John A. Hayes - Chairman, Chief Executive Officer and President Scott C. Morrison - Chief Financial Officer and Senior Vice President.

Mark Wilde Mehul M. Dalia - Robert W. Baird & Co. Incorporated, Research Division Scott L. Gaffner - Barclays Capital, Research Division George L. Staphos - BofA Merrill Lynch, Research Division Chip A. Dillon - Vertical Research Partners, LLC Anthony Pettinari - Citigroup Inc, Research Division Philip Ng - Jefferies LLC, Research Division Tyler J.

Langton - JP Morgan Chase & Co, Research Division Deborah Jones - Deutsche Bank AG, Research Division Christopher D. Manuel - Wells Fargo Securities, LLC, Research Division Alex Ovshey - Goldman Sachs Group Inc., Research Division.

Ladies and gentlemen, thank you for standing by. Welcome to the Ball Corporation Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, July 31, 2014. I would now like to turn the conference over to John Hayes, Chairman, President and CEO for Ball Corporation.

Please go ahead, sir..

solid global beverage can demand with healthy year-over-year growth in Europe, Asia and Brazil and firmer demand in North America; lower operating costs in our European beverage can segment and continued strong cost management in our North American as well as Asian beverage can businesses; continued specialty can and beer container growth in North America; strong performance in our European and Mexican impact-extruded businesses from both a volume and cost perspective; strong aerospace program execution; and ongoing disciplined returns-oriented capital allocation strategy from all drove our results.

North American tinplate container volumes were lower than expected and, operationally, we continue to have some operational challenges that we discussed on our first quarter conference call.

Some of it is related to the repositioning of certain manufacturing equipment across the domestic food and household segment footprint, and some of it is a bit self-inflicted as we have taken steps -- and we have taken steps to get it back on the right track for 2015 and beyond.

While some previously disclosed segments still exist in the back half of '14, including persistent LME premium in Europe, the aforementioned manufacturing inefficiencies in our food and household products division, and tougher second half volume comps, it's evident that 2014 is shaping up to be a better year than 2013.

And with that, I'll turn it over to Scott for a review of our second quarter numbers.

Scott?.

Thanks, John. Excuse me, I'm fighting a bit of a cold this morning. Ball's comparable diluted earnings per share were $1.13 versus last year's $0.85. In addition to John's comments around better year-over-year global beverage can volumes and cost-out progress, a lower share count contributed to our improved results.

During the first half of the year, we acquired net $239 million of our stock and returned another $37 million to shareholders in the form of dividends. And presently, the majority of our free cash flow is expected to be returned to shareholders via share repurchases and dividends.

For the full year, again, no significant changes to our previous financial metrics. Free cash flow is expected to exceed $550 million, share buybacks will be in the range of $500 million, CapEx around $375 million, with it being more back-end weighted.

Interest expense should be around $163 million and our effective tax rate for the full year should be in the range of 28%. On a full year basis, corporate undistributed should be closer to $80 million. Net balance sheet debt at the end of the quarter was approximately $3.4 billion.

Credit quality and liquidity of the company remains solid with comparable EBIT-to-interest coverage of 5.6x and net debt-to-comparable EBITDA at 2.7x. Committed credit and available liquidity at quarter end was in excess of $1 billion.

For a complete summary of second quarter results on a GAAP and non-GAAP basis, please refer to the Notes section of today's earnings release. Moving to operations. Our metal beverage, Americas and Asia, segment comparable earnings were up more than $15 million in the second quarter.

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

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

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

As John briefly touched on, between our previously disclosed second half LME premium headwind of roughly EUR 7 million and tougher second half volume comparisons, our ongoing cost savings initiatives should offset these headwinds in the back half of the year.

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

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

In summary, our global beverage operating team continues to execute in tight supply/demand situations across the majority of its manufacturing portfolio, while also managing capital projects in North America and Europe to further improve our packaging business in 2015 and beyond. With that, I'll turn it back to you, John..

Great. Thanks, Scott. Our aerospace business continues to exceed expectations. Solid execution and higher work fees on existing programs, successful deliveries and niche product wins for antennas and sensors are some of the highlights.

Contracted backlog ended the quarter at 580 -- excuse me, $858 million, and as mentioned on our January call, we are pursuing some large programs that are expected to be awarded late this year or early next year. We do have a significant launch coming up for the WorldView-3 satellite by DigitalGlobe later in August, and so far, things look good here.

Now looking out across our company today. We are proud of our year-to-date results and the teamwork it took to accomplish them. Though some challenges still exist, we will control what we can control and effectively manage through the rest.

We remain confident in our ability to achieve our long-term diluted EPS growth goal of 10% to 15% in 2014 and beyond while growing both our EVA dollars and free cash flow. And with that, Nelson, we're ready for questions..

