Ball Corp (BALL) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation second quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, July 24th, 2008.

It is now my pleasure to turn the call over to Mr.

Dave Hoover, CEO of the Ball Corporation.

Please go ahead, sir.

Thanks, Tommy, and good morning everyone and welcome to Ball's conference call regarding our second quarter results in 2008.

I need to remind everyone the information provided during this call will contain forward-looking statements that 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 latest 10 Q and in other Company SEC filings as well as Company news releases.

If you don't already have this earnings release, it is available on our web site at Ball.com where you can also find information regarding the use of non-GAAP financial measures,.

You will find those on our web site as well.

With me today on today's call are Ray Seabrook, Executive Vice President and CFO, and John Hayes, the Executive Vice President and Chief Operating Officer.

While I'm pleased with our operating performance in the second quarter and in the first half of 2008, in the first half of last year, 2007, we benefited from a few nonrecurring items and still our Company's results improved this year.

Ray and John will say more about that and provide some color on our financial and operations performance, then I'll close with a few comments about our outlook.

Ray?

Thanks, Dave.

Comparable diluted earnings per share for the quarter were at $1.10 and through the first six months were at $1.90.

Up in the quarter and up through the first six months compared to last year's record per share earnings.

To better understand first half results, you need to look at the earnings performances over the last two years as Dave said.

Normalized earnings per share is up 53% for the two year period.

A 46% improvement in 2007 and a 7% improvement in 2008.

Although we touched on this in our last call, it seems some investors were of the opinion that the 2007 per share earnings increase was not sustainable due to one-time operating gains made in 2007.

Though the earnings mix has changed, our performance reflects the improvement was not only sustainable but we have increased earnings per share through the first half of 2008, again, off the record 2007 performance.

Turning to the operations, lower second quarter beverage can earnings were somewhat offset by higher aerospace, food and household, and [brazero] equity earnings.

Lower interest and tax expense and lower share count due to our share buyback program contributed to higher second quarter and year-to-date comparable earnings per share.

Second quarter beverage can sales volumes remain strong in Europe and China with North American volumes down year-over-year through the first half.

Lower second quarter worldwide beverage can earnings were anticipated coming off tough 2007 comps, but were up 30% from 2006 levels.

Last year, second quarter beverage can earnings included $9 million of North American inventory metal gains and $17 million of European business interruption insurance not recurring in 2008.

Both of these items were essentially finished in the second quarter of 2007.

Aerospace had another record second quarter and first half.

Sales are trending somewhat lower than last year, but better program execution, improved contract mix and lower unrecoverable cost contributed to their higher earnings.

Food and household sales volumes are down from a year ago, but earnings are much improved from a very low base due to better manufacturing performance and some price recovery.

Interest expense is $3 million lower in the quarter compared to a year ago due to lower rates and full-year interest expense should be at least $10 million lower than 2007.

Lower employee cost and lower unrecoverable aerospace expenses account for the majority of reduction in G&A expenses.

And the stronger Euro added $0.07 per diluted share in the quarter compared to a year ago.

Turning to free cash flow, we still anticipate full-year free cash flow to be in the range of $300 million which is after deducting the one-time $70 million legal settlement paid in the first quarter.

We also anticipate full-year capital spending will be around $330 million lower than our first quarter forecast and we still foresee more than 50% of that spending being for new top line growth projects.

Turning to the balance sheet, net balance sheet debt at the end of the quarter was at $2.7 million, higher due to seasonal working capital requirements, elevated stock purchases and a strong Euro.

As we look ahead to the second half, free cash flow is on target and we should see debt balance sheet debt of less than $2.3 billion at the year end, which means very strong second half cash flow.

The announced full year 2008 $300 million stock program is still on target and through the first half we have purchased a net $181 million of stock and we continue to see excellent value in our stock buyback program, especially at these prices.

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

Thanks, Ray.

In the second quarter, our various business segments performed well in a tough environment and generally exceeded our expectations.

As I mentioned in the first quarter conference call, 2008 is a year of execution, but equally importantly, a year to position ourselves well for 2009 and beyond.

While much more needs to be done, we currently are in line and on target for all of our businesses to meet these objectives.

In light of the core cost inflation we are seeing, pricing initiatives are well underway in all of our packaging businesses as we have no choice but to pass along the higher costs we are incurring.

Overall pricing, new pass-through models on energy and freight, and other risk management initiatives are being discussed both in person and in writing with all of our customers in all of our segments where our contracts allow.

In terms of second quarter performance, metal beverage packaging Americas and Asia came in near our expectations from a profit point of view despite weaker volumes in our 12 ounce business and difficult comps related to the remaining North American metal inventory holding gains that benefited us in the second quarter of last year.

Normalizing for the prior year's metal gains, segment performance was relatively flat even with rising costs in decreased unit sales but up 11% since 2006 which would factor out any impact of inventory holding gains.

Overall volumes in North America were down by more than 5% versus a 3% industry decline due to slower CSV volumes and as we have mentioned on our first quarter call, our beer volumes are lower as a result of our decision last year to not participate where we felt pricing actions did not make business sense.

Our specialty can business continues to grow although at a slower rate due to the overall lower consumer sales throughout the convenience store channel that most of our customers are experiencing.

Our new 24 ounce capacity in Monticello, Indiana, will be on stream during the third quarter of this year and we look to continue to provide additional can formats and other innovations to help our customers win in the marketplace.

Our Kent, Washington, 12 ounce beverage can plant will cease operations in late August and we continue to monitor very closely the overall soft demand for carbonated soft drinks in the US.

