Ball Corp (BALL) 2007 Q2 法說會逐字稿

Welcome to the Ball Corporation second-quarter 2007 earnings conference call.

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

Afterwards we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded Thursday, July 26, 2007.

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

Please go ahead, sir.

Thanks, John.

Good morning, everyone, this is Ball Corporation's conference call regarding the Company's second quarter 2007 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 9, 2007 and other company SEC filings, as well as company news releases.

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

Finally, information regarding the use of non-GAAP financial measures may also be found on the web site.

And with me on the call today are Ray Seabrook, EVP and CFO.

John Friedery, Senior Vice President and COO of our Ball Packaging Americas, and John Hayes, Senior Vice President and President of Ball Packaging Europe.

The Company reported a first -- a record first half performance in sales and earnings in 2007.

Our second quarter, continued our strong start for the year.

Our focus cost reduction programs, and our end making project, that John Friedery provide detail on in the first quarter call, contributed significantly to improved earnings in our metal beverage packaging Americas segment.

Sales volumes to metal beverage Americas were about flat, compared to the same period, last year.

You might recall in that 2006 industry beverage can shipments increased by 2.3%.

That included a 4% increase in the fourth quarter, versus the prior year.

This year 2007, is likely to be a more typical year, with a somewhat slower fourth quarter, in our view.

In Europe, sales volumes are very strong.

We expect continued increase demand in that region, as well as growth in Asia.

The new lines in Hassloch, and Hermsdorf, Germany those plants started up on time, and really just in time for the summer peak demand season and they are fully utilized.

The metal food and household products segment was profitable in the second quarter, and manufacturing performance is improving overall.

Or plastics food packaging acquisition is performing well, and we are pursuing new opportunities there.

The historical PET results have been disappointing, but it's performance is expected to improve for the balance of the year.

Ball Aerospace continued its strong performance.

Last week NASA Goddard Space Flight Center selected Ball Aerospace for its operations land imager, that is about a 128 million cost plus award fee contract, and backlog at the end of the quarter before that contract win was about $723 million.

So that's a quick summary of our operations.

I will address our outlook a little bit later for 2007, in a few minutes.

And first Ray will go through our financial performance.

Ray.

Thanks, Dave diluted earnings per share for the quarter were at $1.03, and through the first six months were at $1.81.

On a comparable basis diluted earnings per share up 29%, in the quarter and up 46%, through the first six months.

Segment earnings in all businesses except for Plastic Packaging were up in the quarter, ahead of last year through the first six months.

The continued strong sales volume growth in Europe, the year-over-year strength of the Euro, and improved operating margins in China, were the contributors to increased earnings at International beverage can.

In North America, beverage can operating margins returned to more normal levels in the second quarter, on volumes as Dave said, that were flat through the first half.

Manufacturing performance has been good, and costs reduced, as a result of the capital spending program managed in 2005.

The higher aluminum inventory levels that we talked about in the first quarter, carried through from 2006, are being reduced, and will be at near normal levels by the end of September.

For the first time since the U.S.

Can acquisition, operating results in the food and household segment were encouraging, in the quarter.

Business integration activities are starting to come together, and acquisition synergies are being realized, we are not done with business consolidation activities in the segment, however, and expect to have more news to talk about by the fourth quarter.

Food and household earnings will be much stronger in the second half of the year, than the first half.

Second-quarter operating results in the plastics segment, continued to disappoint.

The Alcan acquisition has exceeded our expectation, but PET bottles, are underperforming.

Higher cost, and lower than projected sales volume contributed to the second quarter PET bottle earnings shortfall; however, with all that said, we still expect that the segment earnings in this sector to be better in the second half as well.

Aerospace had another good quarter, and a very strong first half.

Continued higher sales, and improved contract mix, and better program execution, contributed to the -- a higher first half earnings.

Due to program completions in the first half of the year, we foresee some sales slowdown in this segment for the remainder of the year.

The first half 33% effective tax rate is a little higher than we originally planned in changes in earnings mix; however, we perceive the second half to -- to be lower as a result of tax changes in Europe, which should retain the full-year rate in the 32% range.

