Ball Corporation (BALL) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation Second Quarter 2008 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 24th, 2008. It is now my pleasure to turn the conference over to Mr. Dave Hoover, CEO of the Ball Corporation. Please go ahead, sir.

Thanks, Tommy, and good morning everyone, and welcome to Ball's conference call regarding our second quarter results in 2008. I need to remind everyone the information provided during this call will contain forward-looking statements that actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company's latest 10-Q and in other company SEC fillings as well as company new releases. And if you don't already have this earnings release, it is available on our website at ball.com where you can also find information regarding the use of non-GAAP financial measures, you will find those on our website as well. With me today on today's call are Ray Seabrook, Executive Vice President and CFO; and John Hayes, Executive Vice President and Chief Operating Officer. While I'm pleased with our operating performance in the second quarter and in the first half of 2008, in the first half of last year, 2007, we benefited from a few non-recurring items and still our company's results improved this year. Ray and John will say more about that and provide some color on our financial and operations performance, and then I'll close with a few comments about our outlook. Ray?

Thanks, Dave. Comparable diluted earnings per share for the quarter were at $1.10 and through the first six months were at $1.90, up in the quarter and up through the first six months compared to last year's record per share earnings. To better understand our first half results, you really need to look at the earnings performance over the last two years, as Dave said. Normalized diluted first half earnings per share is up 53% for the two-year period, a 46% improvement in 2007 and a 7% improvement in 2008. Although we touched on this in our last call, it seems some investors were of the opinion that the 2007 per share earnings increase was not sustainable due to one-time operating gains made in 2007. Though the earnings mix has changed, our performance reflects the improvement was not only sustainable, but we have increased earnings per share through the first half of 2008, again off the record 2007 performance. Turning to the operations, lower second quarter beverage can earnings were somewhat offset by higher aerospace, food and household, and the [inaudible] equity earnings. Lower interest and tax expense and lower share count due to our share buyback program contributed to higher second quarter and year-to-date comparable earnings per share. Second quarter beverage can sales volumes remained strong in Europe and China with North American volumes down year-over-year through the first half. Lower second quarter worldwide beverage can earnings were anticipated coming off tough 2007 comps, but were up 30% from 2006 levels. Last year's second quarter beverage can earnings included $9 million of North American inventory metal gains and $17 million of European business interruption insurance not recurring in 2008. Both of these items were essentially finished in the second quarter of 2007. Aerospace had another record second quarter and first half. Sales are trending somewhat lower than last year, but better program execution, improved contract mix and lower unrecoverable cost contributed to their higher earnings. Prudent household sales volumes are down from a year ago, but earnings are much improved from a very low base due to better manufacturing performance and some price recovery. Interest expense is $3 million lower in the quarter compared to a year ago due to lower rates, and full-year interest expense should at least $10 million lower than 2007. Lower employee costs and lower uncovered aerospace expenses account for the majority of reduction in G&A expenses. And a stronger euro added $0.07 per diluted share in the quarter compared to a year ago. Turning to free cash flow, we still anticipate full-year free flow to be the range of $300 million, which is after deducting the one-time $70 million legal settlement paid in the first quarter. We also anticipate full-year capital spending to be around $330 million, lower than our first quarter forecast, and we still foresee more than 50% of that spending being for the new top line growth projects. Turning to the balance sheet, our net balance sheet debt at the end of the quarter was at $2.7 billion, entirely due to seasonal working capital requirements, elevated stock purchases and a strong euro. As we look ahead to the second half, free cash flow is on target and we should see net balance sheet debt of less than $2.3 billion at the year-end, which means we have very strong second half cash flow. The announced full-year 2008 $300 million stock buyback program is still on target and through the first half we have purchased a net $181 million of stock and we continue to see excellent value in our stock buyback program, especially at these prices. With that, I will turn it over to John.

