Ball Corp (BALL) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ball Corporation first-quarter 2013 conference call.

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

Afterwards, we'll conduct a Question-and-Answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, April 25, 2013.

I would now like to turn the conference over to Mr. John Hayes, President and CEO with Ball Corporation.

Please go ahead, sir.

Thank you, Daisy, and good morning, everyone.

This is Ball Corporation's conference call regarding the Company's first-quarter 2013 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 results or outcomes to differ are in the Company's latest 10-K and in other Company SEC filings as well as Company news releases.

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

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

Joining me on this call today is Scott Morrison, Senior Vice President and Chief Financial Officer.

I'll provide a brief overview of our Company's performance.

Scott will discuss financial and global packaging metrics, then I'll finish up with comments on our aerospace business and the outlook for the remainder of 2013.

We've made a lot of progress towards our longer term objectives in the majority of our businesses, including our ability to overcome the shortfall created from the previously announced 12-ounce customer shift in North America.

However, disappointing results in our European beverage container segment overshadowed this good work and led to our first quarterly results coming in below our expectations.

We will discuss this more when I talk about the outlook later in the prepared remarks.

But the overarching business fundamentals at Ball have not changed.

And while we have dug ourselves a hole the first quarter, we do expect the remainder of the year to be largely consistent with our expectations.

Although the year is probably more back end weighted as volumes in the second quarter are getting off to a slow start and our cost out plans in Europe will take time.

Other events in the quarter included, we successfully integrated our recently acquired Mexican extruded aluminum aerosol business which brings a new growth platform and a new region for Ball.

We began installation of a second beverage can line capable of making multiple specialty can sizes in our new Alagoinhas, Brazil, facility.

Volumes for us in Brazil were up strong double-digits for the quarter.

We are aggressively managing our manufacturing footprint by announcing that we will cease production at our Elgin, Illinois, steel aerosol packaging plant later this year, as well as redeploying beverage and manufacturing equipment from our Gainesville facility to existing facilities in the US.

We are launching exciting new beverage can innovation resulting in a leading US craft brewer offering their beer in cans for the very first time.

And we continue to leverage Ball aerospace's technology expertise by maintaining more than a $1 billion of contracted backlog despite the ongoing effects of sequestration.

We are encouraged by the operating performance across the vast majority of our businesses.

And as you can see, we have cost issues in Europe.

The consolidation of the Ratingen and Bonn locations is the first step of many activities over the balance of the year to ensure we are as cost competitive as we can be.

And with that, I'll turn it over to Scott for a review our first-quarter numbers.

Thanks, John.

Ball's comparable diluted earnings per share from continuing operations in the first quarter were $0.58 versus last year's $0.63, an 8% percent decrease.

Also in the quarter, the Company recorded after-tax charges totaling approximately $16 million related mainly to cost associated with plant closures and European headquarters relocation to Switzerland.

Our metal beverage Americas and Asia segment comparable earnings were roughly flat year-over-year due to shifting mix to specialty cans and excellent cost control at the plant level offsetting double-digit declines in 12-ounce can demand in North America.

Brazil volumes were up 40% plus in the quarter.

China volumes were up mid-teens though pricing in the region remains difficult.

European segment profit declined $0.06 in the quarter due to weaker volumes brought about by challenging economic and weather conditions in Northern and Western Europe, higher costs related to our regional headquarters move, and higher input costs.

In food and household year-over-year segment earnings declined slightly due to higher cost inventory carried into the year, and segment volumes declined 5% in the seasonally weak quarter with food cans down a bit more, which we expect to end up flat by year end.

And steel aerosol up mid-single digits in the quarter.

Extruded aluminum containers continued to grow globally.

Also in the quarter, we were notified by a food can customer of their decision to shift buying from Ball to a new supplier beginning no earlier than 2015.

While this is a ways away, we do not expect this shift to be material to the Company's results in 2015.

We have new things in the pipeline to deliver value-added packaging to other customers.

And as always, we will actively manage our manufacturing footprint to enhance returns on invested capital.

In the first quarter, we had two fewer accounting days as a result of moving to a quarterly calendar closing schedule.

And our effective tax rate was lower than expected due to lower taxes on foreign earnings and benefits of the reinstatement of the R&D tax credit.

Net balance sheet debt at the end the quarter was approximately $3.4 billion due to normal seasonal working capital build and nearly $90 million of pension plan contributions during the quarter.

Credit quality and liquidity of the Company remains solid with comparable EBIT to interest coverage of 4.9 times and net debt to comparable EBITDA at 3.1 times.

Given our seasonality and strong full-year free cash flow, we anticipate year-end net debt levels to be in the range of $3.1 billion.

For a complete summary of the first quarter results on a GAAP and non-GAAP basis, please refer to the notes section of today's earnings release.

Moving on to the financial metrics for full-year 2013, hardly any changes here.

Interest expense is expected to remain flat with last year.

The effective tax rate on comparable earnings is expected to be approximately 28%.

We believe full-year corporate expense to be in the range of $70 million, due to one-time costs related to the impact of retiree and other deferred comp elections primarily in the first quarter.