As noted on our first-quarter call, we anticipate making an incremental fourth quarter payment to our North American pension plan, to fund pension obligations to a 95% level.

The initial estimate was $70 million for this payment, but because of good pension asset performance and higher interest rates, we now estimate the amount of incremental payment to be in the $45 million range, $27 million after tax.

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 and free cash flow computation.

As seen in our first half results, we have been focusing on reducing working capital levels, and are making real progress.

Free cash flow is strong through the first half, and will continue in the second half.

We are completely sold out of cans in Europe, and we will need to start line speed up projects earlier than anticipated, which will move our full-year capital spending estimate to around $300 million, net of the property insurance recoveries.

Even still with the higher capital spending, we are expecting better working capital management, and now foresee adjusted full year free cash flow to be 400 million or even better.

Some of the other key financial metrics for 2007 as we talked in July, share repurchases are expected to be in the $200 million range.

Interest expense is still expected to be around $144 million.

The rolling four quarters EBIT to interest coverage is at 4.4 times.

Total net debt to EBITDA is 2.5 times.

And our year end net debt levels, are forecast to be well below the $2.2 billion number.

I will finish my comments with a word on our second quarter 10-Q.

In the Q you will see that during the quarter Miller Brewing company has asserted various claims under our long-term supply contract, primarily relating to the aluminum cost (inaudible) of containers.

We believe we have performed in accordance with the terms of this supply contract, and continue to supply cans and ends under the contract.

In an attempt to resolve this matter, mediation has been scheduled for the fourth quarter.

The contract provides for disputes to be settled first by mediation, and then by binding arbitration.

With that I will turn it back to you, Dave.

Thanks, Ray.

For the past few years our second half performance typically was better than our first half.

This year we don't expect that will be the case, because of our very strong fourth quarter in 2006.

We benefited last year from the significant increase in volumes that I mentioned earlier in the fourth quarter, and as a result of that increase, we deferred some normal maintenance that we might have done into 2007.

Our businesses are really running well.

We are addressing performance in the food and household and plastics segments, and we're seeing positive results from those efforts.

And we have a number of opportunities ahead of us, with plans in place to capitalize on those opportunities.

And I believe that when this year ends, we think that it will be viewed as another excellent year for Ball Corporation.

So with that, Shawn, I guess we are ready for questions.

Thank you.

[Operator Instructions] Our first question comes from the line of George Staphos, with Banc of America Securities.

Thanks, hi, everyone, good morning.

Hi, George.

I guess the first question I would like to ask is around the outlook.

You gave us some good color, Dave.

I just wanted to, if possible, nail down a few more things.

It is understandable that the second half, will not necessarily be at the first half level.

The first half was a record.

You also reminded us about the fourth quarter volume comparison, in beverage cans in North America and also maintenance expense, I guess, that may pick up the rest of the year.

Maybe I mis-heard you there.

Do you expect the second half will be up versus the last year's second half?

Or is that tough to call at this juncture?

I wasn't clear.

I haven't been looking at it that way.

I can't remember what we did in the second half of last year.

Miss Suzanne Scott is rifling around in those now.

I don't mean to say that we are going to fall out of bed or anything, but that we had a big increase in the fourth quarter last year, versus the prior year.

I think it was like 40% or something.

I am not sure of that percentage.

But, you know, that sets a fairly high bar is all I am saying, and that's a seasonally slow quarter for the company.

We've just concluded the half of the year, and we have reforecast for the balance of the year, and I am just saying what I expect, is probably going to be the case, so that, you know, people don't take this great performance in the first half and just forecast it to continue forever, running it 30% up, in earnings, because that is probably not our goal, and not what we are going to be able to do.

So you should be up the second half in total, but don't extrapolate first half?

Yes.

I am not ready to then a second question yet, because I can't -- I can't see the number, but I think that is probably right.

Okay, okay.

George, this is Ray.

I think the -- I think it is mainly the fourth quarter that we are concerned about.

We don't know, but I would say we had a very, very, strong fourth quarter last year, and it will be difficult for us to do as well this year, but we will see.

I understand.

One other question and then I will turn it over.