Thanks, Ray. In the second quarter, our various business segments performed well in a tough environment and generally exceeded our expectations. As I mentioned in the first quarter conference call, 2008 is a year of execution but equally importantly a year to position ourselves well for 2009 and beyond. While much more needs to be done, we currently are in line and on target for all of our businesses to meet these objectives. In light of the core cost inflation we are seeing, pricing initiatives are well underway in all of our packaging businesses as we have no choice, but to pass along the higher costs we are entering. Overall pricing, new pass through models on energy and freight and other risk management initiatives are being discussed both in person and in writing with all of our customers and all of our segments where our contracts allow. In terms of second quarter performance, Metal Beverage Packaging, Americas and Asia came in near our expectations from a profit point of view despite weaker volumes in our 12 ounce business and difficult comps related to the remaining North American metal inventory holding gains that benefited us in the second quarter of last year. Normalizing for the prior year's metal gains, segment performance was relatively flat even with rising costs and decreased unit sales, but up 11% since 2006 which would factor out any impact of inventory holding gains. Overall, volumes in North America were down by more than 5% versus a 3% industry decline due to slower CSD volumes, and as we have mentioned on our first quarter call, our beer volumes are lower as a result of our decision last year to not participate where we felt pricing actions did not make business sense. Our specialty can business continues to grow although at a slower rate due to the overalls lower consumer sales throughout the convenient store channels that most of our customers are experiencing. Our new 24-ounce capacity in Monticello, Indiana will be on stream during the third quarter this year and we look to continue to provide additional can formats and other innovations to help our customers win in the marketplace. Our Kent, Washington 12-ounce beverage plant will cease operations in late August, and we continue to monitor very closely the overall soft demand for carbonated soft drinks in the U.S. We must ensure that we are economically sustainable for the long term in our 12-ounce business and customer negotiations regarding contract maturing in future years have begun. In China, year-over-year sales volumes were up around 20% driven by promotional activities ahead of the Olympics and continued growth in the use of cans in the beer segment. We continue to assess opportunities to respond to this growth. Strong demand continues in Brazil with overall industry volume growth of approximately 11% year-to-date and we expect this strong demand to continue. Our capacity addition in our existing facility is progressing nicely and we expect this to be on stream in the first quarter of 2009. In addition, our new Rio de Janeiro plant is underway and we expect to break ground in the third quarter of this year. In our European operations, our volumes grew 7% in the quarter despite some poor weather conditions in Poland and other eastern and central European countries that you witnessed if you watched the Euro Cup Soccer tournament on television. In addition, sporadic freight interruptions and customer strikes, particularly in France and to a lesser extent in Spain, caused some slowdown in shipments. Overall, industry volume grew about the same 7% throughout Europe with continued steady growth across all regions, and we have seen an acceleration of overall beverage can shipment during the past several weeks. From a profitability point of view, EBIT was down in the quarter due in part to the timing differences of businesses interruption insurance that Ray mentioned in his comments. However, when compared to 2006, which is a more apples-to-apples comparison, EBIT is up 20% over the two years. Also impacting profitability were costs associated with our capacity expansion projects. The various projects we are pursuing in this segment are all on time and on budget, including our new Lublin, Poland facility, which is expected to be operational in the second quarter of 2009. We continue to monitor the regional economies very closely and we will adjust our timing depending on market conditions. Turning to Metal Food & Household Products, it continues to improve. Our pricing initiatives, continued operational improvements and improved mix added to the quarter. Volumes for the quarter were down mid-single digits, in part due to decisions to walk away from certain business and in part to continued lower-than-expected food can shipments as customers finished working off high inventories. We have begun to see a pickup in food can volumes over the past several weeks as customers prepare for the seasonal pack. Our aerosol volumes came in as we had planned. Performance out of this business is progressing, and year one of our three-year improvement plan is playing out as we expected. The previously announced rationalization program is on schedule and should deliver at least $15 million of cost savings in 2009. Reaping the cost savings of our ongoing rationalization plan, pricing initiatives, contract administration and cost recovery will ensure our three-year goals are met. Customers are being notified of the steep steel price hikes anticipated for 2009 and our need to recover these and other costs. Plastic Packaging, Americas results are comparable with last year after adjusting for a small write-down associated with a customer bankruptcy. Volumes from monolayer, carbonated and non-carbonated containers in the quarter were down approximately 10%, while custom containers were up 15%. And custom containers now represent approximately 25% of our total volume. Many of the same C-store trends that I mentioned in my comments about our North American Beverage Can volumes ring true in our monolayer 20-ounce CST and water business. We continue to adjust our supply to meet current and future market demands, and we believe we are on track to improve this business beginning in 2009. As we indicated on our last conference call, Ball Aerospace will have another good year in 2008. Second quarter performance is evidence of that. Backlog for the quarter finished at $654 million, which is down from $727 million at the end of the first quarter. We will likely gain more visibility on the outlook for 2009 and future contracts prospects and awards after the presidential election. So in summary, we have programs in place to respond to the increasing cost impacting our packaging businesses. We have taken actions to improve pricing now and in the future. We are controlling cost across the operations. We are focused on building the backlog in our Aerospace segment. And we've an excellent team with employees up and down the company focused on delivering the earnings and free cash flow that we and our shareholders expect. Dave?

Well, thank you, John, and thanks also Ray for your comments. I am really gratified that our company has progressed so far this year and that… the programs that John was talking about that we have in place to continue to improve this enterprise. All of our employees are working really hard and I appreciate everyone's effort. But we are not anywhere near finish. We see opportunities in each one of our businesses to improve performance and we are going hard after them. Even with the tough economic conditions we've experienced to date, our goal for the second half of 2008 is to succeed last year's solid second half performance. We have a great portfolio of businesses, a solid balance sheet and financial flexibility to respond to opportunities to grow our business. And with that, Tommy, I guess we are ready for questions. Question and Answer

Certainly, thank you. [Operator Instructions]. And our first question comes from the line of Ghansham Panjabi of Wachovia. Please go ahead with your question. Mr. Panjabi, your line is open for your question.

Hi guys, good morning.

Good morning, Ghansham. How’d you beat George?

I guess faster fingers, I don’t know. Anyway, looking back to the third quarter of '07, your European operating margins… bev can operating margins were 6.5% if my model is correct. Was there anything unusual in there, any business interruptions, insurance proceeds, inventory gains, etcetera, or is that a quaint number?

Well, I'll take a shot. I think... I guess I have to check this, and you can get the exact numbers from me. But I think there was a couple of million dollars in the last two quarters for business interruption insurance. It pretty much tailed off, the second quarter was plastic payment and then there was a little bit… and there was nothing else unusual that I can remember. John, do you remember--?

No, I can't recall anything else.

So if volumes fall to the single digits, then should operating margins be comparable to last year, adjusting for the 2 million?