CapEx is still expected to be in the range of $400 million and free cash flow will be in the range of $450 million.

Our disciplined capital allocation remains with the majority of our free cash flow being returned to shareholders via share repurchases and dividends.

On balance, absent the disappointment in Europe, the remainder of the business is on track with our expectations.

With that, I'll turn it back to you, John.

Thanks, Scott.

Our aerospace business continued to perform well with solid execution on existing programs and contracted backlog growing slightly to a $1.070 billion.

As in the past being cost competitive has allowed Ball to win our fair share of government contracts.

And despite some minor slippage in some of our more tactical products related to sequestration, we remain well positioned.

After a long and very successful career at Ball Aerospace, Dave Taylor retired at the end of the first quarter.

We thank him for his significant contributions to our Company and wish him well in retirement.

Dave hands the reigns over to Rob Strain who joined Aerospace as Chief Operating Officer in early 2012 and is doing a great job in what has been a very smooth transition.

Now looking out across the operations today a few observations to share.

First, we continue to expect the Americas Asia segment earnings to be relatively flat in 2013.

Specialty can growth in North America and Brazil is strong.

And cost out initiatives are on plan, which are expected to offset anticipated lower volumes for 12-ounce containers in North America and difficult pricing in China.

In Europe beverage, given existing challenges and the time required to achieve cost optimization across the region, we are unlikely to fill the first quarter performance hole in 2013.

We anticipate seeing the benefits of ongoing cost out initiatives later in the year into 2014 and as such margins are expected to remain challenging in the second quarter.

Going forward, our global food and household segment will benefit from increased demand for aluminum aerosol containers in the typical customer pull through ahead for a normal seasonal vegetable harvest here in the United States.

In our aerospace business, while some uncertainty still exists around future ramifications of sequestrations, Ball's strong performance and track record should keep us well positioned for the long-term.

With the exception of our European beverage business, remaining segments operating performance are expected and anticipated to be solid and should improve over the back half of the year.

However, given our first quarter results and volumes in the second quarter are off to a slow start, it is unlikely we can reach our long-term 10% to 15% diluted earnings per share growth goal in 2013.

Our Company's cash flow is strong.

And we are actively managing our businesses to align assets and cost structures to respond to current market conditions.

This is a year where our attention to detail and focus on operational excellence are required to position us well for the long-term.

And with that, Daisy, we are ready for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of George Staphos with Bank of America Merrill Lynch.

Thanks.

Everyone, good morning.

Good morning.

I wanted to start on Europe.

These things happen obviously from time to time and ultimately you've good performance in Europe over the years.

It sounds like from listening, and also reading through the press release, that the issues in Europe, to some degree, perhaps caught you by surprise.

And so, I was wondering if you could provide a bit more details in terms of what varied, if anything, from your expectations in the quarter?

And then, again, if possible, on a forum like this, can you comment to the degree to which you ultimately see cost out benefiting results?

Obviously it's not going to happen second quarter, but in aggregate say by 2014?

Yes, George.

This is John.

Hi, John.

There were several things that surprised us a little bit.

The greatest of which candidly was probably volume.

Recall in January I had said that Europe, we were facing some issues in Europe, but we were coming off a year that we grew mid-single digits.

And in Western and Northern Europe, in particular, not only the economic climate, but they had a very long cold winter, and beer was very soft.

And we're weighted towards beer.

And so we were down in the quarter and that was a big issue, particularly when you're in a fixed cost business.

Having said that though, no excuses.

We've got to be laser focused on improving our cost out.

You know the shortfall was approximately 33% volume and mix, 33% labor efficiencies related to move, as Scott said, and 33% related to higher cost, whether it was metal premiums, higher energy costs.

And we are laser focused on getting those costs out of our system.

Okay.

The labor, I'm assuming was related to what you needed to do once operating trends vary from what you were expecting.

But the metal premiums I'm not sure why that would've been any different than what you would've expected going into the year?

Well we did expect some higher energy and labor premiums that -- excuse me, metal premiums that we're having some challenges trying to push through into the marketplace.

The labor efficiencies where we had redundant costs related to several opening up a new headquarters, and we hadn't yet closed the new headquarters and those things just take some time.

And we had a little bit higher labor cost than we expected in that business.

And so as I said, we are getting after that right now because we have to.

Okay.

John, I'd asked a question.

I'm not sure you're in a position to answer it.

I respect that, but can you size what the cost outs might look like?

If you mentioned it already, I apologize for missing it.

No, George, I do think it is premature to review that.

Our folks are taking a full scrub.

And we're going to be talking with them in the next couple weeks about that.

But we need to get the costs out.

And, look, this was a short-term blip that had to do with this is the first time in a long time we actually had volumes decline in the quarter over in Europe.

And so we need to make sure that our cost are as aggressively controlled as possible because you can anticipate given the economies of Europe, that we're going to see mid-double, or mid-single digit growth.

So we are planning for the worst and then the rest is upside if we can get after it.

Okay.

I'll turn it over.

Thanks for the color.

Next question Phil Gresh with JPMorgan.

Good morning, guys.

Good morning.

First question, is just the earnings outlook.

You know, not going to get the 10% to 15%, understood.

