligations to a 95% level.

The tax arbitrage associated with this payment and the new Pension Protection Act of 2006 make 2007 an appropriate time to make these incremental pension payments.

The after-tax impact of this payment will be shown in our consolidated cash flow statements as an operating activity and, therefore, will be a reconciling item in our free cash flow computation.

Net balance sheet debt at the end of the quarter was at $2.5 billion, higher than in December, due to seasonal working capital requirements and a stronger Euro.

Our December 2007 target is to have net balance sheet debt of $2.2 billion.

And with that I'll turn it to John Friedery.

Thank you, Ray.

Results in the North American beverage can segment were very strong.

It's our largest business, the plants are running very well and I will get back to its performance in a moment.

Most of you have our press release financials in front of you and it's clear we have two underperforming businesses, food and household products and plastics.

Let me talk about those areas first.

The food and household products segment is clearly not where we want it to be, though we have made progress.

The former U.S.

Can headquarters in Lombard, Illinois, was closed, reducing head count by more than 50; the Alliance, Ohio, plastic pail plant was closed, reducing head count by another 40.

We reassigned the Atlanta plastic pail plant to our plastics division, where it is a better strategic fit.

And on April 1st, we took a major step forward when we combined all parts of the business under one president, Mike Feldser.

Sales and marketing, manufacturing, quality and other key functions are under one roof with one person leading each area.

Our focus is 100% on managing, operating and improving this business.

It's taken us a little longer than we might like, but we're on the right track now.

We're critically evaluating the totality of our cost structure in our food and household products division, both fixed and variable.

It is our goal to drive significant improvement in this division.

We've set aggressive targets for internal cost savings over the next two years and we also have set goals for meaningful reductions in invested capital over the same period.

That message has been sent loud and clear internally and I expect to see results this year.

The first quarter is historically a slower sales quarter for our metal food packaging business and we were negatively affected to the tune of some $6 million by higher inventory and other costs carried in from 2006.

This appears to be behind us and I am pleased at the recent positive trends in our manufacturing operations.

We've increased prices for our products where possible.

And those increases take effect at various times throughout this year.

So we haven't seen the full impact yet.

You've heard us say in the past that we don't make cans and bottles for practice.

We will not sell our products at unsustainable prices and we will take out capacity when we feel that is what is in the best interest of our Company and our shareholders.

Our lean initiative, which was begun in our metal food packaging plants last year, is starting to take hold.

We have seen reductions in changeover times of up to 50% in the plants we have completed.

The increased productivity as a result of these improvements allows us to reduce finished goods inventories by 10 to 20%, through increased cycle times.

We're now pushing these lean practices into the acquired operations.

In our plastics segment the challenge is in our legacy PET beverage business.

The integration of the new plastics business acquired last year has gone well.

Those new plants have been fully assimilated into our plastic packaging division and are contributing meaningfully to our results.

On the PET beverage side, volumes were lower than expected.

Some of the softness was due to customer decisions to seek price at the retail level.

The volume softness caused us to take some unscheduled downtime to control inventories at acceptable levels in the quarter and negatively impacted our costs.

We are now running all of our plants at full capacity and are looking for improved performance for the balance of 2007.

While we are off to a rough start, we expect full-year performance in both the food and household products and plastics segments to be up over a year ago.

In the North American beverage can business, our volumes were down 1.4% to the first quarter of 2006, while the industry was down just over 4% year-over-year.

Volumes were aided by continued strength in the custom can sizes driven primarily by energy drinks, beer and non-CSD categories.

Our results benefited from lower cost inventory carried into the year and from improved operating performance.

Manufacturing cost improvement programs are delivering anticipated results and we are on track to work down material and finished goods inventories by the third quarter.

Our long-term program to modernize and streamline our end making capacities as we switch to a new metal efficient end design is performing to our expectations.

We now have four of the eight modules in full operation.

Two more are scheduled for start-up this year and the last two modules are scheduled for installation in 2008.

