Ball Corp (BALL) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(Operator Instructions).

As a reminder this conference is being recorded today Thursday, July 31, 2014.

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

Please go ahead, sir.

Thank you, Nelson, and good morning, everyone.

This is Ball Corporation's conference call regarding the Company's second-quarter 2014 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 a 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 and then I will finish up with comments on our aerospace business and the outlook for the remainder of 2014.

In short, we had a strong second quarter and our results exceeded our expectations.

During the second quarter we saw an extension of many of our first-quarter themes.

Solid global beverage can demand with healthy year-over-year growth in Europe, Asia and Brazil and firmer demand in North America, lower operating costs in our European beverage can segment and continued strong cost management in our North American as well as Asian beverage can businesses.

Continued specialty can and beer container growth in North America, strong performance in our European and Mexican impact extruded businesses from both a volume and cost perspective, strong aerospace program execution and ongoing disciplined returns oriented capital allocation strategy all drove our results.

North American tinplate container volumes were lower than expected.

And operationally we continue to have some operational challenges that we discussed on our first-quarter conference call.

Some of it is related to the repositioning of certain manufacturing equipment across the domestic food and household segment footprint.

And some of it is a bit self-inflicted and we have taken steps to get it back on the right track for 2015 and beyond.

But some previously disclosed headwinds still exist in the back half of 2014 including persistent LME premia in Europe, the aforementioned manufacturing inefficiencies in our food and household products division and tougher second-half volume comps.

It is evident that 2014 is shaping to be a better year than 2013.

And with that I will turn it over to Scott for a review of our second-quarter numbers.

Scott?

Thanks, John.

Ball's comparable diluted earnings per share were $1.13 versus last year's $0.85.

In addition to John's comments around better year-over-year global beverage can volumes and cost-out progress, a lower share count contributed to our improved results.

During the first half of the year we acquired a net $239 million of our stock and returned another $37 million to shareholders in the form of dividends.

And presently the majority of our free cash flow is expected to be returned to shareholders via share repurchases and dividends.

For the full year again no significant changes to our previous financial metrics.

Free cash flow is expected to exceed $550 million, share buybacks will be in the range of $500 million, CapEx around $375 million with it being more back end weighted, interest expense should be around $163 million and our effective tax rate for the full year should be in the range of 28%.

On the full-year basis corporate undistributed should be closer to $80 million.

Net balance sheet debt at the end of the quarter was approximately $3.4 billion.

Credit quality and liquidity of the Company remains solid with comparable EBIT to interest coverage at 5.6 times and net debt to comparable EBITDA at 2.7 times.

Committed credit and available liquidity at quarter end was in excess of $1 billion.

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

Moving to operations, our metal beverage Americas and Asias segment comparable earnings were up more than $16 million in the second quarter.

Year-over-year benefits from cost-out programs, excellent operating performance at the plant level and continued specialty can growth in the Americas all contributed to better segment results.

In the quarter North America volumes were up due to our customer weighting to beer and continued growth in specialty while volumes in Brazil and China were both up mid-teens in the quarter due to higher can penetration for beer packaging.

European segment profit was up roughly $22 million in the second quarter due to mid-single-digit volume growth and the benefit of reduced costs which will continue to flow through the segment in 2014 and into 2015.

As John briefly touched on, between our previously discussed second-half LME premium headwind of roughly EUR7 million and tougher second-half volume comparisons, our ongoing cost savings initiatives should offset these headwinds in the back half of the year.

Food and household comparable segment earnings were down approximately $8 million in the quarter as low-single-digit segment volume declines and manufacturing inefficiencies in North America, which John mentioned earlier, dampened the results.

Rest assured that the food and household team has a plan to a align tinplate supply with demand in North America while wrestling with the current flat performance headwind to ensure that we are well-positioned going into 2015.

In summary, our global beverage operating team continues to execute in tight supply-demand situations across the majority of its manufacturing portfolio while also managing capital projects in North America and Europe to further improve our packaging business in 2015 and beyond.

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

Great.

Thanks, Scott.

Our aerospace business continues to exceed expectations.

Solid execution and higher work fees on existing programs, successful delivers and niche product wins for antennas and sensors are some of the highlights.

Contracted backlog ended the quarter at $858 million and as mentioned on our January call, we are pursuing some large programs that are expected to be awarded late this year or early next year.