We must insure that we are economically sustainable for the long term in our 12 ounce business and customer negotiations regarding contracts maturing in future years have begun.

In China, year over year sales volumes were up around 20% driven by promotional activities ahead of the Olympics and continued growth in the use of cans in the beer segment.

We continue to assess opportunities to respond to this growth.

Strong demand continues in Brazil with overall industry volume growth of approximately 11% year to date and we expect this strong demand to continue.

Our capacity addition and our existing facility is progressing nicely and we expect this to be on stream in the first quarter of 2009.

In addition, our new Rio de Janeiro plant is underway and we expect to break ground in the third quarter of this year.

In our European operations, our volumes grew 7% in the quarter despite some poor weather conditions in Poland and other eastern and central European countries that you witnessed if you watched the Euro Cup Soccer tournament on television.

In addition, sporadic freight interruptions and customer strikes, particularly in France and to a lesser extent in Spain, caused some slowdown in shipments.

Overall industry volume grew about the same, 7% throughout Europe with continued steady growth across all regions and we have seen an acceleration of overall beverage can shipments during the past several weeks.

From a profitability point of view, EBIT was down in the quarter due in part to the timing differences of business interruption insurance that Ray mentioned in his comments.

However, when compared to 2006 which is a more apples-to-apples comparison, EBIT is up 20% over the two years.

Also impacting profitability were costs associated with our capacity expansion projects.

The various projects we are pursuing in this segment are all on time and on budget including our new Lublin, Poland facility which is expected to be operational in the second quarter of 2009.

We continue to monitor the regional economies very closely and will adjust our timing depending on market conditions.

Turning to metal food and household products, it continues to improve.

Our pricing initiatives continued operational improvements and improved mix added to the quarter.

Volumes for the quarter were down mid-single digits in part due to decisions to walk away from certain business and in part to continue lower-than-expected food can shipments as customers finished working off high inventories.

We have begun to see a pick up in food can volumes over the past several weeks as customers prepare for the seasonal pack.

Our aerosol volumes came in as we had planned.

Performance out of this business is progressing and year one of our three-year improvement plan is playing out as we expected.

The previously announced rationalization program is on schedule and should deliver at least $15 million of cost savings in 2009.

Reaping the cost savings of our ongoing rationalization plan, pricing initiatives, contract administration and cost recovery will insure our three-year goals are met.

Customers are being notified of the steep steel price hikes anticipated for 2009 and our need to recover these and other costs.

Plastic packaging Americas results are comparable with last year after adjusting for a small write down associated with a customer bankruptcy.

Volumes from monolayer carbonated and noncarbonated containers in the quarter were down approximately 10% while custom containers were up 15%.

And custom containers now represent approximately 25% of our total volume.

Many of the same C stores trends that I mentioned in our comments about our North American beverage can volumes ring true in our monolayer 20 ounce CSD and water business.

We continue to adjust our supply to meet current and future market demands and we believe we are on track to improve this business beginning in 2009.

As we indicated on our last conference call, Ball Aerospace will have another good year in 2008.

Second quarter performance is evidence of that.

Backlog for the quarter finished at $654 million which is down from $727 million at the end of the first quarter.

We will likely gain more visibility on the outlook for 2009 and future contracts prospects and awards after the presidential election.

So in summary, we have programs in place to respond to the increasing cost impacting our packaging businesses.

We have taken actions to improve pricing now and in the future, we are controlling costs across the operations, we are focused on building the backlog in our aerospace segment and we have an excellent team of employees up and down the Company focused on delivering the earnings and free cash flow that we and our shareholders expect.

Dave?

Well, thank you, John, and thanks also, Ray, for your comments.

I'm really gratified at our Company's progress so far this year and at the programs that John was talking about that we have in place to continue to improve this enterprise.

All of our employees are working really hard and I appreciate everyone's effort.

But we're not anywhere near finished.

We see opportunities in each one of our businesses to improve performance and we're going hard after them.

Even with the tough economic conditions we have experienced to date, our goal for the second half of 2008 is to exceed last year's solid second half performance.

We have a great portfolio of businesses, solid balance sheet and financial flexibility to respond to opportunities to grow our business.

And with that, Tommy, I guess we're ready for questions.

Certainly.

Thank you.

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

Please go ahead with your question.

Mr.

Punjabi, your line is open for your question.

Hey guys, good morning.

Good morning, Ghansam.

How did you beat George?

I guess faster fingers, I don't know.

Anyway, looking back to the third quarter of '07, your European beverage can operating margins were 16.5% if my model is correct.

Was there anything unusual in there, any business interruption, insurance proceeds, inventory gains etc., or was that a clean number?

I'll take a shot.

I guess I have to check this -- you can get the exact numbers -- but I think there was a couple million dollars in the last two quarters for business interruption insurance.

It pretty much tailed off -- the second quarter was the last big payment and then there was a little bit and there was nothing else unusual that I can remember.

John, do you remember?

No, I can't recall anything else.

So volume holding in the mid-single digits.

should operating margins be comparable to last year, adjusting for the $2 million?

Let me explain this a little bit more.

I'll talk about the second quarter, we will relay it throughout the rest of the year.

Three factors effective to earnings and margins in the quarter in Europe.

First, is the difficult comp compared to last year as a result of the closeout of the insurance settlement related to the 2006 fire.

Back in 2006, recall, we talked about the challenge of working with our insurance company to match the business interruption insurance proceeds with the cost and lost profit associated with the fire.

And in 2006 we settled that.

As time went on, there's always disconnects where the close-out ultimately created a situation where the match between the two is more favorable in the second quarter of 2007 relative to prior quarters.

