Ball Corporation (BALL) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Ball Corporation Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, July 25, 2013. I would now like to turn the conference over to John Hayes, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Ciglund. And good morning, everyone. This is Ball Corporation's conference call regarding the company's second quarter 2013 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company's latest 10-K and in other company SEC filings, as well as company news releases. If you don't already have our earnings release, it's available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found on our website. Joining me on the call today is Scott Morrison, Senior Vice President and Chief Financial Officer. I'll provide a brief overview of our company's performance, Scott will discuss financial and global packaging metrics, then I'll finish up with comments of our aerospace business and the outlook for the remainder of 2013. Now despite a very cold and damp spring, particularly in North America and Western and Central Europe, that resulted in volume declines for standard beverage cans in these regions, our second quarter results were largely in line with expectations. In fact, the soft demand resulting from the challenging weather and global economic malaise actually more than offset much of the good work and performance our various businesses have accomplished. Over the past month, we've begun to see more normalized weather patterns and slightly better demand than we saw in the second quarter, which if sustainable, should give us better visibility as we cycle into the second half of 2013 and, more importantly, into 2014. During the quarter, we tackled a variety of issues, including: aggressively addressing the unusually soft demand in our 12-ounce U.S. beverage container manufacturing output by permanently eliminating 12-ounce capacity in our Milwaukee, Wisconsin, facility; making progress on European cost-out plans through, among other items, announcing the consolidation of our former European headquarters in Ratingen, Germany, into our regional technical center in Bonn, Germany; as well as other G&A optimization measures. While we are working through the various approvals required, we expect this to be completed in the first half of 2014 and, combined with other cost-out and value-in initiatives, will help us to improve our fixed cost leverage in this segment. In Brazil, we are on track to complete the installation of a second line in our Alagoinhas beverage can manufacturing facility by early fourth quarter of this year, which positions us nicely as we look to the World Cup next summer. In Asia, we are in the process of relocating the capacity from our one-line facility in Shenzhen, China, to one of our existing locations there. This optimized footprint and better cost structure will position us nicely in the growing Southeast China region. Our food and household products business also had a good quarter, with volumes up 8%. And we are finalizing the installation of another production line in our Mexican impact-extruded facility. Lastly, in the quarter, we took advantage of attractive credit markets to increase our financial flexibility by amending and extending our credit facility, coupled with the issuance of $1 billion of 10.5-year senior notes at 4%. And with that, I'll turn it over to Scott for a review of our second quarter numbers. Scott?

Thanks, John. Ball's comparable diluted earnings per share from continuing operations in the second quarter were $0.85 versus last year's $0.89. Also in the quarter, the company recorded after-tax charges totaling approximately $32.6 million primarily related to business consolidation and debt refinancing costs. Our metal beverage Americas and Asia segment comparable earnings were down year-over-year. These results were slightly weaker than expectations given continued weak industry demand for our standard cans in North America where our volumes were down double digits in the quarter, which was consistent with the first quarter trend. From a manufacturing perspective, cost containment and operating performance at the plant level were exceptional in all regions, and specialty cans in the Americas continued to grow at a double-digit pace. The European segment profit declined in the quarter due to slightly lower volumes brought about by challenging economic and weather conditions, coupled with higher labor and input cost, both of which are being addressed aggressively. In food and household, year-over-year segment earnings were higher due to improving volume trends, our recently acquired Mexico plant and good performance in our steel and aluminum aerosol businesses. Segment volumes increased 8% in the quarter, and conditions leading into the seasonal fruit and vegetable pack are favorable. Transitioning from operations. During the quarter, our corporate undistributed costs were roughly in line with expectations, the effective tax rate was slightly lower than we anticipated and we repurchased a net $202 million of our stock. Net balance sheet debt at the end of the quarter was approximately $3.7 billion. Credit quality and liquidity of the company remained solid, with comparable EBIT-to-interest coverage at 4.7x and net debt-to-comparable EBITDA of 3.2x. Committed credit and available liquidity at quarter end was in excess of $900 million. Given our seasonality and strong full year free cash flow, we anticipate year-end net debt levels to be in the range of $3.1 billion. For a complete summary of the second quarter results on a GAAP and non-GAAP bases, please refer to the notes section of today's earnings release. Moving on to financial metrics for full year 2013. Hardly any changes here. Interest expense will be in the range of $183 million due to some negative carry associated with the senior notes offering. Full year effective tax rate on comparable earnings is expected to be approximately 27% and full year corporate expense is expected to be around $73 million. CapEx is still in the range of $400 million, and free cash flow will be in the range of $450 million. And the majority of our free cash flow is expected to be returned to shareholders via share repurchases and dividends. With that, I'll turn it back to you, John.

