Ball Corp (BALL) 2013 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation's second-quarter 2013 earnings conference call.

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

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

  • (Operator Instructions) As a reminder, this conference is being recorded Thursday, July 25, 2013.

  • I would now like to turn the conference over to John Hayes, Chairman, President, and Chief Executive Officer.

  • Please go ahead, sir.

  • John Hayes - Chairman, President, CEO

  • Thank you, Sieglinde, and good morning, everyone.

  • This is Ball Corporation's conference call regarding the Company's second-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 the 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 use of non-GAAP financial measures may also be found on our website.

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

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

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

  • Now despite a very cold and damp spring, particularly in North America and Western and Central Europe, that resulted in volume declines for standard beverage cans in these regions, our second-quarter results were largely in line with expectations.

  • In fact, the softened demand resulting from the challenging weather and global economic malaise actually more than offset much of the good work and performance our various businesses have accomplished.

  • Over the past month, we have begun to see more normalized weather patterns and slightly better demand then we saw in the second quarter which, if sustainable, should give us better visibility as we cycle into the second half of 2013 and, more importantly, into 2014.

  • During the quarter, we tackled a variety of issues including -- aggressively addressing the unusually soft demand in our 12-ounce US beverage container manufacturing output by permanently eliminating 12-ounce capacity in our Milwaukee, Wisconsin, facility; making progress on European cost-out plans through, among other items, announcing the consolidation of our former European headquarters in, Ratingen, Germany, into our regional technical center in Bonn, Germany, as well as other G&A optimization measures.

  • While we are working through the various approvals required, we expect this to be completed in the first half of 2014 and, combined with other cost-out and value-in initiatives, will help us to improve our fixed-cost leverage in this segment.

  • In Brazil, we are on track to complete the installation of a second line in our Alagoinhas beverage can manufacturing facility by early fourth quarter of this year, which positions us nicely as we look to the World Cup next summer.

  • In Asia, we are in the process of relocating the capacity from our one line facility in Shenzhen, China, to one of our existing locations there.

  • This optimized footprint and better cost structure will position us nicely in the growing Southeast China region.

  • Our food and household products business also had a good quarter, with volumes up 8%.

  • And we are finalizing the installation of another production line in our Mexican impact extruded facility.

  • Lastly, in the quarter we took advantage of attractive credit markets to increase our financial flexibility by amending and extending our credit facility, coupled with the issuance of $1 billion of 10.5-year senior notes at 4%.

  • With that, I will turn it over to Scott for a review of our second-quarter numbers.

  • Scott?

  • Scott Morrison - SVP, CFO

  • Thanks, John.

  • Ball's comparable diluted earnings per share from continuing operations in the second quarter were $0.85 versus last year's $0.89.

  • Also in the quarter, the Company recorded after-tax charges totaling approximately $32.6 million, primarily related to business consolidation and debt refinancing costs.

  • Our metal beverage Americas and Asia segment comparable earnings were down year-over-year.

  • These results were slightly weaker than expectations, given continued weak industry demand for our standard cans in North America, where our volumes were down double digits in the quarter, which was consistent with the first-quarter trend.

  • From a manufacturing perspective, cost containment and operating performance at the plant level were exceptional in all regions.

  • And specialty cans in the Americas continued to grow at a double-digit pace.

  • European segment profit declined in the quarter due to slightly lower volumes brought about by challenging economic and weather conditions coupled with higher labor and input costs, both of which are being addressed aggressively.

  • In food and household, year-over-year segment earnings were higher due to improving volume trends, our recently acquired Mexico plant, and good performance in our steel and aluminum aerosol businesses.

  • Segment volumes increased 8% in the quarter, and conditions leading into the seasonal fruit and vegetable pack are favorable.

  • Transitioning from operations, during the quarter our corporate undistributed costs were roughly in line with expectations.

  • The effective tax rate was slightly lower than we anticipated, and we repurchased a net $202 million of our stock.

  • Net balance sheet debt at the end of the quarter was approximately $3.7 billion.

  • Credit quality and liquidity of the Company remain solid with comparable EBIT-to-interest coverage of 4.7 times and net debt to comparable EBITDA at 3.2 times.

  • Committed credit and available liquidity at quarter end was in excess of $900 million.

  • 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 second-quarter results on a GAAP and non-GAAP basis, please refer to the Notes section of today's earnings release.

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

  • Interest expense will be in the range of $183 million, due to some negative carry associated with the senior notes offering.

  • Full-year effective tax rate on comparable earnings is expected to be approximately 27%, and full-year corporate expense is expected to be around $73 million.

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

  • The majority of our free cash flow is expected to be returned to shareholders via share repurchases and dividends.

  • With that, I will turn it back to you, John.

  • John Hayes - Chairman, President, CEO

  • Thanks, Scott.

  • Our aerospace business continued to perform well in the quarter with solid execution on existing programs, the award of a Korean environmental instrument, and solid contracted backlog at $966 million.

  • While backlog continues to remain at or near record levels, we have seen some slight delays in US government contract awards due to the effects of sequestration.

  • Our operating performance has been excellent, and we remain well positioned while continuing to monitor closely our timing of project starts as we move into the third quarter.

  • Longer term, we are seeing a variety of opportunities both domestically and internationally that will continue to help grow our business and help mitigate any effects of sequestration.

  • Now, looking out across our Company today, a few observations to share.

  • Over the past month we have seen some improvement in the demand for standard beverage cans in North America and Europe, although we are not planning to recoup the volume shortfall of the first half of the year.