However, going forward, the comparables around this are relatively clean, so I don't expect that to have an impact going forward.

But two other factors or three other factors really did impact Europe.

One, we had an unfavorable product mix issue.

We mentioned on my comments the temporary slowdown in the east due to the weather.

This did create some negative mix issues for us.

However, in speaking with our customers, they all believe this region's going to pick up in the second half and we indeed have begun to see this pick up over the last three or four weeks.

In other issues, we have been incurring additional costs related to our new projects whether it be higher labor costs as we begin to hire employees and train them in our other facilities, or significantly higher freight costs as we ship product into these regions to seed the market in order to insure we will be at full capacity for our new plants as they come on stream.

We would expect going in the third and fourth quarter some of those costs -- we're still going to have some of those and that's part of our investment for the future.

We talked about the strikes in France and Spain, but all in all, we are aggressively managing these issues and we do feel constructive about the future going forward.

Okay.

And, Ray, on the corporate expense line, the delta there, year over year?

Thanks.

Yes, believe it or not, a lot of that is the -- are you talking about the actual statements attached to the press release?

Yes, exactly.

A lot of it comes from aerospace, believe it or not, on the unrecoverable cost.

They're way down year over year.

That and some of our employee costs are down -- those are the two big items.

Okay, thanks so much.

Thank you very much.

We will proceed to our next question, the line of George Staphos of Banc of America Securities.

Please go ahead, sir.

Thanks, hi everyone, good morning.

I'm sorry, we had a couple other conference calls we had to deal with today.

We will give the crown to Ghanshom today.

Listen, in terms of the business interruption insurance, was it a couple million or was it $17 million?

I'm a little confused.

Let me explain this .

You go back and look at what we said in the conference calls.

When we first had that fire, we said that we were going to negotiate our insurance coverage and we were going to do our best to try to match when we record the business interruption insurance to when we thought, in fact, it fell.

The way the accounting works on something like that is you can't record a profit until you actually get the money.

So when we were negotiating and sorting all that through, these are in -- through most of 2007, when we were doing that, we were trying to do the best match when we got the cash versus when we thought the profits lied.

So when we say for example, with $17 million in a quarter, there was $11 million in the first quarter.

So you would expect more in the second than the first because Europe makes more in the second than the first.

So I think the point is that we're never exactly sure when exactly it should fall.

So maybe $3 or $4 million of that or some amount maybe should belong to another quarter, I couldn't tell you.

The point is, it was the largest cash payment from the insurance company in the second quarter of '07.

And certainly most of that money should belong in that quarter, but maybe not all of it.

Does that

Yes.

Ray, no one's going to go back and audit these, we're trying to figure out just what we should --

I'm just trying to explain we can't book something until we get the cash.

So we try to match the infusion of the cash with when we thought the interruption surge was and the second quarter was the largest payment, that's all.

And I think we wrote words about that in last year's 10-Q.

Yes.

All that is disclosed in our 10-Q.

But at the end of the exercise, I think our point with the $17 million is, it was our largest payment and we didn't have it this year and maybe some of it belonged in other quarters, we couldn't tell you.

We understand.

We're not quibbling with that, we're just trying to figure out again, or to assure ourselves, what the comparison figures are, the best that you can estimate, the best that we can estimate.

If I were guessing, George, maybe $2 or $3 or $4 million of it, maybe some belonged in the first, maybe some belonged in the third, I don't know.

No worries, no worries.

Now, as we look at cash flow and CapEx in the uses, $20 million or $30 million on CapEx relative to your overall free cash flow budget for a year -- rounding, or obviously free cash flow, a lot of things can move that number -- but I was curious with CapEx perhaps being a little bit less than expected, what is giving you reason perhaps to just keep the free cash book items for the year where you have had it and --

Yeah, if you go back, George, 300 was going to be tough for us.

As John pointed out in his comments, we're working real hard to take a close look at everything we do, because we're going to deliver that cash flow.

The other thing that's happening is, with all these raw materials and other increases and exchange, we're probably not going to get all that working capital back out.

We're going to get by far the majority of it out, but we're not going to get it all out.

And it's probably in our best interest not to get it all out.

So at the end of the exercise if you were to think of it mentally, the reduction of capital spending -- just take the money and put it into working capital.

Got it.

Vis a vis exchange or the fact that we may have a little bit more working capital going into it.

And the other thing is, when you do the numbers, you will see we need to flow at least $530 million of free cash flow in the second half to hit those kind of numbers.

George, I'll Just add on from an operating point of view we had very clear and distinct plans on how to get that working capital out because we need to position ourselves for the future in terms of not only our P&L but also our balance sheet.

I understand.

The last one, I'll turn it over, should we read anything into the fact that year-to-date I guess you're running a little bit ahead of your overall, if I annualized it, your goal for share repurchases and your comment about, you're finding good value in the share repurchase program.

Yes, not only should you read anything into it other than the fact that at these prices I'd like to buy $500 million worth of stock.

Our balance sheet says right now it's prudent for me to do what we're doing.

As we look at next year, we will see what we need to do.

We plan to have a strong buyback program next year.

We'll see what the size of it is when we get to the end of this year.

Okay, fair enough, thanks.

Thank you very much.

And we will proceed to our next question from the line of Timothy Thein of Citigroup.

Please go ahead with your question.

Thank you.

First, just two questions.

One, if you could comment at all, I think you mentioned in Europe that -- correct me if I'm wrong -- I think it was Europe, that you said you're seeing improvement in early days here in July, but I'm curious if you can share what you're seeing in North America thus far here in the quarter.

