1. Ball Corporation Second Quarter
Earnings Conference Call Transcript
July 24, 2008
Mr. Hoover: 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 filings as well as company news
releases.
If you do not already have this earnings release, it is available on our Web site at ball.com
where you can also find information regarding the use of non-GAAP financial measures; you
will find those on our Web site as well.
With me on today’s call are Ray Seabrook, executive vice president and CFO and John
Hayes, executive vice president and chief operating officer.
Well, I am 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 nonrecurring 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 will close with a few comments about our outlook. Ray?
Mr. Seabrook: 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 percent for the two-year period–a 46 percent improvement in 2007 and a 7 percent
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 that the
improvement was not only sustainable, but we have increased earnings per share through
the first half of 2008, again, off of a record 2007 performance.
Turning to the operations, lower second quarter beverage can earnings were somewhat
offset by higher aerospace, food and household and Brazil equity earnings. Lower interest
and tax expense, and a lower share count, due to our share buy-back program, contributed to
higher second quarter and year-to-date comparable earnings per share.
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2. Second quarter beverage can sales volumes remain 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 that were
up 30 percent 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 costs contributed to their higher earnings.
Food and 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 be at least $10 million lower than in 2007. Lower
employee costs and lower unrecoverable aerospace expenses account for the majority of
reduction in general and administrative expenses and the stronger euro added 7 cents per
diluted share in the quarter compared to a year ago.
Turning to free cash flow, we still anticipate full-year free cash flow to be in 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 will be around $330 million, lower than
our first quarter forecast, and we still foresee more than 50 percent of that spending being for
new top-line growth projects.
Turning to the balance sheet, net balance sheet debt at the end of the quarter was at
$2.7 billion; higher 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 for a
very strong second half cash flow.
The announced full-year 2008, $300 million stock buy-back 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 buy-back program, especially at these prices.
With that, I will turn it over to John.
Mr. Hayes: Thanks, Ray.
In the second quarter, our various business segments performed well in a tough environment
and generally exceeded our expectations.
As I mentioned on 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.
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3. 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
incurring. 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 in 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 gain, segment performance was relatively flat even with rising costs and
decreased unit sales, but up 11 percent since 2006 which would factor out any impact of
inventory holding gains.
Overall volumes in North America were down by more than 5 percent versus a 3 percent
industry decline due to slower CSD [carbonated soft drink] volumes and as we 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 overall
lower consumer sales throughout the convenience store channel that most of our customers
are experiencing. Our new 24-ounce capacity in Monticello, Indiana, will be on stream during
the third quarter of 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 can 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 contracts maturing in future years have
begun.
In China, year-over-year sales volumes were up around 20 percent 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 percent 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 under way and we expect to
break ground in the third quarter of this year.
In our European operations, our volumes grew 7 percent in the quarter despite some poor
weather conditions in Poland and in other Eastern and Central European countries that you
witnessed if you watched the EuroCup 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 percent throughout Europe, with continued steady growth across all regions, and we have
seen an acceleration of overall beverage can shipments during the past several weeks.
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4. From a profitability point of view, EBIT was down in the quarter due in part to the timing
differences of business 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 percent 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 will adjust our timing
depending on market conditions.
Turning to metal food and 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 pick up 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 for monolayer carbonated and
non-carbonated containers in the quarter were down approximately 10 percent while custom
containers were up 15 percent and custom containers now represent approximately
25 percent of our total volume. Many of the same c-store [convenience store] trends that I
mentioned in my comments about our North American beverage can volumes ring true in our
monolayer 20 ounce CSD 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 contract prospects and awards after the
presidential election.
So, in summary, we have programs in place to respond to the increasing costs impacting our
packaging businesses, we have taken actions to improve pricing now and in the future, we
are controlling costs across the operations, we are focused on building the backlog in our
aerospace segment and we have an excellent team of employees up and down the company
focused on delivering the earnings and free cash flow that we and our shareholders expect.
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5. Dave?
Mr. Hoover: Well, thank you John, and thanks also, Ray for your comments. I am really
gratified at our company’s progress 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 finished. 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 have experienced to date, our goal for the second half of 2008 is to exceed 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, I guess we are ready for
questions.
Q: Looking back to the third quarter of 2007, your European operating margin, beverage can
margins were 16.5 percent, if my model is correct, was there anything unusual in there? Any
business interruption insurance proceeds, inventory gains, etc., is that a clean number.
Mr. Seabrook: I think, I guess I have to check this, Ann, can you get the exact numbers for
me, but I think there was a couple million dollars [$7 million in third quarter 2007 & $1.5
million in fourth quarter 2007] in the last two quarters for business interruption insurance. It
pretty much tailed off. The second quarter was the last big payment and then there was a
little bit and there was nothing else unusual that I can remember. John, do you remember?