  • In our metal beverage Americas segment a tremendous amount of great work has been done to arrest the volume issues we have been facing.

  • And while it is not impossible, our ability to reach last year's profitability in this segment for the full year will be challenging.

  • In Europe beverage, we have plans in place and are executing on a variety of cost-out and value-in projects, the majority of which will be realized in 2014 and 2015, which should get us back to operating margins consistent with the 2010/2011 period.

  • Plantings to date related to the seasonal vegetable harvest for our food and household products business look good.

  • And as of today and if the weather holds for a strong pack, we should see continued good performance out of this business in the second half.

  • Going forward, we also see some more upside with the aluminum aerosol business performing well.

  • In our aerospace business, Ball's strong performance and track record should keep us well positioned for the long term.

  • So given all of this, we expect strong free cash flow, as Scott had mention, full-year 2013 results to exceed full-year 2012 comparable diluted earnings per share results, and a return to a more historical earnings per share growth in 2014.

  • With that, Sieglinde, we are ready for questions.

  • Operator

  • (Operator Instructions) Scott Gaffner, Barclays.

  • Scott Gaffner - Analyst

  • Good morning.

  • John, I think you mentioned you saw some pickup in the beginning of the third quarter in demand in North America.

  • I was wondering if you could just talk to us about that a little bit.

  • Is it just weather returning more normal?

  • Or are you actually seeing some pickup in promotional activity that is been relatively nonexistent?

  • What exactly are you seeing there?

  • John Hayes - Chairman, President, CEO

  • I think the vast majority of it has been weather-related.

  • As you know the month of June, particularly the first half of the month of June, had the same trends in May, being largely wet and even cold.

  • And we have seen a more normalization of that.

  • There has been a little bit more spot promotion, but I think the vast majority of it is weather.

  • Scott Gaffner - Analyst

  • Okay.

  • When I look at your volumes, you said your 12-ounce volume was down double-digits.

  • I think the industry was down about 5% in the quarter.

  • I know that 12-ounce is not your only offering.

  • Can you talk about how your volumes overall compared relative to the industry and maybe how your mix played into that somehow?

  • John Hayes - Chairman, President, CEO

  • Well, yes.

  • On the specialty side, we grew double digits again in this quarter, which helped to offset our softness in the 12-ounce.

  • On an apples-to-apples comparison if you exclude the business that we lost last year, we were about down on the 12-ounce side equal to the industry.

  • And then you just compound that with the business we walked away from, and that is why we are a little bit worse than the market.

  • Scott Gaffner - Analyst

  • Okay.

  • Just lastly, the facility -- you said you were going to eliminate a 12-ounce line in Milwaukee.

  • Is there anything left at that facility?

  • Are we closing a full facility?

  • And if so, what should we think about cost reduction?

  • John Hayes - Chairman, President, CEO

  • No, that was one of our facilities that we shared with the metal food business.

  • We make two-piece food cans there as well.

  • We have right-sided the G&A part of that business as we go forward as best we can.

  • But we are still making two-piece food cans there.

  • Scott Gaffner - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Ghansham Panjabi, Robert W. Baird.

  • Ghansham Panjabi - Analyst

  • Good morning.

  • First on Brazil, a lot of your packaging peers have reported challenges there in the beverage business, whether it is weather or the economy or social unrest or whatever the reason.

  • Can you just give us your perspective on the market and how your thinking about the upcoming selling season in '14 1Q?

  • John Hayes - Chairman, President, CEO

  • Yes, actually, we feel reasonably bullish on what is going down in Brazil.

  • As you know, we started up a new facility beginning of this year.

  • Our plans are on track for adding a second line in.

  • Our customer base, which is at times different than maybe some of the people you are referring to, has been reasonably strong.

  • We are well diversified into the Northeast and then down into the South, so overall we feel pretty good.

  • As you know, we're just start -- it is beginning of their spring right now, so we are starting to get into the heavier selling season.

  • And with the startup of the second line in Alagoinhas, I think we feel pretty good, particularly going into the World Cup in 2014.

  • Ghansham Panjabi - Analyst

  • Okay.

  • Then on the beverage can business as a whole, how should we think about inventories across North America and Europe, given all the challenges you faced during the first half?

  • I guess I am asking because -- should we expect below-average operating rates during the third quarter, or is it pretty well aligned by now?

  • Scott Morrison - SVP, CFO

  • We are managing that as we go along in the year, actually.

  • So inventory rates are little bit higher than where we expected them to be, given the softness in volume.

  • But we monitor that as we move throughout the year.

  • Ghansham Panjabi - Analyst

  • Okay, okay.

  • Thanks so much.

  • Operator

  • George Staphos, Bank of America Merrill Lynch.

  • George Staphos - Analyst

  • Thanks; hi, everyone.

  • Good morning.

  • I had a couple of questions to start.

  • Can you tell us, to the degree that you are looking at your headcount in aerospace, do you expect, given the opportunities you have in the next couple years, that you will be able to maintain your headcount within aerospace?

  • John Hayes - Chairman, President, CEO

  • Yes.

  • In fact even year-to-date we are up slightly in the aerospace business, because we have been winning work.

  • But I think as we go forward, George, we would continue to grow the headcount because you are going to see continued growth in revenue.

  • George Staphos - Analyst

  • Right, no, and that is the point I was trying to get at.

  • So that is a good sign that your headcount is up right now and suggests that whatever you are seeing out of sequestration, you are being able to manage it with other opportunities.

  • That would be fair?

  • John Hayes - Chairman, President, CEO

  • Yes, yes, it is fair.