We do have a significant launch coming up for the WorldView-3 satellite by DigitalGlobe later in August and so far things look good here.

Now looking out across our Company today, we are proud of our year-to-date results and the teamwork it took to accomplish them.

Though some challenges still exist we will control what we can control and effectively manage through the rest.

We remain confident in our ability to achieve our long-term diluted EPS growth goal of 10% to 15% in 2014 and beyond while growing both are EVA dollars and free cash flow.

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

Thank you.

(Operator Instructions).

Mark Wilde, BMO Capital Markets.

Good morning and congratulations on a good quarter.

I wondered on bev cans in Europe, is it possible, Scott, to quantify the benefit you got from just no more drag from the switch in headquarters that you were dealing with last year?

And then I wondered if you could also provide a little color on that expansion in the Netherlands.

Sure.

I think that Europe benefited from nice volume gains in the quarter.

As you remember year-over-year volumes were a lot tougher in the first half of last year.

This year they have been better.

They are getting the benefits of cost out, some of the cost-out programs that they have been putting in place.

So I think there's really not much of a drag anymore from the European headquarters relocation.

And then we are getting the benefit on the tax rate side we are making more money in Europe, which has a lower tax rate, so that is helping us.

The second part of your question was about the Netherlands expansion and that is moving along.

And we expect to have that capacity up for the busy season next summer.

And that's all committed volume at this point?

Yes, we have a variety of contracts to take that volume.

Excellent.

I will turn it over.

Thanks.

Gansham Panjabi, Robert W. Baird & Company.

Hi.

Good morning, it's actually Mehul Dalia sitting in for Gansham.

How are you doing?

First question just wanted to make sure I heard correctly.

Aluminum premium is expected to be a $7 million headwind into Asia and Europe and do you expect a price recovery in 2015 as a result?

To the first part, yes.

The premium that we expect the headwind is about EUR7 million in the second half of the year.

We had a little bit of that in the second quarter but only maybe about EUR1 million.

In terms of price recovery it is too early to talk about what pricing looks like for 2015.

But obviously if our costs are going up at some point you need to recover that through the system.

Okay, great.

And I know the press release talked about a plant fire in the Americas.

Just being it's the peak season right now, is there any worries about supply as a result?

Our people did a phenomenal job.

We did have a fire in Monticello, Indiana really at the peak time of shipping.

And through the great work that they did they were able to get that plant up and running in different pieces over a period of just a few weeks.

And throughout our system of people doing really phenomenal work we really didn't miss a beat.

So due to the great work of our people it really was less of a financial impact but tremendous work by our people.

Okay, great.

And just one last one.

Just wanted an update on the supply and demand balance in China and if you have any initial thoughts on pricing for 2015 there?

Well, we are hopeful that pricing has stabilized.

There's still a lot -- there's probably 20% excess supply.

We are sold out so we are running kind of hand in mouth in terms of our selling what we can produce so we are pretty tight.

But it is a much more seasonal market, too.

So even though there's 20% overcapacity in total finding cans at the peak time is a bit tough.

And I think it's a little too early to tell in terms of pricing in China but hopefully we have seen the bottom.

Things that we've seen recently it doesn't look like it's materially changing from where it's at right now.

The only thing I would add is the market continues to grow very strongly there, mid double digits, 15%, 17%, which obviously helps to soak up some of that excess supply.

I think we said on our last call that some of the smaller, more regional players continue to put some more capacity in.

But I think the tone and tenor of building plants versus making money has changed slightly towards the positive in terms of looking to make money and make returns.

Great.

Thank you.

Scott Gaffner, Barclays.

Thank you.

Good morning.

Just a few interconnected questions on Brazil and Latin America.

Can you talk a little bit about the pack mix changed to more one-way during the World Cup.

What are you hearing from your customers as far as retaining that shift in pack mix?

What do you think is going to happen with the impact to demand from a possible beer tax coming later in the year and then how should we be thinking about 2015 just off of a strong 2014 comparison?

That's a lot of questions there.

I think the first one in terms of package mix, we continue to see growth in one-way packaging.

The can as a percent of the beer mix is now 45%, 46% and that is up from 39%, 40%, I think a year ago.

So things continue to go strong there.

I don't think it was only related to the World Cup because we have seen a consistent growth of that metric over time.