Thanks, Scott. Our aerospace business continued to perform well in the quarter, with solid execution on existing programs, the award of a Korean environmental instrument and solid contracted backlog at $966 million. While backlog continues to remain at or near record levels, we have seen some slight delays in U.S. government contract awards due to the effects of sequestration. Our operating performance has been excellent, and we remain well positioned while continuing to monitor closely our timing of project starts as we move into the third quarter. Longer term, we are seeing a variety of opportunities both domestically and internationally that will continue to help grow our business and help mitigate any effects of sequestration. Now looking out across our company today, a few observations to share. Over the past month, we have seen some improvement in the demand for standard beverage cans in North America and Europe, although we are not planning to recoup the volume shortfall of the first half of the year. In our metal beverage Americas segment, a tremendous amount of great work has been done to arrest the volume issues we have been facing. And while it is not impossible, our ability to reach last year's profitability in this segment for the full year will be challenging. In Europe beverage, we have plans in place and are executing on a variety of cost-out and value-in projects, the majority of which will be realized in 2014 and 2015, which should get us back to operating margins consistent with the 2010-2011 period. Plantings to date related to the seasonal vegetable harvest for our food and household products business look good. And as of today, and if the weather holds for a strong pack, we should see continued good performance out of this business in the second half. Going forward, we also see some more upside, with the aluminum aerosol business performing well. In our aerospace business, Ball's strong performance and track record should keep us well positioned for the long term. So given all of this, we expect strong free cash flow, as Scott had mentioned; full year 2013 results to exceed full year 2012 comparable diluted earnings per share results; and a return to a more historical earnings per share growth in 2014. And with that, Ciglund [ph], we are ready for questions.

[Operator Instructions] And our first question comes from the line of Scott Gaffner with Barclays.

John, I think you mentioned you saw some pickup in the beginning of the third quarter, in demand in North America. I was wondering if you could just talk to us about that a little bit. Is it just weather returning more normal? Or are you actually seeing some pickup in promotional activity that's been relatively nonexistent? What exactly are you seeing there?

I think the vast majority of it has been weather related. As you know, the month of June, particularly the first half of the month of June, had the same trends in May being largely wet and even cold, and we've seen a more normalization of that. There has been a little bit more spot promotion, but that -- I think the vast majority of it is weather.

Okay. And when I look at your volumes, you said your 12-ounce volume was down double digit. I think the industry was down about 5% in the quarter. I know that 12-ounce is not your only offering. Can you talk about sort of how your volumes overall compared relative to the industry and maybe how your mix played into that somehow...

Well, yes. On the specialty side, we grew double digits again in this quarter, which was -- helped to offset our softness in the 12-ounce. And on an -- on a apples-to-apples comparison, if you exclude the business that we lost last year, we were about down on the 12-ounce side equal to the industry, and then you just compound that with the business we walked away from. And that's why we were a little bit worse than the market.

Okay. And just lastly, the facility or the -- you said you were going to eliminate a 12-ounce line in Milwaukee. Is there anything left of that facility? Are we closing a full facility? And if so, what will you think about cost reduction?

No, that was one of our facilities that the -- we shared with the metal food business. And we make 2-piece food cans there as well. And we've right-sided the G&A part of that business as we go forward as best we can. But we are still making 2-piece food cans there.

Our next question comes from the line of Ghansham Panjabi with Robert W. Baird. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: On -- first on Brazil, a lot of your packaging peers have reported challenges there in the beverage business, whether it's weather or the economy or social unrest or whatever the reason. Can you just give us your perspective on the market and then how you're thinking about the upcoming selling season in 4Q and 1Q?

Yes. Actually, we feel reasonably bullish on what's going down in Brazil. As you know, we started up a new facility beginning of this year. Our plans are on track for adding a second line in. Our customer base, which is at times different than maybe some of the people you're referring to, has been reasonably strong. We're well diversified into the Northeast and to -- and then down into the South. So overall, we feel pretty good. And as you know, we're just -- it's beginning of their spring right now, so we're starting to get into the heavier selling season. And with the startup of the second line in Alagoinhas, I think we feel pretty good, particularly going into the World Cup in 2014. Ghansham Panjabi - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then on the beverage can business as a whole, how should we think -- kind of think about inventories across North America and Europe given all the challenges you faced during the first half? I guess I'm asking because should we expect below-average operating rates during the third quarter. Or is it pretty well sort of aligned by now?