Should we be expecting EPS to be up year-over-year this year at this stage?

And that's a question for the year but also for the second quarter given what you were saying about trends and some of these cost of variables, any color would be helpful.

Thank you.

Sure.

Moving into the second quarter, it is starting off slower in terms of volume.

So I think the second quarter has got some challenges.

Full year though we're still expecting earnings per share to be up.

We just said we're not going to hit our 10% to 15% long-term goal, but we expect it to be up.

Recall, Phil, that at the first quarter we said we're going to be striving to reach the lower end of that range.

And so if we made $3, $3 plus at the end of 2012, you can do the math there.

We've dug ourselves a $0.06 sent hole or so relative to that.

But we still are going to be striving to get as much as we can, it's just going to be difficult given the shortfall in the first quarter.

Got it.

And then on the free cash flow guidance, it sounds like you're keeping CapEx the same.

So if earnings are expected to be lower, Scott, are there other levers you're pulling here to keep that free cash flow?

Or did you have cushion in that original guidance or how should we be thinking about that?

We are finding some things on the working capital front that we can go after to make up for the shortfall in the earnings side.

And right now, the CapEx plans that we have, the growth capital that we're spending on are projects that we like.

It's a lot of specialty capacity in both North America and Brazil.

And those projects have proven to be well-worth investing in.

And so we're going to continue to be disciplined in deploying capital we can find growth.

It's probably the maintenance side where we can maybe shave a little bit out.

But right now, we're keeping the number the same.

Got it.

Okay.

Last question just on the Europe mix issue.

Could you just elaborate on what that is?

I assume it's specialty cans.

But just kind of more detail on what you're seeing?

And is that just seasonal or what's going on there?

Well, as I said, number one we're more weighted to beer.

And beer is more weighted to 5-centilitre.

And so with the softness, overall just give you the context, overall beer, industry beer cans in the first quarter in France was down about 8.5%, in Germany down about 7%, in Belgium down about 2.5%.

All largely related to the economy and weather.

I mean even in Germany they were having snow in April, which they haven't had in a long, long time.

So the mix issue was related to we were selling less beer, which is 50-centilitre predominantly.

And we're selling on a relative base more 33-centilitre, which is the standard container in Europe.

Okay.

Got it.

Thanks a lot.

I'll turn it over.

Next question from Scott Gaffner with Barclays.

Good morning.

Good morning.

Just wanted to follow-up on the metal premium issue in Europe.

Is that -- because first I the contract pretty much adjusted for any changes in metal prices?

And the second is, is it related to steel versus aluminum?

It's not really related to steel versus aluminum.

This is aluminum premium and every contract is different.

There are some contracts where it's a straight pass.

And there are other contracts where they negotiate on a short-term basis where all that has to be negotiated.

And I would say we need to do, we need to push more of getting that premium passed through.

That's where we're getting squeezed a bit.

Are you going back to these customers and trying to get back that contractually passed through on a go forward basis?

No.

You have to honor the contracts that you have.

But obviously going forward you try to fix anything that's new that's coming up.

Or if the contracts need to change for whatever reason, then that's high on our priority list of things to go after.

Okay.

And then just on the -- you made a lot of management changes over the last year.

A lot of people retired.

So it's not as if the changes were made due to performance.

But is there anything in the last quarter where maybe just because of management changes the data wasn't flowing back as quickly as you would have expected?

So therefore Europe surprised a little bit just from an information flow perspective?

I don't think it has anything to do with any management changes.

I would say if you're -- the one comment I made on undistributed costs being up a little bit, that has to do a little bit with retirements because of the way the deferred comp plans work and certain retiree elections.

So it was a little bit higher the first quarter.

But I don't think there was any issue with -- we had a lot of changes last year in terms of going to the principal structure, moving our headquarters to Zurich.

And when something like that happens, I think you have a tendency to potentially to lose focus a little bit.

But I don't think it has to do with any personnel changes.

And the other thing I'd point out is when you look at our volumes sequentially through the quarter, that actually in January they were okay.

And then it really started to get soft in February and even more so in March.

I think largely it had to do with the prolonged winter.

Right.

And just lastly, the facility that you're consolidating, that's just a administrative facility?

That's correct.

It was our former regional headquarters and just outside of Dusseldorf.

Great.

Thank you.

Next question from Ghansham Panjabi with Robert W. Baird.

Hi, guys.

Good morning.

Good morning.

You know, John, just judging by what your customers are also reporting, Heineken was out yesterday saying volumes were down 8% in Western Europe for the quarter.

So obviously they're seeing it and it's flowing through the supply chain.

Are you seeing, or are you sensing any sort of weak link in terms of promotional activity at their end and they sort of adjust to this new reality of what's happening in Europe?

Not yet.

But what I will tell you as a general rule in the United States and in Europe it's not lost on their customers that the volumes have been quite soft.

Obviously for different reasons.

We've been focused on Europe on the weather.

Even here in the United States, not only weather, but the payroll tax.

I think the impact on the consumer surprised people a bit more.

So as we sit here thinking about promotional activity, it's very high on the minds of trying to get their volumes back.

