Ball Corp (BALL) 2009 Q2 法說會逐字稿

Welcome to the Ball Corporation second quarter 2009 earnings conference call.

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

Afterwards we'll conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded Thursday, July 23rd, 2009.

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

Please go ahead, sir.

Good morning, everyone, thank you for being with us.

This is Ball Corporation's conference call regarding the Company's second quarter 2009 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 SEC filings as well as in Company news releases.

And if you don't already have our earnings release, it's available on our Web site at ball.com.

Information concerning the use of nonGAAP financial measures may also be found on our Web site.

But with me today on our call are Ray Seabrook, Executive Vice President and Chief Financial Officer, and John Hayes, Executive Vice President and Chief Operating Officer.

On a comparable basis Ball reported diluted earnings per share of $1.20 for the second quarter compared to $1.10 for the second quarter in 2008.

We're pleased with those results and they affirm our strategy and the actions we've taken over the past 18 months or so.

Volumes are also picking up and plant performance is really good and getting better.

We're excited about an agreement we announced earlier this month to acquire four metal beverage packaging manufacturing plants from Anheuser-Busch Inbev.

These large low cost plants are an excellent fit within our metal beverage business and this acquisition supports our strategy to grow our worldwide metal beverage can business.

These plants are well run by experienced can makers.

We're confident that once this acquisition closes that we'll benefit immediately by sharing best practices, capitalizing on synergies and improving our operations.

We expect the acquisition to be accretive to Ball's earnings and cash flow in 2010.

While next, Ray will review the quarter from a financial perspective and then John will discuss our operating results, and I'll close with a few comments about our outlook for 2009.

Ray.

Thanks, Dave.

Comparable diluted earnings per share for the quarter were at $1.20 and through the first six months were at $1.97, up 9% in the quarter and up through the first six months compared to last year.

Turning to the operations, second quarter year-over-year sales volumes showed seasonal improvement compared to the first quarter.

However, through the first six months sales volumes were down in all business segments with the exception of European beverage cans where sales volumes were flat through the first half.

Along with lower aluminum prices, a lower Euro exchange rate also contributed to lower sales in the quarter and year-to-date.

Offsetting second quarter reduced sales volumes were improved operating margins in all of our North American packaging businesses, primarily result of lower cost due to plant rationalization programs commenced in late 2007, inventory gains in Food & Household segment and better pricing.

Lower interest expense and a lower share count due to our 2008 share buyback program also contributed to higher second quarter and year-to-date comparable earnings per share.

Exclusive of our announced acquisition, full year interest expense should be $40 million lower than last year.

The second quarter effective tax rate of 27% was favorably impacted by a lower tax rate on the gain on sale of DigitalGlobe shares.

The 32% effective tax rate on comparable earnings in the quarter was a little better than expected and slightly lower than the forecasted comparable full year effective tax rate of 32.5%.

Turning to the balance sheet, net balance sheet debt at the end of the quarter was at $2.3 billion, almost $300 million lower than at the end of the first quarter, and $365 million lower than at the same time last year.

We're working hard on deleveraging the Company prior to closing on our recently announced acquisition.

We still anticipate full year free cash flow in the range of $375 million and capital spending below $250 million.

Finally, a few comments about our recently announced acquisition.

As Dave said, we expect this acquisition to be earnings per share accretive from the outset.

Once we get by year one, which will require a little more capital than the out years, we expect this acquisition to generate approximately $50 million of free cash flow per annum.

And assuming we close the acquisition this year, that pro forma credit quality ratios at the year end will be better than they were at the end of the first quarter.

If you remember, the first quarter credit quality ratios had net debt to adjusted EBITDA of 2.9 times and a rolling four quarters adjusted EBIT to interest coverage at 4.9 times.

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

Ray, thank you.

Momentum is beginning to build across our businesses and we have begun to see some of the positive results from the actions we made over the past 18 months flow to the bottom line.

Proactive supply demand management, but disciplined approach to our commercial activities, meaningful cost savings resulting from our sustainability efforts and a continued focused drive for improvement throughout our packaging operations are helping to offset early volume declines.

In Aerospace we had challenging comp from a record 2008 second quarter but still had a stronger first half in this business than anticipated.

As summer gets into high gear and we move closer to closing on the A-B Inbev acquisition, there is growing energy and excitement in our operations and we are absolutely focused on driving results and making sure every action we take creates value for Ball and our shareholders.

Now turing to the operations.

Profitability in the quarter in our metal beverage packaging Americas and Asia segment, was down slightly versus last year.

As we indicated on our prior call, inventory holding losses on aluminum would impact the second quarter but to a much lesser degree.

Barring this impact in the quarter, results would have been improved year-over-year on lower volume.

For the balance of this year we expect little if any impact from aluminum inventory gains or losses.

Branded CSD continued to decline in the second quarter albeit at a slower rate.

The 4th of July holiday stimulated much needed promotional activities from our US metal beverage customers.

Overall industry volumes were down approximately 1% in the second quarter with increases in beer volume offset by declines in CSD.