Mr. Hayes: No, I cannot recall anything else.
Q: The volumes hold in the single digits then should operating margins be comparable to last
year, adjusting for the $2 million.
Mr. Hayes: Yes, we have, let me explain this a little bit more and I will talk about the second
quarter and we will relay it throughout the rest of the year. Three factors affected earnings
and margins in the quarter in Europe. First is a difficult comp compared to last year, as a
result of the closeout of the insurance settlement related to the 2006 fire. Back in 2006, if you
recall, we talked about the challenge of working with our insurance company, to match the
business interruption insurance proceeds with the costs and loss profit associated with the
fire and in 2006 we settled that. As time went on, there were always disconnects where the
closeout ultimately created a situation where the match between the two was more favorable
in the second quarter of 2007 relative to prior quarters. However, going forward, the
comparables around this are relatively clean so I do not expect that to have an impact going
forward. But two other factors or three other factors really did impact Europe. One, we had an
unfavorably product mix issue. We mentioned on my comments, a 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 costs as we get into hiring employees and train them in our other facilities and
more significantly higher freight costs as we ship product into these regions to seed the
market nor to ensure that we are going to be at full capacity for our new plants as they come
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6. on stream. We would expect, going into the third and fourth quarter, some of those costs we
are still going to have some of those and that is 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.
Q: Again, Ray on the corporate expense line, the delta there year over year. Thanks.
Mr. Seabrook: Believe it or not, a lot of that is the, are you talking about the actual
statements attached to the press release? The G & A expense . . .
Q: Yes.
Mr. Seabrook: A lot of that is coming from aerospace, believe it or not, on the unrecoverable
costs. They are way down year over year. That and some of our employee costs are down.
Those are the two big items.
Q: O.K. thanks so much.
Q: Listen, in terms of the business interruption insurance, was it a couple million or was it
$17 million, I am a little bit?
Mr. Seabrook: Let me explain this because Ann was in my office and said she had a bunch
of question on this. Let me explain this. If you go back and look at the other conference calls,
when we first had that fire, we said that we were going to negotiate with our insurance
companies and we were going to do our best to try to match when we record the business
interruption insurance and when we in fact, you know, they fell. The way accounting works on
something like that is you cannot record a profit until you actually get the money and so when
we were negotiating and sorting all that through and these are in, through most of 2007,
when we were doing that we were trying to do the best to match when we got the cash
versus when we thought the profits lie. So, when we say, for example, when we say that it
was $17 million in the quarter, there was $11 million in the first quarter and so what
happened, you would expect more in the second than in the first because Europe makes
more in the second than in the first. So I think the point is, is that we are never exactly sure
when exactly it should fall. So, maybe $3 or $4 million of that, or some amount, that maybe
should belong to another quarter. I could not tell you. The point is, we had, that was the
largest cash payment from the insurance company was in the second quarter of 2007 and
certainly most of that money should belong in that quarter but maybe not all of it. Does that
help?
Q: Yes. Ray, no one is going to go back and audit these, we are just trying to figure out what
we should.
Mr. Seabrook: We cannot book something until we actually get the cash and so tried to sort
of match the infusion of the cash with when we thought the interruption was and the second
quarter was the largest payment, that is all.
Mr. Hoover: And I think we wrote words about that in last year’s 10Q. [ 10-Q filed 8-1-2007,
page 9]
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7. Mr. Seabrook: Yes, it is in the second 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 did
not have it this year and maybe some of it belonged in other quarters; we could not tell you.
Q: We understand, we are not quibbling with that, we are just trying to figure out again, to
assure ourselves, what the comparison figures are; the best that you guys estimate and the
best we can estimate. So again,
Mr. Seabrook: Maybe $2 or $3 or $4 million of it maybe some of it belonged in the first and
then maybe some belonged in the third, I do not know.
Q: No worries, no worries. Now, as we look at cash flow and CAPEX [capital expenditures]
and the uses, $20 million or $30 million on CAPEX relative to your overall free cash flow
budget for year is rounding error obviously free cash flow there are 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 guidance for the year
where you have had it.
Mr. Seabrook: Yes, if you go back, we always, $300 [million] 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 is
happening is, with all these raw material and other increases, we are probably not on
exchange. We are probably not going to get all that working capital back out. We are going to
get, by far the majority of it, but we are not going to get it all out and it is probably not in our
best interests not to get it all out. So, at the end of the exercise, if you were thinking it
mentally, that the reduction of capital spending, just take the money and put into working
capital.
Q: Got it.
Mr. Seabrook: Vis-à-vis the exchange or in effect, that we may have a little bit more working
capital. 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.