Yes, we have… let me explain this a little bit more. I'm going to talk about the second quarter and we will relate throughout the rest of the year. Three factors affected the earnings and margins in the quarter in Europe. First is the difficult comp compared to last year's result of the closeout of the insurance settlement related to the 2006 fire. Back in 2006 recall, we talked about the challenge of working with our insurance company, to match the business interruption insurance proceeds with the cost and loss profit associated with the prior... with the fire, and in 2006 we settled that. As time went on, there is always disconnects where the closeout ultimately created a situation where the match between the two is more favorable in the second quarter of 2007 relative to prior quarters. However, going forward the comparables around this are relatively clean, and so I don't expect that to have an impact going forward. But two other factors or three other factors really did impact Europe. One, we had an unfavorable product mix issue. We mentioned on my comments of temporary slowdown in the East due to the weather. This did create some negative mix issues for us. However, in speaking with our customers they all believe this region is going to pick up in the second half and we indeed have begun to see this pick up over the last three or four weeks. Another issue is we have been incurring additional costs related to our new projects, whether it be higher labor cost as we begin to hire employees and train them in our other facilities or significantly higher freight costs as we ship product into these regions to seize the market in order to ensure we are going to be at full capacity for our new plants as they come on stream. We would expect going into the third and fourth quarter some of those costs… we're still going to have some of those in this part of our investment for the future. We talked about the strikes in France and Spain, but all in all, we are aggressively managing these issues and we do feel constructive about the future going forward.

Okay. And Ray, on the corporate expense line, the delta there, year-over-year? Thanks.

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

Yes.

A lot of that speak… a lot of it comes from Aerospace, believe it or not, on the unrecoverable cost. They are way down year-over-year. That and some of our employee costs are down, those are the two big items.

Okay. Thanks so much.

Thank you very much. And we will proceed to our next question from the line of George Staphos of Banc of America Securities. Please go ahead, sir.

Thanks. Hi, everyone. Good morning.

Good morning.

Sorry, I was… we had a couple of other conference calls we had to deal with today.

I’m disappointed you aren’t first, but [inaudible] okay.

We'll give the crown to Ghansham today. Listen, in terms of the business interruption insurance, was it a couple of million or was it $17 million? I’m--.

Let me explain that because Anne [ph] came into my office [inaudible] she had a bunch of questions on this. Let me explain this. You go back and look at our conference and go back to what we said in the conference calls, when we first had that fire we said that we're going to negotiate our insurance companies and we were going to do our best to try to match. When we recorded the business interruption insurance, when we thought in fact it fell. The way accounting works on something like that is you can’t record a problem until you actually get the money. And so when we're negotiating and sorting all that through, I mean these are in… through most of 2007, when we were doing that we were trying to do the best of match when we got the cash versus when we thought the profits lie. So when we say… for example, when we say that we're $17 million in the quarter, there was $11 million in the first quarter. And so, what happen… and you would expect more in the second than the first because that business… Europe makes more in the second than the first. So, I think the point is that we're never exactly sure when exactly it should fall, so maybe that 3 million or 4 million of that or some amount maybe should belong to another quarter, I couldn't tell you. The point is, we had… that was our largest… the largest cash payment from the insurance company was in the second quarter of '07 and certainly most of that money should belong in that quarter, but maybe not all of it. Does that help?

Yes. Ray, no one is going to go back and audit these, we’re just… we’re trying to figure out what we should--.

No, but I am just trying to explain how the… and we can't book something before we actually get the cash. So we tried to sort of match the infusion of the cash with when we thought that the interruption insurance was in, and the second quarter was the largest payment, that's all.

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

Yes, it's in the 10-Q. All that was disclosed in our 10-Q, but at the end of the exercise I think our point with the $17 million is, it was our largest payment and we didn't have it this year and maybe some of it belong to other quarters, we couldn't tell you.

We understand, we are not quibbling with that. We're just trying to figure out again in order to show ourselves what the comparison figures or the best that you can estimate, the best that we can estimate. So at $17 million in last --.

I am getting it, George. Maybe, $2 million or $3 million or $4 million of that maybe some belonging to first, maybe some belonging to third, I don't know.

No worries. Now, as we look at cash flow and CapEx and the use of $20 million or $30 million on CapEx relative to your overall free cash flow budget for year, it is rounding your obviously free cash flow, there is a lot of things that can move that number, but I was curious with CapEx perhaps being a little bit less than expected, what is giving you reason perhaps to just keep the free cash flow guidance for the year where you’ve had it and --?

Well, if you go back to towards… we always… 300 was going to be tough for us and as John pointed out in his comments, we are working real hard to take a close look at everything we do because we are going to deliver that cash flow. The other thing that's happening is with all these raw material and other increases, well, probably not an exchange, well, probably neither can we get all that working capital back out. We're going to get by far the majority of it out, but we are not going to get all of it and it's probably in our best interest not to get it all of that. So the end of the exercise if you think about it mentally, the reduction of capital spending, just take the money and put into working capital.

Got it.

Vis-à-vis exchange or the fact that we make out a little bit more, we kept going into it, and the other thing is when you do the numbers you are going to see that we need to flow at least $530 million of free cash flow in the second half to hit those kind of numbers.

Understand.

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

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

Yes, I mean not only you should [ph] read anything into it other than fact that at these prices, I'd like to buy $500 million of the stock and our balance sheet says that right now that it's prudent for me to do what we're doing. And as we look at next year we'll see what we need to do. As I say, we plan to have a strong buyback program next year, we'll see what size it is and let me get to end of this year.

Okay. Fair enough, thanks.

Thank you very much. And we'll proceed to our next question from the line of Timothy Thein of Citigroup. Please go ahead with your question.