But I do think that we're just coming out of the winter time, and so it's really late in the second quarter is when you'll start to see those promotions.

And the cycle promotions is very different than it was say five years ago.

They happen much more quickly.

Decisions are made much more quickly.

And so I think it's going to be more of a tactical approach to promotions and advertising as well.

I think you'll see a lot of marketing and advertising this summer in the beer category as well as a CSD category both here in the United States and over in Europe.

Okay.

And then just switching to Brazil, your two primary competitors down there seem to be focused on adding capacity in Northern Brazil.

Can you just remind us on your Northern Brazilian strategy?

And how that sort of fits in with your plan for the region as a whole?

Well, we have as you know we started up a plant in the Northeast in Alagoinahas last year.

And everything is going very well.

And we even in January announced that we would by later on this year have a second line installed.

And it was tied up under a long-term agreement.

We're halfway through the execution there.

And we expect probably late third quarter is when that will get up and running.

So when you talk about, I wouldn't describe it as a Northern Brazil strategy, it's our Brazil strategy and a customer-focused strategy.

And right next to our Alagoinahas plant, two of our big customers have built brand new breweries there.

Alright.

Thanks so much.

Next question Philip Ng with Jefferies.

Good morning, guys.

You guys were mentioning that you're off to a slow start to Q2.

Can you provide a little color on which businesses you are seeing a little more weakness from?

Well, relative to last year, I would say here in North America the beverage can volumes are a bit soft.

I think if you look at IRI-type data you can see just again the overall market is soft on the soft drink and beer side.

I know that some of the soft drink companies over the last couple weeks have talked about that.

And then over in Europe, the winter was prolonged.

I mentioned snow in Germany in mid-April.

That's in some ways, that's unprecedented.

So it's just a bit slow.

But as we start to cycle into the summertime, it is weather dependent.

But it is really those two things that I was referring to.

Got you.

And then on the food can business, I'm surprised to see some inventory holding drag from template.

I would've thought typically prices were pretty flat.

Did you see a drop-off.

Is that why there was a drag on the quarter?

There was just a little bit of that.

It had to do with some higher cost inventory from how we ran from the fourth quarter into the first quarter.

So I wouldn't read too much into that.

Remember, we took a lot of downtime in the food can business in the fourth quarter of last year.

And to manage inventories and that helped generate some very good cash flow for us.

But then, so you're spreading a fixed cost nut if you will over smaller volume and that's where the higher cost inventory flows through and it's a timing issue.

Got you.

And then just one last question on China, demand is still pretty strong.

One of your competitors mentioned that some of the regional players are having some execution issues.

They're having some setbacks.

Perhaps the excess capacity is not as bad as people have feared.

Are you seeing that dynamic?

And has it opened a door for you to win some new business?

And what are your thoughts on pricing, I guess potentially turning to the positive going forward?

I think all that you suggested, we would see it the same way, meaning volumes are continuing to grow strong.

As we said, we're relatively sold out.

We haven't added a lot of capacity in the market.

And so as we go into the summer, it will be interesting to see if there are indeed how tight the market gets.

And we are going to take a very pragmatic approach to prioritizing our customer demand and how we supply that relative to where the economic returns are.

So we are going to make sure that our customers that want to be with us for the long term and aren't just tactical price fires.

We are going to focus on those relationships over the tactical price buyers.

Got you.

So it sounds like there's potentially some opportunity to get a little better pricing if things do firm up inter year during the peak summer months then?

Yes, there could be.

But again it is a bit earlier and there are some operational problems.

But the local competitors over in China, they have a capability of getting their act together and so we'll see how the summer unfolds.

Thanks.

Good luck on the quarter.

Thank you.

Next question comes from Chip Dillon from Vertical Research.

Hi and good morning.

I was on a few minutes late.

So I apologize if you addressed this.

In light of the slightly softer guidance on the EPS line to get to the free cash flow number are you planning to reduce CapEx a little bit?

Or do you think you'll have a little bit better working capital managed?

How do you think you'll get there?

Well, it's still real early in the year, but right now we think we've got a little more upside in working capital than what we had.

We didn't change our CapEx guidance for the year.

Got you.

And then secondly, on the aerospace division, if there were an impact, or is going to be an impact from the sequester, when do you think that would both show up in the backlog and possibly in the actual results?

I think there's two ways you got to think about this.

The backlog we have is contracted backlog.

And that's been increasing and I think that's relatively solid.

So you wouldn't see anything -- and that's a lot of what I've described is the space hardware of what we do there.

That's pretty firm and pretty solid because these are satellites that need to be replenished.

And we're not seeing any impact with respect to sequestration, at least right now on that.

On the more tactical products, the antennas for say the joint strike fighter and other more tactical programs like that, we have seen slippage to the right.

Not cancellations but a slippage to the right.

That part of our business is certainly a much smaller part of the business than our space hardware.

And so I think you're going to see softness you'll see it in that area.

Okay.

That's great very helpful.

Then again I apologize if you are ready addressed this.

It seems like your experience in Europe, and I know that segments by company aren't apples to apples, but it seems like it's been little bit tougher in the first part of the year than in your other competitors.