  • As you know, our backlog is down slightly from the last quarter; but the real issue is we have been burning off backlog and the government hasn't made any decisions because many of their employees have been furloughed, and so the decisions are just being slowed.

  • But our contracted work is still going well.

  • George Staphos - Analyst

  • Okay.

  • Now the next question I had for you and Scott, you made the comment about you are working very hard to arrest the decline in 12-ounce beverage can.

  • You obviously shut the line in Milwaukee; you have been doing other activity to shift your mix to specialty can.

  • But aside from that, is there anything that you are seeing either from your customers to support growth rates, either for mega-beer or for soft drinks or anything that you are doing within 12-ounce or cans broadly, to support growth there?

  • John Hayes - Chairman, President, CEO

  • Yes, we have been doing a lot, but let's first start with the customers.

  • As you know, the end markets -- beer is down 2.5%, 2.6%, and that is the biggest decline they have had in a long time.

  • So they have been doing a lot of innovation work trying to arrest the demographic change.

  • As people get older, they've been drinking less beer.

  • But also the shift to spirits and wines, because they very much have been focused on the value side, the pricing side relative to volume.

  • I think the same thing holds true on the CSD.

  • As you know, CSD has been challenged.

  • It is a little bit more sensitive to economic issues, and I think this payroll tax has hurt them a little bit more.

  • The pricing strategies they very much have been focused on.

  • So CSD is down in overall category a little bit more than beer.

  • I think both of those segments, our customers are very much focused on the long-term aspects of this because that is where a lot of their value is derived from.

  • So just based on first- and second-hand knowledge of working with those customers, they are trying to put some more excitement into their categories.

  • Some of it has to do with innovation, coming out with their new products.

  • Some of it has to do with innovation around packaging.

  • Some of it has to do with innovation about placements.

  • So I think they are very much focused on all those.

  • And as you know, innovation is a key part of our strategy, and so we have been helping them on that.

  • George Staphos - Analyst

  • John, I thought I saw a headline recently about you using a straw in can innovation in Europe.

  • Correct me if I am wrong.

  • But if that is correct, do you have the ability to do that here in the States as well?

  • And is there any interest in that?

  • John Hayes - Chairman, President, CEO

  • We do have the ability to do that in the States.

  • We don't think that is going to be a huge discriminator.

  • But yes, we can do it in the United States.

  • George Staphos - Analyst

  • Okay.

  • Last question, then I will turn it over.

  • There has obviously been a lot discussed about -- some relevant maybe, some maybe not -- but in terms of your potential customer loss in a couple of years.

  • Can you update us with the latest you can provide in terms of how you plan to deal with that potential customer loss, or that actual customer loss in '15?

  • And what activity have you garnered already, or progress in terms of refilling?

  • Thanks.

  • John Hayes - Chairman, President, CEO

  • Well, it is premature to tell the outside world what we are doing.

  • But we definitely, George, have plans in place to recover most, if not all, of that loss -- from a profit perspective; I am not talking about from a volume perspective.

  • Our volume will be down, but we are here to make money not necessarily only to make cans.

  • So at the appropriate time we will be talking about it.

  • I just think it is premature based on some of the activities and the impact it has to be talking about it on this call today.

  • George Staphos - Analyst

  • Okay, thanks.

  • I appreciate that.

  • I will turn it over.

  • Operator

  • Philip Gresh, JPMorgan.

  • Philip Gresh - Analyst

  • Hi, good morning.

  • First question.

  • John, you talked about some nice margin recovery opportunity in Europe.

  • Sounds like you are targeting something in the 12% range, which would be maybe 200 to 300 basis points higher than where you are now.

  • You have talked about a variety of different factors that have driven the results so far this year.

  • So I guess my question is if you could parse out for us what part of that recovery comes from just cost-out and those types of opportunities, versus things like getting more price to recover, the input cost inflation you have been seeing from metal premiums and other things to get there.

  • That would be helpful.

  • John Hayes - Chairman, President, CEO

  • Yes, let me first clarify.

  • I think when I talked about the 2010/2011 time frame, it is closer to 11% to 12%.

  • You're at the high end of that.

  • And I wouldn't disagree that is an aspiration, but it's going to take an awful lot of hard work to get to that.

  • But having said that, the types of initiatives we have ongoing is taking a look at our G&A headcount.

  • And as part of that, it is not only about the headcount, it is about how we conduct our various processes, whether it is payroll processes, whether it is credit collections, all those various things.

  • We think there is a lot of opportunity to move to more of a truly pan-European approach to that and take a lot of cost out.

  • I think we have a lot of opportunity on the freight side and the logistics side of the business in optimizing that.

  • And we are doing a lot of activities there.

  • We have some other cost activities at the plant level, although as Scott mentioned the plants are performing very well from a manufacturing perspective.

  • Then last but not least, the value-in is about trying to get paid for what we think is good value and also looking at our mix issues.

  • So it is a combination of a whole host of things that we think over the next two-plus years will get us there.

  • Philip Gresh - Analyst

  • Got it.

  • Thanks for the clarification of the number.

  • I think I hadn't stripped out Aerocan.

  • But so what you are saying is you don't need price to recover the input costs as part of this plan?

  • John Hayes - Chairman, President, CEO

  • Not completely.

  • Put it this way, we are not relying on it, but we are certainly focusing on it.

  • Philip Gresh - Analyst

  • Got it.

  • Okay.

  • Then the second question is just that you talked also about the framework for 2014 being in place, with the long-term view of a 10% to 15% EPS growth.