Hi, thank you. First… just two questions. One, if you could comment at all, I think you mentioned in Europe... or correct me if I'm wrong, I think it was Europe that you said you're starting to see… or you're seeing improvement as you’ve… in early days here in July, but I'm curious if you can share what you're seeing in North America thus far here in the quarter? And then separately, what did the currency help you, I think you… I missed it if you said it in terms of the per-share impact, but I'm also curious what it added to the revenue improvement in Europe [inaudible]? Thank you.

In North America, it's challenging out there is what I’d tell you. It’s… I'm sure you all look at CCE and what they’ve had to do and some of the other of our big customers out there, it is chilling, soft drink is down in the mid-single digits, beers is flat to up slightly in terms of overall industry volumes, and as we go forward CCE is announced… for example, they’ve announced that… their take-home channel that they're going to be increasing prices after Labor Day. That's going to have an impact most likely on our business and that's why I said in my comments that we are aggressively and proactively planning for various contingencies because we need to match our supply with the demands in the marketplace, and as we go forward we're going to be committed to doing that. This is an economic climate where I think many of our customers should have been caught off-guard, whether it’s the significant slowdown in the c-store channel or the lack of pick-up in the take-home channel. And so it's a very fluid situation and we are being very proactive and are willing and able and are… will respond to any changes in demand that we see.

Yes, and just to finish the second part of your question, I think I did say in my comments that the impact of the euro was $0.07 for the quarter, $0.10 year-to-date. The interesting part about that, that is really just the conversion of the European earnings… net earnings to the bottom line and that includes after interest, after taxes, after everything. That includes… that’s the conversion of their earnings into the U.S. dollars. Now the interesting point I was talking about Europe as well, they’ve got more than one currency over there. They have got… we deal in other countries other than just the euros. So I think when we go back and at look at the quarter there, their results were a little negatively impacted by some of their exchange differences.

Okay. Thank you.

Thanks.

Thank you very much. And we will proceed to our next question from the line of Claudia Hueston of JPMorgan. Please go ahead with your question.

Thanks very much. Good morning. I was just hoping could talk a little bit more about that transportation issues that you’ve had in Europe, sort of just… a little bit of color on what exactly has happened there and where it’s based in now as we move into the quarter? Thanks.

Okay, well there’s two issues really, there is one issue that relates to where we currently do business and currently manufacture business. With the sharp rise in oil throughout many of the Western European countries and I'm thinking specifically of the U.K., France and Spain, there has been all sorts of strikes going on. We seeing a significant increase in the cost of petrol and we are actively and aggressively talking with our customers about that, but the freight created a lot of dislocation as… the freight strikes created a lot of dislocation that we had to back-fill and do some other things that added some cost to our systems, so that is one point. The other point is as we going to other countries, whether it’s Eastern Poland, whether it’s India and some other places, we are shipping cans there and that is of significant cost. We view that cost as we need to do that to feed the market to make sure that we are well positioned and when our facilities get up and running that they are at or near capacity as opposed to building something, crossing the fingers and hoping that demand will come. So those are really the two issues going on from a freight perspective in Europe.

That's really helpful, and in terms of the strikes, are they still going on sort of often or have they kind of stopped do you think?

We all know that it was really in the May and June time frame, and one of our big customer in France I think publicly disclosed that they were having some issues and it did have… no doubt it had impact to us not only from our volume perspective but from a cost perspective as well.

When we were in England in June, the people at Hall [ph] Gasoline for BP struck for seven days. They tend to kind of come out and say, okay, we are going go on a seven-day strike, whatever it might be, it is a little different, but it really puts sand in the gears of your distribution system and it raises the cost temporarily.

Okay. That's helpful. Could you also just tell me what the shares were at the end of the quarter, the shares outstanding?

I think it is on the face of our… it's a little bit lower than the number that you see, it’s about 98 million.

Okay.

[inaudible].

Yes. That's what I wanted. Thank you.

Thank you very much. [Operator Instructions]. And our next question comes from the line of Mr. Mark Wilde of Deutsche Bank. Please go ahead with your question.

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

Yes. Let me take a stab at that --.

I think you mentioned couple at Brazil.

Yes. Well, we have a capacity expansion on Brazil that's well on the way and then we have a new plant that we have not even broken ground on that, but we have plans to do that. We are paying very close attention to all the economies because the North America has a cold and we need to be very cognizant of what happens if that impacts other countries. So, in Brazil we are being very close to that, we see no slowdown in the market, but we're paying close attention to that. So that's a new line, our new plant that will… the current plan is to break ground in the third quarter. We have our Lublin, Poland plant, which is on the Belarus and Ukraine border that serves Eastern Europe as we continue to go east from Poland, and that is on track to be… begin production early in the second quarter of 2009. And that's currently a one-line plan. And we are seeing very strong growth, particularly in the Ukraine market. We have plans to invest in India. We are paying very close attention of that. Depending on the economy down there, we may slow that down a bit. Just to give you an example of the inflation in India, six months ago it was about 3%, now it's 11% and that's going to start to squeeze the middle class. So we're paying very close attention to all these things. And I believe those are... And Monticello, Indiana, which effectively is largely completed, will be up and running within six weeks or so I believe on that line. And those are all the various capacity expansion plans that we have on the pipeline right now.

Okay, and just one other issue. With the euro at pretty much record levels against the dollar right now, any thoughts on just hedging a bit?

We do that as on a normal course and as we speak we have various hedges throughout '09 on our conversion of our euros to dollars.