[Operator Instructions] Our first question comes from the line of Mark Wilde with BMO Capital Markets..

I wondered, on bev cans in Europe, is it possible, Scott, to quantify the benefit you got from just no more drag from the switch of headquarters that you were dealing with last year? And then I wondered if you could also provide a little color on that expansion in the Netherlands?.

Sure. The -- I think the Europe benefited from nice volume gains in the quarter. If you remember, year-over-year, volumes were a lot tougher in the first half of last year. This year, they've been better. They're getting the benefits of cost-out, some of the cost-out programs that they've been putting in place.

So I think there's really not much of a drag anymore from the European headquarter's relocation. And then we're getting the benefit of the -- on the tax rate side, we're making more money in Europe, which has lower tax rates, so that's helping us.

The second part of your question was about the Netherlands' expansion, and that is moving along and we expect to have that capacity up for the busy season next summer..

And that's all committed volume at this point?.

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

Our next question comes from the line of Ghansham Panjabi with Robert W. Baird..

It's actually Mehul Dalia sitting in for Ghansham. First question, just wanted to make sure I heard correctly.

Aluminum premium is expected to be a EUR 7 million headwind in 2H in Europe? And do you expect a price recovery in 2015 as a result?.

To the first part, yes. The premium that we expect, the headwind is about EUR 7 million in the second half of the year. We had a little of that in the second quarter, but only maybe about EUR 1 million.

In terms of price recovery, it's too early to talk about what pricing looks like for 2015, but obviously, if our price -- or if our costs are going up at some point, you need to recover that through the system..

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

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

Our people did a phenomenal job. We did have a fire in Monticello, Indiana really at the peak time of shipping. And through the great work that they did, they were able to get that plant up and running in different pieces over a period of just a few weeks. And throughout our system of people doing really phenomenal work, we really didn't miss a beat.

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

Okay. Great. And just one last one.

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

We're hopeful that pricing would stabilize. There's still a lot of -- there's probably 20% excess supply. We're sold out so we're running kind of hand and mouth in terms of our selling them what we can produce. So we're pretty tight. But it is a much more seasonal market, too.

Even though there is 20% overcapacity in total, finding cans at the peak time is a bit tough. And I think it's a little too early to tell in terms of pricing in China, but hopefully we've seen kind of the bottom. Things that we've seen recently, it doesn't look like it's materially changing from where it's at right now..

The only thing I'd add is the market continues to grow very strongly there. Mid-double digits, 15%, 17%, which obviously helps to soak up some of that excess supply. I think as we said on our last call that some of the smaller, more regional players continue to put some more capacity in.

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

Our next question comes from the line of Scott Gaffner with Barclays..

Just a few interconnected question on Brazil and Latin America. Can you talk a little bit about the pack mix change to more one-way during the World Cup.

What are you hearing from your customers as far as retaining that shift impact mix? What do you think is going to happen with the impact of the demand from a possible beer tax coming later in the year? And then how should we be thinking about 2015, just off of a strong 2014 comparison?.

That's a lot of questions there. I think the first one, in terms of the package mix, we continue to see growth in one-way packaging. The can as a percent of the beer mix is now 45%, 46%, that's up from 39%, 40%, I think, a year ago. So things continue to go strong there.

I don't think it was only related to the World Cup because we've seen a consistent growth of that metric over time. Certainly, the World Cup had, on the margins, some positive. But there was also a lot of on-premise beer drinking in Brazil, which is not cans. It's more returnable glass.

But I do think, overall, those trends that we've seen have continued. In terms of your question about the beer tax, we've talked about this before. They pushed it out on the last call. It was supposed to happen in June and now they're talking September, and it may not happen at all, so it's unclear. It would put a little bit of a headwind into it.

But these things happen from time to time. What we're hearing is it's unclear whether it's going to be implemented or at what time, given the elections going on. We had a very strong first half of the year than the overall industry did from a volume perspective.

Our plan -- our expectations are it's going to be much more muted, is the best way to say it, and it's going to be relatively flat is what we're planning on in the second half this year. Going in 2015, it's really as much about the economy, and the economy is not doing all that well. The elections are coming up. So it depends upon that.

We certainly don't see any big upside or downside, relative to overall volumes. And so kind of relatively flat to up a couple of percent, if you'd ask us right now, it's probably what we'd say. But it is a bit premature to look into the crystal ball for 2015 down there..

Just a quick follow-up then on that.

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

We've got -- it's a very seasonal business there, as well. And we brought up a line -- the last line in the fourth quarter of last year. So I think from a supply standpoint, we've got kind of where we need to be. I don't think we're going to need to be adding any additional capacity. Again, it's a very seasonal business.

So seasonally, you run really hard when it's summertime and you run a little bit less when it's not..