  • So I guess what I was wondering there is just, as you think about the drivers of that and what we continue to see from the volume side of the equation, what kind of volumes do you feel like you need to assume for regions like Europe and North America to get to that kind of target?

  • I mean, if North America is going to continue to be down, let's say 2% to 3%, can you still get there?

  • Or do we need something closer to flat in North America to reach that type of a target?

  • John Hayes - Chairman, President, CEO

  • No, I think from a big picture, we need more normalized volumes that we have seen over the past couple years.

  • And what that means in North America, it is probably down 1% to 2%, maybe even 3%.

  • It is the 5% or 6% declines that really put a -- makes it challenging.

  • But as you have seen, we have been able to take a tremendous amount of fixed cost in our business.

  • In Europe, we're focusing on the more traditional growth.

  • Call it the 2% the 5% growth.

  • It is an even year next year.

  • Putting weather aside with the World Cup, those are big drivers for European beverage can growth as well as Latin American beverage can growth.

  • And with it being in Brazil I think there is some upside there.

  • China, all the trends that we have talked about in the past continue to go forward.

  • So in order to achieve our long-term target in 2014, we just need a more normalized set of volumes that we have not experienced in the first half this year.

  • Philip Gresh - Analyst

  • Got it.

  • Last question is just one of your peer companies was talking about significant underproduction in areas like France for beer in the second quarter.

  • I didn't know if maybe there were some elements of that that were impacting you more than just the general volume trends.

  • If you could give a number for how Europe did in the quarter, that would be helpful.

  • John Hayes - Chairman, President, CEO

  • Overall, European volumes were down less than 1%, so I don't know, 0.8%, something like that.

  • The two big areas that hurt us the most probably were Germany and France, just because of the weather in Germany as well as some of the things.

  • I don't think we were directly impacted or specifically impacted by the beer issue in France you just mentioned, although there was some of an impact.

  • But it was even soft drink was relatively flat, if not down slightly, in France as well.

  • So I think it's Germany and France.

  • And as we said, looking forward if we are able to get some of this weather normalized and they are not underwater in Central Europe and wearing parkas in May like they were in Germany, we feel okay about where we stand today.

  • Philip Gresh - Analyst

  • Okay, great.

  • Thanks.

  • I will turn it over.

  • Operator

  • Philip Ng, Jefferies.

  • Philip Ng - Analyst

  • Good morning, guys.

  • Heading into the year, demand/supply was pretty tight in Europe on the bev can side; and things are still pretty tight, I would imagine.

  • You had some aspirations of getting some incremental price in 2014.

  • In light of the recent pullback on demand and one of your competitors adding capacity in the UK region, is that a -- is there some concern on the pricing front on 2014?

  • Or should we see some upward trajectory from here?

  • John Hayes - Chairman, President, CEO

  • Well, as I said earlier about our cost-out value and initiatives we are not planning on it.

  • It is always challenging.

  • It is too early to say what we're going to be able to achieve.

  • But we are -- we have not been adding any capacity ourselves, and we are focusing on trying to recover some of those costs that we have mentioned before.

  • But it is too early to predict victory.

  • Philip Ng - Analyst

  • Got you.

  • Then can you give us a little preview on CapEx guidance for 2014?

  • And should we expect free cash flow getting back to that $500 million range for next year?

  • Scott Morrison - SVP, CFO

  • This is Scott.

  • As always on CapEx, it's dependent on what kind of good growth opportunities we see around the world.

  • But with the world being a bit slower, I would see CapEx trending down meaningfully in 2014.

  • Philip Ng - Analyst

  • Okay.

  • Do you have a number for us, or is it still --?

  • Scott Morrison - SVP, CFO

  • No, not yet, because it is really early.

  • So we are still expecting to spend -- remember, we have got -- this year we had $100 million of carrying capital into this year, so it's unusually high.

  • And I don't think we will have that much carrying capital into next year because most of the capital that we are spending will be concluded by this year.

  • So I would see it dropping by a fairly sizable number next year.

  • Philip Ng - Analyst

  • Got you.

  • Then, John, I think in the past you have mentioned that when the macro environment does slow down that has been a pretty good time for you to get more active on the M&A front.

  • Have you seen now that pipeline improve a bit here?

  • John Hayes - Chairman, President, CEO

  • Well, as always we have a variety of conversations going on.

  • And as you know, it has been a cornerstone of how we have created value over the long term, and that hasn't changed at all.

  • I don't think we have anything to report at this time, however, but you just never know.

  • You always -- my predecessor always said you need motive and opportunity.

  • And I think we have the motive; we are just making sure the opportunity is right.

  • Philip Ng - Analyst

  • Okay.

  • Good luck, guys.

  • Operator

  • Chris Manuel, Wells Fargo.

  • Chris Manuel - Analyst

  • Good morning, gentlemen.

  • A couple questions for you.

  • First, I missed a few sets of numbers I think in here; but did you give us what your volumes were like in Europe and in Brazil specifically?

  • Scott Morrison - SVP, CFO

  • In Europe, they were down less than 1% in the quarter and in Brazil they were up double digits high.

  • It was very strong.

  • Remember, we had capacity that came online this year with our new plant, and we will have another new line coming on in the fourth quarter of this year.

  • Chris Manuel - Analyst

  • Okay.

  • That's helpful.

  • As we look at your performance here in North America in beverage cans and we look at your performance in Europe in beverage cans, you have been a bit below the market in Europe and a good chunk below the market here in North America, though I do recognize there has been some customer shift back and forth.

  • But maybe more specifically, over the last couple years you have seemingly had to take a disproportionate amount of the capacity out in North America, or maybe not grow as fast as some of the other folks in Europe.