This modernization has resulted, to date, in the closure of one end making operation, a head count reduction of more than 200 people and significant net metal savings over today's standard end.

We continue to make meaningful progress on the key initiatives in our North American beverage can business.

With that, I'll turn it to John Hayes.

Thanks, John.

Volumes continue to be quite strong in Europe, with overall industry volumes up in excess of 10% for the quarter, and our volumes up on a similar basis.

The positive trends we saw in 2006 continue with growth coming from most areas, but in particular, eastern and southern Europe.

In addition, one way packaging in general and cans in particular, continue to take share from returnable packaging, due in large part to their convenience and consumer acceptance.

As we've been discussing for quite a while, we have implemented price increase with our customer base to address the significant inflation increases in our business and are on track and on target in this area.

Equally important, the cost reduction -- or should I say cost optimization program that we began in late 2005 to help address the cost compression we were facing are paying off in controlling these so-called uncontrollables.

This is the result of a very focused effort by all of our employees, in order to ensure we are well positioned for the future.

With the continued strong growth in our markets, can supply and demand will be very tight this summer.

We're actively working with our customers to anticipate their needs and carefully plan longer run lengths in other nonproductive changeover activities.

We continue to monitor and manage this closely.

That is one reason why the start-up of our new can line in Hermsdorf, Germany, and the two can lines in the Hassloch plant, which was severely damaged by fire a year ago, are so important.

I'm happy to report that we began making commercial cans on the Hermsdorf line during the third week of March and the first line in Hassloch came on stream last weekend.

I commend our employees for keeping those projects on a very tight schedule and allowing us to bring that capacity back slightly ahead of our plan.

We expect the second line in Hassloch to begin production during the month of May.

It's turning out to be a very busy year, and we look forward to the opportunities and challenges that brings.

With that, I'll turn it over to Dave.

Thanks, John Hayes, John Friedery and Ray Seabrook for your comments.

I want to comment on performance in Ball Aerospace, which had a very strong first quarter.

Backlog at the end of the quarter was $832 million and we're doing better work in almost all our programs.

Stronger performance is probably going to be weighted toward the first part of this year, due to the ramp-up of some new starts we had late last year and in the first quarter, and, as Ray mentioned earlier, I think that performance may moderate some as we go through the year.

We talked about this being a lumpy business before.

But we're certainly liking the trends we're seeing and we're seeing many new opportunities in this part of our business so we're real happy with it.

Overall, our strong performance in the first quarter makes us more confident that our full-year results will show solid improvement over 2006.

As a matter of fact, if you exclude the property insurance gains from the fire John Hayes was just talking about, if we make what we made in the last three quarters in 2006, I think we'd have an earnings increase on a per share basis of more than 10%.

And we're now entering the seasonably strong months of the year and there are all kinds of uncertainties including weather, crop stamina and others that still have to play out.

We're going to try our very best to exceed last year's three quarters excluding property insurance gains.

And with that Sharon, I think we're ready for questions.

Hello?

Sharon, are you there?

Yes, yes.

I think we're ready for questions now.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Ghansham Panjabi from Wachovia Securities.

The aluminum impact on the quarter, could you just quantify that from a bottom line perspective for us please, just relative to a year ago?

First of all, what we want to know is how you were able to get ahead of George Staphos and be the first questioner?

Quick fingers.

[ Laughter ]

I don't think so.

In terms of the aluminum impact?

What was your question?

The aluminum impact, how much do you estimate that it contributed on the bottom line?

I don't know, Ray, do you want to comment on it?

Obviously it had an impact but we're not going to give you that information.

Given the underperformance in food and households, should we expect some more asset rationalization in this business above and beyond what you've already announced?

And could you comment on the price increases in aerosol relative to your expectations?

I'll be happy to answer that.

The question on rationalization, what I would tell you is, as I said in my comments, we're taking a critical look at all parts of our cost structure, and everything's on the table.

As far as the second part of it, we did achieve some price, but relative to our expectation we were not able to achieve what we were looking for.