Mr. Hayes: I will just add on from an operating point of view, we have very clear and distinct
plans on how to get the working capital out because we need to position ourselves for the
future in terms of not only our P&L but also our balance sheet.
Q: Understand. The last one and I will turn it over. Should we read anything into the fact that
year to date I guess you are running a little bit ahead of your overall, if I annualized it, your
goal for share repurchases and your comment about, you are finding good value in the share
repurchase program?
Mr. Seabrook: Not only should you not read anything into it other than the fact that at these
prices, I would like to buy $500 million of stock and our balance sheet says right now that it is
prudent for me to do what we are doing and as we look at next year we will see what we
need to do. As we say, we plan to have a strong buy-back program next year. We will see
what the size of it is, when we get to the end of this year.
Q: O.k. Fair enough. Thanks.
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8. Q: First, just two questions. One, if you could comment at all, I think you mentioned in Europe
that, correct me if I am wrong, I think it was Europe that you said you are starting to see, that
you are seeing improvement in the early days here in July, but curious if you could share
what you are seeing in North America thus far here in the quarter and then separately, what
did the currency help you, I missed it if you said it, in terms of the per share impact but I am
also curious what it added to the revenue improvement in Europe bev cans. Thank you.
Mr. Hayes: In North America it is challenging out there is what I would tell you. I am sure you
all look at CCE and what they have had to do and some of the other of our big customers out
there. It is a challenge. Soft drink is down, in the mid-single digits. Beer is flat to up slightly in
terms of overall industry volumes and as we go forward CCE has announced for example
that they announced that their take home channel, that they are going to be increasing prices
after Labor Day. That is going to have an impact, mostly likely, on our business and that is
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 are going to be committed to doing that. This is an economic
climate where I think many of our customers have been caught off guard; whether it is the
significant slow down in the c-store channel or the lack of pick up in the take home channel
so it is a very fluid situation and we are being very proactive and are willing and able and will
respond to any changes in the demand that we see.
Mr. Seabrook: Just to finish the second part of your question, the, I think I did say in my
comments that the impact of the euro is 7 cents for the quarter, 10 cents year to date. The
interesting part about that, that is really just the conversion of the European earnings net
earnings, to the bottom line, that includes after interest, after taxes, after everything. That
includes, that is the conversion of earnings into U.S. dollars. Now the interesting point when
you talk about Europe as well, they have got more than one currency over there. We deal in
other countries other than just the euro, so I think when you go back and look at the quarter
their results were a little negatively impacted by some of their exchange differences.
Q: O.k. Thank you.
Q: I was hoping you could talk a little bit more about the transportation issues that you had in
Europe, sort of just a little bit of color on what exactly has happened there and where they
stand now in as we move into the quarter. Thanks.
Mr. Hayes: O.k., well there are 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 am thinking specifically of the
U.K., France and Spain. There have been all sorts of strikes going on. We have seen a
significant increase in the costs of petrol and we are actively and aggressively talking with our
customers about that but the freight created a lot of dislocation. The freight strikes created a
lot of dislocation that we had to back fill and do some other things that added some costs to
our system. So, that is one point. The other point is, as we go into other countries, whether it
is eastern Poland, whether it is 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 seed 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 your fingers and hoping
that demand will come. So those are really the two issues going on from a freight perspective
in Europe.
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9. Q: That is really helpful. And in terms of those strikes, are they still going on, sort of off and
on or have they kind of stopped, do you think?
Mr. Hayes: Well, it was really in the May and June time frame and one of our big customers
in France publicly disclosed that they were having some issues and it did have, no doubt it
had impact to us not only from a volume perspective but from a cost perspective as well.
Mr. Hoover: When we were in England in June, the people that hauled gasoline for BP
struck for seven days. They tend to come our and say we are going to go on a seven day
strike, whatever . . . It is a little different but it really puts sand in the gears of your distribution
system and it raises the costs, temporarily.
Q: Do you also just, tell me what the shares were at the end of the quarter shares
outstanding.
Mr. Seabrook: Yes, I think it is on the face of our state, oh, it is a little bit lower than the
number that you see. It is about 98 million [shares outstanding] on a diluted basis.
Q: O.k. Thank you. That is what I wanted, thank you.
Q: I wonder if you could just recap for us all of the new lines that you have coming up over
the next 12-18 months?
Mr. Hayes: Yes, let me take a stab at that.
Q: I think you mentioned a couple in Brazil.
Mr. Hayes: Well we have a capacity expansion in Brazil that is well on the way and then we
have a new plant [in Brazil] 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 are paying close attention to that, so that is a new line or a 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 begin production early in the second quarter of 2009. That
is currently a one-line plant 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 to that.