Our volumes followed a similar trend with beer being up and CSD being down.

Overall we are off a bit more than the industry in the mid single-digit range, driven by our decision to forgo volume rather than reduce price in some locations, as well as the closure of our Puerto Rico plant.

However, our declines in the second quarter were nearly halved from the first quarter and volume trends improved sequentially during the second quarter.

Given customer indications and what we are experiencing this month, we expect to see improved demand in the second half of the year relative to our first half performance.

Now in China, volumes were flat year-over-year and performance was comparable to last year's.

This is the positive when you consider that the second quarter of 2008 benefited from strong demand in advance of the Beijing Olympics.

While Europe's volumes were essential flat in the second quarter, a continued shift to $0.33 a liter cans to $0.50 a litter cans impacted second quarter performance.

Next to product mix, currency translation was the largest factor in the decline of segment results.

Our European team is doing a good job of managing through the recent slow down and assessments are being made to identify additional cost savings in the near term including curtailing selected lines to ensure that supply is matched with demand.

We do foresee improved volumes across Europe as we move into 2010.

If that materializes as we expect, we plan to start up our Lublin, Poland plant which we had slowed during the economic downturn, in the first half of 2010.

We are pleased with our Food & Household Product segment performance.

Better manufacturing performance, disciplined commercial strategies, a smaller increment of inventory holding gains on template steel and the initial recognition of cost savings related to prior plant closings offset high single-digit volume declines in both food and aerosol containers.

This business continues to be on track to deliver the profitability that we expect.

As we approach the seasonal pack, demand is as forecasted to pick up in the back half of 2009, and all indications point to a very strong pack season.

Plastic Packaging Americas reported a noticeable improvement in EBIT before counting for the charge to close two PET facilities and despite 10% volume declines in the quarter.

We do expect improved momentum in volumes during the second half of this year, particularly in the custom side of our business, and the timing of our Watertown, Wisconsin and Baldwinsville, New York plant shutdowns are on target with Watertown now closed and Baldwinsville closing at the end of this month.

Our innovation efforts continue to build momentum and play an important role in keeping us close to our customers.

Over the last 18 months or so we have launched 25 new products that have resulted in 5 billion new or enhanced products in the marketplace, a growth of 1 billion new units in 2009 alone.

Examples of our success include the Monster import energy drink launched with our award winning Ball Resealable End.

Sutter Home, introducing single serve wine in Ball plastic bottles made with a unique coating that provides a more sustainable alternative to other barrier bottles.

And Miller lite can now be purchased nationwide in Ball's Alumi-Tek reclosable bottles.

Ball Aerospace is performing slightly better than we expected given the continued uncertainty in Washington after the administration change.

In the second half of 2009 we still see some softness as we deliver the remaining instruments slated for launch in 2009 and early 2010.

We are beginning to obtain more visibility on order on contract flow.

Last week you may have noticed news releases indicating that Ball Aerospace was awarded a significant contract from the U.S.

Air Force to continue providing measurement and signature intelligence and advanced geospatial intelligence to war fighters, as well as contract for the hardware for a second space test program standard interface vehicle space craft.

We have other proposals in the pipeline and we anticipate more good news and new business later on in the year which, if won, could provide up side to what we anticipate will be a challenging second half for this segment.

In summary, we are confident that our focus on operating performance, our continued disciplined commercial strategies, our progress on sustainability initiatives and our emphasis on optimizing costs will result in improved operating performance and cash flow over the remainder of 2009 and into 2010 and beyond.

We have made measurable progress, and we are not finished yet.

Dave.

Thanks, John, and thanks to you Ray as well.

This was a good quarter.

Maybe a little stronger second quarter than we anticipated.

We're executing on our strategy, we're focused on reducing costs and increasing efficiency and we have an exciting acquisition on deck.

I like many of you I'm sure would like to see a little more improvement in the environment outside Ball, that is the general economy.

It's different world and we're managing our businesses with that in mind.

We're happy with the progress that we're making but we're also not going to get overconfident and we have plenty of opportunities in front of us to do better.

We expect second half 2009 diluted earnings per share to exceed those of the second half of 2008.

And consequently we expect full year 2009 diluted earnings per share to be greater than 2008 results.

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

Thank you.

(Operator Instructions) Our first question comes from George Staphos from Bank of America-Merrill Lynch.

Please proceed with your question.

Thanks.

Hi, everyone, good morning.

Good morning.

First question is on Europe.

John, I was wondering if you could, if not precisely, generally break down what the sources of the EBIT variance were year-on-year and how much was, if anything, attributable to, again, inventory costs that hopefully are now behind you?

George, very little of it was related to anything like that.

It really had to do with the things I mentioned in my prepared remarks.

Number one being a shift from $0.50 a liter to $0.33 a liter cans.

And then the second thing was currency.

We talked in the first quarter a little bit about feel and as we go into the second half of the year we think we have some tailwind on that, but that was not a big component.

Okay, fair enough.