We're managing that as we go along in the year, actually. And so inventory rates are a little bit higher than where we expected them to be given the softness in volume and -- but we kind of monitor that as we move throughout the year.

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

I had a couple of questions, to start. Can you tell us, to the degree that you're looking at your headcount in aerospace, do you expect, given the opportunities you have in the next couple of years, that you'll be able to maintain your headcount within aerospace?

Yes. And in fact, even year-to-date, we're up slightly in the aerospace business because we've been winning work. And -- but I think, as we go forward, George, we would continue to grow the headcount because you're going to see continued growth in revenue.

Right. No, and that's the point I was trying to get at. So if -- that's a good sign that your headcount is up right now and suggests that, whatever you're seeing out of sequestration, you're being able to manage it with other opportunities. That would be fair?

Yes.

Yes, it is fair. You know what, as you know, our backlog is down slightly from the last quarter, but the real issue is we've been burning off backlog and the government hasn't made any decisions because many of their employees have been furloughed. And so the decisions are just being slowed but our contracted work is still going well.

Okay. And now the next question I have for you and Scott, you made the comment about you're working very hard to arrest the decline in 12-ounce beverage can. You obviously shut the line in Milwaukee. You've been doing other activity to shift your mix to specialty cans. But aside from that, is there anything that you're seeing either from your customers to support growth rates, either for mega beer or for softdrinks, or anything that you're doing within 12-ounce, or cans broadly, to support growth there?

We've been doing a lot, but let's first start with the customers. As you know, the end markets, beer is down 2.5%, 2.6%, and that's the biggest decline that they've had in a long time. And so they've been doing a lot of innovation work trying to arrest the demographic change: as people get older, they've been drinking less beer; but also the shift to spirits and wines because they very much have been focused on the value side, the pricing side, relative to volume. I think the same thing holds true on the CSD. And as you know, CSD has been challenged. It's a little bit more sensitive to economic issues, and I think this payroll tax has hurt them a little bit more. The pricing strategies, they very much have been focused on. And so CSD is down in overall category, a little bit more than beer. I think both of those segments, the -- our customers are very much focused on the long-term aspects of this because that's where a lot of their value is derived from then. So just based on first- and second-hand knowledge of working with those customers, they are trying to put some more excitement into their categories. Some of it has to do with innovation and coming out with their new products. Some of it has to do with innovation around packaging. And some of it has to do with innovation about placements. And so I think they're very much focused on all those. And as you know, innovation is a key part of our strategy, and so we've been helping them on that.

John, I thought I saw a headline recently about you using a straw-in-can innovation in Europe. I -- correct me if I'm wrong, but if that is correct, do you have the ability to do that here in the States as well? And is there any interest in that?

We do have the ability to do that in the States, yes. And we don't think that's going to be a huge discriminator, but yes, we can do it in the United States.

Okay. Last question, and then I'll turn it over. There's obviously been a lot discussed about, some relevant, maybe, some maybe not, but in terms of your potential customer loss in a couple of years. Can you update us with kind of the latest you can provide in terms of how you plan to deal with that potential customer loss or that actual customer loss in '15? And what actually have you garnered already, or progress, in terms of refilling?

Well, it's premature to tell the outside world what we're doing, but we definitely, George, have plans in place to recover most, if not all, of that loss from a profit perspective. I'm not talking about from a volume perspective. Our volume will be down, but we're here to make money, not necessarily only to make cans. And so at the appropriate time, we'll be talking about it. I just think it's premature based on some of the activities and the impact that has to be talking about it on this call today.

And our next question comes from the line of Philip Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: First question. John, you talked about some nice margin recovery opportunity in Europe. It sounds like you're kind of targeting something in the 12% range, which would be maybe 200 to 300 basis points higher than where you are now. And you've talked about a variety of different factors that have driven the results so far this year. So I guess my question is, if you could parse out for us, what part of that recovery comes from just cost-out and those types of opportunities versus things like getting more price to recover the input cost inflation you've been seeing from metal premiums and other things to get there? That would be helpful.

Yes, let me, first clarify. I think when I talked about the 2010-2011 time frame, it's closer to 11% to 12%. You're at the high end of that. And I wouldn't disagree that's an aspiration, but it's going to take an awful lot of hard work to get to that. But having said that, the types of initiatives we have ongoing is taking a look at our G&A headcount. And as part of that, it's not only about the headcount, it's about how we conduct our various processes, whether it's payroll processes, whether it's credit collections, all those various things. We think there's a lot of opportunity to move to more of a truly pan-European approach to that and take a lot of cost out. I think we have a lot of opportunity on the freight side and the logistics side of the business in optimizing that, and we're doing a lot of activities there. We have some other cost activities at the plant level, although as Scott mentioned, the plants are performing very well from a manufacturing perspective. And then last but not least, the value-in is about trying to get paid for what we think is good value and also looking at our mix issues. So it's a combination of a whole host of things that we think, over the next 2-plus years, will get us there. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Got it. Thanks for the clarification on that number. I think I hadn't stripped out aero can. But so what you're saying is you don't need price to recover the input costs, as part of this plan?