Depending on the economy down there, we may slow that down a bit. Just to give you an
example, the inflation in India six months ago was about 3 percent, now it is 11 percent and
that is going to start to squeeze the middle class. So we are paying very close attention to all
these things and I believe those are, and in Monticello, Indiana, which effectively is largely
completed will be up and running within six weeks or so, I believe, on that line [24-ounce can
line] and those are all the various capacity expansion plans that we have in the pipeline right
now.
Q: O.k. and then just one other issue. With the euro pretty much at record levels against the
dollar right now, any thoughts on just hedging a bit?
Mr. Seabrook: We do that at normal course and as we speak, we have various hedges
throughout 2009 on our conversion of our euros to dollars.
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10. Q: So is that, Ray, that just goes out through the end of 2009, so you are like hedging
18 months forward?
Mr. Seabrook: Yes.
Q: is that right?
Mr. Seabrook: Basically, long term, as it goes up or down, we cannot, it will reflect in our
results. What we do by this, we really soften the blow. So, if in fact the Euro does go down
like you are anticipating, our results would be better in 2009 than they otherwise would be
because we have positions in place that ours would not go down as much. So I can soften
the blow but over the long term our results, you know, will hinge on the strength of the euro
and the dollar and how all that plays out but I can, we can soften the blow as we move
through those periods.
Q: Do you hedge in any of the other currencies? Like, let us say, the [Brazilian] real or
anything?
Mr. Seabrook: These are business situations, I just said, we have other currencies we deal
with in Europe. We have Polish zloty, we have the pound sterling, we have other currencies
and normally we have, depending on what we are doing we hedge up to match to our
customer commitments generally.
Q: O.k. and then the final question I have, is just on the CAPEX side, the 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?
Mr. Hayes: Yes, well, this was part of our overall Project NET [new end technology] that
began several years ago and as we get close to the end this plays right into what we 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 are making, not only making, we are
executing on plans to do just that.
Q: O.k. Sounds good. Thanks very much.
Q: A couple questions for you. First, let me start with one for you, Dave Hoover, your favorite
line of business, the aerospace business, had an outstanding quarter. Can you give us a little
more color as to how the rest of the year flows? Some of these, as you wind up some of
these projects, they tend to have higher margin and 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?
Mr. Hoover: I think we had 3 or 4 percent of margin related to a couple of large programs
that as we try to say or as we did say, as they wind down and they are fixed-price programs
and we do a good job, their margin increases and we are very disciplined in how we do this.
So, do not expect that kind of margin for the rest of the year but they are going to have a very
solid year, the way we see it now in terms of the profitability. Longer term, right now, I do not
know if you have noticed but there is an election, a national election going on and
Q: No one has seen any commercials . . .
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11. Mr. Hoover: And, right, right, so it seems that the government gets sort of wrapped around
the axle at the times in terms of making budgets or passing anything. We are on the trail of a
couple of really good, big programs and they are being delayed. I am not sure that we will win
them but we are, they are in our sweet spot, so it is just hard to predict. We keep hearing
good things about well it is going to happen now, it is going to happen now, but I think the
closer we get to the election, the less likely people are to step up and pay attention and fund.
In all likelihood we will be working on a continuing resolution in the government’s new fiscal
year until after our new president takes office. So, that is going to hurt us a little. We are
working really hard to work 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 will like the
margin for the year and it will be very strong.
Q: Ray, you must have fed him too much coffee this morning because he talked so fast, I
heard him say the backlog numbers but I could not quite make them out. Could you give me
those again?
Mr. Seabrook: Gee, I must have talked real fast, I do not think I gave you the backlog
number, I think you are right, I was talking fast.
Mr. Hayes: I think, this is John, I must have been impersonating Ray. [Laughter]
Mr. Seabrook: And I do not have them.
Mr. Hayes: Backlog for the quarter, spent at the end of the second quarter was $654 million.
Q: O.k. $654. Another question I had for you was, you talked about, I think in response to
Mark’s question, some of the capacity that you are at. I forget what the amounts of the
capacity were. I think you said one line in Poland, if you could tell us how many units that
equates to and the units for the Brazilian piece as well?
Mr. Hayes: In Poland, it is approximately 700 million cans. In Brazil, the speed-up was 200-
300 million and then the new line which realistically will not come on until the end of 2009,
really going into 2010, is about 700 million, as well.
Q: O.k. and then the last question I had, was one of the things I did not see when I saw all
these television commercials, was that there is a large brewer in the U.S. that looks like they
are getting 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, would the industry support going from four
to three or does, give me a little thought on the acquisition environment and what, whether
you think something like that would be feasible going from four to three in the industry?