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

Yes. I mean basically long-term... I mean we can't... long term if goes up or down, I mean we can’t... it will reflect in our results. What we do by this is we really soften the blow. So if in fact the euro does go down like you are anticipating, our results would be better in '09 than they otherwise would be because we have positions in place that would... that ours would not go down as much. So I can soften the blow, but over the long term our results will hinge on the strength of the euro and the dollar and how that plays out. But I can... we can soften the blows as we move through those periods.

Yes. And do you hedge any the other currencies, like let's say the [inaudible] or anything?

No. These are business situations. As I just said, we have other currencies we deal with. In Europe, we have Polish zlotys, we have the pound sterling, and we have other currencies and normally we have... depending on what we are doing, we hedge up to match to our customer commitments generally.

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

Yes. Well, this was part of our overall project net that begin several years ago and as we get close to the end, this plays right into what were talked about in managing supply and demand, and as demand has gone down, we think we can get away with not having to put in the last module. And so we're making… not only making, we are executing on plans to do just that.

Okay. Sounds good, thanks very much.

Thank you. And our next question comes from the line of Chris Manuel of KeyBanc Capital Markets. Please go ahead, sir.

Good morning, gentlemen.

Good morning.

Couple of questions for you. First, let me start… one for Dave over your favorite line of business, Aerospace business had an outstanding quarter. Can you give us a little more color as to how the rest of the year flows? Someday, as you wind up some of these projects they tend up higher margin, it showed through this quarter. Is that likely to continue through the balance of this year as some of the project deliveries take place or --?

I think we had 3% or 4% of margin related to a couple of large programs that as we try to say or as we did say, as they wind down in their fixed-price programs and we do a good job, their margin increases and we are very disciplined on how we do this. So don't expect that kind of margin for the rest of the year, but they're going to have a very solid year, just the way we see that in terms of the profitability. Longer term right now, I don't know if you’ve noticed, but there is an election… a national election going on --.

I wouldn’t have seen any commercial?

Yes, right. So, it seems that the government gets sort of wrapped around the axel at these times in terms of making budgets or passing anything. We’re on the trial of a couple of really good big programs and they are being delayed. Not sure that we will win them, but we are… they are in our sweet spot. So it's just hard to predict. We keep hearing good things about, well, it's going to happen now, it's going to happen now. Now, I think the closer we get to the election, the less likely people are to step up and pay attention [inaudible]. In all likelihood, we’ll be working on a continuing resolution in the government's new fiscal year until after our new President takes office. So that's going to hurt us a little, but we're working really hard to build backlog in the business and with some success in some particular parts. But I would say this year is likely to be… at the end of the year, we’ll like the margin for the year and it will be very strong.

Okay. And Ray, you must have had too much coffee this morning because you talk so fast. I heard him say the backlog numbers, but I couldn't quite make them out. Could you give me those again?

Yes, I must have talked real fast, I don't think I gave you the backlog numbers. But you’d be right, I was talking fast.

I think this is --.

And I don’t have it. John, you’ve got--.

Yes, this is John. I must have been impersonating Ray. Backlogs --.

That’s hard to do.

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

Okay. 654. Other question I had for you was, you talked about I think in response to Mark’s questions, some of the capacity you had. I forget what the amounts of capacity were. Did you think… you said one line [inaudible] if you could tell how many units that equates to and then the units for the Brazilian piece as well?

Yes, in Poland, excuse me, it's approximately 700 million cans. In Brazil, the speed-up was 200 million to 300 million and then the [inaudible] line, which realistically won't come on until the end of '09. Really going into 2010, it is about 700 million as well.

Okay. And then the last question I had was one of the things I did see when I had my… all these television commercials, was that there is a large brewer in the U.S. that looks like they’re going to be bought. They also have a can business there that could be pretty attractive. Could you maybe give us a little on your thoughts as to with the industry support going from four to three or does… a little bit of thought on the acquisition environment and what… whether you think something like that will feasible going from four to three in the industry?

Yes, I think it's feasible to go from four to three. I think the beer industry is respectively gone from three to two or from four to two, five to two, whatever you want to say. So, feasible, yes, and in a market that's relatively mature and so on maybe it's likely. I certainly don't know what the folks at InBev and at Anheuser-Busch plan to do relative to this. Obviously, both of them are good customers of ours and we would be prepared to talk to them at any time, but that's in their court. I'd suggest you talk to them about what their plans might be.

Okay. Thank you. That's all I had.

Thank you. And our next question comes from the line of Mr. Alton Stump of Longbow Research. Please go ahead, sir.

Thank you. Good morning. Had a quick question, not to I guess beat a dead horse on bev cans in Europe, but it looks like just from a peer margin perspective that with one of the lower better quarters you’ve had in a while and you've already talked about some of the costs that have popped up over the course of quarter. Obviously, one of your major competitors came out with a very strong number in that segment. Just trying to get an idea of is there anything else that we’re missing there that was a one-time impact in the second quarter or was it truly just some of these costs, whether it was for the strikes or elsewhere?

No, I think it was just we are pretty transparent. This is truly what's going on our business.

John did mention one thing that I might re-emphasize in terms of where we sold is important, but also what we sold, so the mix issue hurt us a little more in the second quarter than we might have thought. And… but for the strikes and the wet weather, who knows this probably might have been a double-digit quarter for the market and for us. So we don't see that as necessarily changing the trend or certainly not from the customers that we talk to and about their aggressive plans to grow throughout, particularly the Eastern European region.