The second question, as we think about free cash flow for the year, Ray, depending on how you want to adjust for the settlement last year, you're running, I think, anywhere from $60 million and $130 million ahead of last year's free cash flow number, roughly just operating cash minus CapEx, which would suggest that this year's free cash guidance of the range of $375 million seems pretty achievable.

Can you talk us through what some of the puts and takes around that might be?

Because at least from our vantage point it looks like that number probably has more upward than downward tension.

Here's what I would tell you , George.

If you remember last year I think we overshot the mark by either $25 million or $35 million of what we thought.

And so what happened is, working capital came in-- working capital came in a little stronger than expected.

These are numbers that hinges on what our year end working capital tends to be.

Right now, as we look at it, we have commitments on metal and some other things that are going to make us probably have that working capital go a little higher.

So probably I think the $375 million is good.

We might get a little upside on that, but what you'll probably see when we get to next year, you'll probably see me advertising a real big number.

Because some of that number that we're talking about coming out, that -- the amount we increase, the working capital this year, we'll get it out next

Okay.

So I'm sticking with the $375 million.

Could be a little upside in that, and I think the real upside comes next year.

Okay, that's very helpful.

The last question, I'll turn it over, as we think about beverage can volumes in North America, you said that 2Q-- second half should be up versus the first half for the Americas in total.

Should we be able to suggest from that or imply from that, that [2H] versus [2H] last year is up for North American beverage can volumes?

Thanks.

Well, that's always a tough one to answer, George, because it depends largely on what type of promotional activity our customers are going to be doing in the balance of the year.

What I would tell you is you've seen heavy promotional activity by the large CSD customers, particularly going into the 4th of July holiday.

I think you see that generally speaking nationwide.

How long that continues will play a big component of it, but we feel relatively constructive based on our consumer analyses and discussions with our customers regarding the volume in the second half.

Okay, I'll turn it over.

Thank you.

Our next question comes from Ghansham Panjabi from Robert W.

Baird.

Please proceed with your question.

Hi, guys, good morning.

Good morning.

Hey Dave I was wondering-- hoping you could touch on, what was the biggest variance relative to expectations for 2Q?

Was it volumes in the US or Europe, cost savings, or something else?

Thanks.

The reality is, everything was kind of a little bit better.

You could see it in -- I mentioned in my early remarks that our operations are running really well, so we were -- the production cost is down a little bit, and that's pretty much across the Company, with the exception of Aerospace, Aerospace actually finished up a little stronger than their revised forecast as well though for the quarter.

So there wasn't any particular thing, Ghansham, and I would say pretty much across the board.

Okay.

And John this one's for you, if you don't mind.

The volume trajectory for European beverage cans intra-quarter, if you could just comment on that?

And also what really gives you comfort that 2010 will be much better?

Is it, is it what your customers are telling you?

Give us some color there, thanks.

Well it's a-- that's a good question.

Overall, European volumes were down a couple of percent in the second quarter, and it was really driven by continued softness in Eastern Europe, particularly in Russia.

We are starting to see in Eastern Europe a -- certainly a stabilization of the volumes.

We were seeing relatively high declines in the latter half of last year and early this year in places like Poland and other things.

We've seen that stabilized.

In fact, I think Poland was relatively flat for the second quarter overall, and we continue to see strong growth in the Balkan region, where our Serbian plant is running full out.

So that's a little bit on the east.

On the west, we're seeing a pretty good stabilization in terms of volumes.

I think overall Western European volumes were roughly flat, and that's despite a summer season that was okay in some parts but certainly not terrific in other parts.

ISo think overall as we talk to our customers and we see these trends and see these facts that are dictating the trends, we expect to see 2010 to be up a little bit.

Okay.

And is there -- is part of that just based on maybe the World Cup as well, or some sort of event equivalent to that?

Well, obviously the World Cup in 2010 is going to be helpful.

It's in the same -- while it's in South Africa, it's in the same time zone, relatively speaking, than Europe, so that should be a big boost in terms of European volumes in 2010, yes.

Okay, thanks.

Thank you.

Our next question comes from Chris Manuel from KeyBanc Capital Markets.

Please proceed with your question.

Good morning, gentlemen, and congratulations on a terrific quarter.

Thanks, Chris.

Couple questions for you.

First just couple kind of random different direction questions.

First, on the Aerospace business, you talked about in the prepared remarks, a few contract wins.

Could you give us an updated backlog number or could you maybe give us a sense as to when some of those projects will start to take hold?

Are those 2010 events or--?

Yes, they are largely 2010 events.

If I remember, I don't have it in front of me, but I believe our backlog was in the range of $590 million or so.

$587 million in the press release is what we said.

Yes, and so those are awarded, but they're not in our backlog just yet.

And so as we go forward, those will start.

Once we actually have the contracts signed, they will start to go in our backlog.

Okay.

So that's-- all right that's what I didn't realize, it appears as though the backlog didn't move much.

So these contracts aren't in the backlog yet?

That's correct.

They've been won since the end of the quarter.