Could that be because of who your specific customers are?

Or the mix of business with say soft drinks versus beer?

Could you give us a little help with that?

Yes.

I did address that earlier.

So I'd ask you to go back when the transcript comes out.

But it really gets into the geographic location.

You know Western Europe, France, Benelux region, Germany, that's a sweet spot for us and where a lot of our production capacity and customers are.

We are focused on beer there.

Given the weather and given the economic conditions, it was quite soft in those regions relative to some other regions.

And then last, real quickly, more for Scott, is there any obvious or are there obvious things you're looking at to even further lower your debt cost, given this incredible environment?

Or do you feel you've pretty much done all you can do?

No.

We're always looking at the debt markets and they've been very attractive lately.

So we're always looking and we'll be opportunistic.

Got it.

Okay.

Thank you.

Thanks.

Thank you.

Our next question comes from the line of Adam Josephson with KeyBanc.

Thanks.

Good morning, everyone.

Good morning.

On Brazil, what were your like-for-like volumes in the quarter excluding the new plant and what do you expect the market growth to be in subsequent quarters?

I don't have the likes.

I mean year-over-year volumes were up 44%, taking out the new capacity.

Yes.

Absent the new facility, we were sold-out so we've been getting some productivity improvements there.

But when you don't have anything else to sell, it's tough to sell more.

Hopefully that addresses the first question.

On the second question, we continue to see I think in the first quarter industry volumes were up around 9% in Brazil.

We're starting to enter their winter months, but I think all the prospects based on conversations with our customers and based upon the economic activity related to infrastructure builds for the World Cup next year.

I think as we go through the back half of 2013 and into 2014 we're going to continue to see a nice volume improvements in Brazil.

Thanks, John, for that.

And just one more on the food can contract.

Can you go into any more detail about what happened with that contract?

Obviously you said you're not going to lose it before 2015.

But any additional insight into that situation?

Other than we're talking a couple years out into the future.

When you have something like that, usually it comes down to price, is my guess.

So price plays a big part of it.

But nothing more to offer.

I think we know we've got other things in the pipeline from a new product perspective.

And we'll manage our footprint as necessary and we've done this before in other businesses.

So we know how to do it.

We are just letting people know.

Great.

Thanks a lot, Scott.

Sure.

Next question from Mark Wilde with Deutsche Bank.

Good morning, John.

Good morning, Scott.

Good morning.

Can you talk a little bit about how much of that double-digit drop in 12-ounce North American bev you've been able to offset with specialty cans?

Quite a bit.

If you look at the profitability, well you can't see the profitability in North America, but they've done a heck of a job of both taking out costs -- growing specialty can, even some of the business, some of the same customers that we reduced 12-ounce volume with, we're growing specialty business.

So it's been a great offset to that business to offset the declines in 12-ounce.

I would just add that from a volume perspective, we grew mid-teens in the specialty size.

It's obviously off a smaller base.

But our overall volumes are down.

But the double-digit improvement in specialty now represents 22%, 23% of our overall mix.

Part of it has to do with lower 12-ounce obviously.

But the other part has to do with increasing specialty.

We've been very focused on that.

There's a variety of new products coming out this year related to that.

We continue to focus on that segment.

I think that and managing the cost base aggressively has done a great job.

Yes.

Am I correct that kind of the through put, just the unit through put on specialty cans tends to be a bit lower than on the 12-ounce?

That is correct.

Okay.

And are you likely, given this growth in specialty, are you likely to have to make any more capacity changes over the next 12 months as you see right now?

I think in the growth capital, as Scott has mentioned, anticipated in that is some of these changes.

It's not adding new capacity, it's converting 12-ounce capacity to other sizes and capabilities.

Okay.

And then could you also just address kind of timing on share repurchase activity?

The stocks down about 4.5% today.

I wonder whether you're likely to do more at a point like this?

Or whether you'll wait til the second half of the year when your cash flow tends to be stronger?

Sounds like it's on sale today so it's probably a good day to buy.

We've got to get out of a blackout period.

We're still on track to use most of our free cash flow to buy back our stock and we'll anticipate we'll get there.

Okay.

That's very helpful.

Thanks and good luck through the balance of the year.

Thank you.

Next question from Al Kabili with Credit Suisse.

Thanks.

Just a question on Europe on the higher labor cost you sited.

Is that a big sequential step up that you saw fourth quarter to one quarter that helped catch you by surprise?

I think the cost were kind of came into the business in the second half of last year.

You know this move to Zurich is more than just a move of headquarters.

We went to what's called a principal structure where the plant essentially instead of being their own profit and loss center, become total manufacturing operation and a distributing operation.

And I think we've got some added people cost because of that.

So it added complexity to the business.

I think we added people because of that and now we're going through a process.

I've been over to Europe twice in the past couple weeks as we look into how do we streamline some of those processes and make it more efficient?

Alright.

Along those lines, I know mentioned higher metal premiums in Europe.

But I think I understand there was some opportunity in some contracts for higher prices.

So can you just talk about are you saying you didn't get enough pricing to offset all of the increase in metal premiums?

Or was there any extra pricing in this year in Europe bev?

I think that's fair.