Certainly the World Cup had on the margins some positive.

But there's also a lot of on-premise beer drinking in Brazil, which is not cans, it is more returnable glass.

But I do think overall those trends that we have seen have continued.

In terms of your question about the beer tax, we've talked about this before.

They pushed it out; on the last call it was supposed to happen in June and now they are talking September and it may not happen at all, so it's unclear.

It would put a little bit of the headwind into it but these things happen from time to time.

What we are hearing is it is unclear whether it's going to be implemented or at what time given the elections going on.

We had a very strong first half of the year and the overall industry did for my volume perspective.

Our expectations are it's going to be much more muted is the best way to say it and it is going to be relatively flat is what we are planning on in the second half this year.

Going into 2015 it's really as much about the economy, and the economy is not doing all that well.

The elections are coming up so it depends upon that.

We certainly don't see any big upside or downside relative to overall volumes.

And so kind of relatively flat to up a couple of percents.

If you had asked us right now, it's probably what we would say, but it is a bit premature to look into the crystal ball for 2015 down there.

Okay.

Just a quick follow-up then on that.

How sold out are you with your facilities in Latin America and Brazil specifically at this point?

We've got -- it's a very seasonal business there as well.

And we brought up a line -- the last line in the fourth quarter of last year.

So I think from a supply standpoint we've got we're kind of where we need to be.

I don't think we are going to need to be adding any additional capacity.

Again it is a very seasonal business, so seasonally you run really hard when it's summertime and you run a little bit less when it's not.

Yes, we currently have no plans to add any additional capacity.

But our manufacturing focus right now is really to be as efficient as we can with those assets that we have put in place and get more cans out of them.

So I think over the next 12 to 18 months you should expect that's really were our focus is.

Thank you.

George Staphos, Bank of America Merrill Lynch.

Thanks, hi, everyone.

Good morning.

Thanks for all the details.

Congratulations on the quarter.

I guess starting off maybe shorter term talking about the food can business in North America.

As you mentioned and for a lot of reasons you have already discussed in the past, earnings were down quite a bit.

Is there a way to parse how much of the decline in earnings year-on-year was attributed to your volumes being off, how much of it is just from higher cost to serve as you're realigning capacity of 2015 and how much of it was the self-inflicted if you can get into any of that that would be helpful, and I had some follow-ons.

Well I don't know if I could break it into those three buckets but I can break into these two buckets.

I think from a volume decline, one-third of the decline of profits came from volume and two-thirds came from the manufacturing side.

And whether that -- the relocation of the assets as well as the self-inflicted, we just haven't been executing as well as we would've liked in terms of these movements and it's going to take some time to cycle through.

So, George, that's one of the reasons why we said in the second half of this we are going to see continue to face some of these headwinds.

But I think as we go into 2015 we are laser focused on making sure these issues are corrected.

John, on the volume is this market or is this related to the contract that is ultimately coming up I would have thought then have an impact in 2015?

It is market related.

We are down a couple of a percent I think, as we said.

The packs have started a little bit late but they seem to be, it depends on where you are talking, but they seem to be going okay.

But I wouldn't read anything into it other than we are off a couple of percent.

Just because remember the first quarter the weather was bad and I think even in the early part of the first half of the second quarter the weather wasn't all that great.

So it's kind of pushed the packs out a little bit.

But I wouldn't read into anything other than that.

That's fair.

I guess maybe the last question on food and again you did very well everywhere else, so I apologize if I am focusing mostly on where the performance wasn't as great this quarter.

If we consider the volume effect in 2015 as the contract comes off but then the recovery from your operating standpoint from the realignment and then getting back perhaps on the performance to where you have had some missteps, do you think earnings in food next year are down versus 2014 or might you be flat to up because of the improvement in operations?

I think flat to up would be a big stretch as we sit here right now.

But I do think that they will be down slightly but it's really a function of how much we can improve the manufacturing side of the business here.

We have talked about, as we go into the second half of this year, that we are going to be looking at executing on our plans that we already have in place to optimize our business going into 2015.

So I think there are some puts and takes as you think about 2015.

One of the positive things is we should get better manufacturing performance.

Okay.

One last one, John, and I will turn it over.

And really more for Scott.

Realizing that it's not 2015 yet and it's hard to provide a CapEx forecast, since a lot of your projects seem to be more back end weighted Aus, Myanmar, the spending this year my guess is a little bit more back end loaded as well.