And then separately, what do the currency -- I think I missed it if you said it in terms of the per share impact, but I'm also curious what it added to the revenue improvement in Europe.

Thank you.

In North America, it's challenging out there, is what I'd tell you.

I'm sure you all look at CCE and what they have had to do and some of the other of our big customers out there, it is a challenge.

Soft drink is down, in the mid-single digits, beer is flat to up slightly in terms of overall industry volumes.

And as we go forward, CC has announced for example their take-home channel, they will be increasing prices after Labor Day.

That's going to have an impact most likely on our business and that's why I said in my comments that we are aggressively and pro-actively planning for various contingencies because we need to match our supply with the demands in the marketplace.

As we go forward, we will be committed to doing that.

This is an economic climate where I think many of our customers have been caught off guard, whether it's the significant slowdown in the C store channel or the lack of pickup in the take-home channel, so it's a very fluid situation and we are being very proactive and are are willing and able and will respond to any changes in demand that we see.

Yeah, just to finish the second part of your question.

I think I did say in my comments that the impact of the Euro is $0.07 for the quarter, $0.10 year-to-date.

The interesting part about that, that is really just the conversion of the European earnings, net earnings, the bottom line, that includes after interest, after taxes, after everything, that's the conversion of their earnings into US dollars.

The interesting point talking as we're talking about Europe as well, they have got more than one currency over there.

We deal in other countries other than just the Euro.

So I think when we go back and look at the quarter, their results were a little negatively impacted by some of their exchange differences.

Okay, thank you.

Thank you very much.

We will proceed to our next question, the line of Claudia Hueston of JPMorgan.

Please go ahead with your question.

Thanks very much, good morning.

I was just hoping you could talk a little bit more about the transportation issues that you have had in Europe, throw just a little bit of color on what exactly has happened there and where they stand now as we move into the quarter.

Thanks.

Well, there's two issues really.

There's one issue that relates to where we currently do business and currently manufacture business with the sharp rise in oil throughout many of the western European countries, and I'm thinking specifically of the UK, of France and Spain -- there's been all sorts of strikes going on.

We have seen a significant increase in the cost of petrol and we are actively and aggressively talking with our customers about that.

But the freight created a lot of dislocation, the freight strikes created a lot of dislocation that we had to backfill and do some other things that added some cost to our system.

So that's one point.

The other point is as we go into other countries, whether it's eastern Poland, whether it's India or some other places, we are shipping cans there and that is of significant cost.

We view that cost as we need to do that to seed the market to make sure we are well positioned when our facilities get up and running that they are at or near capacity as opposed to building something, crossing your fingers and hoping the demand will come.

So those are really the two issues going on from a freight perspective in Europe.

That's really helpful.

And in terms of those strikes, are they still going on, sort of off and on, or have they kind of stopped, do you think?

Well, no, it was really in the May and June timeframe, and one of our big customers in France I think publicly disclosed that they were having some issues and no doubt it had impact to us not only for a volume perspective, but from a cost perspective as well.

When we were in England in June, the people that haul gasoline for BP struck for seven days.

They tend to come out and say okay, we're going to go on a seven day strike, whatever it might be.

It's a little different.

But it really puts sands in the gears of your distribution system and it raises the costs.

Okay.

Temporarily.

That's helpful.

Could you also tell me what the shares were at the end of the quarter, shares outstanding.

Yes, it's a little bit lower than the number you see, it's about $98 million.

On a diluted basis.

Okay.

Thanks very much That's what I wanted, thank you.

Thank you very much.

(OPERATOR INSTRUCTIONS) The next question comes from the line of Mr.

Mark Wilde of Deutsche Bank.

Please go ahead with your question.

Good morning.

I wonder if you could just recap for us all of the new lines that you have coming up over the next 12 to 18 months.

Yeah, let me take a stab at that.

I think you mentioned a couple in Brazil.

Yeah, we have a capacity expansion in Brazil that's well on the way.

Then we have a new plant that we have not even broken ground on that, but we have plans to do that.

We are paying very close attention to all the economies, because the North America has a cold.

And we need to be very cognizant of what happens if that impacts other countries.

So and Brazil, we're being very close to that, we see no slowdown in the market, but we are paying close attention to that.

So that's a new line or a new plant that will -- the current plan is to break ground in the third quarter.

We have our Lublin, Poland plant which is on the Belarus and Ukraine border that serves eastern Europe as we continue to go east from Poland.

And that is on track to begin production early in the second quarter of 2009.

And that's currently a one line plant.

We're seeing very strong growth, particularly in the Ukraine market.

We have plans to invest in India; we are paying very close attention to that and, depending on the economy down there, we may slow that down a bit.

Just to give you an example, the inflation in India six months ago was about 3%.

Now it's 11%.

That's going to start to squeeze the middle class.

So we're paying very close attention to all these things.

I believe those are, well, in Monticello, Indiana, which effectively is largely completed will be up and running within six weeks or so I believe on that line.

Those are all the various capacity expansion plans that we have in the pipeline right now.

Okay.

Then just one other issue.

With the Euro pretty much record levels against the dollar right now, any thoughts on just hedging a bit?

We do that on a normal course.

And as we speak, we have various hedges throughout '09 on our conversion of our Euros to dollars.

So, Ray, that just goes out through the end of '09, so you're hedging 18 months forward, is that right?

Yeah, long term if it goes up or down, it will reflect in our results.

What we do by this is we really soften the blow.

So if, in fact the Euro does go down like you're anticipating, our results would be better in '09 than they otherwise would be because we have positions in place that ours would not go down as much.