Mr. Hoover: Yes, I think it is feasible to go from four to three, I think the beer industry,
respectively, gone from three to two or from four to two, five to two, whatever you want to
say, so feasibly, yes, and in a market that is relatively mature and so on, maybe it is likely. I
certainly do not 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 is in their court. I would suggest that you talk to them about what
their plans might be.
Q: O.k. Thank you. That is all I had.
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12. Q: I have a quick question, not, I guess to beat a dead horse about bev cans in Europe, but
since it looks like just from a pure margin perspective that was one of the lower middle
quarters you have had in a while and you probably talked about some of the costs that
popped up over the course of the quarter. Obviously one of your major competitors came out
with a very strong number in that segment, I was trying to get an idea of is there anything
else that we are 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?
Mr. Hayes: I think it was just, we are pretty transparent. This is truly what is going on in our
business.
Mr. Hoover: John did mention one thing that I might reemphasize in terms of where we sold
[beverage cans in Europe] is important but also what we sold [different can sizes] 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, it probably might have been a double-digit quarter
for the market and for us. So, we do not see that as necessarily changing the trend or
certainly not from the customers that we talk to about their aggressive plans to grow
throughout, particularly the eastern European region.
Q: O.k. I think you mentioned, John, that there were some costs with the plant that you are
building for the first half of next year in Poland. I think you mentioned that you thought a few
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 the second quarter?
Mr. Hayes: It is a good question and I do not want to evade it, it is a few million Euros, a few
million Euros. It is always tough to pin down because as you are talking, for example, as you
are talking about, we have hired new people for the plant; we have put them in our facilities
for training purposes. To track that on a person by person basis, we would need to hire five
more accountants to do that. That does not make sense at all, so it is a few million Euros in
the quarter.
Q: O.k. Thank you.
Q: 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 of where those are? I
know that some of it is just perhaps passing through metal pricing but can you just elaborate
more on what price initiatives are underway?
Mr. Hayes: Well, as I mentioned, we have price initiatives on the way in all of our business,
with all of our contracts where allowed by contract. You know we have some existing
contracts that we are looking at them very hard in terms of freight pass-throughs in terms of
other things like that. We have sent letters out in certain of our businesses talking about
where we are allowed to, the need for recovery of these costs but equally, but if not more
important, as our contracts come up for renewal, we are taking a fresh look at everything.
And I mentioned core pricing initiatives. I mentioned cost pass-through models, taking a fresh
look at that and making sure that we are 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.
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13. Mr. Hoover: 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.
Q: And can you elaborate on how much of your business is currently up for renewal?
Mr. Hayes: 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.
Q: Second question, can you just elaborate, are there any start-up costs associated with the
Indiana can line that will show up in the third quarter or the fourth quarter?
Mr. Hoover: Not so big that it would be meaningful. Yes, when you start a line you usually,
as you are flipping from capitalizing the last cost in to getting it truly operational, there are
some costs, but I do not think it will be a big number.
Mr. Hayes: One of the things, when we invest in things like that, it is very important that we
invest where we have high confidence in the people who 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.
Mr. Hoover: And hopefully, Ross Rittberg, the plant manager, was listening to that.
[Laughter]
Q: And then just lastly, Ray has talked about, in the past, sort of a 10-15 percent earnings
growth year over year and as you look at 2008, is there any reason why you would not expect
that to happen in 2008?
Mr. Hoover: I am not sure I understood your question.
Mr. Seabrook: Yes, let me just try this way and then you can take it, Dave. I mean, one of
my comments where I think we had something like 25 percent last year and between the two
years we are certainly going to exceed those, you see our top end. Whether, in fact, we can
have 10-15 percent in 2008 remains to be seen.
Mr. Hoover: 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 not to give real specific guidance. Interesting that you all
seem to know exactly what we are going to make. We usually have to close the books and
find out. With 98 million shares outstanding, less than $1 million in net income is a penny and
we are a $7.5 billion company. All that means, I think that we are optimistic that there are
parts of this company and you have heard us go over all of the different operations that are
definitely on the way up. We have got between this year and 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 a little soft, so and he also said and Ray said that we are going to run, not to build a lot of
inventory and report profits this year that will not show up next year so we are going to
manage that working capital down too, if necessary. But, given all those things, everything
that 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 say, by
as much as we can and that is sort of where we are in July. It is not a negative message, it is
just that we are going to control everything we can, push hard and operate better and as Ray
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14. has been pointing out, if you integrate the last couple of years, we have taken a big step
forward in the performance of the company and I think there is more to come.
Q: Thank you.
Q: Are your steel suppliers honoring their contracts?