Okay.

Second question I had was actually for Ray.

When you guys issued your press release in conjunction with the A-B Inbev assets, I think you'd indicated first full year operation that EBITDA would be in the neighborhood of $94 million.

Could you help us with what the breakout is between what the D&A component of that is between EBIT and EBITDA, or approximately?

Let me think about that.

Some of that's going to depend on the -- we have to write up the assets.

We basically got a fair value of the assets, but when you're going to find out, I don't have it right in front of me, but most of it is, it's much more heavily weighted towards EBIT than EBITDA.

All right.

I'll check back with Ann, but that's a number that would help us out.

Yes, I think we think depreciation and amortization is somewhere just a little north of $30 million, so that-- And I think we think that it's $102 million of EBITDA.

Well that's a nice improvement then.

Yes.

Last question --

Of course, we don't have -- We don't own it yet Chris, so.

Well, no that's-- but if you're finding more opportunities, that's terrific.

It is.

Okay, last question I had was with respect to kind of following on to the earlier question about volume in the second half here domestically in North America.

As you see the -- where are you seeing -- where do you think you'll see the principal improvement?

Is it more in the CSD side, or is it more in beer continuing to do well?

What gives you better confidence here in the back half of the year?

I think it's more on the CSD side.

We were-- in the first quarter, recall we were talking about promotional activity, and that really didn't kick in until late June.

It was really the 4th of July holiday.

And through the month of July you've seen some very strong promotional activity across the board by the large CSD customers.

On the beer side, I-- we don't expect to see much deviation.

It's been reasonably strong.

I think the secular trends, given the macro economic environment, are going to continue that, but so the real improvement we expect to see is probably on the CSD side.

Okay.

Thank you very much.

You bet.

Thank you.

Our next question comes from Tim Thein from Citigroup.

Please proceed with your question.

Thank you, good morning.

First question for Ray.

On the initial-- when you were going through the Inbev numbers, I think you said after year one, and correct me if I'm wrong here, but after year one, north of $50 million in free cash flow per annum, is that correct?

No, what I said is-- what I said and it was a little confusing, we've got a little bit of capital spend in year one and that-- and we're still working out what that number is going to be.

It could-- it may-- we may not spend as much as we think, but we think we've got a little capital spend in year one.

Once we get through year one the normalized cash flow from that business it should be around $50 million.

In year one it's going to be a little bit lower.

I don't know exactly how much capital we're going to spend.

It's somewhere probably-- the additional capital is probably somewhere between $0 million and $10 million.

So you can probably look for anywhere $40 million to $50 million the first year.

Okay.

And that $50 million-- the normalized $50 million number, what-- just ballpark what does that assume in terms of CapEx relative to D&A, do you have that?

That assumes ongoing CapEx for those four plants at just under $10 million.

Okay.

And secondly, if we look back here, in terms of -- and you gave some commentary with regards to the back half earnings, if you look historically on our numbers, anyway, this decade, I think, save the last two, that the second half was better than the first.

And, again, not pinning you down here on guidance, but did the back half of this year, you don't have this movement with regards to the inventory gains and losses, but presumably if currencies are anywhere near where they are today that likely becomes a tailwind in the back half of the year.

So is there anything that you'd call out in terms of what we should think about in the back half of the year that may be different than the first?

Well, I think that we aren't going to have probably the net inventory gain anything like we had in the first half but we're going to get it out of the operations of the Company, and I think you're right, Tim, I think if we execute very well and so on that pattern you talked about could repeat itself.

All right, thanks a lot.

Thank you.

Our next question comes from Claudia Hueston from JPMorgan.

Please proceed with your question.

Hi, thanks very much.

Good morning.

Good morning.

I was just hoping you'd mentioned foreign exchange had an impact in the European business.

I was wondering if you could quantify that?

And my second question was just more broadly looking at specialty cans in the US.

I just wondered how that business was holding up in this environment and what trends you're seeing there?

Let me talk about the-- John mentioned the-- when we talk about our exchange, normally we're talking about the translation of our European business into the US dollar financials, but sometimes we forget.

Within Europe we get exchange gains and losses as well.

We have Polish Zlotys, we've got the Pound Sterling against the Euro, so inside our business we also get gains and losses.

If I-- the-- I think we had some losses on Pound Sterling to the tune of EUR3 million or EUR4 million and we had some gains on Zlotys to the tune of EUR2 million or EUR3 million.

So I think it's a net EUR2 million or EUR3 million loss as to with exchange inside the business.

In addition, the exchange rate of translation, translating those earnings into US dollars, the Euro is about $0.20 below where it was this time last year.

Now we had bought some Euro hedges to offset some of that, so.

But that probably cost us $0.06 in the quarter, the translation of the european business into the U.S.

dollars.

Does that help you at all?

Perfect.

Yes, that's actually great, thanks.

Okay, and on the specialty cans, specialty cans have been a bit soft, and it depends on how you define specialty cans, but let's call it everything other than 12-ounce containers.