  • Is there anything that has changed in the competitive landscape that maybe has put you at a bit of a disadvantage?

  • Whether it is how you are going to market with pricing or whether it is what-have-you that may account for that?

  • And how might that or can that change going forward?

  • Or is it just simply a position of doing what your customers or your set mix is?

  • John Hayes - Chairman, President, CEO

  • Let me try and tackle that, because I think there are two answers for each -- there is a different answer for each of the regions.

  • In North America, we have been trying to take a very disciplined approach as the market leader, and we have been putting our money where our mouth is in terms of capacity.

  • I do think that if you separate this one-time item that we lost last year, on an apples-to-apples basis we are right there with everything else.

  • In fact, we are probably even a little bit ahead because of the specialty growth.

  • So I wouldn't read into that too much.

  • I think it really was a one-time item.

  • And when you look at the Europe, I certainly wouldn't agree with over the last couple of years anything has been happening that has disadvantaged us.

  • It has really been over the last six months, and it has to do with weather and geographic footprint.

  • Everyone knows that Western and Northwest Europe in particular have been much more heavily hit than Southern Europe and Eastern Europe.

  • So when you look country by country and category by category, where we were off slightly relative to the market had to do with the geographic proximity.

  • Chris Manuel - Analyst

  • Okay.

  • That's very helpful.

  • Last question I had is, you spoke about getting back to -- in the corridor of your traditional earnings growth rates in 2014.

  • With some of these factors, weather now seemingly getting better, along with your comments earlier about better 12-ounce and some of these other factors seeming to improve here in the back half of the year, is it feasible that you could get back to 10% to 15% earnings growth per quarter the back half of this year?

  • John Hayes - Chairman, President, CEO

  • I think it is too early to say.

  • Certainly what we told in guidance was we said the full year '13 will be higher than the full year '14.

  • And if you look, we are down in the first half of '13 versus first half of '12; so by definition we have to be up in the second half of '13.

  • I think we feel good about the efforts that we can control.

  • It really is a volume gain.

  • And we feel okay right now, but you know how volatile the weather has been here in North America and in Europe.

  • So I know that probably doesn't directly answer your question, but that is where we are.

  • Chris Manuel - Analyst

  • That's helpful.

  • Thank you.

  • Operator

  • Adam Josephson, KeyBank.

  • Adam Josephson - Analyst

  • Thanks, good morning, everyone.

  • John, one of your competitors this morning talked about a mix shift toward can that tends to occur whenever economies weaken, as they have recently.

  • Have you seen any evidence of such a shift recently?

  • Or would you expect one in the developed markets?

  • John Hayes - Chairman, President, CEO

  • Well, I think on the beer side it hasn't.

  • Over the last five years I think beer cans as a share of the package mix in the beer category has gone from, call it 47% to 53%, so we have actually seen some relative health on cans.

  • I do think you are seeing a resurgence on cans particularly on the beer side.

  • Think about all of the activity that has been going on, on the craft side of the market, and you're even starting to see them in the on-premise.

  • So I think that is constructive.

  • I do think it has more to do with where the customers are pointing to and a little bit less to do with the overall economies.

  • Because what I would tell you is it has to do in part with what the pricing strategy of the beer makers is, as well.

  • And over the last few years on the value side of beer they have been pushing price up more than they have on the premium side.

  • Adam Josephson - Analyst

  • That's helpful.

  • Just one on the mix in Brazil.

  • Have you seen any recent trends there in terms of a continued mix shift toward cans and away from returnable bottles?

  • John Hayes - Chairman, President, CEO

  • A little bit, yes.

  • There is not that many one-way bottles down in Brazil; it is largely returnable.

  • And again, this share is a package mix.

  • Over the last couple of months I don't think we have seen a wholesale change.

  • But certainly over the last five years that is one of the big drivers of the beverage can in Brazil.

  • Now it is up in the upper 30%s, and hopefully as we go into 2014 with the World Cup and the other things, hopefully it will start with a 4.

  • But it is premature to declare that.

  • But we have been seeing good growth in the beverage can relative to overall industry beer growth.

  • Adam Josephson - Analyst

  • Got it, thanks.

  • And one last one, any notable change in the competitive dynamics in China as of late?

  • I know you talked about the supply/demand imbalance getting a bit better in the second quarter.

  • John Hayes - Chairman, President, CEO

  • Yes, nothing to update.

  • The market continues to grow strongly.

  • I think the balance -- some of this excess capacity is being soaked in.

  • I do think that we haven't seen any -- certainly any more downside relative to prices, but we haven't yet seen any upside relative to pricing, either.

  • Adam Josephson - Analyst

  • Thanks a lot, John.

  • Appreciate it.

  • Operator

  • Al Kabili, Macquarie.

  • Al Kabili - Analyst

  • Hi, thanks.

  • I guess, John, a question on the European cost saves.

  • I know most of this is really in '14.

  • But incrementally, what is the opportunity to ramp that up a little bit more in the back half of '13?

  • John Hayes - Chairman, President, CEO

  • Well, the biggest issue I think has to do is -- things happen more slowly in Europe because of the works councils and because of the union and how you deal with the various people component of it.

  • And we're going to do it the right way, and that just takes time.

  • That is probably the biggest -- that and combined with some of the other cost initiatives.

  • Scott had mentioned in the plants we are doing a very good job, and it has been offsetting some of the softness in Northwest Europe from a volume perspective.

  • But I think that is the main reason -- the reason why I just said on the labor side is why we don't expect to see a tremendous amount of upside in the second half of '13.