When we look at beverage can, both in North America and in Europe, do you think that EBIT, especially in the first half of next year, can be equal to, or greater than what you have seen this year, which was outstanding performance?

I know that is a bit -- you know, it's a bit out there in terms of a forecast period, but what are your thoughts right now?

Well, I think -- you know the combined North America and Europe businesses are performing very well.

You know hopefully, if you -- if you add them together, we will see an uptick next year, but, we had a hell of a first half, and I think -- I think the comparisons in the fourth quarter this year, and first quarter next year, are going to be difficult, George, because of that.

But the businesses are running well.

I don't know, John Friedery and John Hayes, do you want to comment on your outlook?

We feel very good from an operations side, the question will be what happens with volumes.

As Dave mentioned in his comments, we had a strong full year, last year, and we're kind of flat in the first half.

Last year's full year was helped by a very strong fourth quarter.

As we look to next year, we will have to see what that looks like.

We fully expect to run well.

We fully expect to be in position to supply, and we will have to see what volumes do next year.

Let me turn it over.

Thanks, guys.

We also have a question from the line of EdingsThibault, with Morgan Stanley.

Thanks very much.

And good morning, gentlemen.

A couple of questions regarding Europe, if possible.

I would love to understand when the timing of the new volumes will come on.

I assume that they will be ready for the selling season in 2008?

Is that correct?

Yes, that's correct.

Okay.

And then as we look into the second half in Europe, I mean, the -- you've shown some very strong results here, particularly in the second quarter.

Any particular reason why we shouldn't see at least probably, similar results in the third quarter, given the seasonality?

Well, generally speaking, you are right.

Our volumes have been very strong.

It is really a continuation of the strong growth in 2006, despite whether that hasn't been very favorable for large parts of Europe.

I don't know who was watching the British Open last week but you saw an awful lot of rain in the U.K.

and it's been that way throughout Western Europe, and we have had good growth despite that.

We have seen that continuing, although particularly in the U.K.

there's a little bit of softness there.

But softness right now means less growth than we had anticipated, but nevertheless, it is still growth.

So I think for the third quarter you should expect to see some continued good results.

Okay.

Can you -- John, to follow up on that, do you mind giving us a breakdown of where that strength is coming from?

Either by sort of category, beer versus soda, and then potentially by geography?

You know, there are -- potentially by geography?

Many countries in Europe and many different stories.

Generally speaking beer is growing a little higher than soft drink, and the East is growing more fast than the West and three or four different general reasons why.

Number one is the continued rollout of large format retailers.

The Wal-Mart effect if you want to call it that.

Historically in the East, the beverage can is single serve, and part of this rollout of the large format that's going into multi-serve, which certainly helps us, the beer companies are pushing cans, over other packages because it is quite premium.

And also in the South of Europe, we have good growth.

So there is not a place in Europe where it is not growing right now, but the highest growth is occurring in the East and to the lesser extent in the South.

Great.

Thanks.

Perhaps just switching gears a little bit to Mr.

Hoover.

I am going to probably preempt a question or two that usually comes around later in the call, but it seems to be last couple of quarters you had a lot of strong quarters, and the one chink in the armor to to speak is the PET business.

I know that has been a lagging issue.

At what point does that PET business, perhaps -- do you have to seek a bigger structural solution there, partnering with somebody, exiting the business.

I mean I know it is small and I don't want to overstate it, but, you know, just seems to me kind of a lagging business for you guys.

You want to buy it?

How much?

You sound like you are on that track.

Yes, you know particularly on the PET side, we have had a couple of things that occurred this year.

We secured some new heat set volume, and our customer unfortunately didn't get the growth.

For the first several months of this year that they were looking at, and there is a significant volume related negative to the profitability of that side the business.

So we have just come through the first six months of this year, and most of that time we were lagging the performance that we thought we were get.

We had our board meeting in Finley, Ohio, got back here in the afternoon and I walked in as Larry Green was walking out, talking to a customer here, and he told me things were working a lot better, as we get into the second half.

So, you know, we have got to work at that.

There isn't a point in time where -- we won't wake up with an epiphany some morning and say A-HA!

It's time to do something.