Would the project spending spill over into 2015 and therefore make it more likely that capital spending is up from 2014, or should we not draw that conclusion?

Thanks, guys.

I don't know, George.

It's probably too early to call.

There's definitely, the capital has been slower than what we expected it to be flowing out this year.

And we will see what we get done in the second half of this year.

But we would typically have some amount of carry-out capital, carry-in capital year-over-year and it's really too early to call.

And it is also frankly dependent on the opportunities that we have.

So too early to tell what 2015 will be.

I have a hard enough time judging next quarter.

Understood.

Join the back of the line on that.

I'll get back in queue, thanks.

Chip Dillon, Vertical Research Partners.

Yes, good morning and again congratulations on a good quarter.

First question I have is actually let's jump over to aero space.

John, you mentioned that there are some initiatives, I guess some proposals that are out there that you guys are kind of aiming to get a piece of in late 2014 and 2015.

Are these contracts that could make the business a lot bigger or are they more to kind of keep the business the size it is right now?

No, I think it's more growth, look to growth.

We just are aware of a fair number of different program proposals that will be put out for bid in the second half of this year that kind of fall into our sweet spot.

So as we think about that whether we win them this year or next year or whether they will be awarded this year or early next year, it is unclear at this time because some of the requests for proposals aren't even out yet.

But we do see those type of things and I think it will help to grow our business.

Okay.

And then I might have missed this -- go ahead, sorry.

No, please.

Okay.

I might have missed this, but in the Americas segment could you give us a little bit of detail between how specialty did versus standard and even within standard sort of what was the difference between beer and non-beer?

Well, I think, I'll take a crack at that.

I know our specialty can growth was up high single digits.

And so by definition our standard containers were probably down a little bit.

When you look at beer versus soft drink as an industry, beer was up a few percent, soft drink was down a few percent.

And so I think those trends that we have talked about in the past where the can is taking share, the package mix in beer continues to go strong.

The beer market is relatively stable and solid.

And on the soft drink side they have some challenges in terms of volume and I think the can is feeling it.

Those are the overall headlines.

And then I guess the last question just really more from a qualitative perspective, when you think about the aluminum premium that you are paying in Europe, that's something that I would imagine wasn't anticipated when you did your contracts.

Because it seems like that we have seen contracts in Europe as well as North America kind of have as a precondition almost, or that volatility in aluminum is borne by the customer and yet here that is not occurring.

So why would there not be a change in the contracts just to keep that rule of thumb that we have been seeing for the last few years?

Yes, the pricing in Europe has always been a little bit different but I think you are exactly right.

I think the premiums that we are experiencing now at some point need to flow through the system.

So it's always been a little bit less connected than it has been in North America than in other markets.

But if we are paying double the premium this year versus where we were six, nine months ago at some point you need to get that back.

I think one of the issues that premium historically had been relatively stable.

And so people never really thought about these big deviations that have been seen.

So your point is spot on that I think as we look to contracts going forward, that's one of the things that we are certainly going to be trying to address.

And I know maybe this is not a fair question, but is it possible that premium could go down and you could actually benefit say next year if it's not -- if the volatility is not written out of the contracts?

I think what you would have year-over-year comps that are easier.

But I'm not sure -- we would be helpful that it would go back to a more normalized level but I'm not sure it's going to go much further than that.

And we think irrespective of the changes at the LME of the rules, it's going to take some time for this to wind out the premium changes to kind of flow through the system just because the way the whole system works.

Okay.

That's very helpful, thanks.

Anthony Pettinari, Citi.

Good morning.

Just a follow-up on North American specialty cans.

It sounds like volumes were strong.

If you were to look at specialty can margins would you describe those as up year over year, are they stable, or is there any pressure there?

And I think on the last call you referenced potentially a line edition in specialty cans in North America in the second half?

If there's any update on that?

Yes, I would say again, we talk about specialty as almost like one type of package but it's 20 or 25 different sizes and shapes.

I think from a profitability perspective we really haven't seen any change in that.

We do have some plans that we really can't talk about in terms of putting a specialty container opportunity in North America that we are moving forward on.

And that will be up and running sometime next year.

So that's the only update I can provide.

Okay.

Is it possible to give capacity figures for the Holland and the Myanmar lines?