  • Al Kabili - Analyst

  • Okay.

  • All right, I appreciate that.

  • Then secondly, you mentioned on the aerospace side the sequestration and the impact on new awards.

  • Are you seeing any impact on the pace of your backlog burn at this point?

  • And what do you see the risk to the current backlog that you have?

  • John Hayes - Chairman, President, CEO

  • No, I think our current backlog is pretty solid right now.

  • In fact we were just speaking about that the other day.

  • I think the biggest issue is just with the government.

  • There is two things going on.

  • Number one, the overall budgets are declining.

  • And I won't go into the details here, but if you are a Program of Record you are relatively solid; and most if not all of our backlog is Programs of Record, which is good.

  • I think in terms of new awards, in terms of new initiatives, those are the things that are a bit slower.

  • It's slower because, number one, the government has less money so they need to figure out efficiencies to find money to fund those.

  • But then number two, because of the short-term nature of sequestration and the furloughing of employees, people who had been working 40, 50, 60 hours a week to try and process some of this stuff are now working 25 to 35 hours a week.

  • So there is just not as -- it just takes longer to get things through the system.

  • Al Kabili - Analyst

  • Okay.

  • Then along those lines, you mentioned the small international award that you recently booked.

  • It is pretty small, but I guess it is notable because that is something you have talked about looking to do, is expand internationally on the aerospace side.

  • What is the outlook there?

  • John Hayes - Chairman, President, CEO

  • Well, we actually are bidding on more international opportunities than we ever have in the history of Ball Aerospace right now.

  • They have to come to fruition, but it is really based upon some of the nonclassified technologies that we have developed in that business and the global need for some of those things.

  • So for example, this environmental satellite we are building for the South Koreans was based on some things we have done for the US government over here.

  • And as we look in other places of the world we think there's opportunities for things like that in terms of environmental monitoring and other technologies.

  • Al Kabili - Analyst

  • Okay.

  • Then final question is just the Vietnam JV that I know is small but wanted to just get an update there, and if you see that as a springboard to further expand into Southeast Asia.

  • John Hayes - Chairman, President, CEO

  • Yes, well it's been up and running a little over a year now, and it is making good progress.

  • We were there a couple weeks ago, and I think it is an excellent facility.

  • If any of you are ever in Southeast Asia, we would be happy to give you a tour of it.

  • I do think that it is not just a Vietnamese joint venture, but it is more as part of a regional strategy.

  • We have an interest in one of our partners in Thailand as well.

  • So that whole region, when you look at a map, it is not just one country versus another country; it is a regional perspective.

  • So, yes, there could be opportunities going forward.

  • Al Kabili - Analyst

  • Okay, thank you.

  • Operator

  • Anthony Pettinari, Citi.

  • Anthony Pettinari - Analyst

  • Good morning.

  • In the food can business you referenced high single-digit growth.

  • I am wondering if there are specific categories in which you are doing well, if you had a preliminary view on the pack season.

  • And then there is a competitor that has discussed maybe some food can business being shifted from 3Q to 4Q because of a potentially later pack or delayed pack.

  • I am just wondering if you had any view on that in the back half of the year.

  • Scott Morrison - SVP, CFO

  • Yes, our numbers were up high to mid single digits in the quarter, and we feel pretty good about where the pack is at now.

  • We are getting more normalized weather.

  • The Southeast in the last couple years has been just horrendous, and this year it has been more stabilized.

  • But I would agree with the comment in terms of pushing more into the fourth quarter from the third quarter.

  • We expect third quarter to be solid but there is probably more that will benefit us in the fourth quarter of this year.

  • Anthony Pettinari - Analyst

  • Okay, that's helpful.

  • Then just shifting gears to the aerospace side, you discussed some of the headwinds with sequestration, and I guess earnings in this segment were flattish sequentially with the first quarter.

  • I am wondering as we look forward to 3Q/4Q, is that $19 million type run rate a decent estimate for 3Q/4Q?

  • Or could we see a little bit more of a pickup?

  • Or is a too soon to tell?

  • John Hayes - Chairman, President, CEO

  • I think to answer your question, it is probably a decent run rate.

  • We had talked on prior calls that in 2012 we had a number of closeouts on some programs that we had executed very well on, and that provided some upside in 2012.

  • With the startup of many of these new programs in 2013, these are three-, four-, or five-year contracts.

  • So the way we do it, as we reduce the risk, if you will, the execution risk of those, the accruals change; so you usually make more profits on the back end of programs if you are doing well, as opposed to the front end.

  • So the fundamentals of the business and '13 are quite good, but really where you are going to see that profitability, assuming we are executing, it really starts to ramp up in '14 and '15, relative to the current run rate.

  • Anthony Pettinari - Analyst

  • Okay.

  • I will turn it over.

  • Operator

  • Chip Dillon, Vertical Research Partners.

  • (Operator Instructions) George Staphos, Bank of America Merrill Lynch.

  • George Staphos - Analyst

  • Thanks.

  • Guys, two strategy questions or bigger-picture questions.

  • First in aerosol, the Company's technology bet, if you will, is on impact extruded aluminum.

  • Thus far that has been a good place to be, given your performance, from what we can see in Aerocan.

  • Are there other technologies that are viable in the aluminum aerosol can market that you need to be mindful of that maybe could start to pick up share?

  • Would you have the ability to adopt other technologies to make aluminum aerosol cans in quick order if you needed to?

  • John Hayes - Chairman, President, CEO

  • The short answer to that, George, is we have a variety of technologies we have been working on, on the aluminum aerosol side, even the steel aerosol side, that we feel very confident that they have some interesting developments.