Not completely. We're -- put it this way: We're not relying on it, but we're certainly focusing on it. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Got it. Okay. And then the second question is just -- you talk also about the framework for 2014 kind of being in place with the long-term view of kind of a 10% to 15% EPS growth. So I guess that what I was wondering there is just, as you think about the drivers of that and what will you continue to see from the volume side of the equation, what kind of volumes do you feel like you need to assume for regions like Europe and North America to get to that kind of target? I mean, if North America is going to continue to be down, let's say, 2% to 3%, can you still get there? Or do we need something closer to flat in North America to reach that type of a target?

No. I think, from a big picture, we need -- kind of need more normalized volumes that we've seen over the past couple of years. And what that means, in North America, it's probably down 1% to 2%, maybe even 3%. It's the 6 -- 5% or 6% declines that really put a -- makes it challenging. But as you've seen, we've take -- been able to take out a tremendous amount of fixed cost in our business. In Europe, we're kind of focusing on the more traditional growth, call it the 2% to 5% growth. It's an even year next year. And putting weather aside, with the World Cup, those are big drivers for European beverage can growth, as well as Latin American beverage can growth. And with it being in Brazil, I think there is some upside there. China, all the trends that we've talked about in the past continue to go forward. So in order to achieve the -- our long-term targets in 2014, we just need a more normalized set of volumes that we have not experienced in the first half of this year. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Got it. The last question is just, one of your peer companies was talking about significant underproduction in areas like France, for beer, in the second quarter. And I didn't know if maybe it's -- there are some elements of that, that were impacting you more than just the general volume trends. And if you could give a number for how Europe did in the quarter, that would be helpful.

The overall European volumes were down less than 1%, so I don't know, 0.8%, something like that. That's -- the 2 big areas that hurt us the most probably were Germany and France just because the weather in Germany, as well as some of the things -- I don't think we were directly impacted or specifically impacted by the beer issue in France you just mentioned, although we -- there was somewhat of an impact. But it's even softer and [indiscernible] relatively flat, if not down slightly, in France as well. So I think it's Germany and France. And as we said, looking forward, if we're able to get some of this weather normalized and they're not underwater in Central Europe and wearing parkas in May, like they were in Germany, we feel okay about where we stand today.

Our next question comes from the line of Philip Ng with Jefferies.

Heading into the year, demand-supply was pretty tight in Europe on the bev can side, and things are still pretty tight, I would imagine, and you had some aspirations of getting some incremental pricing in 2014. In light of the recent pullback on demand and one of your competitors adding capacity in the U.K. region, is that a -- is there some concern on the pricing front on 2014? Or should we see some upward trajectory from here?

Well, as I said earlier about our cost-out and value-in initiatives, we are not planning on it. It is always challenging. It's too early to say what we're going to be able to achieve, but we are -- we have not been adding any capacity ourselves. And we are focusing on trying to recover some of those costs that we've mentioned before, but it's too early to predict victory.

Got you. And then can you give us a little preview on CapEx guidance for 2014? And should we expect free cash flow getting back to that $500 million range for next year?

Well, this is Scott. As always, on CapEx, it's dependent on what kind of good growth opportunities we see around the world. But with the world being a bit slower, I would see CapEx trending down meaningfully in 2014.

Okay. Do you have a number for us? Or is it still...

No, not yet, because it's really early. So we're still expecting to spend -- remember, we've got, this year, we had $100 million of carry-in capital to this year, so it's unusually high. And I don't think we'll have that much carry-in capital into next year because most of the capital that we're spending will be concluded by this year. And so I'd see it dropping by a fairly sizable number next year.

Got you. And then, John, I think, in the past you have mentioned that when the macro environment does slow down, that's been a pretty good time for you to get more active on the M&A front. Have you seen now that pipeline improve a bit here?

Yes, well, we -- as always, we have a variety of conversations going on. And as you know, it's been a cornerstone of how we've created value over the long term. And that hasn't changed at all. I don't think we have anything to report at this time, however, but you just never know. You always -- my predecessor always said you need motive and opportunity. And I think we have the motive, we're just making sure the opportunity is right.