Typically when you add a new line, for example, an existing facility you get depending on the speeds and other things 750 million to 900 million cans plus or minus.

So it's kind of in that range.

And then in Myanmar it really is more about the demand of Myanmar than it is about the capacity.

And we expect to be up and running with an excess of 0.5 billion cans in Myanmar.

And as we go forward we will continue to incrementally build out that line to provide more capacity.

Okay.

That's helpful.

And maybe just one last one.

We have seen some undisciplined supply behavior by Chinese producers within China.

As you look at Southeast Asia as an attractive opportunity are you seeing Chinese competitors look at that market or maybe put capacity into that market that doesn't necessarily make sense or is concerning to you or how do you think about the threat of Chinese producers in Southeast Asia?

Well, we have seen a little bit but not a wholesale.

In Vietnam there's a Chinese producer that is manufacturing there and some other areas we look from time to time.

It is certainly not as acute as in China itself.

But there's other competitors as well, whether they are Japanese or whether even some European competitors that have been looking over there.

So I would say the overcapacity and the thought around that is not as acute as it historically had been in China but it is certainly a competitive world.

Okay.

That's helpful.

I'll turn it over.

Philip Ng, Jefferies.

Hey.

Good morning, guys.

Bev can demand in North America was pretty encouraging the first half.

Are you seeing that momentum carry over into 3Q and how has the promotional activity tracked thus far?

In terms of continuing in, and we are only three or four weeks into the third quarter and we haven't seen any appreciable change in the demand profile.

I would describe the promotional activity as average.

As I said earlier, beer cans were up, soft drink cans were down a little bit.

I think that kind of mirrors the overall industry for both of those categories.

And so we did see some Fourth of July some promotional activity but I would just describe it as average.

Okay.

That's helpful.

And then it looks like one of your competitors is looking to add some capacity in the specialty can side in Europe and North America.

Any concerns of saturation in that market as you bring on your plant in the Netherlands and I guess you are looking to add some capacity as well next year in North America?

No, because as you all know, typically when we add capacity it is on the back of customer contracts.

And so we feel good about the capacity additions we are putting in.

Okay.

And then in China, it was pretty impressive that you were able to run your plants that hard.

I would've thought your plants were running pretty full at this point.

Can you talk about some initiatives that you have placed to unlock more capacity?

And is that double-digit type trajectory sustainable as we head into next year, if there is demand?

Well, we are, as Scott mentioned, hand to mouth in Asia.

And our folks have been doing a good job.

And any time you are hand to mouth it creates inefficiencies from a logistics perspective because you are shipping cans all over the place.

We are, while we have no specific things to talk about right now, we do have to look about capacity in Asia.

But we are not going to do anything unless we can make economic returns.

And so as this oversupply exists but at the same time the growth continues very strongly, we are looking at ways of getting more of our existing system and then if we have to add incremental capacity.

Because generally speaking particularly in the south of China is where we are short cans.

Got you.

And just one last final one.

The aluminum producers have continued to shift more production into auto and aerospace.

Have you taken any initiatives to lock up supply longer term?

There's been a lot of talk about the automotive business.

It remains to be seen where that is going to go.

It depends on the customer what the customer wants to do really is how long they want to go in their contracts.

There hasn't been any appreciable change in how we are contracting for aluminum or what we are doing.

The only thing I would add as well is remember the North American market is not exclusively but largely a soft tool market.

And so the contracting of the rolled aluminum is often done by some of our major customers.

Okay.

All right, good luck in the quarter.

Tyler Langton, JPMorgan.

Yes, good morning.

Thanks.

Just of Europe, I was wondering in terms of taking out cost could you provide just a little more detail I guess on how much you have achieved as of now in relation to your goals?

And how much is left potentially?

I think we are making pretty good progress.

Part of it is fall off of some depreciation from projects that had kind of run through their life.

But a lot of it is efficiencies that we are getting out of running the business as a pan-European business out of Zurich.

And I think there's more to go in terms of manning and efficiency.

But right now I'd say we are on track with where we hoped and thought we would be, but I think there is more to go.

Got you.

And then just a follow-up on the premiums.

If European premiums remained where they are now would there be any incremental hit as you head into 2015?

Well you would have a tougher comp in the first half of 2015.

But since they've been elevated in the second half of 2014 that would balance out.