So I can soften the blow, but over the long term, our results will hinge on the strength of the Euro and the dollar and how all that plays out.

But we can soften the blows as we move through those periods.

Do you hedge any of the other currencies?

Like, let's say, the KI or anything?

We do.

These are business situation as I just said, we have other currencies we deal with.

In Europe, we have Polish zloty, we have the pound sterling, we have other currencies, and normally we have, depending on what we're doing, we hedge up to match to our customer commitments generally.

Okay.

Then final question I had was just on the CapEx side, that can line or that end line project that you decided not to go ahead with, can you give us a little more color on that?

Yeah, well this was part of our overall project net that began several years ago and as we get close to the end, this plays right into what we talked about managing supply and demand.

And as demand has gone down, we think we can get away with not having to put in the last module.

So we're not only making, we're executing on plans to do just that.

Okay, sounds good, thanks very much.

Thank you.

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

Please go ahead, sir.

Good morning, gentlemen.

A couple questions for you.

First, let me start one for you, Dave Hoover, your favorite line of business here, space business, had an outstanding quarter.

Can you give us a little more color as to how the rest of the year flows, as you wind up some of these projects they tend to have higher margin, and it showed through this quarter.

Is that likely to continue through the balance of this year as some of the project deliveries take place or --

I think we had 3% or 4% of margin related to a couple of large programs that, as we tried to say, or as we did say, as they wind down in their fixed price programs and we do a good job, their margin increases and we're very disciplined in how we do this.

So, don't expect that kind of margin for the rest of the year, but they're going to have a very solid year is the way we see it now in terms of the profitability.

Longer term right now -- I don't know if you've noticed, but there's an election, a national election going on, and --

I wouldn't have seen any commercials.

Yes, right, right.

So it seems that the government gets sort of wrapped around the axle at these times in terms of making budgets or passing anything.

We're on the trail of a couple of really good big programs and they're being delayed.

Not sure that we will win them, but they're in our sweet spot.

So it's just hard to predict.

We keep hearing good things about it's going to happen now, it's going to happen now.

But I think the closer we get to the election, the less likely people are to step up and pay attention and find, in all likelihood, we will be working on a continuing resolution in the government's new fiscal year until after our new president takes office.

So that's going to hurt us a little.

We're working really hard to build backlog in the business with some success in some particular parts.

But I would say this year is likely to be -- at the end of the year we will like the margin for the year and it will be very strong.

Okay.

Ray, you must have fed him too much coffee this morning, because he talked so fast, I heard him say the backlog numbers but I couldn't quite make them out.

Could you tell me those again?

I must have talked fast, I don't think I gave you the backlog numbers.

You're right, I was talking fast.

This is John.

I must have been impersonating Ray.

Backlog at the end of the second quarter was $654 million.

Okay, 654.

Another question I had for you was, you talked about, I think in response to Mark's question, some of the capacity you're at, I forget what the amounts of capacity were.

I think you said one line in Poland, if you could tell us how many units that equates to, and then the units for the Brazilian piece as well.

In Poland, it's approximately 700 million cans.

In Brazil, the speedup was 200 to 300 million, then the new line which realistically won't come on until the end of '09.

going into 2010.

is about 700 million as well.

Then the last question I had was one of the things I did see when I had these television commercials was that there's a large brewer in the US that looks like they're getting bought.

They also have a can business there that could be pretty attractive.

Could you maybe give us a little on your thoughts as to would the industry support going from four to three, or maybe a little bit of thought of the acquisition environment and whether you think something like that would be feasible going from four to three in the industry.

Well, yes, I think it's feasible to go from four to three.

I think the beer industry has respectively gone from three to two or four to two, five to two, whatever you want to say.

So feasible, yes.

In a market that's relatively mature and so on, maybe it's likely.

I certainly don't know what the folks at InBev and at Anheuser-Busch plan to do relative to this.

Obviously, both of them are good customers of ours and we would be prepared to talk to them at any time.

But that's in their court.

I'd suggest you talk to them about what their plans might be.

Okay, thank you.

That's all I had.

Thank you.

And our next question comes from the line of Alton Stump at Longbow Research.

Please go ahead, sir.

Thank you.

Good morning.

Had a quick question.

Not to beat a dead horse on beverage cans in Europe, but it looks like just from a pure margin perspective, was one of the lower middle quarters you have had in a while.

You probably talked about some of the costs that popped up over the course of the quarter.

Obviously, one of your major competitors came out with a very strong number in that segment.

Just trying to get an idea of, is there anything else that we're missing there that was a one-time impact in the second quarter or was it truly just some of these costs -- whether it was through the strikes or elsewhere?

No, I think it was -- we're pretty transparent -- this is truly what's going on in our business.

John did mention one thing I might re-emphasize in terms of where we sold is important, but also what we sold, so the mix issue hurt us a little more in the second quarter than we might have thought.

And, but for the strikes and the wet weather who knows it probably might have been a double digit quarter for the market and for us.

So we don't see that as necessarily changing the trend or certainly not from the customers that we talked to about their aggressive plans to grow throughout particularly the eastern European region.

Okay.

I think you mentioned, John, that there were some costs with the plant that you're building for the first half of next year in Poland.

I think you mentioned that you thought that costs would still be there obviously in back half of the year.

But could you go me an idea of the magnitude in the back half on a per quarter basis, how that would compare to what it was in Q2?

It's a good question.

I don't want to evade it.

It's a few million Euros, it's always tough to pin down because, for example, as you're talking about we have hired new people for the plant, but we have put them in our facilities for training purposes.