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

A couple of questions for you. First, I missed a few sets of numbers, I think, in here, but did you give us what your volumes were like in Europe and in Brazil specifically...

In Europe, they were down less than 1% in the quarter. And in Brazil, they were up double digits high. It was very strong. Remember, we had capacity that came online this year with our new plant. And we'll have another new -- or a new line coming on in the fourth quarter of this year.

Okay, that's helpful. As we look at your performance here in North America in beverage cans and we look to your performance in Europe in beverage cans, you've been a bit below the market in Europe and a good chunk below the market here in North America. While I do recognize there's been some customer shift back and forth, but maybe more specifically, over the last couple of years, you've seemingly had to take a disproportionate amount of the capacity out in North America or maybe not grow as fast as some of the other folks in Europe. Is there anything that's changed in the competitive landscape that maybe has put you at a bit of a disadvantage, whether it's how you're going to market with pricing or whether it's what-have-you that may account for that? And how might that, or can that, change going forward, I mean? Or is it just simply a position of doing what your customers or your set mix is?

Well, let me try and tackle that. It -- because I think there are 2 answers for each -- there's a different answer for each of the regions. In North America, we've been trying to take a very disciplined approach as the market leader. And we've been putting our money where our mouth is in terms of capacity. I do think that, if you separate this onetime item that we lost last year, on an apples-to-apples basis, we're right there with everything else. And in fact, we're probably even a little bit ahead because of the specialty growth. So I wouldn't read into that too much. And I think it really was a onetime item. And when you look into Europe, I would -- I certainly wouldn't agree with, over the last couple of years, anything has been happening, that has disadvantaged us. It's really been over the last 6 months, and it has to do with weather and geographic footprint. And everyone knows that Western and Northwest Europe in particular have been much more heavily hit than Southern Europe and Eastern Europe. And so when you look country by country and category by category, where we were off slightly relative to the market, had to do with the geographic proximity.

Okay, that's very helpful. Last question I had is, you spoke about getting back to in the corridor of your traditional earnings growth rates in 2014. With some of these factors, weather now seemingly getting better, along with your comments earlier about better 12-ounce and some of these other factors seeming to improve here in the back half of the year, is it feasible that you could get back to 10% to 15% earnings growth per quarter the back half of this year?

I think it's too early to say. Certainly, what we've told in guidance was we said the full year '13 will be higher than the full year '14. And if you look, we're down in the first half of '13 versus first half of '12. So by definition, we have to be up in the second half of '13. I think it -- we feel good about the efforts that we can control. It really is a volume game. And we feel okay right now, but you know how volatile the weather has been here in North America and in Europe. And so I know that probably doesn't directly answer your question, but that's where we are.

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

John, one of your competitors this morning talked about a mix shift toward can that tends to occur whenever economies weakened, as they have recently. Have you seen any evidence of such a shift recently? Or would you expect one in the developed markets?

Well, I think, on the beer side, it hasn't -- over the last 5 years, I think beer cans, as a share of the package mix in the beer category, has gone from, call it, 47% to 53%. So we've actually seen some relative health on cans. I do think you're seeing a resurgence on cans, particularly on the beer side. Think about all of the activity that's been going on on the craft side of the market, and you're even starting to see them in the on-premise. And so I think that is constructive. I do think it has more to do with where the customers are pointing to and a little bit less to do with the overall economies because what I would tell you is it has to do, in part, with what the pricing strategy of the beer makers is as well. And over the last few years, on the value side of beer, they've been pushing price up more than they have on the premium side.

No, that's helpful. And just one on the mix, the mix in Brazil. Have you seen any recent trends there in terms of a continued mix shift toward cans and away from returnable bottles?

A little bit, yes. It's -- there's not that many one-way bottles down in Brazil. It's largely returnable. And we, again the share is a package mix, over the last couple of months, I don't think we've seen wholesale change. But certainly, over the last 5 years, that's one of the big drivers of the beverage can in Brazil, and now it's up in the upper 30s. And hopefully, as we go into 2014, with the World Cup and the other things, hopefully it will start with a 4, but it's premature to declare that. But we have been seeing good growth in the beverage can relative to overall industry beer growth.

And one last one. Any notable change in the competitive dynamics in China as of late? I know you talked about the supply-demand imbalance getting a bit better in the second quarter.

Yes, no, nothing to update. The market continues to grow strongly. I think, the balance, some of this excess capacity is being soaked in. I do think that we haven't seen any -- certainly any more downside relative to prices, but we haven't yet seen any upside relative to pricing either.