We think about everything all the time, and we look at this industry as a business and it has got to get better.

We are doing all we can to make it better, in all ways from the way we operate, to thinking of all those alternatives, that you are talking about.

And -- and I think that is really all I can say.

I can't tell you-- and even if I knew I wouldn't give a forecast, as to we are going to in 18 months sell the business, you know.

That's not likely to happen.

But as soon as we know anything, I will give you a call.

You have got a track that across the capital returns?

Absolutely.

Absolutely.

Got it.

Fair enough.

Thank you.

We have a question from the line of Ghansham Panjabi, from Wachovia.

Hi, guys, good morning.

Hi.

It's obvious the beer market seems to be growing in Europe, but also looks like it is picked up in North America as well.

I'm just curious as to whether you have enough capacity in North America, to support this growth if it is, in fact, sustainable?

Thanks.

Well, we have enough capacity to support the growth, and what we are seeing is a lot of interest in different formats, both larger and smaller formats in the custom can category, and we have equipment on order right now, which we'll are putting in towards the end of this year, beginning of next year, that will allow us to make sure that we're-- fully able to do that.

As I said the total industry statistics show flat.

So we have got the capacity to do it, and we've got the ability to kick things up here and there.

What we are putting in is simply swing capability, so we're not adding additional capacity, but we are adding the ability to make different sizes, both larger and smaller.

Ray, given the Cap Ex pull forward into '07, Should we expect then the Cap Ex comes down in 2008 as well.

Not necessarily, Gansham.

We have some wonderful growth opportunities in Europe, and internationally.

We talked about that for a while.

And we are going to spend our money wisely, and we think we can make lots of money by -- you know, investing in the right spots internationally, and putting in can equipment.

So I think capital spending is going to be relatively high next year, because we are going to be expanding -- expanding internationally.

Okay, great.

Thanks so much.

Good luck in the quarter

With that being said we expect pretty darn good cash flow in the face of it.

Looks like it, thanks.

The next question will be come from the line of Mark Wilde, with Deutsche Bank.

Good morning.

Hi.

Good morning.

Any sense, Dave, if you were to look across both Europe and Asia, about how much do you think unit volume for the entire business is looking now.

You are talking the global can market?

Yes, exactly, beverage cans in particular.

Well, because -- because the North America essentially flat, and it is the biggest market.

You start with 100 billion, more or less cans.

You know, probably the rest of the world is -- I would say net double digits.

And can you break that out kind of Europe versus Asia?

Well you just heard John Hayes talk about different parts of Europe.

As we -- as we were talking in the last couple of days.

You know 26 different countries in Europe, and each is a little different than the other.

But the dynamics there.

You know China has -- has been up double digits the last two or three years.

Yes.

And you see other parts of the world where capacity has been added, and where growth is taken place.

What you are finding also, you know, interestingly, is that the cans are a pretty good package, from a lot of perspectives.

Certainly, you know -- I think in Europe, particularly, where 10 and 15 years ago beer was put into PET initially, and there was a big thing about that.

I think that package is getting a little tired right now.

What we're seeing, is that as the consolidation occurs in brewing, new can lines and lots of demand for those kind of things.

But, you know, in the developed -- more developed markets of Europe and North America, you know, what I said I think is -- is the case.

We are growing than greater than 10% in the new market areas that would be in the East and so forth, so -- and the other thing is, you know, the world -- if you do too much linear thinking you can get yourself in trouble.

The world cycles at different times, and so on.

What we have to-- I think as good stewards for our company, and so on, is to be careful not to overbuild, because when we do that we know the outcomes aren't very good, but by the same token as Ray said, we want to grow with the market in Europe, we've got to invest some money, and we thinks over the next two or three years, you will see us continuing to participate in a positive way.

Okay.

And if I could just as follow-on, I wonder if you could just talk a little bit about what you see out there in terms of the acquisition market ,and whether you think some of this turmoil we are seeing in the credit markets, may actually put you in a little better position, vis-a-vis say, private equity buyers.

You mean that people that are not going to staple ten times EBITDA financing to some of these deals?

Can you imagine?

Yes.

The worm turns.

That's what I was talking about the linear thinking.