Got you.

Okay.

And then I just sort of just last question.

I know on US bev cans you've kind of benefited from the closures in the previous two quarters.

Is there still room to reduce cost there, or is the cost base roughly where you think it should be?

Well, I think from a footprint perspective if that's where you are going, I think we're comfortable with where we are right now.

But our folks continuously focus on taking inefficient costs out of the system.

And we've been spending a lot of time on the freight and logistics side, the whole warehousing side.

There's a lot of opportunity to optimize that.

And so our folks have done a wonderful job.

And it's the part of the mantra is just to continue to try and take cost out.

But from a manufacturing footprint perspective we have no plans to do anything other than what we are doing right now.

Okay.

And those savings from the previous closures have lapsed as of the second quarter?

Yes.

Got you.

All right.

Thanks so much.

Debbie Jones, Deutsche Bank.

Hi.

Good morning.

Just a few questions on Europe.

I know you kind of talked around this a bit but can you just comment on the sustainability of the 13% EBIT margin?

I know that you are going to see some premium headwinds in the back half but it just seems like you previously had said 11% to 12%, so it was a little bit better than I was anticipating.

Remember, when you go back and look over the past number of years there's a seasonality aspect of it.

And our margins are usually a little bit higher in the second and third quarters relative to the first and second.

So when we were talking about that 11.5%, 12%, that was really on a full-year basis.

Okay, that makes sense.

And then again, do you expect with the situation in Russia and the Ukraine that you might see some fallout of volume basically making its way into other Eastern European markets that might typically go in that direction?

I don't think anything appreciably.

We don't think too much about Russia because Russia from a logistics point of view is very far away from the other parts of Europe.

In the Ukraine I know that there is one plant in the Ukraine.

But the overall continental European market has been reasonably strong.

And so when you are talking about a base of 50 billion and it's going mid single digits, that's a couple of can lines a year.

And so we -- if your question is around are you concerned that things from the East may move to the West and it's going to put pricing pressure on it, I just don't think on the margin there may be some cans going there but it's not going to have enough of an impact.

Okay.

And my last question is, have you guys made any decisions on leadership in the metal beverage business?

Well, we are taking our time.

As you see we are performing very well and we are having conversations about that.

But we have made -- to answer your question, no, we have not made any decisions.

Okay.

All right, thank you.

I will turn it over.

(Operator Instructions).

Chris Manuel, Wells Fargo.

Good morning and congratulations on a very strong quarter.

Most of my questions have been answered but I wanted to kind of hone in on a couple of areas if I could.

One being recognizing you guys are very very disciplined when you go to put capital in, you don't build a lot of spec capacity or do things of that nature.

But you go about that the right way, when you put the new capacity, or you are in the process of putting new capacity in the Netherlands as an example, given some of the premium issues can you use that as an opportunity -- and appreciating you don't want to talk in too much detail about contracts -- but can use that as an opportunity to maybe change some of the mechanics of how you do contracts to protect yourself for LME premiums and things of that nature?

Or do you kind of have to follow industry dynamics and then work it as a whole?

Maybe a little color would be helpful.

I think they are a bit separate.

I hear where you are going with that in terms of how to use this capacity as leverage.

We are sold out in Europe right now.

In fact, we are real tight in Europe right now and so we need the capacity to come on.

How you negotiate contracts with customers I think is separate and apart from that.

And it's a competitive world so if we were trying to do certain things in competition or not, we would have to deal with that.

So that's why we think about it.

Okay.

No, that's helpful.

And then the second, you said that you're in a spot where you are sold out and tight in China.

We've heard some discussion here and there about some incremental capacity or someone looking to potentially add a facility in, I think, the Weilin area.

Could you comment on your appetite as it sits today given that you are full and seemingly running at okay returns to potentially add some capacity?

Well I think I mentioned this earlier, we are looking at that.

We have nothing to announce right now.

But again we are sold out in Asia.

And as the market continues to grow mid-double-digit the teens, 15%, 17%, we want to capture our fair share of that but only do it if we can be economically sustainable.

And our folks have done a very good job from a cost perspective and a capital perspective of making sure that we are low-cost there.

So stay tuned on what some of our plans are but we are looking at various things.

That's helpful.