To track that on a person by person basis, we need to hire five more accountants to do that and that doesn't make sense at all.

So it's a few million Euros in the quarter.

Okay, thank you.

Thank you very much.

And our next question comes from the line of Mr.

Richard Skidmore from Goldman Sachs, please go ahead, sir.

Thank you, good morning.

Just really a couple questions.

First, John Hayes mentioned some price initiatives across the business, can you just talk about a little bit more in detail where those are.

I know that some of it's just perhaps just passing through metal pricing, but could you just elaborate more on what price initiatives are underway?

Well, as I mentioned, we have price initiatives underway in all of our business, with all of our contracts we're allowed by contract.

We have some existing contracts that we are looking at them very hard in terms of freight pass-throughs in terms of other things like that.

We have sent letters out in certain of our businesses talking about where we're allowed to, the need for recovery of these costs.

But equally if not more importantly, as contracts come up for renewal we are taking a fresh look at everything.

I mentioned core pricing initiatives, I mentioned cost pass through models, taking a fresh look at that and making sure that we are balancing the risk taken in those contracts so that we are not taking unnecessary risk and we're getting paid for the value delivered.

So what I would tell you is in every one of our businesses these discussions are ongoing.

I was just going to add that we are communicating with clarity and in detail about all these things, trying to be in advance as much as we can.

And can you elaborate on how much of your business is currently up for renewal?

Well, again, it varies by business.

But I would say a significant amount across the portfolio is up for renewal over the next 18 months.

Okay.

Second question can you just elaborate, are there any startup costs associated with the Indiana can line that will show up in the third quarter or the fourth quarter?

Probably not.

Not so big that it would be meaningful.

Yes, when you start a line usually as you're flipping from capitalizing the last cost into getting it truly operational there are some costs, but I don't think it will be a big number.

One of the things when we invest in things like that, it's very important that we invest where we have high confidence in that people are going to deliver on the commitments.

And our Monticello facility is a wonderful facility, and the people there are tremendous and we have high expectations that they are going to hit the ground running.

Hopefully, Ross Rittberg, the plant manager was listening to that.

Lastly, Ray talked about in the past sort of a 10% to 15% earnings growth year over year.

As you look at 2008, is there any reason why you would not expect that to happen in 08.?

I'm not sure I understood your question.

Let me just try it this way, then you can take it, Dave.

One of my comments were, I think we had something like 25% last year and between the two years we're certainly going to exceed those, exceed our top end.

Whether in fact we can have 10% to 15% in '08 remains to be seen.

What I said and I think we wrote it in our press release is that our goal is to exceed the second half.

We try not to give real specific guidance.

Interestingly, you all seem to know exactly what we're going to make, we usually have to close the books and find out.

Each with 98 million shares outstanding less than a million dollars in net income is a penny and we're a $7.5 billion company.

All that being said, I think we're optimistic that there are parts of this company, you have heard us go over all the different operations that are definitely on the way up.

We have got, between this year year, next year, the year after, programs in place to incrementally improve on both the operating side and the pricing side various parts of the company, demand on some of our best customers as John talked about a little soft, and he also said and Ray said that we're going to run not to build a lot of inventory and report profits this year that won't show up next year.

So we have to manage that working capital down, too, if necessary.

But given all those things and everything we know about, all the volatility, we're feeling pretty good about the opportunity to beat last year's second half.

Then somebody might say well, by how much?

I say, by as much as we can.

And that's sort of where we are in July.

It's not a negative message it's just that, we're going to control everything we can and push hard and operate better and as Ray has been pointing out, if you integrate the last couple of years, we have taken a big step forward in the performance of the Company and I think there's more to come.

Thank you.

Thank you very much.

And our next question comes from the line of Andy Feinman of Iridian Asset Management.

Please go ahead with your question.

Thanks.

Are your steel suppliers honoring their contracts?

We are having challenging discussions with many of our steel suppliers, but we have very firm contracts, virtually every one of them, and we are taking a very firm legal position with them.

But we also recognize that we need a healthy supply chain over the long term.

What we have been doing is warning our customers, not only warning, but communicating very clearly with our customers that going into 2009, the price increases related to steel and other input costs will be significant and material.

Okay.

When do you finish preselling in Europe?

Finish preselling -- I'm not sure I understand the question.

You're shipping product in to sell new capacity and that's caused some costs in the quarter.

I think you said the new capacity in Poland comes on second quarter of '09.

So does that mean that that's when the preselling costs go away?

Yes, and you understand the seasonality of our business so it's most impactful in the summer months.

But it's also India as well.

What we are looking at India is working with our global supply if you will, with our licensees and with our Asian operations to make sure we're optimizing as we see that market, to make sure we're optimizing the costs as we see that market because we continue to see very strong growth, but we are a bit cautious that with the increase of the inflation and the budget deficits India is starting to run, what the implications of that.

So we are being very mindful of all of that.

Now, you guys have made the tough decision regarding beverage can capacity in North America which I commend you for, it's not easy to close capacity, and last year Crown closed some capacity.

I'm kind of shocked that we haven't seen any capacity closure announcements yet from [Rexum] and I hope we will.

Is there anything that would prevent you or any of your competitors from closing capacity, like for instance, the transportation costs to reach customers would be too high so therefore you've got to keep some suboptimal plant operating.

Obviously, I can only speak for ourselves.

When we're looking at capacity, when market demand goes down, it's not a billion in this part of the region or a billion in that part, it's 100 million here, 200 million there.

So inevitably you have customer contracts you need to honor and live up to and those, at least for us we have contracts that go as far as 2015 and as short of end of 2008.