We've seen some of the smaller size holding up reasonably well.

Some of the larger size have been a bit softer largely due to those are take-out from the convenience stores for construction and other trades like that.

But we're starting to see a lot of our customers put more emphasis on those things, and I wouldn't say it's anything that you wouldn't expect in a soft economy.

But it has been a bit more soft than what it has historically been the case.

Okay.

And are there margins still holding in on those businesses even if demand is down a bit?

Yes.

Okay, thanks.

Thank you.

Our next question comes from Chip Dillon from Credit Suisse.

Please proceed with your question.

Hi, good morning.

Good morning.

Good morning.

First question getting back to the Inbev acquisition, you mentioned again in the out year free cash flow number, and actually you've been saying year one the free cash flow number is only different because of the incremental CapEx.

Are you not building in any further synergies beyond what you get on closing?

And if you could also remind us sort the timing roughly of some of the major contracts that come with that acquisition and when they would come up for renewal?

Let me talk the synergies first.

We obviously have some synergies on closing because we're not taking G&A costs.

We're not taking some allocated G&A costs, we take in those plants and we're not taking any G&A.

So that happens at closing.

We are expecting some more synergies as we get the operations under.

That was probably the difference between my number and the number mentioned earlier.

And it'll take us 18 to 24 months to start getting some of that out.

So the initial synergies is about $12.5 million of G&A costs up front and then the rest of it comes out over probably the next 24 to 36 months.

And the rest of that would be that $8 million difference in EBITDA --

Yes, and that's got to do with some -- that's got to do with some of this capital we're talking about as well.

So we're going to make a few little changes here and there of which we think will get a little bit of synergies.

Okay.

And can you give us a little color on the timing of the contracts?

I think that at this juncture what we said in our press release is I think about 70% of this business is soft drink and the balance was beer, and I think that's as far as we have gone or will go at this point.

Got you.

Thank you very much.

Thank you.

Our next question comes from Pete Ruschmeier from Barclays Capital.

Please proceed with your question.

Thanks, good morning and congratulations on a strong quarter.

Thank you.

I wanted to ask a question.

I was hoping you could amplify your comments on the Alumi-Tek closable bottle opportunity, and to the extent you can share with us a little bit more about the number of units you're talking about, the kind of growth you might expect, price points of the product, unit profitability, better or worse than your existing business?

Just trying to better understand where you're going with this business.

Yes, it's a good question.

In fact, it started out with the Miller Coors organization that they were trialing in various markets.

They have now gone to a national rollout.

It's in the range of 30 plus million units per year, but they have, and other customers as well, have significant opportunities going into 2010, and in fact, we're going to be installing more capacity to grow that into overall, not just with one customer, but overall in the 100 plus million units.

It is a very attractive product for us.

It's a new product.

It provides a lot of backbone into the metal beverage container, and generally speaking, we ought to make reasonable returns on that business.

Okay.

And any sense of the price points of the product relative, I would imagine it's a higher price point?

It is a higher price point, both because it has more aluminum in, it has slower speeds on how you manufacture it, and the technology is unique.

But then also from a customer perspective, how they're pricing it in the marketplace relative to single serve versus six-packs and other things it really depends as they go forward.

Okay.

That's helpful.

In Metal Beverage Europe, it was a little better than expected, and I was curious if you could share with us more about the unit volume progression year-on-year?

And you mentioned the outlook for 2010 is better, but how about the outlook for unit progressions second half versus first half?

Well, as I said --

On a year-over-year basis.

Yes exactly.

I think for the first half it's been roughly, for us it's been roughly flat.

The market's been down a little.

The main difference has to do with we've been exporting some cans into Africa and some other export countries.

We don't see going into the second half of 2009 any significant deviation from those trends.

We do take comfort that on the beer side of the market, as I mentioned earlier particularly in Eastern Europe, we're starting to see a stabilization of that which has been soft.

I do know that some of the CSD customers have been very strong in different countries as their execution gets better.

But I wouldn't expect in 2009 to have any significant improvement relative to the first half of 2009.

And if it does happen, that's all upside.

Okay.

That's helpful.

And just last question, if I could.

Maybe a question for Ray on your outlook for tin plate, what's your sense as to where we may be headed 3Q, 4Q?

And then as you talked about a positive seasonal food pack, I'm curious on whether the strong seasonal food pack is enough to more than offset potential destocking to the extent customers are waiting for price to come back down?

Yes, this is John, perhaps I'll take it.

On the steel side, we are starting to see steel prices begin to come down, but not near as much as the increase going into this year.

We have been in discussions with our customers regarding this issue, and we've communicated to those relevant customers that once our higher cost inventories flush through, we will discuss providing them the benefit of providing lower steel prices, but not until those higher costs flush through.

Could be several months, and we don't expect margin loss as a result because, quite candidly, we can't take on the commodity risk.

With respect to your question about volumes and destocking, there has, in the first half of the year, the destocking was a little bit more than we had anticipated.

You could you speculate on the reasons why.

Maybe it had to do with steel, maybe not.