Mr. Hayes: We are having challenging discussions with many of our steel suppliers but we
have very firm contracts with virtually every one of them and we are taking a very firm legal
position with them and, but, we also recognize that we need a healthy supply chain over the
long term and what we have 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.
Q: O.k. When do you finish pre-selling in Europe?
Mr. Hayes: Finish pre-selling, I am not sure I understand your question.
Q: Yes, you are shipping product in to pre-sell your new capacity and that has caused some
costs in the quarter and I think you said the new capacity in Poland comes on second quarter
of 2009, so does that mean that is when the pre-selling costs go away.
Mr. Hayes: Yes, you understand the seasonality of our business so it is most impactful in the
summer months but it is also India’s as well and what we are looking at in India is working
with our global supply, if you will, with our licensees and with our Asian operations to make
sure we are optimizing as we seed that market to make sure we are optimizing the costs 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 in India are starting to run, what
are the implications of that so we are being very mindful of all that.
Q: Now, you guys have made the tough decision regarding beverage can capacity in North
America, which I commend you for, it is not easy to close capacity and last year Crown
closed some capacity, I am kind of shocked that we have not seen any capacity closure
announcements yet from Rexam and 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 have to keep a sub-optimal plant
operating?
Mr. Hayes: Obviously, I can only speak for ourselves. When we are looking at capacity,
when market demand goes down, it is not a billion in this part of the region or a billion in that
part, it is 100 million here, 200 million there and so inevitably you have customer contracts
you need to honor and live up to and those, at least for us, we have contracts that come and
go as far as 2015 and the short of end of 2008. So when we are 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 of this.
Mr. Hoover: I think that if you are in this business, you have a lot of plants; there are a few
that are at the edge. Usually, for most people. I cannot, as Ray, or John said, I cannot speak
for others, but we are doing a lot of thoughtful analysis and planning and scenario making
- 14 -

15. around what happens here and there. I think that over the last decade or so all of the can
companies, maybe with the exception of Metal Container, have shuttered capacity from time
to time and one must deal with the reality of the market and we need to all run at high rates in
order to get our costs the lowest it can be and so we are just trying, as John has been saying,
to do our part to keep the supply and demand in balance.
Q: So it sounds like what you are saying, Dave, is that as far as you can see there is no
reason why your, why any of your competitors, you or any of your competitors could not take
advantage of the opportunity to reduce capacity if they see fit?
Mr. Hoover: 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.
Q: Thank you.
Mr. Hoover: You bet.
Q: I have 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 carpel tunnel syndrome
after these conference calls and it is becoming like my left foot. I am using my left foot to now
write.
Mr. Hayes: It is really 24 ounce energy is what Ray is after. [Laughter]
Q: Well, either way, put some child resistant caps on those. I had a question for you 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 beverage can
business has done as well as almost anybody in getting price passed-through. It shows. But
does it not have to be a win-win for your customer and how do you do that?
Mr. Hayes: It does and in part what Dave was talking about, freight optimization in terms of
the various plant networks and we are trying to talk with our customers because, look, it is 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 are right on, in North American metal bev, the whole
metal side of it; it has been relatively efficient but let us not forget energy and energy in terms
of running our plants and energy in terms of freight. When oil is even at $60, $70, $80 a
barrel, it is very different than when it is at $130 or $140. To put a new spotlight on those
types of costs, to try to optimize it for our customers and for ourselves, those are the types of
things we are doing and so just putting more discipline in the whole process.
Q: It sounds like you are trying to make it more seamless, though the chain is lubricated and
nobody gets stuck except the consumer, probably. But I think I hear you. The other thing is,
somebody once said that growth is over rated and while 5 to 8 percent growth in Europe ain’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
well know. And yet, beyond Eastern Europe, it sounds like you are going to be going into
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16. territories where there is already established competition or where the way of doing business
and how people do business is quite different. How do you approach that?
Mr. Hayes: Well, one of the things and you just hit the way of doing business. One of the
differentiators that we believe of Ball, relative to other people, is we are very close with our
customers in understanding and anticipating their needs and when you think about all, let us
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 do not have the facts in
front of me, but of a Russia or Ukraine or an India, you know five years ago they had
breweries you had never heard of and now 80 percent, generally speaking, of the market
shares control by one of the big four or big five beer companies. They have certain ways of
doing business and they need to rely on a supplier that is not going to let them down and so it
is those types of things that we are in discussions with. We often bring customers here to
Colorado; we go out to see them and not talk about price but we talk about where their
footprints are going, where our footprint needs to go and how we can overlap. I am sure
others do that as well but that is one of the ways that we do it and it helps mitigate the risk
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 do is whittle each one of those down
to the lowest possible risk profile so that we get comfortable, that we can get returns that
represent the risk taken.