Thank you.

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

Thanks very much and good morning.

You guys aren't getting off that easy on the aluminum issue, come on.

Maybe -- just to John Friedery, obviously a great quarter in the beverage business, but volumes are a little bit soft.

It sounds like the cost programs are coming through.

And you're obviously picking up some custom ends.

So as you look at that business, what do you think -- if you look at volumes down, you probably would have been at 53 or so.

You're $40 million higher than that.

How much of that was cost-cutting?

The gain in the year-over-year was due to inventory gain and our cost improvement programs relative to project net, our end project, which we have been pushing and has really begun to bare fruit.

We had some mix gains as I mentioned, our custom can business is doing well.

And so we picked up some gains there on mix and our manufacturing costs in general.

We have got several programs including programs in energy, manning and other areas which are baring good fruit.

Got it.

And then maybe to Ray, as you think about -- and how has the switch to FIFO caused us to rethink perhaps how we model some of these businesses relative to costs, what's the average age of inventories you're cycling through these systems?

You said it would take you, I think, to third quarter of this year to cycle down the inventories?

Well, we turn that beverage can inventory over probably six or seven times a year, so we're turning over a couple times in a quarter, almost.

So that's not the reason it takes us to work down.

We have commitments with our suppliers to take certain volumes of materials.

So we built this inventory up last year as we were worried that certain supply situations with our suppliers.

And it will take us a little bit to kind of work that out, because we have commitments to take material.

So our guys that do this for a living have worked it all out, and we think we'll be back down to normal levels by the third quarter.

And then do you feel comfortable that the pricing initiatives that you got, it looks like you got about 8% pricing in that, or price mix I should say, in that business.

Is that -- most of that just strictly covering you on some of the higher cost of aluminum, or do you feel like you got a little bit ahead of aluminum in the bev can business?

I -- this is Dave, I don't know that -- we certainly aren't talking about 8% price increases.

Remember, the cost of the aluminum is higher, which -- that, even though there's a 1.4% reduction in numbers of units as John Friedery was saying, the mix of those units might not -- might be favorable as well as some price.

But not an 8% number.

Got it.

Thanks very much.

And congratulations, John Hayes, on the volumes there too.

Thank you.

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

Good morning, everyone.

Good morning.

Maybe for Dave or John Friedery first, what are your customers saying about volumes in North America and marketing programs, to the extent you can comment on that on this kind of forum, for the rest of the year given it's been a little bit of a slower start this year?

And are any of them maybe reconsidering some of their prior pricing strategies?

Again, to the extent that you can comment.

John, why don't you handle that one?

We're looking at obviously trying to understand the first quarter and talking with our customers.

I don't think we're at a point that we can comment on any of their plans relative to either pricing and/or volume strategies at this point in time.

Well, hopefully, it could only improve from here, but in any event.

I guess the next question I had for you, John Friedery, regarding food and household obviously, you're working very hard right now and looking at all elements of the cost structure, and other elements of the business to try to improve performance and that's great.

Do you think, John, that there are any structural differences between Ball's three-piece operation and the others in the industry?

Said differently, if there are, how much benefit can you get from restructuring or rationalization around any other of these other programs?

As we look at this, we are looking at all of that.

As I said, the totality of our cost structure and our footprint and making sure that we're clearly understand the structural issues in terms of asset base, location of those assets, the served markets and -- so I would say stay tuned and you'll see and hear more from us in that.

But those are certainly areas that we're looking at, product mix, customer mix and where we're going and how far we're shipping our products.

John, when do you think it will have a bit more detail on that?

Would that be more of a third quarter, fourth quarter issue or might we even get something in 2Q reporting?

I would say somewhere in between those -- kind of third to fourth quarter, I'd expect, to your point.

I think we want to make sure that we've got everything completely understood.

But we're not letting any grass grow, George.

I understand that, but obviously you want to do this right, so you want to spend some time studying it in the first place?