  • It is premature to talk about those.

  • But as we move forward I think you are going to see some things where leveraging our D&I capabilities in the aerosol sector, and we are excited about the promise of that.

  • As you know, we are already doing that in terms of the Alumi-Tek bottle with MillerCoors, and we have some other interesting things.

  • And then even on the impact extruded side, as we have talked about having our ReAI slugs, which is a much lighter-weight slug by utilizing some of our technology that we have morphed from our beverage can business.

  • So we have got a variety of things that we have been actively looking at.

  • Some are commercialized right now, and others could be commercialized in the future.

  • George Staphos - Analyst

  • Okay.

  • Would it be fair to say that doing a D&I aluminum aerosol can is probably a couple years away?

  • Next month?

  • How would you ballpark it for us, if you could?

  • If you could?

  • John Hayes - Chairman, President, CEO

  • Well, D&I aerosol is challenging just because the pressure is held in aerosol and you need to make sure that the wall thickness will with stand that.

  • But that is one of the areas we are working on, but it is premature to say when it might be out.

  • George Staphos - Analyst

  • Understood.

  • The other question I had is around return and EVA.

  • Obviously Ball Corp., going back to the 1990s, has been really a pioneer in EVA.

  • It has worked very, very well for you.

  • I was looking at my model; and historically the big jumps up for you have come with things like a Reynolds, like a Schmalbach.

  • It's not been the only thing, but it has been where you've gotten the outsized pickups in economic profit.

  • As we sit here and think about the next two to three years for Ball Corp., should we expect that more of your economic profit improvement, which I would imagine you think you will improve from these levels, will come from what you do with the balance sheet in terms of capital allocation, buying back stock, versus other sources of capital?

  • Or do you think that the investments that you have made and could make would be the bigger driver of economic profit, say between end of '13 and say a '15 or '16 in terms of a time frame?

  • Thanks, guys.

  • Good luck in the quarter.

  • Scott Morrison - SVP, CFO

  • Well, first, EVA is still a big driver of how we decide what to invest and how to invest.

  • I think it's a combination of the things that you talked about.

  • It is going to be the capital allocation that we have done in the past of returning -- absent other opportunities, returning a lot of cash to shareholders.

  • We feel real good about the EVA returns of the investments that we have been making.

  • Even if you look at the North American beverage business that shrunk this year, their EVA returns are getting better.

  • So the returns that we are getting on those incremental investments have been very attractive.

  • So I think it is a combination of continued focus on EVA and making sure that we are getting the returns.

  • As John mentioned, acquisitions have always been part of our strategy, and that continues to be.

  • And then it is allocating capital in a balanced way and a disciplined way that we have done in the past, that we will continue to do in the future.

  • George Staphos - Analyst

  • So you think your investment will be able to at least keep up with the buyback component of EVA.

  • Would that be fair, if we look out the next three years?

  • John Hayes - Chairman, President, CEO

  • It's opportunity depends -- this is the way I would think about it.

  • There is kind of three different buckets of EVAs.

  • Number one, what you have right now.

  • And what we are trying to do is improve the profitability and minimize the investment there, and that generates excess EVA dollars.

  • Number two, and the number two and number three both get to capital deployment.

  • But number two is what Scott said; it is more of expanding into new geographies, expanding into new products, it's the specialty containers that we have talked about that generate returns in excess of that capital.

  • So you are putting more capital to work.

  • Then the last but not least are of the big hitters, as you described, that aren't lost on us, which are putting an even greater amount of capital to work through acquisition.

  • The only thing you really need to be focusing there on is making damn sure that the capital you're putting to work there can generate that excess return.

  • So we think about it in those three buckets.

  • So what are we doing right now in terms of improving our business?

  • What are we using our cash flow for?

  • And is it returning it and reducing the investment to our shareholders, or is it investing in new internal growth opportunities, or is it on the M&A side?

  • George Staphos - Analyst

  • Okay.

  • Then lastly on this, guys -- and I promise I will give it up here.

  • Scott, you said your EVA returns, if I heard you correctly, in North America are up this year.

  • Did I hear that correctly?

  • And does that include even the cost or the cash flow outlay for integration?

  • Thanks, guys.

  • Scott Morrison - SVP, CFO

  • The cash flow outlay for integration?

  • You are talking about restructuring costs?

  • George Staphos - Analyst

  • Yes, exactly.

  • Scott Morrison - SVP, CFO

  • Restructuring costs get capitalized.

  • You still have to pay for those over time.

  • George Staphos - Analyst

  • Exactly.

  • So even including that in your EVA calculation, you are up in terms of EVA returns in North American beverage?

  • Scott Morrison - SVP, CFO

  • Yes, that's correct.

  • George Staphos - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Mark Wilde, Deutsche Bank.

  • Mark Wilde - Analyst

  • Yes, just a few cleanups.

  • First of all, the aluminum storage situation has been in the news a lot the last week.

  • Anything new there from your perspective?

  • John Hayes - Chairman, President, CEO

  • No.

  • As people know, there was a big article in The New York Times on Sunday about the issues on metal premiums in LME, and it has been widely discussed.

  • We do know that there were some governmental hearings on Tuesday.

  • I probably shouldn't comment on them because I wasn't -- purposefully -- there.

  • But there has been issues there and I do think it is getting more focus to make sure that there is a level playing field around how metal is purchased on a global -- aluminum is purchased on a global basis.

  • So that is probably all I should say.

  • Scott, anything?

  • Scott Morrison - SVP, CFO

  • No, it's the same thing.