Q: Yes, because Dave and I had these conversations quite a bit, but the old game in North
America was kind of warfare, my plant is bigger than yours, I have got more capacity than
yours and just as an example, I look at a Brazil, obviously, our friends from the U.K. are pretty
well established, so how do you kind of in a docile manner come in and make a business and
make some money.
Mr. Hoover: Well, we have been in Brazil for 12 years, with our plant, [in Jacerei, Brazil]
where the speedup is going on and we are making a different size there too, we are swinging
a line and then in the Rio state, we are seeing a 10 percent compound growth. We make a
business through the market growth and hopefully we will get the one line in and I believe
that we are going to be able to sell those cans right away and over time we can add capacity
there. What is interesting about that we were in one of these discussions and 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 do not want to buy everything from one guy or maybe I want to grow
into this marketplace where not only are there no existing can plants but I am building a new
brewery or I am a soft drink person; I am going to fill soft drinks. I think the growth that you
talked about, taking the risk; we have been taking risks in some interesting places for a long
time. We have had our lumps. Some of that, 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 has been
owned in part by American companies for 50 years.
Mr. Seabrook: We do not use the same cost of capital where ever we are in the world. We
have different costs of capital to take in those risks.
Mr. Hayes: But, let us be clear, our growth as we try to grow where markets are growing so
that we are growing with the market because you should not expect that we are going to have
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17. any opposite strategy than that because you are absolutely right. Growth for growth sake
does not mean anything. What we are looking at is profitable growth.
Q: Yes, well, listen I think there are 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, the last thing I have, I am
sorry if I am taking this up. Dave, you do not do any commercial airline stuff, do you?
Mr. Hoover: No, not at this point. I fly occasionally. [Laughter]
Q: Lucky you. But then the last thing was, it was talked about that the whole InBev, AB
[Anheuser-Busch] saga and everybody has been calling on AB to buy MCC [Metal Container
Corporation] for probably 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, any thoughts?
Mr. Hoover: No, none that we would want to discuss with you. [Laughter]
Q: Not with me? Do I have some kind of plague or something?
Mr. Hoover: Well no, but with the size of your checkbook and I do not think you buy any cans
directly.
Q: [Laughter] Yes, I understand.
Q: Quickly, was there any metal gain in Europe in this quarter? I know you mentioned North
America; I just wanted to confirm that.
Mr. Hayes: No.
Q: O.k. Secondly, did Asian profits move in-line with Asian sales in the quarter?
Mr. Seabrook: Yes, they were up year over year, absolutely in-line with what John said with
their volume increase.
Q: O.k. Third question. PET, are you in a position to comment where you stand with the
margin recovery process realizing that it might not initially be a 2008 event from a timing
standpoint has much of the work been done, how would you index it if you had to?
Mr. Hayes: I will 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.
Q: O.k. Fair enough. I guess the last question, you talked quite eloquently about how you
have to shine a light on the risks that you take, 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 five and twenty 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?
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18. Mr. Hayes: I will reiterate what I said. We are prepared to balance our supply with what we
see in terms of our demand.
Q: O.k., once more with emphasis John. [Laughter]
Mr. Hoover: I think that the other comments that we make in this kind of an environment we
do not really have a choice and we have got to be understanding of what is the economic
environment that we deal with. You may recall a gentlemen who used to work here he used
to say that we do not like to do things for practice and I am optimistic that we are out ahead of
these things and we are going to do our very best. Understanding that, we are part of a
supply chain and we are in this for the long run, but we have got to make adequate returns.
Q: Dave, is it possible to, as you see capacity creep and as, you see perhaps some
deterioration in demand in CSD in North America to utilize that capacity that you had in North
America, one for one in the international market, emerging markets or is that probably a too
aggressive ratio?
Mr. Hayes: It is probably from a capital point of view a touch too aggressive, but generally
speaking, you are correct.
Mr. Hoover: And that is certainly in our mind, the notion of that and then if you also think
about the various moves that we made over the last several years in modifying capacity so
that it makes other sizes, sizes other than the 12 ounce can. It [specialty cans] is a big chunk
of our business these days and it is almost a different product.
Q: A final, 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 capacity is not going up but perhaps PET capacity might go up but that would not
happen if the customers were not envisioning using more and more of that in the mix; the
same thing in the beer market. Do you expect anything, especially within North America, to
change from a package mix standpoint that would alter your ability to manage supply and
demand?
Mr. Hayes: I think that what you will see going forward is our customer base, generally
speaking, trying out new and different formats whether it is in the plastic bottle or a beverage
can, to try and really relate to the consumer and try to 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.