Correct.

Maybe the last question and I'll turn it over.

Ray, what kind of spread, if that's the way to think about it -- and perhaps you can give me a different way, are you -- do you think you might be able to get from the pension investment relative to the cost associated with those funds?

Obviously funding the pension probably helps your earnings outlook for 2008.

Would that be fair?

George, as you know, we've been advertising a real strong cash flow this year, because we had this inventory build and we're working it out.

That's a lot of years strength and plus, you can see our earnings are trending pretty well, so we really do expect a strong cash flow year.

Last year, you know, the -- the government passed a pension reform act that really made a lot of changes, and those changes are going to require companies to fund up their pension plans or start paying fees and other things.

When you go through the analysis of something like that what you find out is that there's a tax arbitrage, so you get -- the money you fund up your pension plan, you earn tax free.

And of course the money that you borrowed to put into it is tax deductible.

There's quite a tax arbitrage to do it.

We're go to have to do it anyway.

It's a really strong cash flow year for us, and so it makes a lot of sense for us to fund that up this year, and get it behind us.

Okay.

That's -- it's no more complicated than that.

If you think about it, George, I mean, I don't know, our average borrowing rate is under 6% for the company, pretax.

Right.

So after tax maybe it's 2/3 of that, and so you're paying that kind of a number, and we try to earn in excess of 8.25% I think it is, Ray?

Yes, I think we just saw some numbers yesterday.

I think our average earnings in the pension plan over the last four years is 13% or something.

Yes, we made 13%.

So that's -- think of that.

And it is debt in a way.

We also changed our plan last year, so we have got a good chunk of North American employees where the whole game is somewhat different.

And that's going to be real helpful to us going forward.

I might volunteer a little color answer.

You said something earlier about when you were talking with John Friedery about volumes and so on.

I think -- and I know you're a thorough person, but I think one of our competitors talked about a substantial buy ahead at the end of last year.

So I think the first quarter numbers for the industry and so on aren't necessary as dire at 4% down as you may be thinking, and I think last year wasn't probably quite as good.

But might dig into that a little bit.

We, I think, wrote the same thing, but also looking at the scanner data, it looks like volumes were off a bit for your customers.

Hopefully they can figure out more effective market programs too.

That's what we're driving at.

Thanks, I'll be back, guys.

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

Good morning, gentlemen.

Hello, Chris.

If we can dig in a little bit on the plastic side of the business.

We haven't talked about that as much yet.

We hear every day about some of your large customers, the Pepsis and Cokes and their bottling units of the world, thinking about bringing more and more capacity in house, as opposed to outsourcing or else potentially changing the way they do bids and look at business.

How have you been thinking about that business?

I know you've added to it last year, when you purchased the Alcan plastics, but does there come a point where -- I think it's been about 10 years now -- where you haven't quite yet got to your cost to capital?

Does it reach a point where you finally think about cutting it loose?

Well, I'll comment on that.

We think about everything all the time.

I think the basic issue this year has been a slow start to the year in some of the product areas for our customers.

The newly acquired business is actually running a little better than we thought it would.

So we're liking that part real well.

And as John said in his comments, I think, we're now running as the warm months come on.

But in a couple cases, I think our customers may have taken pricing action and maybe that's what's hurt their volume a little bit.

As to the long term, our goal is to achieve at least our cost to capital in every business, and we will not tell you, until after we've decided whether we're going to enter, exit or do anything with businesses.

But if you watch us, I think you'll know soon after we make such a decision.

Well, John, Dave, we'll let -- you think in '07 with the addition of this business, do you think it will hit its cost of capital this year?

Well, you know, the only thing I would say on that is what you heard John Friedery say is that notwithstanding a slow start in the first quarter, we expect both businesses to achieve results higher than last year, in the full year.

Rome wasn't built in a day.

We don't have a lot of patience, but this company's performing one hell of a lot better than it did not so long ago.

We're pretty happy about all that.

We're going to keep pushing it.