But as we're entering the heavy pack season, they no longer can destock because as you know is when you pull crops out of the ground, you need to be processing those crops relatively quickly.

And so all indications across the board look good for a very healthy pack season.

Very helpful, thanks, John.

Thank you.

Thank you.

(Operator Instructions) And our next question comes from Richard Skidmore from Goldman Sachs.

Please proceed with your question.

Hi, good morning.

Thank you.

John, just a question with regards to where are you in the progress on the cost savings being realized from the plant closures that you've done?

And what else might there be as you go through the second half of the year?

And it looks like all the plastics savings coming in 2010, is that correct?

Well, no, we're going to get some of that in the second half of 2009.

As I said our Watertown facility closed at the end of June, and our Bville, Baldwinsville, New York facility will close at the end of this month.

There's always a several month delay in getting the savings because of decommissioning.

Recall in the first quarter, and maybe I direct you to that, we spent some time talking about it, going plant-by-plant in terms of the rationalization.

And what we said is we really expect in the second half of this year to see a lot of the benefit, and then the full amount of the benefit going into 2010, and I think we're right on target with all of that.

So just to clarify, the second quarter didn't see a lot of the benefit, and the bulk of the benefit of what you talked about in the first quarter is really second half 2009?

Yes, for the most part.

Again, recall we did get benefits in our metal beverage container because the Puerto Rico plant had been closed at the beginning of this year, but Kansas City was in the decommissioning phase during the second half.

We have announced-- we've closed, excuse me, in the -- during the second quarter.

The can facility has been closed, but during 2009 we're incurring higher freight.

On the Food & Household product side, we have been getting the benefits, as we said in the prepared remarks, related to the closure of a couple of aerosol plants that happened at that end-- at the beginning of this year.

And then on the plastics side, last year we closed a small plant in Brampton, Ontario, which we get some benefit, but that wasn't a big mover.

So as you can see, a lot of the benefits, the full amount is going to start to occur in the second half of this year.

Great.

Thank you.

Thank you.

Our next question comes from Joseph Naya from UBS.

Please proceed with your question.

I'm sorry if I missed this but did you quantify kind of the magnitude of the inventory holding gains and losses in the quarter?

No, we didn't, but I think our CFO can do that for you.

Thank you, Dave.

Well, we normally don't like to do that, and I'll tell you the reason why, is because a lot of things go into it.

You start lacking at scrap, we create scrap that we -- in the operation, we sell it back to the scrap company.

So there's, depending upon what you include or don't include, you can get some different numbers, but fundamentally I would tell you it's between $10 million and $12 million is the inventory holding gain between the two businesses.

Obviously North American Beverage had a loss and the Food business had a gain.

So the net numbers somewhere between $10 million and $12 million probably, when you include everything.

Okay.

Also was curious kind of certainly you've got plenty on your plate with the Inbev acquisition, but what are your thoughts in terms of other potential expansions?

Mentioned if markets hold up you may bring Poland on line.

i know you had put India on hold previously.

Have you thought about any further expansions overseas, or--?

I think internal to the business, I said organic growth opportunities, you mentioned a couple of places that we've looked, we continue to look at that.

It's not good this business to build it and they will come, so we're not going to be doing that.

But certainly we have opportunities that we've progressed to a point that if and as the market comes back, and you mentioned two or three of those, we look in the growing parts of the world for that.

If and as the economy comes back, I think it will, we're seeing signs in China, you see the Government announcing up to 8% growth.

That's not like 15% or 12% that they used to have, but still significant.

So we'll keep our eyes on that.

I think also importantly is that we will continue to look because our financial situation is such we're a pretty well financed Company.

Ray was saying a little bit earlier that even with the close of the acquisition our credit status gets stronger by the end of this year than they were in the beginning.

So we haven't stopped looking for things to acquire that might be really good fits and we'll keep doing that.

So to amplify -- to amplify Dave's point in terms of the internal growth, for competitive reasons, obviously we don't want to disclose exactly what we're looking at, but we have a priority list in every region in the world of where the growth is and what the opportunity is, what the potential timing is, who the customers are, what the competitive dynamics are, and we review that regularly to see when and if it makes sense to pursue in a more aggressive manner.

Okay, very good.

I think it sounds like nothing necessarily you're willing to talk about today, but you're maybe a little bit more optimistic than you were last quarter?

Oh, I think that's clear.

I mean, I just go back and revisit the question earlier, our first half was pretty darn good for the Company, second quarter in particular.

First quarter benefited more from this inventory situation than the second.

We don't expect much of anything to happen in the second half of the year and yet we're talking about the possibility of beating it.

So I think that when you see that, what you see is that the business is performing better.

All right.

Great, thanks a lot.

You bet.

Thank you.

The next question comes from Al Kabili from Macquarie.

Please proceed with your question.

Yes, good morning, guys.

Good morning.

Just a question on the inventory gains, losses.

In North America Bev, if I remember right, that the loss on high cost inventory there was about $9 million in the quarter?