Our next question comes from the line of Al Kalibi (sic) [Kabili] with Macquarie.

I guess, John, a question on the European cost saves. And I know most of this is really in '14. But incrementally, what's the opportunity to ramp that up a little bit more in the -- I mean, the back half of '13?

Well, the biggest issue, I think, it has to do is things happen more slowly in Europe because of the works councils and because of the union and how you deal with the various people component of it and where to do it the right way. And that just takes time. So that's probably the biggest reason is that [ph], and combined with some of the other cost initiatives. As Scott had mentioned, in the plants, we're doing a very good job, and it's been offsetting some of the softness in Northwest Europe from a volume perspective. But I think that's the main reason. The reason why I just said on the labor side is why we don't expect to see a tremendous amount of upside in the second half of '13.

And then secondly, you mentioned on the aerospace side the sequestration and the impact on new awards. Are you seeing any impact on the pace of your backlog burn at this point? And what do you see the risk to the current backlog that you have?

I think our current backlog is pretty solid right now. And in fact, we were just speaking about that the other day. I think the biggest issue is just with the government. There's 2 things going on: Number one, the overall budgets are declining. And I won't go into the details here, but if you're a program of record, you're relatively solid. And most, if not all, of our backlog is programs of record, which is good. I think, in terms of new awards, in terms of new initiatives, those are the things that are a bit slower. And it's slower because, number one, the government has less money, so they need to figure out efficiencies to find money to fund those. But then, number two, because of the short-term nature of sequestration and the furloughing of employees, people who had been working 40, 50, 60 hours a week to try and process some of this stuff are now working 25 to 35 hours a week and so there's just not as -- it just takes longer to get things through the system.

Okay. And then along those lines, you mentioned the small international award that you recently booked. And it's pretty small, but I guess it's notable because that's something you've talked about looking to do, is expand internationally on the aerospace side. And just what's the outlook there?

Well, we actually are bidding on more international opportunities than we ever have in the history of Ball aerospace right now. They have to come to fruition, but it's really based upon some of the nonclassified technologies that we have developed in that business and the global need for some of those things, first. So for example, this environmental satellite we're building for the South Koreans was based on some things we've done for the U.S. government over here. And as we look in other places of the world, we think there's opportunities for things like that in terms of environmental monitoring and other technologies.

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

Yes, well, it's been up and running a little over a year now, and it's making good progress. We were there a couple of weeks ago. And I think it's an excellent facility. And if any of you are ever in Southeast Asia, we'd be happy to give you a tour of it. I do think that it's not just a Vietnamese joint venture, but it's more as part of a regional strategy. We have an interest in one of our partners in Thailand as well. And so that whole region, when you look at a map, it's not just one country versus another country, it's a regional perspective. And so yes, there could be opportunities going forward.

Our next question comes from the line of Anthony Pettinari with Citi.

In the food can business, you referenced high-single-digit growth. And I'm wondering if there are specific categories in which you're doing well, if you had kind of a preliminary view on the pack season. And then you -- there's a competitor that's discussed maybe some food can business being shifted from 3Q to 4Q because of a potentially later pack or delayed pack, and I'm just wondering if you had any view on that in the back half of the year.

Yes, the -- our numbers were up high to mid single digits in the quarter. And we feel pretty good about where the pack is at now. And we're getting more normalized weather. The Southeast in the last couple of years has been just horrendous, and this year, it's been more stabilized. But I would agree with the comment in terms of pushing more into the fourth quarter from the third quarter: We expect third quarter to be solid, but there's probably more that will benefit us in the fourth quarter of this year.

Okay, that's helpful. And then just shifting gears to the aerospace side. You discussed some of the headwinds with sequestration. And I guess earnings in the segment were kind of flattish sequentially with the first quarter. I'm wondering, as we look forward to 3Q, 4Q, is that kind of $19 million type run rate a decent estimate for 3Q, 4Q? Or could we see a little bit more of a pickup? Or is it kind of too soon to tell?

I think, to answer to your question, it's probably a decent run rate. We had talked on prior calls that, in 2012, we had a number of close-outs on some programs that we had executed very well on. And that provided some upside in 2012. With the startup of many of these new programs in 2013, these are 3-, 4-, 5-year contracts, and so as -- the way we do it, as we reduce the risk, if you will, the execution risk in those, the accruals change. And so you usually make more profits in the back end of programs if you're doing well, as opposed to the front end. And so the fundamentals of the business in '13 are quite good. But really, where you're going to see that profitability, assuming we're actually executing, it really starts to ramp up in '14 and '15 relative to the current run rate.