And then just the last question I had was, when we look at your opportunity here in North America in the tinplate business I think you have in the past you have talked about looking for ways or options to try to replace some of that lost EBIT that would be from the contract move.

As you sit today you haven't made any other capacity announcements whether it's adds in different areas, can you maybe share where you are at in the process?

Is that something still you are working on that you will share with us in the future or have you thought about adding whether it's different products or different components aside from moving around some volumes?

Yes, I think we mentioned this on our first-quarter call but we expected come late summer or early fall to know where we stand relative to this loss of the business and whether or not they require our assistance going forward.

I think you should expect that we have plans in place and that we are going to be executing on them in the second half to optimize our business for that expected customer loss.

Some of it includes -- I would not say we are going out and trying to look for new business just to buy business.

We are looking at various cost initiatives.

We are looking at various new product initiatives as well and you should expect to hear some of those in the second half of this year.

Okay, that's helpful.

Thank you.

Good luck.

Alex Ovshey, Goldman Sachs.

Thank you.

Good morning, guys.

Looking at the total EBITDA for the business in the second quarter it looks like it's up about $34 million.

Is it possible to parse out how much of that $34 million improvement is productivity and sort of how you think about the productivity number in the back half of the year what that number typically is in a given year from a planning perspective?

There is always a variety of -- we don't parse it like that.

But the improvement is across the board in the beverage business from volume improvements and cost outs.

It's a variety of things.

So it's a pretty strong operating quarter.

Yes, I think it's the only -- I'm with Scott.

I don't think we parse it out the way you think about it.

But you will go segment by segment and you look at the margin improvement I think we're up in every category except the food and household for the reasons we have talked about before.

So we have had great operating performance and we have had a much more normalized constructive demand situation as well.

Got it.

And then in China, I think we had talked about in the past that you will be able to grow operating earnings there this year even though the pricing environment is tough.

Are you still on track to accomplish that and can you sort of provide an order of magnitude of what you think China operating earnings will be up in 2014?

Well, we never really get into that but I do think that we have some volume improvements.

We have, as I said we have a little bit of higher cost because the volume's been so strong we've had to move cans all over the place.

And we also even have some currency headwinds.

But the volume improvement as well as the cost out on the manufacturing side I think are more than offsetting certainly some of those other headwinds.

Got it, John.

Just last question, so your leverage ratios are moving lower even though you are not paying down debt given EBITDA is growing.

So is there potential to perhaps buy back above the free cash flow number, so north of $0.5 billion given your leverage is moving lower?

We look at it all the time in terms of how much stock we are going to buy back.

The guidance I gave you on the call earlier, we expect to use most if not all that free cash flow to buy back stock and pay dividends.

That's kind of where we are at right now.

Okay, fair enough.

Thanks, Scott.

I will turn it over.

Mark Wilde, BMO Capital Markets.

Yes, I've got just a few short ones.

John, can you give us some sense of what kind of growth you are seeing in that craft beer business right now?

I think you've got most of the can business in that market.

Yes, it continues to go very strong.

Just a data point on that, the can as a share of the package mix in craft is now right around 10%.

And that is a great testament to the work done largely by the business development folks and so we continue to see very strong growth from the craft side.

It's still not a huge part of our overall portfolio but the growth in it is still quite strong and we expect that to continue.

There's been a number of craft brewers that have been putting in new breweries in the southeast region.

And I think as we think about the capacity there as well as them putting new can lines in, we are seeing good growth there.

Yes, what would you guess your penetration would've been in that market three years ago?

Would it have been 5%, or even below that?

Less.

Less than 5%.

I would be speculating but I would guess 2% to 3%.

It has been growing strongly.

Yes, All right.

You are growing relative to the market.

The second one I had, just with conflicts picking up globally, is there any impact in all of that for Ball aerospace as you look forward over the next three or four years?

The short answer is there very well could be but I really can't comment on that.

When you think about the geopolitical environment is such that there is regional conflicts everywhere and I think information and surveillance and reconnaissance around that is real important.

And I think those are some of the strategic opportunities we may have in front of us.

Okay.

And about half of that business is defense, is that right?

Approximately, yes.

Yes, okay.

And then the last one I had is just for Scott.

I noticed that the repurchase activity this quarter was the lowest that we had seen since the second quarter of 2010.

I just wondered whether we should read anything into that?

No, I actually did not know that.