Okay. I think you mentioned, John, that they were [inaudible] products with the plant that you are building for the first half of next year in Poland. And I think you mentioned that you thought costs would still be there obviously in the back half of the year. But can you give me an idea of the magnitude in the back half on a per quarter basis, how that would compare to what it was in 2Q?

Yes, it's a good question, I don’t want to invade it. It's a few million euros, few million euros. It's always tough to pin down because as you are talking… for example, as you are talking about we've hired new people for the plant, but we've put them in our facilities for training purposes. To track that on a person-by-person basis it would hire, we need to hire five more accounts to do that and that doesn't make sense at all. So it's a few million euros in the quarter.

Okay. Thank you.

Thank you very much. And our next question comes from the line of Mr. Richard Skidmore from Goldman Sachs. Please go ahead, sir.

Thank you, good morning. Just really a couple of questions. First, John Hayes mentioned some price initiatives across the business. Can you just talk about a little bit more in detail where those are? I know that some of it just… perhaps just passing through metal pricing, but could you just elaborate more on what price initiatives are underway?

Well, as I mentioned, we have price initiative underway in all of our business with all of our contract where allowed by contract. We have some existing contracts and we are looking at them very hard in terms of freight pass-throughs, in terms of other things like that. We have send letters out in certain of our businesses talking about where we are allowed to the need for recovery these costs. But equally if not more importantly, as our contracts come up for renewal we are taking a fresh look at everything. And I mentioned the core pricing initiatives, I mentioned cost pass-through models taking a fresh look at that and making sure that we're balancing the risk taken in those contracts so that we are not taking unnecessary risk and we are getting paid for the value delivered. So what I would tell you is in every one of our businesses these discussions are ongoing.

Okay, and I think that… No, I was just going to add that we are communicating with clarity and in detail about all these things, trying to be in advance as much as we can.

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

Well, again it varies by business, but I would say a significant amount across the portfolio is up for renewal over the next 18 months.

second question, can you just elaborate it, are there any start-up cost associated with the Indiana can line that will show up in the third quarter or the fourth quarter?

No, probably not so big that it would be meaningful. Yes, when you start a line you usually… as you're flipping from capitalizing the last cost and to getting to the operation, there is some costs but I don't think it will be a big number.

One of the things… and we invest in things like that. It's very important that we invest where we have high confidence in that the people are going to deliver on the commitments, and our Monticello facility is a wonderful facility. The people there are tremendous and we have high expectations that they are going to hit the ground running.

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

Okay. And then just lastly, Ray talked about in the past sort of a 10% to 15% earnings growth year-over-year and as you look at 2008, is there any reason why you would not expect that to happen in '08?

I am not sure I understood the question.

Let me just try it this way and they you can take a dig. I mean one of my comments were I think we had something like 25% last year and between the two years we are certainly going to exceed those… you'll see our top end, whether in fact we can have 10% to 15% in '08 remains to be seen.

Yes. I mean what we… what I said and I think we wrote it in our press release is that our goal is to exceed the second half. We try to give real specific guidance. Interestingly, you all seem to know exactly what we are going to make, we usually have to close the books to find out each… and with 98 million shares outstanding, less than $1 million of net income is a penny and we are a $7.5 billion company. All that being said I think we are optimistic that… there are parts of this company and you could just go over all the different operations that are definitely on the way up. We've got between this year, the next year and the year after programs in place to incrementally improve on both the operating side and the pricing side various parts of the company. Demand on some of our best customers as John talked about is little soft. So… and he also said, and Ray said that we're going to run, not to build a lot of inventory and report profits this year that won't show up next year. So we’ve got to manage that working capital down too, if necessary. But given all of those things and everything we know about and all the volatility, we are feeling pretty good about the opportunity to beat last year’s second half and then somebody might say, well, by how much, and I’d say, well, by as much as we can. And that's where we are in July. It's not a negative message, it's just that we're going to control we everything and push hard and operate better, and as Ray has been pointing out, if you integrate the last couple of years we've taken a big step forward in the performance of the company and I think there is more to come.

Thank you.

Thank you very much. And the next question comes from the line of Andy Fineman [ph] of Iridian Asset Management. Please go ahead with your question.

Thanks. Are there steel suppliers honoring their contracts?

We're having challenging discussions with many of our steel suppliers, but we have very firm contracts with virtually every one of them and we're taking a very firm legal position with that, and… but we also recognize that we need a healthy supply chain over the long-term and what we've been doing is warning our customers, not only warning, but communicating very clearly with our customers that going into 2009 the price increases related to steel and other input costs are going to be significant and material.

Okay. When do you finish pre-selling in Europe?

Finish pre-selling, I am not sure I understood the question.

Yes, you are shipping product in to pre-sell your new capacity and that’s caused some costs in the quarter.

Yes.

And I think you said that new capacity in Poland comes on second quarter of '09, so does that mean that that's when the pre-selling costs go away because it’s--?

Yes, you understand the seasonality of our business, so it's most impactful in the summer months, but it's also India as well, and as we… what we are looking at India is working with our global supply if you will, with our licensees and with our Asian operations to make sure we're optimizing as we see that market… to make sure we're optimizing the cost as we see that market because we continue to see very strong growth, but we are a bit cautious that with the increase of the inflation and the budget deficits India is starting to run, what are the implications of that. So we're being very mindful of all of that.