Our next question comes from the line of Chip Dillon with Vertical Research Partners. [Operator Instructions] We'll go to the next question. [Operator Instructions] We do have a follow-up question from the line of George Staphos with Bank of America Merrill Lynch.

2 strategy questions or bigger picture questions. First, in aerosol, the company's technology bed, if you will, is on impact-extruded aluminum. And thus far, that's been a good place to be given your performance, from what we could see in Aerocan. Are there other technologies that are viable in the aluminum aerosol can market that you need to be mindful of that maybe could start to pick up share? Would you have the ability to adopt other technologies to make aluminum aerosol cans in quick order if you needed to?

The short answer to that, George, is we have a variety of technologies we've been working on, on the aluminum aerosol side, even the steel aerosol side, that we feel very confident that they have some interesting developments. It's premature to talk about those, but as we move forward, I think you're going to see some things where it's leveraging our D&I capabilities in the aerosol sector. And it -- we're excited about the promise of that. As you know, we're already doing that in terms of the Alumi-Tek bottle with MillerCoors. And we have some other interesting things. And then even on the impact-extruded side is we've talked about having our ReAl slugs, which is a much lighter-weight slug, by utilizing some of our technology that we've morphed from our beverage can business. So we've got a variety of things that we have been actively looking at. Some are commercialized right now, and others could be commercialized in the future.

Okay. Would it be fair to say that doing a D&I aluminum aerosol can is probably a couple of years away? Next month? I mean, how would you ballpark it for us if you could? If you could.

Well, it's -- D&I aerosol is challenging just because the pressure is held in aerosol and you need to make sure that the, well, wall thickness will withstand that. But that's one of the areas we're working on, but it is premature to say when it might be out.

Understood. The other question I had is around return and EVA. And obviously, Ball Corp., going back to the 1990s, has been really a pioneer on EVA. It's worked very, very well for you. And I was looking on my model, and historically, the big jumps-up for you have come with things like a Reynolds, like Schmalbach. It's not been the only thing, but it's been where you've gotten the outsized pickups in economic profit. As we sit here and think about the next 2 to 3 years for Ball Corp., should we expect that more of your economic profit improvement, which I would imagine you think you will improve from these levels, will come from what you do with the balance sheet in terms of capital allocation, buying back stock, versus other source of capital? Or do you think that the investments that you've made and could make would be the bigger driver of economic profit, say, between end of '13 and, say, of '15 or '16 in terms of time frame?

Well, first, I mean, EVA is still the big driver of how we decide in what to invest and how to invest. And I think it's a combination of the things that you talked about. It's going to be the capital allocation that we've done in the past; the returning -- absent other opportunities, returning a lot of cash to shareholders. We feel real good about the EVA returns of the investments that we've been making. Even in -- and if you'd look at the North American beverage business that shrunk this year, their EVA returns are getting better. And so the returns that we're getting on those incremental investments have been very attractive. So I think it's a combination of continued focus on EVA and making sure that we're getting the returns. As John mentioned, acquisitions have always been part of our strategy, and that's -- that continues to be. And that's allocating capital in a balanced way and in a disciplined way that we've done in the past and we'll continue to do in the future.

So you think your investment will be able to at least keep up with the buyback component of EVA. Would that be fair if we look out the next 3 years?

Its opportunity depends -- this is the way I'd look -- I'd think about it: There's kind of 3 different buckets of EVA. It's, number one, what you have right now. And what we're trying to do is improve the profitability and minimize the investment there. And that generates excess EVA dollars. Number two in this -- the number two and number three both get to capital deployment, but number two is what Scott said, it's more the expanding into new geographies, expanding into new products, it's the specialty container that we've talked about that generate returns in excess of that capital. So you're putting more capital to work. And then the last but not least are kind of the big hitters, as you described, that aren't lost on us which are putting an even greater amount of capital to work through acquisition. And the only thing you really need to be focusing there on is making damn sure that the capital you're putting to work there can generate that excess return. So we think about it in those 3 buckets. So, what are we doing right now in terms of improving our business? What are we using our cash flow for, and is it returning it and reducing the investment to our shareholders? Or is it investing in new internal growth opportunities, or is it on the M&A side?

Okay. And then lastly on this, guys, and I promise I will give it up here. Scott, you said your EVA returns, if I heard you correctly, in North America are up this year. Did I hear that correctly? And does that include even the cost or the cash flow outlay for integration?

The cash flow outlay for -- you're talking about restructuring costs?

Well, I mean, the -- yes, exactly.

Restructuring costs get capitalized, so you still have to pay for those over time.