I have been alive long enough, and working to understand -- I was talking to Scott Morrison our Treasurer yesterday who spent time in commercial banking.

These things turn fast when they turn, you know.

And you are seeing it.

Spreads widen out all of a sudden.

People are saying gee, there is plenty of money forever, and don't worry about anything.

I think people have been doing nutty things with some of these acquisitions, personally, even though interest loans are low, and so on.

We are a disciplined buyer, and we don't always -- we are not always perfect, but we look for ways that we can pay a price that, you know, we can get a return well in excess of our cost of capital.

And at prices that have been paid lately for some things, we don't think we could have done that, even though we might have had synergy.

I wish everybody good luck and if they have a lot of trouble, maybe they can come see us.

Okay.

Is it possible for Ray to give us some sense of the impact of FX, on quarter to quarter, year-over-year basis, in terms of operating income?

$.03 in the quarter, $.04 year to date.

Okay, thanks.

The following question comes from the line of Chris Manuel, with Key Banc Capital Markets.

Good morning, gentlemen.

Hi, Chris.

Congratulations on a good quarter.

I wanted to ask questions around a couple of areas.

First you mentioned a -- some actions with Miller.

Can you give us a little more color there, as to what the heart of the issue is?

Not really.

You know it's -- it's covered in our contract, our agreement how we deal with the issues that have arisen.

I will refer you -- I think we will file this Q in the next couple of days.

But what we say, is what we are going to say about it, at this point in time.

You know they -- they have a point of view.

We have a different one.

And we will see.

But in the meantime, you know, we are -- it is business as usual.

We are both real busy.

I saw the -- a banner in our Finley, Ohio plant at one of these great, big new modules over there, that talks about partners in excellence, Miller and Ball way to go.

Hopefully we can get back to thinking that way, instead of having disputes.

But these things happen, you know.

We are both important to each other, and I am sure we will get this resolved, and we'll continue to be important to each other.

Dave, is it more around the issue of how you are packing through material costs or is there--

Chris, I told you I wasn't going to talk to you about it.

It is between us and when it is done, it will be over.

Okay.

Let's talk about your plastics business, and food and household business for a moment if we could.

On the plastics side, you mentioned looking at additional opportunities, particularly in the food side.

Can you expand on that a little bit please?

Yes, Chris, this is John, John Friedery.

I will take that.

In terms of what we are looking at there, we are just seeing decent growth in volumes, in that business, and right away, we are able just to use some of the capacity that was there, in addition by virtue of, you know, sharing best practices, and working together within a larger business, and being part of a rigid packaging company.

That group of plants that we acquired are running better, and we are starting to see better output, so we are simply growing with that, and growing our opportunities there.

But we will continue to look in the food and functional beverage categories, and both small and large ware, with utilizing what we've got available, and then maybe adding a little capacity, as appropriate when we see the opportunity, and when we secure those volumes in the marketplace.

Is that something you would look at in such a manner when you want to add that capacity, as looking outside to add the capacity?

Or is that something would you want to do organically?

I think we would probably look at it as doing it organically.

Okay.

And then -- and then a little bit on the -- on the food and household side.

You mentioned that you may want to do some -- have an announcement for us later into the fourth quarter regarding some structural issues.

Are most of the structural issues you are encountering there, is it more from the legacy food can business?

Or is it more from the -- Aerosol general lines business, or is it a combination of both?

Well let me start off by saying that Ray mentioned a word earlier when he was talking about it, that we were encouraged, and we are.

The plants I mentioned at the end of the first quarter -- or on the first-quarter call, I mentioned the plants were beginning to run better, and they are by and large.

We have a couple areas of opportunities.

But the plants are running better and people are working very hard, and we are getting our ducks in a row operationally there.

We will -- we are still on track for looking at, you know, toward the end of the year, for having some decisions on, what our overall footprint will look like, and that will be a combination.

The issues are really making sure that we are utilizing capacity.

Just like we always do.

Making sure we're making best use, sweating our assets as best we can.

We are in the process of taking a very deliberate look, at all of our operations, and all of our product lines, and as I said earlier, we will not do things for practice, so we continue to look at that, we're in the process of installing a common ERP system, which will allow us to do better planning and get a better look, and then we will make our decisions from there.