So when we're looking at overall capacity, freight certainly does play a factor in terms of the customer commitments and how long you have to have out of pattern freight expenses related to servicing those contracts.

So no doubt that is a factor in all this.

But I think, Andy, if you're in this business and you have a lot of plants, there are a few that are at the edge.

Usually, for most people.

As John said, I can't speak for others, but we are doing a lot of thoughtful analysis and planning and scenario making around what happens here and there.

I think that over the last decade or so, all of the can companies maybe with the exception of Metal Container have shuttered capacity from time to time.

One must deal with the reality of the market and we need to all run at high rates in order to get our costs the lowest it can be.

So we're just trying as John has been saying to do our part to keep the supply demand in balance.

So it sounds like what you're saying, Dave, is that as far as you can see there's no reason why you or any of your competitors couldn't take advantage of the opportunity to reduce capacity if they see fit.

I think I would agree with that, yeah.

Okay, thanks.

All have from time to time and I expect will in the future.

Thank you.

You bet.

Thank you very much.

And our next question comes from the line of Mr.

Tim Burns of Cranial Capital.

Please go ahead, sir.

Good morning.

Morning Tim.

I got a suggestion, I think you ought to put up a Ray-resistant coffee delivery system in the office.

Because I unfortunately Ray, have to go visit a therapist for carpal tunnel syndrome after these conference calls and it's becoming like my left foot, I'm using my left foot to now write.

Hey Tim, it's really 24 ounce energy is what Ray's after.

Well, either way, put some child resistant caps on those.

I had a question for you, I know it was hit earlier, I always hate that, but John, when you talked about new pass-through models being discussed, core pricing initiatives, freight pass through, so on and so forth, II think of all the businesses that we follow in packaging, the metal beverage can business is done as well as almost anybody in getting price pass through, it shows.

But doesn't it have to be a win-win for your customer and how do you do that?

Well, it does.

In part, Dave was talking about freight optimization in terms of the various plant networks, we're trying to talk with our customers because it's not easy for them either.

Their volume is going down,their costs are going up, and they need to push it on to the consumer.

But having said all that, we are trying to work with our customers to optimize this whole supply chain.

You're right, in North American Metal Bev, the whole metal side of it, it has been relatively efficient.

But let's not forget energy, energy in terms of running our plants and energy in terms of freight.

When oil's even at $60, $70, $80 a barrel, it's very different than when it's at $130 or $140.

To put a new spotlight on those types of costs to try and optimize it for our customers and for ourselves, those are the types of things we're doing.

And so just putting more discipline in the whole process.

It sound like you're trying to make it more seamless so the chain is lubricated and nobody gets stuck except the consumer probably, but I think I hear you.

The other thing is, somebody once said growth is overrated and while 5% to 8% growth in Europe isn't anything to overlook, there's no holding back that North America and Europe are fairly consolidated markets.

I mean Europe grows in some cases because you guys basically acquire another country.

But allowing for that, growing internationally is very risky.

As you guys well know.

And yet, beyond eastern Europe it sounds like you're going to be going into territories where there's already established competition or where the way of doing business and how people do business is quite different.

How do you approach that?

Well, one of the things you just said the way of doing business.

One of the differentiators we believe of Ball relative to other people is we are very close with our customers in understanding and anticipating their needs.

Talk about beer for a minute, think about all the acquisitions that have happened by the majors and many of these disparate regions.

The consolidation, and I don't have the facts in front of me, but of a Russia or a Ukraine or an India, five years ago they had breweries you'd never heard of and now 80% generally speaking of the market share is controlled by one of the big four or big five beer companies.

They have certain ways of doing business and they need to rely on a supplier that's not going to let them down.

And so it's those types of things that we're in discussions with.

We often bring customers here to Colorado.

We go out and see them and not talk about price, but we talk about where their footprint is going.

where our footprint needs to go and how it can overlap.

I'm sure others do that as well, but that is one of the ways that we do it.

It helps mitigate the risk you're talking about because when you talk about risk there's economic risk, there's customer risk, there's political risk.

What we try and do is whittle each one of those down to as low of a possible risk profile so that we get comfortable that we can get returns that represent the risk taken.

Uh-huh.

Yes, Dave and I had these conversations quite a bit, but, the old game in North America was kind of warfare -- my plant's bigger than yours, I've got more capacity than your.

Just as an example, I look at Brazil, obviously our friends from the UK are pretty well established, so how do in a docile manner come in and make a business and make some money?

Well, we have been in Brazil for 12 years with our plant which is where the speedup is going on and we're making a different size there too, we're swinging a line.

In the Rio state, we're seeing a10% compound growth.

We make a business through the market growth.

And, hopefully we will get one line in and I believe that we're going to be able to sell those cans right away and, over time, we can add capacity there.

What is interesting about -- we were in one of these discussions John talked about just a week ago with a large customer from Europe who was here and there are a lot of different discussions that go on, but believe it or not, these folks need our containers.

Fundamentally, maybe I don't want to buy everything from one guy or maybe I want to grow into this marketplace where not only are there no existing can plants but I'm building a new brewery.

Or I'm a soft drink person, I'm going to fill soft drinks.

So, I think the growth that you talked about, taking the risk, we have been taking risks in some interesting places for a long time.

We have had our lumps, some of that, we have a lot of institutional memory about that.

And I think that there is more risk in some of these markets, but actually the business that if you think of Europe, the business that we own now has been in business and been owned in part by American companies for 50 years.

We don't use the same cost to capital.