I think if I remember right that we said the first quarter was about, divided up a third, a third, a third, I think, and then I think the first quarter was closer to $20 million in North American Beverage.

Okay.

So this quarter, you had, it sounds like you had a $10 million to $12 million gain in food and offset by --

Probably a little higher than that.

We said $10 million net, $10 million net, so since beverage also lost some in the second, so the food's got to be a little higher.

Got it.

Okay, so that's a net number.

Okay.

Got it.

Okay.

And then if you could help us with what the volume trends were in the Food & Household business, maybe help us split out food versus aerosol?

Yes the -- well, overall as I said before I believe, overall industry volumes were off in the 4% to 5% range.

Our volumes generally speaking in both businesses were off a little bit more than this.

We're not concerned, though, the-- on the food side, we're more skewed to the seasonal business and the decline relative to the market was really driven by timing differences in different markets, different segments, et cetera.

And we've talked about the strength that we see in the pack going forward.

On the aerosol side, it has been a bit softer.

We have seen pickup more recently in terms of positive year-over-year trends, but in the second quarter alone they were down largely because of the do-it-yourself and whether it was paint, whether it was automotive, other things like that, that served the aerosol market serve.

They were just a bit soft but we are seeing them come back.

Okay.

Got it.

And then can you help us, you mentioned in better Americas bev can trends starting off in the third quarter, can you-- I know it's early days but can you help us think about what the volume trends were early on in July?

Well it is July 23rd, so I mean, we don't-- we can't manage this business day-by-day in terms of the volumes.

What we're seeing, at least year-- month-to-date, in the month of July is better volume trends were roughly flat to up slightly year-over-year as we sit here today.

But again, a couple weeks doesn't necessarily make a trend so I wouldn't read into that too much but that is just yet another proof point that when we talk about volumes we expect to get a little bit better in the second half of this year as we sit here on the 23rd of July, they are a little bit better.

Okay.

And maybe the better way to ask it is, the volume trajectory through the quarter I think you were down maybe mid single-digits, but through the quarter, how did that progress through the quarter, that volume trend in America's bev?

Well I mean again we've talked in the past about volatility.

It was strong in April, it was a little bit weaker in May and strong in June.

Okay.

And then final question, is on the Inbev asset acquisition, just any updated thoughts on how are you planning on financing this?

You're generating some decent free cash flow, but want to get your thoughts on debt versus using some of the free cash flow that you're going to be generating?

Yes we-- obvious we've got a real good idea what we're going do, but we're looking at two or three different options.

We may go with some senior notes and we may look at some other options as well.

So you'll stay tuned, and you'll see fairly quickly here what we're going do.

If you take a look, though, at all the cash that we we're generating here with just this acquisition, we don't need a lot of extra money.

Except we have some big financings coming up between 2010 and 2011, so.

And you talked about growth-- other growth opportunities.

Right.

So we'll have to see.

Yes.

Okay.

And okay final question, if I may.

You talked about potentially curtailing some capacity next year if you build that Poland plant.

Any way to think about what kind of earnings impact that may have next year, if you do that?

No, to be honest, I think it's too early to predict anything like that.

We-- we were-- had a-- were discussing it earlier this week and once we get through the summer selling season and in the contractual negotiations with our customers, we'll have a much better sense and as we talk all along what we try and do is match our supply with our demand.

And until we get the demand nailed down in a more clinical way, country-by-country, region-by-region, it's just premature to talk about it.

I think in John's remarks when he was talking about selected down time in Europe, that's right now.

Yes.

That's not-- wasn't meant to talk about next year.

Yes, that's more of the second half 2009.

Okay.

Okay.

I'll turn it over.

Thank you.

Thank you.

Thank you.

The next question comes from Alton Stump from Longbow Research.

Please proceed with your question.

Yes, thank you.

Good morning.

Good morning.

Just a quick question with inventory gains in US Food, is that going to be gone completely in the back half, just to help us model out the profitability domestically?

Alton, the simple answer is it's gone.

Okay.

Okay, great.

And then just looking at Europe, is there any sort of color you can add in terms of breaking out how Eastern Europe is doing versus Western Europe?

If I recall, it looked like in April they were seeing some growth return to Western Europe.

Is it still Eastern Europe that's really dragging on your overall volumes there?

Yes, I think I mentioned it earlier, I don't know if you heard it, but yes, the short answer is Eastern Europe has stabilized, but it has been softer than Western Europe.

Okay, great, thanks, guys.

Okay.

Thank you.

Our next question comes from Andy Feinman from Iridian Management.

Please proceed with your question.

Thanks.

Listen, I just want, first of all, in case any of your customers are listening, I just want to tell you, I have two teenage boys and they're both very athletic and they love Gatorade, but I'm afraid to buy it for them because there's so many different kinds now that they tell me specific instructions what kind I'm supposed to buy at the supermarket, and when I get there, my head is spinning.

They have G, they have X, they have G2, and so yesterday I went down there and I was ready to buy 10 or 20 bottles and I came back with three bottles.