Thank you.

One question on the aluminum side of the equation.

It looked like from the dialogue in your press release, that you anticipated this outside benefit that you don't want to quantify, will sort of evaporate as we get through the second quarter.

Is that fair that we can still see a little more benefit from it in the second quarter, but then it will be pretty much done?

Yes, I think it's primarily a first quarter event.

If you go back and look at the comments we gave you in January, we said we expected a strong first quarter and we got a strong first quarter.

And most of that inventory gain -- holding gain -- we're talking about, it washed through in the first quarter.

I said inventory turns over seven times a year.

So it's turned over in the first quarter.

Okay, thank you very much, gentlemen.

Our next question comes from the line of Mark Wilde from Deutsche Bank.

I had a question on volume.

You kind of addressed volume issues in North American beverage.

I wonder what you think about the sustainability of that 10% plus volume over in Europe through the balance of the year.

And then also it sounds like you're getting a little better pricing over in Asia, I wonder if you could talk about that.

This is John Hayes and I'll talk quickly about Europe.

The can throughout Europe is benefiting from a number of trends.

Substitution of returnable packaging is one of them.

Multi-packing is becoming more important.

And probably the most important in Eastern Europe is the development of the large format retail trade, where the can has traditionally done well.

We've got a lot of tail wind in terms of volume growth there.

The weather's been quite good recently in Europe.

I know in Germany today it's about 90 degrees Fahrenheit.

Assuming a normal summer weather pattern, we expect this good growth to continue.

Just to give you an example, typically, it's about this time of year where our inventories begin to decrease as we draw down the stock buildup that we do in the winter months.

However, this year that began about a month ago.

And so our ability to serve the market if it continues at this double-digit growth rate is largely dependent on our Hassloch and Hermsdorf projects and that's why we're happy that they're on stream now.

Okay.

John Friedery, do you want to talk about Asia or do you want me to?

No, I'll be happy to mention, we've seen the market in China continues to be strong.

Good growth there and yes, we did have success.

Remember, a year ago we talked about the fact that we were unable -- we got caught in a squeeze as aluminum prices rose, and we were unable to pass those through.

We've recovered price in China.

Okay, very good.

Thanks.

Your next question comes from the line of Claudia Shank from J.P.

Morgan.

Thanks very much.

Good morning.

I was hoping you could talk a little bit about specialty cans and the trends you're seeing there, how the growth compare -- the growth rates now compare to the growth rates we've seen historically, and then just how pricing and margins are holding up in that business?

I think both John and John could make comments on that probably.

Sure.

I'll start with North America.

Certainly we continue to see good strong growth, and it is growing, I would say in absolute terms as much as it ever has.

Of course, we're growing against a bigger base, so the percentage rates are falling a little bit.

And pricing is holding up in those areas.

We're seeing that, again, when we talk about specialty cans, we're talking about a wide range and customers want more and more differentiation.

So there's a different variety and different mix of cans going out.

So as we make more of these cans and with the demand by customers to make sure that we have short runs and batch up with them, we have got a lot of changeovers and a lot of additional costs in our system.

So that is an area that we need to make sure we recover all those costs on and maintain the margins that allow us to continue to invest in the new types of cans that will allow that differentiation.

And from a European perspective, the definition of custom cans is probably a little different.

The 50 centiliter cans are much larger than perhaps even 16 ounce as a percentage, relative to North America.

We're more heavily weighted to 50 centiliter because we're more heavily weighted to beer and that's the primary package for beer.

In addition, though, we're doing a lot of different things, whether it be embossed cans, on the slim cans, we continue to see good growth.

Actually, over the last couple years, we've seen very good growth in our Sleek Can.

That continues to roll out quite nicely.

I think overall from Europe, we do continue to see good growth in the custom products and I only echo what John said on the cost side.

Thanks, that's helpful.

I just wondered if you might be able to take a step back at look a little bit at emerging markets and the trends you're seeing in the emerging markets, where you participate and if there are any opportunities for expansion you see out there on the emerging market front?