Now, you guys have made a tough decision regarding beverage can capacity in North American, which I commend you for, it’s not easy to close capacity. And last year Crown closed some capacity. I'm kind of shocked that we haven't seen any capacity closure announcements yet from Rexam and then I hope we will. Is there anything that would prevent you or any of your competitors from closing capacity like for instance the transportation costs to reach customers would be too high, so therefore you’ve got to keep the sub-optimal plan operating?

Yes, obviously I can only speak for ourselves. When we are looking at capacity, when market demand goes down it's not 1 billion in this part of a region or 1 billion in that part, it's a 100 million here, 200 million there, and so inevitably you’ve customer contracts you need to honor and live up to and those… at least for us we have contracts that count go as far as 2015 and are short of end of 2008. And so when we're looking at overall capacity, freight certainly does play a factor in terms of the customer commitments and how long you have to have out-of-pattern freight expenses related to servicing those contracts. So no doubt that is a factor in all this.

But I think, Andy, if you are in this business and you have a lot of plants, there are a few that are at the edge usually for most people, I can't... as Ray or as John said, I can’t speak for others, but we are doing a lot of thoughtful analysis and planning and scenario making around what happens here and there. I think that over the last decade or so, all of the can companies, maybe with exception of metal container have shut their capacity from time to time. And one must deal with the reality of the market and we're… we need it all to run at high rates in order to get our cost the most it can be. And so, we’re just trying to… as John has been saying to do our part to keep the supply/demand balance.

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

I think I would agree with that. Yes. And certainly I think all have from time to time and I expect will in the future.

Thank you.

You bet.

Thank you very much. And our next question comes from the line of Mr. Tim Burns of Cranial Capital. Please go ahead, sir.

Good morning.

Good morning, Tim.

I’ve got a suggestion. I think you ought to put up a Ray resistant coffee delivery system in the office, because I unfortunately, Ray, have to go visit a therapist for carpal tunnel syndrome after these conference calls. And it's becoming like my left foot, I'm using my left foot and not right.

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

Well, either way, put some child-resistant caps on those. I had a question for and I know it was hit earlier, I always hate that, but John, when you talked about new pass-through models being discussed, core pricing initiatives, freight pass-through, so on and so forth, I mean, I think of all the businesses that we follow in packaging, the metal leverage can business has done as well as almost anybody in getting price pass-through, it shows. But doesn't that have to be a win-win for your customer and how do you do that?

Well, it does, and in part Dave was talking about freight optimization in terms of the various plant networks and we're trying to talk with our customers because, look, it's not easy for them either, their volume is going down, their costs are going up and they need to push it on to the consumer. But having said all that, we are trying to work with our customers to optimize this whole supply chain. You're right on… in North American metal bev the whole medal side of it, it has been relatively efficient, but let's not forget energy, and energy in terms of running our plans and energy in terms of freight. When oil is at... even at $60, $70, $80 a barrel, it’s very different than when it’s at $130 or $140. And to put a new spotlight on those types of costs to try and optimize it for the… for our customers and for ourselves, those are the types things we're doing, and so just putting more discipline in the whole process.

It sounds like you're trying to make it more seamless, so the chain is lubricated and nobody gets stock except the consumer probably. But I think I hear you. The other thing is somebody once said that growth is overrated and while 5% to 8% growth in Europe, isn’t anything to overlook, there is no holding back that North America and Europe are fairly consolidated markets. I mean, Europe grows in some cases because you guys basically acquire another country. But allowing for that, growing internationally is very risky as you guys will know, and yet beyond Eastern Europe it sounds like you are going to be going into territories where there is already established competition or where the way of doing business and how people do business is quite different. I mean how do you approach that?

Well, one of the things… you just hit the way of doing business. One of the differentiators of, we believe… of Ball relative to other people is we are very close with our customers and understanding and anticipating their needs. And when you think about all, let's talk about beer for a minute. Think about all the acquisitions that have happened by the majors in many of these disparate regions. The consolidation and I don't have the facts in front of me, but of a Russia or a Ukraine or an India, five years ago they had breweries you’d never heard of and now 80% generally speaking of the market share is controlled by one of the Big Four, Big Five beer companies. They have certain ways of doing business and we… and they need to rely on a supplier that is not going to let them down. And so those types of things that we're in discussions with, we often bring customers here to Colorado, we go out and see them and not talk about price, but we talk about where are the footprints going, where our footprint needs to go and how it can overlap. I'm sure others to do that as well, but that is one of the ways that we do it and it helps to mitigate the rest of that you are talking about because when you talk about risks, there is economic risk, there is customer risk, there is political risk and what we try and to do is whittle those… each one of those down to as low of a possible risk profile so that we get comfortable that we can get returns that represent the risk taken.

Yes, because Dave and I had these conversations quite a bit, but the old game in North America was kind of warfare, my plan is bigger than yours, I've got more capacity than yours, and just as an example I looked at Brazil, obviously our friends from the UK are pretty well established. So how do you kind of in a docile manner come in and make a business and make some money?

Well, we've been in Brazil, Tim, for 12 years with our plant in Recife, which is where the speed-up is going on and we're making a different size there too to swing it to line. And then in the real estate we're seeing a 10% compound growth. We make a business through the market growth, and hopefully we will get the one line in and I believe that we're going to be able sell those cans right away and over time we can add capacity there. What’s interesting about… we were in one of these discussions John talked about just a week ago with a large customer from Europe who was here and there are a lot of different discussions that go on. But believe it or not, these folks need our containers, sort of fundamentally maybe I don't want to buy everything from one guy on maybe I want to grow into this marketplace where not only are there no existing can plants, but I'm building a new brewery, and… or I am a soft drink person. I am going to fill soft drinks. So I think the growth that you talked about taking the risk, we've been taking risks in some interesting places for a long time. We've had our lumps, some of that is we have a lot of institutional memory about that and I think that there is more risk in some of these markets, but actually the business that… if you think of Europe the business that we own now has been in business and been owned in part by American companies for 50 years.