  • We have been involved in those conversations because we think that there are -- better transparency around how the warehouses work will be beneficial to the industry and ultimately to consumers.

  • Mark Wilde - Analyst

  • Okay.

  • Second question.

  • That 8% volume gain in food and household in the second quarter, any sense of what you would expect there for the full year?

  • Scott Morrison - SVP, CFO

  • We said for the full year we will be up slightly, but it is not going to be at that kind of a pace.

  • Mark Wilde - Analyst

  • Okay.

  • Then, finally, any thoughts on specialty can margins in North America and Europe, and where you see those moving over time?

  • John Hayes - Chairman, President, CEO

  • I think we talked about this on the call last time.

  • We haven't seen any changes up or down relative to them.

  • As the specialty can market size gets bigger, it is logical to think from an economic perspective it may put some downward pressure on volumes.

  • But from an overall profit pool perspective I think it will continue to grow.

  • Mark Wilde - Analyst

  • Okay.

  • Then finally, you guys didn't make this, but this bowtie can that was out there, do you have any sense of what that actually did for volume for the brewer involved?

  • It's just one example of --?

  • John Hayes - Chairman, President, CEO

  • We would be speculating if we said anything.

  • Mark Wilde - Analyst

  • Okay, all right.

  • That's fine.

  • Good luck in the third quarter.

  • Operator

  • Alex Ovshey, Goldman Sachs.

  • Alex Ovshey - Analyst

  • Thank you.

  • Good morning, guys.

  • You mentioned several times on the call that the volumes thus far in July are tracking better, and improved weather is really the key reason.

  • So in places like North America and Europe, where the improvement in the weather seems most obvious, can you actually tell us how your volumes are tracking on the beverage side thus far in July?

  • John Hayes - Chairman, President, CEO

  • Well, I think nothing else to add.

  • You just summarized it.

  • I think particularly North America and Europe, they are more normalized or becoming more normalized, which means we weren't seeing this huge -- the month of June was very, very soft from a North American perspective.

  • I don't have the numbers in front of me from an industry perspective, but they were in excess, I believe, of the 5.5% or so decline for the quarter.

  • So what we have seen is more moderation of that.

  • I would not say it is anything to go home and get overly excited about, however.

  • All we are saying is they have returned to more historical normalcy.

  • Alex Ovshey - Analyst

  • Got it, John.

  • Then I know you are running pretty full, but where do you see utilization rates for the market in China as a whole?

  • And where do you think they need to go to before pricing power begins to shift back to the suppliers?

  • John Hayes - Chairman, President, CEO

  • Well, they are somewhere in the 80%s right now, and it depends upon region and it depends on what you assume that the actual output versus the rated output of some of these new competitors in there.

  • I do think this you look at any region in our industry, and the minute you can start to get the upper 80%s or lower 90%s that is when you start to see tightness in the market.

  • Alex Ovshey - Analyst

  • Okay, that's helpful.

  • John Hayes - Chairman, President, CEO

  • Because there as you all know there is a seasonality effect.

  • Alex Ovshey - Analyst

  • Right.

  • That makes sense.

  • Just the last quick one for me.

  • In North America, with the standard 12-ounce cans going down pretty significantly for you in '13 and specialty continuing to grow, where do you see the mix between the 12-ounce and specialty can as you end 2013?

  • John Hayes - Chairman, President, CEO

  • Probably in the low 20%s, specialty as a percent of total mix.

  • Alex Ovshey - Analyst

  • Thank you.

  • Operator

  • Philip Gresh, JPMorgan.

  • Philip Gresh - Analyst

  • Yes, hi.

  • Just one very quick follow-up just around this normalization of volumes.

  • If I look at Europe in the third quarter of last year, if I have this correct, Scott, you guys were up almost 10% in European beverage.

  • So I just wanted to clarify with what normalization would mean for you guys in Europe against that type of a comp.

  • Scott Morrison - SVP, CFO

  • No, I think what we are talking about normalized volumes is that low to mid single-digit growth rate, kind of that 2% to 5% growth rate would be normalized.

  • Philip Gresh - Analyst

  • Okay, so you would see the ability to do that in the third quarter despite the comps?

  • John Hayes - Chairman, President, CEO

  • Yes.

  • Scott Morrison - SVP, CFO

  • Yes, we should be more -- again it all depends on weather.

  • We should be more in line with the market if weather is normalized.

  • John Hayes - Chairman, President, CEO

  • I don't have last year's numbers in front of us.

  • The 10% seems high.

  • Scott Morrison - SVP, CFO

  • It seems high.

  • John Hayes - Chairman, President, CEO

  • I thought it was low to mid-single digits third quarter last year.

  • But perhaps you can give Ann Scott a call and clarify that.

  • Philip Gresh - Analyst

  • Yes, understood.

  • Scott Morrison - SVP, CFO

  • In Q2 of last year we were up just a couple percent, so you might have a bad number there.

  • Philip Gresh - Analyst

  • Okay.

  • I will check it off-line.

  • Thanks a lot.

  • Operator

  • There seems to be no further questions at this time, sir.

  • John Hayes - Chairman, President, CEO

  • Okay, great.

  • Well, thanks, Sieglinde, and thank you, everyone.

  • I just want to remind everyone that Ball will be hosting an Investor Day and management briefing in midtown Manhattan on October 2 and 3. Analysts and institutional investors should contact Ann Scott for an invitation.

  • We thank you for participating on today's call and we are looking forward to seeing you all in early October and then on the call at the end of October.

  • Thank you.

  • Operator

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

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