We didn't get enough price to offset some of the cost pressures.

There's also energy costs are up dramatically in Europe.

They are raising energy taxes dramatically in places like Germany and France.

So those kinds of things are impacting you too.

Okay.

Now on the energy, it's a little bit surprising to me on the energy front, just given historically, there's not a lot of energy usage for a canned plant.

And traditionally we haven't seen big sensitivity to energy prices in terms of your earnings.

So is there anything unusual going on this year in terms of that?

And is there opportunity on your contract structure, is that a year lag or what's the structure like to pass some of that through?

There's a fair amount of energy use, electricity used in making, in a can plant, if you walk through a can plant.

It typically, the energy prices don't change as dramatically but energy prices in Germany, for instance, they've raised.

They're moving away from all the nuclear plants, going to renewable energy, which is a good green thing to do.

But it's going to drive the costs much higher.

So we're seeing the impact of that.

In terms of the second party your question.

Structure for pass-throughs for that?

It might be a year lag?

There are lags and it would depend on the contract again.

But there's a lag so you're going to feel the pain for a period of time until you can reopen those contracts.

Okay.

All right.

A follow-up just on aerospace, I know it's lumpy quarter-to-quarter, in this quarter you are $18 million or so of EBIT.

And I know it's lumpy, so is that just kind of unusual versus the recent sort of experience we saw last year?

Or how should we be thinking about the run rate of the aerospace business?

Remember last year we had a number of closeouts of contracts and the lumpiness has to do with when you're starting up new contracts usually the profitability is a bit lower on the front of it relative to the back end just because the risk is higher.

As you execute on those contracts and reduce the risk, the profitability goes up.

And so we had a number of closeouts in 2012.

We have a number of ramp ups, which is good for the long term in 2013.

That's the vast majority if not all of exactly what we are talking about.

Okay.

So we should, so should we expect then as we get to the back half of this year, that starts to tick back up as these projects move forward in time?

Or is this kind of a good run rate for the rest of the year?

It's probably closer to a good run rate for the rest of the year.

Because remember contracts are often three-, four-, five-year contracts.

And so, as I said, when you look at our margins last year they were record high margins.

And they were because there were so many closeouts.

And I think we're having so many startups here.

And so the fundamentals of that business are quite good, but really where that profitability will really, assuming we're executing, really starts to fall into 2014 and 2015.

Yes, understood.

Okay.

Thanks, good luck.

Our next question comes from the line of Chris Manuel with Wells Fargo.

Good morning, gentlemen.

Just a couple housekeeping and miscellaneous questions.

At first, let me start with aerospace.

If I heard earlier and to follow-up on Al's question, if I heard earlier I thought you said for the balance of the year, with the exception of Europe that would be down on a year-over-year basis.

In North America or Americas bev where you tended to be flat, you indicated all the businesses would likely be up for the year.

So can you marry that with your previous comments?

As we think of the run rate for the balance of the year, should we still be thinking about aerospace year-over-year being up?

Or been flat?

Or being modestly lower?

I don't think it's up.

Remember in January what I said is there's not upside relative to aerospace.

So if we miscommunicated that, I apologize there.

I think, sorry?

No problem.

It was in an earlier comment.

I might've picked it up incorrectly Second question I had was with respect to, as we look at some of the specialty can and trying to delineate between what we're seeing in your 12-ounce business versus your specialty business, were all pieces up or down in Europe?

In North America, obviously, we knew you lost a lot of regular business.

But when we're looking around different regions, how should we think about which pieces are doing?

Which pieces aren't?

Just trying weigh some of that.

In Europe, as I said, we had mix issues related to, we had lower specialty sales relative to standard sales.

A lot of it had to do with selling less beer, which is 50-centilitre and selling relatively more CSD which is 33-centilitre.

I think that's the biggest change in Europe.

One other question with respect to Europe, is what your mix is as it sits today steel versus aluminum?

Well as this is public knowledge, we are in the process of converting one of our German plants from steel to aluminum.

That's in some of the CapEx that Scott had mentioned and that should be largely completed in the next month or so.

So pro forma that after we go through that, it's less than 33% steel and then the balance of it aluminum.

Okay.

That's helpful.

Last question was with your anticipation as the year rolls on with some of the beer customers in Europe is it that, I know you talked about some of the promotional activity that could help buoy things a bit.

But is it your anticipation that business will get a little bit better, absent any cost cutting pieces?

That' number one.

And then, number two.

Do you worry about other capacity adjustments over there?

I recognize you're going to do some work structurally more on back office headquarters, that type of stuff.

But do you feel you would want any other capacity realignment or adjustments over there as well?

No.

We don't see any capacity realignments in Europe at this time.

The market fundamentally is still growing.

We're just coming off of one quarter, a seasonally slow quarter that had bad weather and was soft.

So as we go into the year, you know you have to assume that weather will be normalized in there.

And we expect volumes to come back.

And we have said this in the prior couple of conference calls that we don't have any plans on adding capacity until we get our cost structure right there.

Okay.

That's helpful.

Thank you.

Thanks.

Next question Alec Stais Goldman Sachs.

Thanks.

Good morning, guys.