But usually we try to buy -- frankly we buy pretty heavy in the first quarter of the year.

Then the second quarter we probably at a more moderate pace.

So you shouldn't read anything into that.

Okay.

That's helpful.

George Staphos, Bank of America Merrill Lynch.

Hi, guys.

Thanks for taking my follow-ons.

I wanted to pick up on a line of questioning I think Chris had started and you had teed up given your comments on Asia and China in particular.

So if you have a market that is -- well if you have a customer base and a supply chain of your own that is sold out and we have acknowledged in the past you have discussed the fact that prices have not been where you would like them to have been.

You are still making economic profit but prices aren't where you would like them to be, you are suggesting that the next move should be potentially to add a can plant in China.

And I was wondering how you, if that wound up being the eventuality, how you would be able to preserve return through a contract where certainly in the last few years because of market factors not your own it has been less good of a market than you would have liked.

Said differently, given your sold-out position, what opportunities do you have perhaps instead of growing capacity but rather using your sold-out position to optimize your customer mix?

Yes, George, those are all fair points.

The way we kind of think about it is, number one, China is such a large country.

And so you have to look at the regional differences, so that is point one.

Pricing has come down but as Scott mentioned it has stabilized.

Point three is our folks over the last two years have done a very good job focused intently on making sure we are low cost from an operating perspective and from a capital perspective.

And so if we were to be thinking about capital going forward I think it's on an optimized capital base at a much lower cost basis and the question is at the current pricing can you make economic returns with that.

And if the answer is yes then you consider it.

If the answer is no then it gets into how do you improve either one of those three further from where you are today.

That's the way we think about it.

That's fair.

And gets me to one of the other questions that I had.

Relative to where the industry was back in the mid-1990s, the beverage can business had become actually a very good business and for a lot of reasons you are currently earning a lot more economic profit both as a company as an industry than had been the case at least given our math.

But that also brings a challenge because it attracts capital.

So what do you believe to be -- if you cannot get into the numbers, I think Alex had asked some questions about productivity -- one of the ways you keep out that capacity is by always improving your own cost position.

To what degree do you think you can improve your productivity and cost position relative to the industry in total, especially in the growth markets like a Europe or Asia, what do you think your productivity is beating the market by?

Well again, I think we've talked about this in the past.

The way that we look at it is, let's just pick on China.

There are a number of smaller, more regional ones that are publicly traded.

And you are able to go and look at their public financial statements and we are able to do that and compare them with ours.

And we see that scale matters in our business and we see that we can bring the global perspective to issues at a regional level.

And so if we are having some operational issues at a particular plant in China it is not just the people in the plant that can deal with it, we can bring to bear some of our experts around the world to help them on that.

Some of the regional guys don't have that.

And so what that ultimately creates is a scale issue where we can see it in the financial statements that our returns and margins are better than some of the local regional guys.

That's fair.

I will drop that line for now.

I guess the last question I had and then I will turn over, realizing that this maybe isn't the most realistic scenario because you are going to win contracts and your backlog is going to get better, but assuming these contracts don't come in quite the way you would expect, when would we begin to see your margins in aerospace begin to fade?

Right now it is very rich because of where you are in terms of the contract terms, the life of the contract and so on.

Would that be a third-quarter or fourth-quarter event?

Good luck in the quarter.

Feel better, Scott.

Thanks.

I don't think it's necessarily a step-change function quarter-over-quarter.

But I do think that we have been -- the first half of this year and you have seen it in both the first and the second quarter -- we have been doing very well as we have closed out some of these programs.

I mentioned that we have the WorldView-3 launch coming up in a couple of weeks.

We delivered that in the second quarter and so that de-risked much of it and we were able to get some benefit there.

I think as we go into the third and fourth quarter you should not expect as much of that as you saw in the first and second quarter.

And then when it comes to rebuilding that backlog whether it's fourth quarter this year, whether it's first quarter next year, we don't necessarily think about it as a point in time.

But there's a number of opportunities we are chasing that are going to be awarded in that timeframe.

And that hopefully will start to build the backlog back again and then we will go through this other cycle of starting the contracts and then performing as we go.

Does that make sense?

All right.

Thank you.

I'm showing no further questions at this time.

Okay, well thank you, everyone.

Enjoy the rest of the summer and we look forward to speaking to you in October.

Thanks.

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.