I might start and ask John and John if they -- if I miss anything here.

We are, as John Friedery just talked about, pleased with our position and the way the market's growing in China, where we've been for a long time.

And we're seeing double-digit market growth there again and are participating in it.

The Brazilian market is growing at double-digits and we're there, as you know.

So the places where we are in that part of the world is good.

We have export business into Africa and other places and we're seeing growth there, and we're typically in communication with our great customers to understand where they're going.

We would think that building a Greenfield plant because we like the country and then wait for the customers to arrive is probably not the right way to do it.

So I don't know guys, do you want to supplement that comment?

Maybe I'll just add a couple other things.

In terms of emerging markets, the can is very much a well-positioned package, because of its logistics and other advantages to particularly glass in that front.

And many of the emerging markets are in warm climates where the can performs as a package better technically than PET, that doesn't have the shelf life.

When you talk about these emerging markets, you're talking about longer supply chains and so, therefore, you need the barrier properties that you have in a can and you need the efficiencies in terms of transportation, the ability to withstand that sometimes the rugged transportation.

I think those things only add and contribute to what we see strong growth of the beverage can around the world.

Thanks a lot, appreciate it.

Our next question comes from the line of Richard Skidmore from Goldman Sachs.

Thank you, good morning.

Just three quick questions.

First, primarily on the North American beverage business, I may not have caught it, but did you talk about, or could you talk about how you see the supply demand shaping up in North American beverage through 2007?

You mentioned Europe is going to be pretty tight.

How do you see it progressing in North America?

I would -- there's not a lot of open capacity in the business, and so I think that that kind of depends on what the demand side does.

If it stays, if we saw the kind of growth we did last year -- which obviously we'd have to overcome a softer first quarter.

But if we did, we'd see more tightness than we even saw in the middle of the last year, so it's in pretty good balance right now I'd say.

The second question (multiple speakers)

I might just interject too.

Unfortunately, one of our competitors is suffering a work stoppage right now, and that only tends to exacerbate this problem, I think we're trying to support our customers and them through this, but hopefully that won't last a long time, because it's going to make it tougher.

And then just a second question on the end cans, on your end can program.

Do you have incremental growth in that, or -- I mean, I guess, the capacity that you've been ramping up in the can ends, is there incremental capacity coming or did you see the bulk of that occur in the first quarter and prior quarters?

This program does not add any incremental capacity.

What it does is upgrade and modernize and streamline our end making facilities and capacity.

Got it.

Thanks.

And lastly on the aerospace business, you mentioned the -- I think in the prepared comments, the margins would go back to an 8% number.

Just trying to reconcile that with the quote and the comment in the press release with improving program margins.

Could you just clarify that for me?

Yes, this is a discussion that's never ending, but the business is comprised of numerous programs.

Some are fixed price in nature and some are cost type.

In the cost-type programs, you know, a typical year we might run somewhere around 70%.

This year we're running a little heavier on the fixed price side at this point due to a large fixed price program that we won last year.

Typically you make a little better margin than that because you're taking more risk.

Sometimes when you're doing cost-type programs, either the funding gets constrained or the customer asks for you to make changes or you don't perform as well as you had anticipated and the cost of a program may grow.

And typically as cost grows, you don't get to make some or any money on that growth.

So that affects what looks like the margin in the business.

But don't think of this as a homogenous -- like the can plant business.

It's a bunch of different contracts-- they all are accruing profit based on how they're performing individually.

What we have right now is a situation where we had some programs, while they were great programs, toward the end we didn't make much money on.

Most of those are through our system and out the door.

Our performance generally has picked up.

The reason for the higher margin in the first quarter, as we said, were start-ups, particularly in a few fixed price programs.

And you're -- as you do those programs you accrue fee or profit, depending on percentage completion, how nearly done you are and how you're doing.

I'm not trying to make this complex, but I think there's a tendency in some people's minds to think of this as this homogenous business and it isn't.