Good morning.

On the food can contract that is going to be lost in 2015, is that going to go to an new entrant in the marketplace?

Or another player that's not the other two big players that we know in the market?

You know, we are not a 100% sure.

So anything we'd say is speculating.

So it could be either one of what you're saying.

We believe it could be a new entrant, but were not 100% sure.

Okay, John.

And then on the specialty can side here in the US, you talked about your mix being 22% to 23% of your can production in the US is specialty.

Do have an estimate of what that number is for the market?

Much less.

Much less.

We lead the market relative to specialty container, so I don't know the number off the top of my head.

But I'm going to guess it's probably half that.

Okay.

That's very helpful.

And then, how much more room do you see on your end to continue to improve the mix towards specialty?

I mean, is there an upper balance that you see?

Well, yes, there is always an upper bound.

And one of the reasons why we improved is because we had less 12-ounce, as you know.

We've been over the past number of years spending a lot of time on looking at new customers and new markets.

You know the craft beer market is a good one that I mentioned in my prepared remarks.

Yes, it's a 12 ounce container, but it's a non-standard 12-ounce container that we'll be rolling out with that one customer.

So there's a variety of opportunities there.

You think about even on the CSD side.

Several years ago there were none of these 7.5-ounce cans.

And now they have really started taken off.

And even some of our big customers have publicly talked about double-digit growth there and their focus on it.

So I think there's just a lot of opportunity in mainstream and in some of the more unique categories where historically cans did not play a part of.

Interesting.

My last question is on Brazil.

Could you talk about how your customer base down there is beginning to prepare for the World Cup next year?

And whether there's any preliminary implications of what that would mean for demand of the metal can relative to glass bottle?

What I can tell you is there's a variety of beer customers.

Virtually every beer company down there, a major one that we are aware of, are putting significant capital dollars towards can filling.

And we pay very close attention to that.

I'm sure other people in the industry do.

And so there's a good sense that there's going to be a focus on cans as we go into the World Cup.

Got it.

Thanks, John.

Yes.

Next question comes from Anthony Pettinari with Citibank.

Good morning.

Good morning.

Just a follow-up on specialties.

Granted volumes have been strong.

When you look at the supply demand balance in North America, given some of your competitors are adding specialty capacity as well, and experiencing some of the same pressures in 12-ounce, is the margin premium, or the return premium you get from specialties over commodity cans has it been fairly stable over last year?

Or is it in some cases expanding or contracting?

Or is there anyway that you can help us think about that?

It's reasonably stable.

It's important to point out though when we talk about specialty, it's not just one specialty size.

We make everything from 5.8-ounce all the way up to 32-ounce.

We make approximately 20 different sizes.

And so when you think about from a manufacturing perspective, when someone's putting in new specialty capacity, they may be putting in one particular size.

And that has no affect on other sizes.

So you just need to be conscious of that fact.

I think as we go forward, we are seeing a proliferation of sizes, which creates complexity.

And I think as a result of that, the supply and demand balance of that is relatively healthy right now.

Okay.

That's helpful.

And then just going back to North American beverage, is there any way that you can quantify the impact of the Gainesville shutdown?

Or to what percentage of that capacity is going to be filled out of other existing facilities?

Or is there any kind of way that you can quantify that?

Well, we moved some of that equipment into existing end facilities in North America.

We still needed to produce a decent number of those ends.

So some of it is being redeployed in North America and some of it is available to be deployed in other places.

But the majority of that capacity will be redeployed elsewhere?

The majority, about half.

About half will be redeployed into existing facilities here in the US, which is actually already done.

Remember Gainesville is winding down right now.

It's a very small staff and crew right now because most of the equipment has already been moved out and moved into other places here in North America.

And the remaining equipment, is what Scott was saying, can be redeployed into other growth areas outside the United States.

Okay.

That's helpful.

I'll turn it over.

Next question is a follow up question from George Staphos with Bank of America.

Thanks.

Hi guys.

I want to come back to the food can issue.

And I think I know a little bit of what's behind it.

But still, you know, food can contracts moving from one supplier to another on price in a market where there's no growth smacks of the 1990s and not in a good way.

And so I recognize every year there's probably a little bit of movement here and there.

But do you sense that the food can market is taking a different turn in terms of competition from a price standpoint than what we've seen here the last 10 years?

And then the related question, I know it's early, could we assume that when that volume moves that you'll be able to utilize the facilities to produce any number of products that you're making these days that you weren't maybe making say 10 or 15 years ago?

Yes.

George, the first answer is no, we believe this to be an isolated event.

Okay.

Secondly, with our facilities, many of our facilities tinplate, we have co-manufacture aerosol containers, as well as food containers there.

And as Scott mentioned, we have some opportunities.

We have some new technologies and new products that are coming down the pipe that we are going to, we are exploring, we haven't made any decision on that.

And certainly in a fixed cost business a great way of leveraging your fixed cost is putting in new at existing facilities.

Okay, thanks.

Thanks for that John.

The last question, to the extent that you can comment, this new contract that you have in craft beer, is it a shaped can in any way?

And is there any way to size the volume benefit you'll get from this once it's fully running?