We don't use the same cost of capital wherever we are in the world, it’s different cost of capital to take in those capital risks.

But let's be clear, our growth is we try to grow where markets are growing so that we’re growing with the market because you shouldn't expect that we’re going to have any opposite strategy than that because you're absolutely right, growth for growth sake doesn't mean anything. What we're looking at is profitable growth.

Well, listen, I think there is two very good stewards in the mature markets and I think that the Big Three are only going to do good things, I think smart pricing management and they need it, you guys need it to further grow the earnings. And so... and the last thing I got, I'm sorry if I'm taking this up, Dave, you don't do any commercial airline stuff, do you?

No, not at this point. I fly occasionally.

Lucky you. But then the last thing was, Chris Manuel talked about the whole InBev AB saga and everybody's been calling on AB to buy MCC for probably, what ten years or so. But could it be more interesting or more risky in terms of InBev changing the contract structure or linking it to global supply where I think you guys might have an advantage, I mean, any thoughts?

No. Not that we want to discuss with you.

What do you mean with me, do I have like some kind of plague or something?

No, I don't know about the size of a check book and I don't think [inaudible].

I understand. Thanks a lot.

Okay.

Thank you very much. And our next question is another follow-up question from the line of Mr. George Staphos with Banc of America Securities. Please go ahead, sir.

Thanks. Hi, guys. Quickly, was there any metal gain in Europe in this quarter? I know you mentioned North America, just wanted to confirm that?

No.

No.

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

Directionally, guys, I don’t need...

Yes, they were up year-over-year. Absolutely in line with what John said [inaudible].

Okay, third question. PET, are you in a position to comment where you stand with the margin recovery process, realizing it might not necessarily be an ’08 event from a timing standpoint? Has much of the work being done? How would you index it if you had to?

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

Okay, fair enough. I guess the last question. You talked quite openly about how you have to shine a light on the risks that you take in the… not just in international markets, but even within North America and some of the things that have changed in the overall cost structure over the last 5 and 20 years or so. And I guess at the end of the day, are you still prepared as you were with Kent to continue to rationalize your capacity, if the customer and you ultimately disagree on what the right relative return on that business, on that supply arrangement, on that commitment from your standpoint is?

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

Okay. Once more with emphasize, John?

I mean, I think, the other comments that we make in this kind of an environment, we don't really have a choice, so we've got to be understanding of what's the economic environment that we deal with. You may recall a gentleman that used to work here who used say that we don't like to do things for practice and I'm optimistic that we're out ahead of these things and we're going to do our very best, understanding that we're part of a supply chain and we're in this for the long run, but we've got to make adequate returns.

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

It's probably form a capital point of view a touch too aggressive, but generally speaking you're correct.

That certainly is in our mind, George.

Okay.

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

Okay. Final question and I will turn it over. Do you sense any change in your customers’ expectations for packaging mix over the next two to three years? So obviously the can industry, probably capacity is not going up, but perhaps PT capacity might go up, but that wouldn't happen if the customers weren't envisioning using more and more of that in the mix, same thing within the peer market. Do you expect anything especially within North America to change from a package mix standpoint that would alter your ability to manage supply/demand?

I think, George, what you'll see going forward is our customer base generally speaking trying out new and different formats whether it's in the plastic bottle or a beverage can to try and really relate to the consumer and try and look at price points relative to the consumer and price points relative to the various channels that they sell into. And so I think that this whole diversity issue and proliferation of SKUs we see increasing, not decreasing.

We’ve been done a lot of work with... directly with our customers and doing our own market research and so, and we’ve got a number of innovative things going on around our packages, from the type of planning, the kind of closure, you can see the ads on TV and a lot of that sort of stuff, and that's the kind of things John was talking about. In the end, we went with the winners, and right now with demand being a little soft I don't know that they know exactly what is going to happen there, but I can assure you that the beverage can and PET bottles that there are going to be a lot of those made in three years as are today. Whether there is a mix shift [inaudible] I don't know, but if you take a look most every raw material is going up in price and I’m not sure they’re at the same time, but it’s all happening. So we are in an inflationary environment and we all have to manage differently in that mode. I was just talking with someone day, the last time the oil prices were like this with the early ‘80s… late ‘70s, early ‘80s and we had a 22% prime rate. Now we've got one that is may be two. I don't get what's going on with all the, but I'm just quite were in the business we are in and not in some others like that airline industry that Tim was talking about a while ago.

Well, I'll let you go, guys. Have a good quarter. Thanks very much.

Thank you.

Thank you.

Thank you very much. Mr. Hoover, there are no further question at this time. I'll turn the call back to you.

Okay, Tommy. Thank you very much, and thanks everybody for joining us today. I do want to note that our third quarter earnings conference call we’re going to be scheduling for October the 30th, which is probably a week or so later than normal. Just want to put that out there and we'll remind everybody about that again in late September. But thanks again for being with us, and we're going to go back to work and have a good third quarter.

Thank you very much. Ladies and gentlemen, that will conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a great day.