I'm pretty pleased with our general performance in this business.

I think -- Ray made the comment about 8%.

I think we'll see not the margin we saw in the first quarter all year, and if we ended the whole year at 8%, we'd be thinking that's probably what we'd get.

That implies it might go below that.

But, you know what?

We don't really know exactly.

So I -- that's kind of a long answer, but maybe it helps you understand a little bit more about how it works.

Thank you very much.

You bet.

Our next question is a follow-up question coming from the line of Edings Thibault from Morgan Stanley.

Just a quick follow-up, maybe on impact of foreign exchange.

And really what I'm trying to understand, if you can help me -- as you look at your international business there, it looks to me as if you guys should continue to benefit from the weak dollar.

But if we wanted to break apart some of that growth in terms of price, volume and FX (multiple speakers)?

Yes, the sales growth, what a 27% improvement year-over-year, 16% of that is the Euro.

And on earnings, it's maybe a penny in the quarter on the Euro.

Perfect, thank you, Ray.

Our next question comes from the line of David Ireland from ABN AMRO.

Good morning to you all.

Two questions on European beverage cans, and specifically Germany.

I wondered first whether you could tell us how much Germany contributes to first quarter volume growth.

And secondly, could you hazard a guess as to the size of the domestic German bev can market this year?

Two good questions, because they're very different questions.

First, the German market generally continues to make progress.

Although, like I said in January, it's a little bit slower than we'd like.

If you look at retail consumption in Germany, it was up over 30% in the quarter, but it was off a very low base.

If you look at fillings in Germany, many of which are exported out of Germany, it was up in the high single digits.

We are seeing growth in the German market.

The reverse vending machines continue to be installed.

Our key focus, right now, remains working with the retailers, as I said back in January, to obtain more listings at the retail shelf and better shelf space positioning of the can.

So that continues to be a big focus of ours.

I think our long term expectations remain the same and we fully expect the market to come back.

But it's going to be step by step.

Almost in a way, it's fortunate that the market has not come back as fast as we initially thought because to be honest, we'd be struggling to fulfill that demand right now.

Just on the potential scale of the domestic German market this year, have you got -- even if it's a broad range?

It's probably too early to say.

But I would -- you know what?

Let me address that in the second quarter, because we're entering the summer and that's very important from a German beer consumption point of view.

I think anything I throw out right now would be more of a guess.

And I'd rather do it on fact in the second quarter.

Sure.

Many thanks.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up question from the line of George Staphos from Banc of America.

Thanks.

You might have mentioned this earlier, but I've been jumping around three conference calls.

Dave, could you give us and we appreciate the color over the rest of the year in terms of what you're expecting but would you be prepared to offer any additional details in terms of what kind of progress versus a year ago, second through fourth quarters you might be able to make the rest of this year?

Now, George, you're trying to trap me.

No, not at all.

Just even qualitative things we should be thinking about.

We've been talking about real strong performance in the -- in our biggest business, I think around the world.

I think we'll see margins moderate in North America.

I don't think we'll see that in the rest of the world.

Okay.

And, you know, hopefully we're going to make some money in these two businesses that are underperforming.

That's what John Friedery said, and I believe him.

And I think we'll see some pickup there.

We had a real strong fourth quarter of last year as well.

I doubt that the fourth quarter this year will have that kind of strength in it.

One other, just general comment; we had our board meeting yesterday, and I'm on some outside boards.

And I think you're going to see more volatility between quarters for almost any company based on certain kinds of things like the new FIN48 for taxes.

And we've changed back to FIFO accounting, so we're going to be tracking a little more closely.

I think, if you're used to saying the first quarter is this, the second quarter is that, the third quarter is that, you might see a little bit different mix.

I tend to suggest that folks like yourself might want to take the longer look --what's going to happen all year, versus was this a great quarter or that a bad quarter or what have you?

Understand.

But what I was trying to do is at least give you an inkling that we're going to work hard to beat the last three quarters.