Thanks and good luck in the quarter.

Yes.

It is.

The can is a 12-ounce.

It has a unique size on the end, which is different.

And it will be in the market shortly.

And I know there's pictures out there on the Internet.

In terms of the growth opportunity, candidly, it's too early to tell.

This is a new product that's getting out to the market.

As you know, we have seen a lot of strong growth in the craft beer market.

When you go with a company the size of this one starts to put their weight behind it, we just don't know what the opportunity is.

But we think it's real important.

If nothing else because it's yet another further validation of the can has a place to play in a different market than it historically had.

Okay.

Thank you, all.

Thanks.

Next question is a follow-up question from Chip Dillon with Vertical Research Partners.

Last time I seem to recall that you, not last quarter but just in the past, when you buttoned up some of your joint ventures in China that your share there was north to 30%.

And you know we've been hearing about very strong growth in China.

My question is how much do you think the supply still exceeds the demand in the marketplace?

In other words, what are operating rates?

If we continue to see recent growth rates, when do you think we get to a tighter condition there?

We talked about this on the first quarter call I remember and we said over capacity in our estimation is in the range of 20% to 25%.

And the overall market has been growing 10% to 15%.

So it's probably about two years or so, maybe a little bit less, maybe a little bit more depending on the growth of the market.

We just had another quarter of reasonably strong growth in the industry, which is generally consistent with what I talked about there.

So I don't think anything that we talked about in the first quarter has fundamentally changed.

Now, how about in terms of some of the smaller players.

Maybe you can't be terribly specific, but do you sense that there's more a consolidation opportunity?

Or do you think these guys are just going to wait it out?

You know, I probably can't comment on that.

What I would tell you, is anytime there's over capacity in a strong growth market, people, the reason why there's over capacity is people are investing ahead.

And then they've realized that wasn't such a good idea.

And if you're financially strong you can probably weather it.

If you're not financially strong, you probably have to think about alternatives.

Got it.

Thanks.

Next question is from Phil Gresh with JPMorgan.

Just to follow up on the CapEx for the $400 million this year, how much of that is spoken for?

I believe maintenance is like $200 million to $220 million, and then you have some carryover from last year.

So how much would wiggle room do you really have in that number?

Well, they should always slide to the right.

If you recall last year, where we started CapEx estimations and then it came down through the year because a lot of things kind of slid to the right.

There's usually not much that gets canceled, probably more that gets shifted.

So we'd slow low down the pace a bit.

I would say all things equal relative to last year though a little bit more of it committed because it was the carryover from last year.

Yes.

We had a lot of things that we announced the Alagoinahas line in January so much of that capital gets spent this year as it comes up and running hopefully by the end of the third quarter.

Some of the specialty things that we've done in the US.

Those things are going to happen so it's probably less potential to have huge shifts in that capital.

I would agree with that.

So as we think about the number last year, around $300 million.

As we look forward beyond this year, and ignore the carryover impacts.

Is that realistically kind of the real floor for how low CapEx would go?

It really is dependent on the opportunities.

I mean every one is a discrete decision that is determined by the customer contract.

We talked about Europe.

We need to do some things in Europe on the cost side before we commit to expanding capacity there.

We're still seeing decent growth in markets like Brazil and North American specialty and even China continues to grow well.

While we're not adding any capacity until we get pricing better there.

So we're still seeing growth opportunities, but I wouldn't say it's necessarily a floor or a ceiling because it depends on the opportunities that are there

Okay.

And then my other question on free cash flow is this is the third straight year where we're seeing guidance for significant working capital benefits.

At what point do we reach saturation on those opportunities versus is this still like a multi-year opportunity for you?

We're not done yet.

So I'd say we're still expecting some benefits in 2013 and then we'll see a lot of the guys kind of across the businesses, in treasury, in a lot of different sourcing.

I mean the businesses have been very creative as to how we go after this and it's kind of like an ongoing treadmill, you're never really done.

As you know, we are evangelical to EBITDA dollars and historically we've focused on EBIT and CapEx.

And, you know, what Scott is really talking about is we see opportunities on the working capital line and we're going after them.

Okay.

Thank you.

We do have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch.

Please proceed.

Guys, one last one.

And piggybacking on Chip's question earlier and your comments as well earlier in the presentation, perhaps you mentioned it but, but how do we reconcile you using an ability perhaps to optimize your customer mix?

That's my phrasing not your's, but paraphrasing.

In China, with an attempt towards perhaps repricing when you still have, from your vantage point, excess capacity in the market?

Thanks.

Talking only on behalf of Ball.

And we're sold out.

So if things get tight and customers need more cans, we're going to be looking at where it makes sense for Ball to be selling those cans that are scarce to us.

Understood.

Thank, John.

Okay.

Mr. Hayes, there are no further questions at this time.

Okay.

Great.

Well thank you, very much, Daisy.

And thank you, everyone.

Just one reminder that we're going to hosting an Investor Day and a Management Briefing in mid-town Manhattan on October 2 and 3. Analysts and institutional investors should contact Ann Scott for an invitation.

And thank you for participating on today's call.

And we look forward to talking to you in three month's time.

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

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