Okay.

Final question.

Is that business, the metal food and household, running at its cost to capital, or hitting the hurdle rates, where it's kind of rough-- Where does it fall?

It's got -- it's got a ways to go.

That's why we are thinking about trying to do some of the things to get it where it needs to be.

Okay.

When you say "a ways to go" you are talking in relation to cost of capitol or --

It is not earning its cost to capital.

Okay.

Thank you, gentlemen

We have a question from Alton Stump of longboat research.

Thank you, good morning.

Good morning.

I just wanted to get a quick update on the can market.

In Europe, obviously, it appears that overall demand is doing well.

Is most of that coming from Germany, as you were talking about, or is the overall region showing stronger growth?

Just kind of looking at over the next couple years.

Do you think Germany could end up potentially getting back to any certain size, for the next three to five years?

Well -- I think the answer is, yes, we certainly expect to continue growth in Germany, over the next few years.

As I said before, it is going to be a marathon, though.

I think in the second quarter fillings in Germany, we're up in the range of 15%, and day by day you see more cans on the retail shelves than in the hands of consumers.

One of the issues going on in Germany, though, before the deposit, the can was a low-price package.

A lot of what is happening in the East, is the can is growing strong because it has been positioned as a premium package.

Many of the German brewers have raised the price of the can, on the retail shelf.

An education going on with the consumer.

That doesn't happen overnight.

Are we happy with how fast it's growing?

No, I would like to see it a little bit faster, but we can't be displeased with 15% growth year-over-year.

So, it is going to take some time to get going, but again it's a very western society as all of us know, and the can, in all the research we have done shown that it is favored very positively with the consumers.

So stay tuned.

But we expect continued growth.

Great, thank you.

For our next question we go to the line of Andrew O'Connor, with Millennium Partners.

Thanks, operator.

Good morning, gentlemen.

I wanted to know if you could elaborate on the planned increase in European capacity for beverage cans in '08.

Is the new capacity, all with existing customers?

Or is some of this for new customers?

Well, I -- I won't comment on the customer side, but when you are having 10% growth, year-over-year, this year I said, past couple of quarters it would be very tight if the volume continued going into 2007, even with the start off of Hassloch and Hermsdorf.

Those two start ups, particularly Hermsdorf has been absolutely terrific.

But at the same time, unfortunately, we've had to have customers on allocation.

Despite the cold and rainy weather in Western Europe, volumes continue to be very strong.

As we go into 2008, we know that we're going need additional capacity even with a full year's effect of Hassloch and Hermsdorf.

So what we try to do is position that capacity, and talking with customers on where it was needed most, and we decided to go with Ramdomsko and Hermsdorf.

John are you able to say, is the new capacity, again, is it all or mostly with existing customers?

Yes.

Thanks very much.

We also have a question from the line of Richard Skidmore, with Goldman Sachs.

Thank you, good morning.

A couple of quick clarification questions.

On the free cash flow.

You raised the guidance, but did you change how you expect to use that free cash flow?

And if so, can you just update us there?

Not really.

We were using majority of it for share buyback.

I used to say between 175 and 200.

Now we are saying for sure 200.

We are going to buy at least $200 million of our stock back, even with that.

The rest of the cash flow goes toward debt reduction, and we talked about $2.2 billion.

Now we are going to be much closer to $2.1 billion, than 2.2 billion of debt, at the end of the year.

We are getting our balance sheet a little stronger and buying back a lot of stock.

Have you bought back any stock year to date?

We brought back 100 million of the 200 from the first half, 95 million.

Okay.

Just second question just to clarify the statement in the press release about several beverage can growth opportunities internationally.

Is that primarily the two facilities that you are expanding capacity in Europe, or other opportunities that you have identified to grow internationally.

I might ask John Hayes to comment on this too, -- and John Friedery, but we are -- you know we are in a lot of places, an,d we are looking not just at extensions where we are, but also possible new places, in the developing world, and without naming names, but, you know, as our customers move into these markets, we need to be there for them.

And want to be there for them.