And by how much, I don't know.

Were you suggesting with the fourth quarter just as we try to craft our models that the fourth quarter might be down versus a year ago fourth quarter or might just will have the toughest comparison in percentage gain.

It will definitely have the toughest comparison.

Yes, I think it has the toughest comparison, but I just mentioned that as an example of what can happen.

The truth of the matter is it, we don't know.

I understand.

Part of the reason we don't know is, because it's harder to manage because of these things I was talking about.

they have damn little to do with the business.

But the accounting world is really being helpful in making everybody understand things better, no doubt.

And I better not say any more about that.

Ray, as you think about -- or Dave, capital spending and cash flow for next year, I realize it's too early to really put out a number.

I'm guessing it is anyway.

But how does having a likely, very strong 2007 alter, perhaps, what plans you might have for spending in 2008?

Or perhaps it doesn't at all, since you're taking the longer term view?

I might just comment on that.

We do look long.

We're in the midst of the project net spending and there will be still some of that in '08.

You know, we've basically talked -- John talked about, we're kind of halfway there at this point.

And we'll probably be 3/4 by the end of this year.

There will be a little bit of that.

But I think our spending will be -- within the businesses, I think with -- will begin to moderate somewhat.

If we have expansion opportunities -- you know if you have got a European business that's growing double-digits, we've got to take care of some expansion needs for the company.

But I think they're all manageable within the company.

The company got bigger last year, it isn't as much better as we'd like it yet.

When we used to think we could spend a couple hundred million dollars, we probably have a need a little greater than that.

Starting with that, plus a little bit of net, I don't think we want to give a number.

I mean, we've got one.

But, I think it's early days to talk about it.

Importantly, because you have got these artificial carry in, carry out, when did you actually spend money?

And sometimes that affects that a little bit.

As you know, and we talk about it all the time, is that one of the key factors on managing these businesses, we need free cash flow generation to be able to buy back our stock or make acquisitions, or whatever we're doing.

You know we'll be concentrating on it 100%.

We expect it to be pretty strong, which hurt this year a little bit.

As what helps the earning, we got the strong Euro, because we had to put those two plants back together over in Europe.

A lot of -- when you dig into capital spending, is Euro related.

When the Euro goes stronger it certainly helps our earnings.

But it's on the capital spending front, it makes it higher.

So it's something that we absolutely pay attention to daily around here, George.

It will be good.

Okay.

Thanks, guys.

Good luck.

Our next question comes from the line of Alton Stump of Longbow Research.

Thank you.

Good morning.

I guess, two very quick questions.

First off, with the plant that went down last year in Germany, was obviously about a 2 billion can facility.

Just wanted to get an idea, could you hazard a guess as to how many cans you may be able to get back from the 2 lines starting up this year?

It's probably a little bit more than a billion under this thesis that we're -- we're sitting here at the end of April now, we're in start-up mode with them.

They're not at the speeds we expect to get from them.

But over the next couple months we expect that to happen along with the second line of Hassloch coming on.

You're really talking about a half a year, maybe a little bit more of production out of that.

So it's a little bit more than a billion.

Thank you.

One other question on the aerospace segment, with the understanding it is a very lumpy and hard to predict business.

I think there was a comment made that we'll probably see margins go down to 8% versus obviously what was a very strong margin in the first quarter.

You know, is there anything going on there, or is that just essentially being conservative, not knowing what orders will actually come through over the course of the year?

It's some combination of the two.

But, you know, we're -- the 8% range, as I said, if you integrate the first quarter at 8%, that means have you have got to make less than 8% for the balance of the year.

And I'm not necessarily going to say that.

No, we said close to 8% for the balance of the year.

Okay.

Not for the year.

Okay.

Great, thanks, guys.

Mr.

Hoover, there are no further questions at this time.

I will now turn the call back to you.

Thank you very much.

And thanks, everybody, for being with us.

We'll look forward to speaking with you in about 90 days.

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

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