Mr. Hoover: We have been doing a lot of work directly with our customers and doing our own
market research and so far we have got a number of innovative things going on around our
packages, from the type of printing, the kind of closure, you can see the ads on TV and a lot
of that is our stuff and that is the kind of thing John is talking about. In the end, we win with
the winners and right now with demand being a little soft I do not know that they know exactly
what is going to happen there but I can assure you that the beverage can and PET bottles,
there are going to be a lot of those made in three years as are today. Whether the mix shifts
a little bit I do not know but if you take a look, most every raw material is going up in price, not
necessarily at the same time, but it is 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 the other
day, the last time oil prices were like this, was the early 1980s, late 1970s, early 1980s and
- 18 -

19. we had a 22 percent prime rate now we have one that is maybe 2 percent. I do not get what
is going on with all that but I am just glad we are in the business we are in and not some
others like that airline industry that was mentioned a minute ago.
Q: I will let you go guys, have a good quarter.
Mr. Hoover: Thank you everybody for joining us today. I do want to note that our third quarter
earnings conference call we are going to be scheduling for October 30, which is probably a
week or so later than normal. I just wanted to put that out there and we will remind everybody
about that again in late September. Thank you again for being with us and we are going to go
back to work and have a good third quarter.
Forward-Looking Statements
This transcript contains “forward-looking” statements concerning future events and financial performance.
Words such as “expects,” “anticipates,” “estimates” and similar expressions are intended to identify forward-
looking statements. Such statements are subject to risks and uncertainties which could cause actual results to
differ materially from those expressed or implied. The company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise. Key
risks and uncertainties are summarized in filings with the Securities and Exchange Commission, including
Exhibit 99.2 in our Form 10-K, which are available at our Web site and at www.sec.gov. Factors that might affect
our packaging segments include fluctuation in product demand and preferences; availability and cost of raw
materials, including recent significant increases in resin, steel, aluminum and energy costs, and the ability to
pass such increases on to customers; competitive packaging availability, pricing and substitution; changes in
climate and weather; crop yields; competitive activity; failure to achieve anticipated productivity improvements or
production cost reductions, including our beverage can end project; mandatory deposit or other restrictive
packaging laws; changes in major customer or supplier contracts or loss of a major customer or supplier; and
changes in foreign exchange rates, tax rates and activities of foreign subsidiaries. Factors that might affect our
aerospace segment include: funding, authorization, availability and returns of government and commercial
contracts; and delays, extensions and technical uncertainties affecting segment contracts. Factors that might
affect the company as a whole include those listed plus: accounting changes; changes in senior management;
the current global credit squeeze; successful or unsuccessful acquisitions, joint ventures or divestitures;
integration of recently acquired businesses; regulatory action or laws including tax, environmental, health and
workplace safety, including in respect of chemicals or substances used in raw materials or in the manufacturing
process; governmental investigations; technological developments and innovations; goodwill impairment;
antitrust, patent and other litigation; strikes; labor cost changes; rates of return projected and earned on assets
of the company’s defined benefit retirement plans; pension changes; reduced cash flow; interest rates affecting
our debt; and changes to unaudited results due to statutory audits or other effects.
Ball Corporation Non-GAAP Financial Measures - Second Quarter 2008 Earnings Conference Call
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Earnings Before Interest and
Taxes (EBIT) - EBITDA is earnings before interest, taxes, depreciation and amortization, and EBIT is earnings
before taxes excluding interest. We use EBITDA and EBIT internally to evaluate pre-tax cash flows prior to financing
and capital spending cash outflows.
Free Cash Flow - Management internally uses a free cash flow measure (1) to evaluate the company's operating
results, (2) to plan stock buy-back levels, (3) to evaluate strategic investments and (4) to evaluate the company's
ability to incur and service debt. Free cash flow is not a defined term under U.S. generally accepted accounting
principles (a non-U.S. GAAP measure). Non-U.S. GAAP measures should not be considered in isolation or as a
substitute for net earnings or cash flow data prepared in accordance with U.S. GAAP and may not be comparable to
similarly titled measures of other companies.
- 19 -

20. Free cash flow is typically derived directly from the company's cash flow statements and defined as cash flows from
operating activities less additions to property, plant and equipment; however it may be adjusted for items that affect
comparability between periods. An example of such an item excluded in the 12 months ended June 29, 2008, is an
after-tax legal settlement of $42 million to settle a customer issue.
Taking into account the legal settlement and based on information currently available, we estimate 2008 free cash
flow to be in the $300 million range, with cash flows from operating activities in the $630 million range and capital
spending at approximately $330 million.
Cash flow from operating activities is the most comparable GAAP term to free cash flow, and it should not be
inferred that the entire free cash flow amount is available for discretionary expenditures.
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