So's that's a general statement.

I don't know, guys, do you have anything you want to say about it?

I will just say regarding China, we continue to see the market grow.

We continue to grow into the existing capacity we have, and we are looking at ways to increase our capacity and stay where we are in the market over there.

From an overall European perspective, you must put it in context.

The markets over the last 18 months, two years, have been growing at 5 billion cans per year.

And for us to just grow with the market, we need approximately two new lines per year.

Now as Dave said, you don't want to get into linear thinking, and get out over your skis, but those are the types of things we will be looking at.

The question is where we are going to be placing those, and we're having many strategic questions with our customers that we are growing with them in a responsible way.

Thank you.

Next we will turn to the line of George Staphos, with Bank of America Securities for a follow-up question.

Thanks.

Hi, guys.

Maybe segueing first off of that topic.

What kind of returns, or what kind of payback, or when do you typically reach cost of capital with -- line additions, excuse me, and in turn, with new facilities in emerging markets.

George, it is Ray.

New facilities a little longer.

With lines, it is always within three to five years.

Usually closer to three years.

In other words, payback is within three years of -- of the capital expenditure.

And -- you know earnings excess cost of capital, is immediate.

Right.

So -- you earn cost of capital immediately, with a loan extension.

Payback is three years or more.

And a new plant would be --

A little longer usually.

-- double that --

No, not double that.

Okay.

Payback on a new plant is a different game.

That is a longer-term investment.

When you can speed up an existing facility, it makes everything better right away.

A lot of times, George, you are building a plant -- if it is a new market area, you build a plant that is big enough for expansion, so you have a little more fix than you normally would have.

When you go to put the expansion in it is a lot cheaper.

Fair enough.

Like a new plan is longer like speed-ups or an existing line.

If not on average, within the first 12 months, you've broken even on your cost of capital over the line extension.

Absolutely.

Fair enough.

For -- you know packaging analysts moonlighting as Aerospace and defense analysts.

Should we keep this 8% margin -- which basically you guided to on the last call for Aerospace on a going-forward basis?

I think so.

We did a little better than that in the first half, but as Ray said we don't see -- we see sales a little less in the second half, than the first half and probably continues into the early part of next year.

We use that term, George, that you heard for many years.

It is a lumpy business.

The Landsat win that we got was real nice.

We got some large bids that are going to be decided during the second half of this year, and early next year.

We put in a couple of proposals just recently,that are big enough that I had to review them, and we keep our fingers crossed.

If we win our share, which we have been, of new business, it is the market for some of what we do has slowed a little bit, we expect to see that continue.

The business, though, if you integrated over time, we are still bullish about it.

Some of us walk through -- you know we expanded our antenna facility which is on the other side of the airport here a year or so ago, and some of us walked through that the other day, and we are working on more longer-term programs from -- anything from building large devices for the new Navy ships, to I think a dozen boxes that go out, and their conformal, and on every joint strike fighter, to the (inaudible) Tomahawk missile antennas.

These are things you start on your own nickel, for R&D, and the government helps you, and then you go on.

Some of them can take three to five years to mature.

We are in the production phase on some of these things.

We really like this business, and even though from time to time, you will see it come up, go down, and so on, because that is the nature of the beast.

Dave, if you win some of these awards, you know, maintain your fair share, or more, obviously it will accelerate your revenue, but will that also help your margin?

Or will the margin stay pretty stable, let's call it in the low 8s.

I think if you look at 8 over time, possibly up to 9.

We are doing a little more -- we are sort of -- depending on what we bid on and -- and the mix in any particular year, this year our mix, is a little more toward the fix price work.

And typically we expect to win -- make a little more margin in that.

But when you go down, and then you look at the amount of money we have invested, and the kind of return we are getting, even with an 8% margin, it's very good.

Sure.

So I think that is a good rule of thumb.

We are doing better.

And, you know, I hope we do a little better than 8% this year, when year is done, but expect it to be a little slower in the second half, than it was in the first half.

Understand.

You know, maybe last question or two, around food and household.