So I thought there was a good article in today's Wall Street Journal.

I hope they fix that.

But the reason I got in the queue was to ask you about one other thing.

Your $375 million of free cash flow, that doesn't include you getting back your collateral, which I think is about another $50 million in the second half.

Is that correct?

Yes, that's correct, Andy.

We should get the other $50 million back in the second half.

That goes through investing activities.

That does not include that.

Right.

But it'll still be cash coming in.

Yes, that's-- that'll be part of debt reduction, there's no question.

Right.

Okay, thanks.

Thank you.

And figure that out and buy more of those bottles.

I'd like to.

Thank you.

Our next question comes from Chip Dillon from Credit Suisse.

Please proceed with your question.

Yes, I had just a quick follow-up.

Some of your competitors in recent-- in the last week or so have talked about basically relying less on bank financing for the seasonal inventory needs that of course you see in the food can area.

Is this something that you all may think about doing as well, in keeping a sort of higher cash balance and depending less on a revolver for the time being?

Not at all.

We don't think about that at all.

We intend to have the revolver, and we're not sitting on cash balances.

Got you.

Okay.

And then just also, you mentioned the Poland plant now being finished.

What is it sort of influencing you the most to go ahead and move forward with that?

Would it be just-- you mentioned that Eastern Europe the volumes seem to be a little bit coming back or stabilizing better than Western Europe, but also I'm sure when you build these plants, as Dan mentioned, you don't build it and they come.

Were you able to solidify volumes in the last few months to a point where you feel more comfortable?

Well, yes generally speaking our-- we have agreements with our customers, but then it depends upon the demand of our customers and what we're seeing is, I mentioned Eastern Europe is much better than it's been.

Generally speaking Poland's been flat, every other country other than Russia is kind up of in the second quarter.

And so those types of trends and in discussion with our customers, we expect those trends to continue, whether it's in the Czech Republic, whether it's in the countries east of where we are building our plant, in Belarus and other places like that, we just see demand starting to perk up a little bit.

Based on our contractual commitments with our customers we think we will be able to get some of that demand, and that is a factor in looking at when we're going to start up the Lublin plant.

Got you.

Thanks.

You bet.

Thank you.

And we have another follow-up question from George Staphos from Bank of America-Merrill Lynch.

Please go ahead.

Thanks, guys.

I'll try to make it quick since it's late in the call.

I guess first question I had, project net was a big initiative for you back a few years ago.

I'm not sure you have much left in that, if anything, but are there potential applications of what you learn from project net on a going forward basis as you grow the portfolio in North America?

I'm not exactly following your question.

Well, you improved the-- your end making productivity significantly as you know, John, through project net.

You're obviously buying a lot of end making capacity potential with Metal Container Corp.

Do you see opportunities to improve the productivity given what you know right now within that big facility?

To be honest, it's a bit early in light of what we've seen so far to commit to anything, but as Ray had mentioned, we do see opportunities over the next 24 to 36 months through a variety of things using a little bit of capital here, whether it's best practice, whether it's optimizing the footprint, if you will, from a supply point of view.

We do think there's some opportunities.

Okay.

Thanks.

Second question, on the most recently announced Aerospace contract, which is a five-year $600 million, I guess, potential value, can you give us more detail on how that might work for you?

Well, yes, George this is Dave.

The-- there are three people who are awarded, if will you, parts of this contract, but it's what's known as a task order contract.

The current contract that has just concluded in the same place was a multi-year agreement.

We won about 80% of the task orders on that contract.

That doesn't necessarily mean that on the new one, which is a larger piece of business that we will, but we're already into it.

And so if I had to guess, I would say at least half of that business will come our way during the course of the contract, if we're as good as we have been, could be more.

If we get bad, could be less.

Okay.

Is that helpful?

Yes, that gives us a little bit more clarity.

And then the last question I had, can you update us, to the extent possible, on your efforts regarding the contracts for next year back to beverage can America, any change in your ultimate expectation in terms of improved returns?

Thanks, guys, and good luck in the quarter.

Thank you.

Thanks, George.

This is always a difficult one, George.

As you know, we do have several contracts coming up for renewal.

We're not going to discuss the specifics, but we have been very consistent that we are focused on the right blend of value and volume, and our conversations remain ongoing and the tone is constructive.

And as we sit here right now we're taking all the necessary steps to ensure that we remain competitive while getting value for our products and improved returns in that part of the business that were below what our expectations are.

Okay, and you remain confident you'll be able to get the appropriate return as you look out to next year and beyond?

We are very focused on that, George.

Okay.

Thanks, guys.

Thank you.

Thank you.

And Mr.

Hoover, it appears there are no further questions at this time.

I'll turn the conference back to you.

Thanks very much, Myra.

You've done a really good job being the operator here, and thanks to everybody who participated in the call.

We are going to go back to work now and try to have a really good second half.

We'll talk to you in about 90 days.

Thank you.

Ladies and gentlemen, that concludes the conference call for today.

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

Have a good day.