Where ever we are in the world, we have different costs to capital to take in those risks.

But let's be clear.

Our growth is we try to grow where markets are growing.

So that we're growing with the market, because you shouldn't expect that we're going to have any opposite strategy than that, because you're right, growth for growth's sake doesn't mean anything.

What we're looking at is profitable growth.

Well, listen I think there's two very good stewards in the mature markets and I think that, the big three are only going to do good things.

I think smart pricing management and they need it, you guys need it to further grow the earnings.

And the last thing I got, I'm sorry if I'm taking this up, Dave, you don't do any commercial airline stuff do you?

No, not at this point.

I fly occasionally.

Lucky you.

But then the last thing was, Chris Manuel talked about the whole InBev AB saga, everybody's been calling on AB to buy MCC for probably what 10 years or so?

But could it be more interesting or more risky in terms of InBev changing the contract structure or linking it to global supply where I think you guys might have an advantage, I mean any thoughts.?

No, not that we want to discuss with you.

What do you mean, with me?

Do I have some kind of plague or something.?

No, I don't know about the size of your checkbook and I don't think you buy any cans directly.

I understand, thanks a lot.

Okay.

Thank you very much.

And our next question is another question from the line of George Staphos of Banc of America Securities.

Please go ahead, sir.

Thanks, hi, guys.

Quickly, was there any metal gain in Europe in this quarter?

I know you mentioned North America, I just want to confirm that.

No.

No.

Okay.

Secondly, did Asian profits move in line with Asian sales in the quarter?

Directionally, guys.

I don't need to get into the --

Yes, they were up year over year, absolutely, in line with what John said with their volume increase.

Okay.

Third question, PET -- are you in a position to comment where you stand with the margin recovery process, realizing it might not necessarily be a no wait event from a timing standpoint, has much of the work been done, how would you index it if you had to.?

Well, I just go back for the comments that I said in the prepared remarks that we believe going into 2009 that we are on track to improve this business.

Okay.

Fair enough.

I guess the last question -- you talked quite eloquently about how you have to shine a light on the risks that you take in the -- not just in international markets but even within North America and some of the things that have changed in the overall cost structure in the last 5 to 20 years or so.

I guess at the end of the day, are you still prepared as you were with Kent to continue to rationalize your capacity if the customers and you ultimately disagree on what the right relative return on that business, on that supply arrangement, on that commitment from your standpoint is.

I'll reiterate what I said, we are prepared to balance our supply with what we see in terms of our demand.

Okay.

Once more with emphasis, John?

I mean, I think -- the other comments that we make in this kind of an environment, we don't really have a choice.

We have to be understanding of, what's the economic environment that we deal with.

You may recall a gentleman used to work here used to said that we don't like to do things for practice.

And I'm optimistic that we're out ahead of these things and we're going to do our very best.

Understanding that we're part of a supply chain and we're in this for the long run, but we have got to make adequate returns.

Dave, is it possible to, as you see capacity creeping as you see perhaps some deterioration in demand in CSD in North America to utilize that capacity that you had in North America one for one in international markets and emerging markets, or is that probably too aggressive a ratio?

It's probably from a capital point of view a touch too aggressive.

But generally speaking, you are correct.

That's certainly in our mind, George.

Okay.

The notion of that, and then if you also think about the various moves that we made over the last several years in modifying capacity so that it makes other sizes, sizes other than the 12 ounce can, that's a big chunk of our business these days.

It's almost a different product.

Okay.

Final question, and I will turn it over.

Do you sense any change in your customers' expectations for packaging mix over the next two to three years ?

Obviously, the can industry probably capacity is not going up, but perhaps PET capacity might go up, but that wouldn't happen if the customers weren't envisioning using more and more of that in the mix, same thing within the beer market.

Do you expect anything, especially within North America, to change from a package mix standpoint that would alter your ability to manage supply and

I think, George, what you will see going forward is our customer base generally speaking trying out new and different formats, whether it's in the plastic bottle or beverage can to try and really relate to the consumer.

And try and look at price points relative to the consumer and price points relative to the various channels that they sell into.

And so I think this whole diversity issue and proliferation of SKU's we see increasing, not decreasing.

We have been doing a lot of work directly with our customers and doing our own market research and so on, we have got a number of innovative things going on around our packages from the type of printing, the kind of closure -- you can see the ads on TV and a lot of that's our stuff.

That's the kind of thing John's talking about.

In the end, we went with the winners and right now, with demand being a little soft, I don't know that they know exactly what is going to happen there, but I can assure you that the beverage can and PET bottles, there are going to be a lot of those made in three years as they are today.

Whether the mix shifts a little bit, I don't know.

But, if you take a look, most every raw material is going up in price, not necessarily at the same time but it's all happening.

So we're in an inflationary environment and we all have to manage differently in that mode.

I was just talking with someone the other day.

The last time oil prices were like this was the late 70's, early 80s, and we had a 22% prime rate.

Now we have got one that's maybe 2%.

I don't get what's going on with all that, but I'm just glad we're in the business we're in and not in some others like that airline industry that Tim was talking about a while ago.

Well, I'll let you go guys, have a good quarter, thanks very much.

Thank you very much.

Mr.

Hoover, there are no further questions at this time.

I'll turn the call back to you.

Okay, Tommy, thank you very much.

And thanks everybody for joining us today.

I do want to note that our third quarter earnings conference call, we're going to be scheduling for October the 30th, which is probably a week or so later than normal.

I just want to put that out there now.

We will remind everybody about that again late September.

But thanks again for being with us.

We're going to go back to work and have a good third quarter.

Thank you very much.

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