When you look back at the merger of the two businesses, if you will, you know, what's been the biggest driver or two, or three, of why EBIT hasn't necessarily kept -- well, it hasn't kept up with the revenue growth, and why basically your EBIT dollars are flat, but your revenues have gone up significantly, and how does restructuring help any of that?

I'll let John -- remember we're not going to restructure anything unless we get tossed up -- how restructuring helps that, George, is you do the same stock for less cost.

I guess maybe I should have phrased the question differently.

What was the biggest source or two, of negative variance over the last couple of years, that you merged U.S.

Can, with your existing food can operations.

Has it been more price and market activity or has it been truly -- should have been more fixed cost taken out more quickly than you thought

It's been to market.

It's been -- prices were going down, and costs were going up.

We just -- our margins have gotten squeezed pretty significantly over the last 18 to 24 months.

Okay.

And plastic, you are going to move that -- or you are already moving that into-- plastic sales into PET?

Yes, that has happened.

Okay.

What does that fit strategically there ,

Plastic pails?

Well we are going into the swimming pool construction business and think it is a good complement to that.

Well, is it the same process?

Yes, it --

Go ahead.

George it's a -- it's an injection molding process.

It is a good plant.

It complements our paint and general line business.

It actually complements some things we can do in our -- in our food business as well.

And so we continue to look at it.

It is that -- that particular part of the business is doing well.

And so it's-- it is not a huge part of it.

And strategically, it is not a linchpin, but it certainly is not hurting us, and in some areas, it helps us when we look at the markets.

,

Okay.

I will turn it over.

(OPERATOR INSTRUCTIONS).

Our next question comes from the line of Chris Manuel with Key Banc Capital Markets.

.

Good morning, again.

Good morning.

Hi.

First, I want to thank George for asking a question about Aerospace because that was one direction I wanted to go, but now going to enable me to go to a different one.

Let's talk about price for a moment here.

As you looked into 2008 with -- with the market being still being very, very tight in Europe, can you talk a little bit about the prospect for potential price increases through some of your different product lines in different regions than Europe potentially on the margin.

Some here in North America as well as for Aerospace -- sorry, Aerospace -- but Aerosol and beverage in Asia.

Yes, this is John Hayes.

Regarding Europe, going into 2008, we still see the significant cost pressures, whether it be metal energy, or other direct materials.

LME, for example, is currently around $2800 a ton which is several hundred dollars above last year's average.

So we are discussing price increases with our customers for those whose contracts expire at the end of the year.

Okay.

Let me try to come at that maybe a little differently.

With respect to a market where, if customers are asking for 100 cans and you have tight capacity in cans and are having a tough time getting them all they need, I am thinking of net price.

That's a -- that's a seller's market, right?

Is there a potential for further net price in Europe next year.

I understand what you are saying, but the other thing that is very important in all of this that you need to maintain -- there are two things that our customers really want.

One of them is stability of price, and other one is overall competitiveness, and the can, is not the only beverage package out there.

We need to go and do what is in our best interest, to make sure that the can is a long-term sustainable package, from a cost and delivery point of view.

At the same time, not pricing it out market so they make alternative switches to PET and glass, there is always a fine line of doing that.

And this is not a linear equation.

It comes and it goes.

So the point you raised is obviously economics 101 will dictate that, but as -- as people say if you go after it too much, they might turn around and go to another package, and we need to avoid that because we are enjoying some good growth.

Finding that balance is what we're gonna be trying to do.

That's fair.

How about in some of the other regions.

I think it is similar in China.

You know, last year we were squeezed pretty hard over there.

We've been able to recover pricing in margin in China.

This year, and we continue to look at what we can do going into next year.

And we continue to look at it from the same standpoint that John talks about in Europe, we need to make sure that the package is competitive in a growing market where people are making decisions about what capital to put in the ground for filling.

And then finally, the Aerosol side?

Well, I said we had an awful lot of activity in the marketplace the last couple of years and it has kind of stabilized, so we are not going any lower, but we have got to recover margin in that business.

Okay.

Thank you very much.

It seems there are no further questions on the phone lines at the moment.

Then we should stop, I assume.

Thank you everybody for being on the call and we'll talk to you again in October.

Thank you, Shawn.

Thank you.

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

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