Exactly. So what's -- even including that in your EVA calculation, you were up in terms of EVA returns in North American beverage.

Yes, that's correct.

Our next question comes from the line of Mark Wilde with Deutsche Bank.

Yes, just a few cleanups. First of all, the aluminum storage situation has been in the news a lot the last week. Anything new there from your perspective?

As people know, there was a big article in the New York Times on Sunday about the issues on metal premiums and LME, and it's been widely discussed. And we do know that there were some governmental hearings on Tuesday. I probably shouldn't comment on them because I wasn't purposefully there. But there has been issues there, and I do think it's getting more focus to make sure that there's a level playing field around how metal is purchased on a global -- aluminum is purchase on a global basis. So that's probably all I should say. Scott, anything...

No. As I said, they -- we're -- we've been involved in those conversations because we think that there are -- better transparency around how the warehouses work will be beneficial to the industry and to -- ultimately, to consumers.

Okay. Second question, that 8% volume gain in food and household in the second quarter, any sense of what you would expect there for the full year?

We said, for the full year, we'll be up slightly, but it's not going to be at that kind of a pace.

Okay. And then finally, any thoughts on specialty can margins in North America and Europe and where you see those moving over time?

Well, I think we talked about this on the call last time. We haven't seen any changes up or down relative to them. As the specialty canned -- can's market size gets bigger, it's logical to think, from an economic perspective, it may put some downward pressure on volumes. But from an overall profit pool perspective, I think it will continue to grow.

Okay. And then final, you guys didn't make this, but there's a "bow tie can" that was out there. Do you have any sense of, like, what that actually did for volume for the brewer involved? As just one example of...

We'd be speculating if we said anything.

Our next question comes from the line of Alex Ovshey with Goldman Sachs.

You mentioned several times on the call that the volumes thus far in July are tracking better and improved weather is really the key reason. So in places like North America and Europe where the improvement in the weather seems most obvious, can you just actually tell us how your volumes are tracking on the beverage side thus far in July?

Well, I think, nothing else to add. You just summarized it. I think, particularly in North America and Europe, they are more normalized or becoming more normalized, which means we weren't seeing those huge -- the month of June was very soft from a North American perspective. I don't have the numbers in front of me from an industry perspective, but they were in excess, I believe, of the 5.5-or-so percent decline for the quarter. And so what we've seen is more moderation of that. I would not say it's anything to go home and get overly excited about, however. All we're saying is they've returned to more historical normalcy.

Got it, John. And then I know you're running pretty full, but where do you see utilization rates for the market in China as a whole? And where do you think they need to go to before pricing power begins to shift back to the suppliers?

Well, they're somewhere in the 80s right now. And it depends by in the -- upon region, and it depends on what you assume that -- the actual output versus the rated output of some of these new competitors in there. I do think, you look at any in the -- any in -- region in our industry, and the minute you can start to get to the upper 80s or lower 90s, that's when you start to see tightness in the market, because there is -- as you all know, there is a seasonality effect.

Right. That's make sense. And just sort of a last quick one from me: In North America where it's-- the standard 12-ounce can is going down pretty significantly for you in '13, and specialty continue to go, where do you see the mix between the 12-ounce specialty can as you end 2013?

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

And we do have a follow-up question from the line of Philip Gresh with JPMorgan. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Just one very quick follow-up just around this normalization of volumes. If I look at Europe in the third quarter of last year, if I have this correct, Scott, you guys were up almost 10% in European beverage, so I just want to kind of clarify what kind of normalization would mean for you guys in Europe against that type of a comp.

Well, I think what we're talking about normalized volumes is that low- to mid-single-digit growth rates. Kind of that 2% to 5% growth rate would be normalized. Phil M. Gresh - JP Morgan Chase & Co, Research Division: Okay, so you would -- you would see the ability to do that in the third quarter despite the comps.

Yes.

Yes. We should be more -- it, again, all depends on weather. But we should be more in line with the market if weather is normalized.

And then at -- I don't have last year's numbers in front of us. The 10% seems high.

It seems high.

I thought it was low to mid single digits the third quarter last year. But perhaps you can give Ann Scott a call and clarify that.

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

And there seems to be no further questions at this time, sir.

Okay, great. Well, thanks, Ciglund. And thank you, everyone. I just want to remind everyone that Ball we will be hosting at Investor Day and Management Briefing in Midtown Manhattan on October 2 and 3. Analysts and institutional investors should contact Ann Scott for an invitation. We thank you for participating on today's call. And we're looking forward to seeing you all in early October and then on the call at the end of October. Thank you.

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.