Yes. We currently have no plans to add any additional capacity, but our manufacturing focus right now is really to be as efficient as we can with those assets that we put in place and get more cans out of them. So I think over the next 12 to 18 months, you should expect that's really where our focus is..

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

I guess, starting off, maybe shorter term, talking about the food can business in North America. As you mentioned, and for a lot of reasons who already discussed in the past, earnings were down quite a bit.

Is there a way to parse how much of the decline in earnings year-on-year was attributed to, say, your volumes being off, how much of it is just from higher cost to service you're realigning capacity ahead of '15 and how much of it was the self-inflicted? If you can get into any of that, that would be helpful, and I had some follow-ons..

Well, the best way -- I don't know if I can break it into those 3 buckets, but I can break it into these 2 buckets.

I think, from a volume decline, 1/3 of the decline in profits came from volume and 2/3 came from the manufacturing side and whether that was -- it was a relocation of the assets, as well as the self-inflicted -- we just haven't been executing as well as we would've liked in terms of these movements, and it's going to take some time to cycle through.

So that's -- George, that's one of the reasons why we said, in the second half of this, we're going to see -- continue to face see some of these headwinds. But I think as we go into 2015, we're laser-focused on making sure these issues are corrected..

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

Yes. No, it's market related. We're down a couple of a percent, I think, as we said.

The packs have started a little bit late, but they seem to be -- it depends on where you're talking, but they seem to be going okay, but I wouldn't read anything into it other than we are off a couple percent just because, remember the first quarter, the weather was bad and I think even in the early part of the first half of the second quarter, the weather wasn't all that great.

So it's kind of pushed the packs out a little bit. But I wouldn't read anything other than that..

That's fair. I guess my last question on food, and again, you did very well everywhere else, so I apologize, I'm focusing mostly on where the performance wasn't as great this quarter.

If we consider the volume effect in '15 as the contract comes off, but then the recovery, from an operating standpoint, from the realignment and then getting back, perhaps, on the performance relative to where you've had some missteps, do you think earnings in food next year are down versus '14? Or might you be flat to up because of the improvement in operations?.

I think flat to up would be a big stretch as we sit here right now. But I do think that they'll be down slightly, but it's really a function of how much we can approve the manufacturing side of the business here.

We've talked about as we go into the second half of this year that we're going to be looking at executing on our plans that we already have in place to optimize our business going into '15. So I think there are some puts and takes as you think about '15. One of the positive things is we should get better manufacturing performance..

Okay. One last one, John, I'll turn it over, and really more for Scott. Realizing that it's not '15 yet and it's hard to provide a CapEx forecast, since a lot of your projects seem to be back-end weighted off Myanmar, the spending this year, my guess, is a little bit more back-end loaded as well.

Would the project spending spill over into '15 and therefore make it more likely that capital spending is up from 2014 or should we not draw that conclusion?.

I don't know, George. It's probably too early to call. There's definitely -- the capital has been slower than what we expected it to be flowing out this year. And we'll see what we get done in the second half of this year. But we typically have some amount of carry-out capital and carry-in capital, year-over-year, and it's really too early to call.

And it's also, frankly, dependent on the opportunities that we have. So too early to tell what '15 will be. I have a hard-enough time judging next quarter..

Our next question comes from the line of Chip Dillon with Vertical Research Partners..

First question I have is actually let's jump over to aerospace. John, you mentioned that there are some initiatives, I guess, from proposals that are out there that you guys are kind of aiming to get a piece off in late '14 and '15.

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

No, I think it's more growth, look to growth. We just are aware of a fair number of different program proposals that will be put out for bid in the second half of this year that had kind of fallen to our sweet spot.

So as we think about that, whether we win them this year or next year, or whether they will be awarded this year or early next year, it's unclear at this time because some of the request for proposals aren't even out yet. But we do see those types of things and I think it will help to grow our business..

Okay. And then I might have missed this.

But in the Americas segment, could you give us a little bit of detail between how specialty did versus standard? And even within standard, sort of what was the difference between beer and non-beer?.

Well, I think I'll take a crack at it. I know our specialty can growth was up high-single digits. And so by definition, our standard container were probably down a little bit. When you look at beer versus soft drink as an industry and as -- beer was up a few percent, soft drink was down a few percent.

And so I think those kind of trends that we've talked about in the pass where the can is taking share, the package mix of beer continues to go strong. The beer market is relatively stable and solid, and on the soft drink side, they have some challenges in terms of volume and I think the can is feeling it. So those are the overall headlines..

And then I guess the last question, just really more on a -- I guess from a qualitative perspective.

When you think about the aluminum premium that you're paying in Europe, that's something that I would imagine wasn't anticipated when you did your contracts because it seems like that we've seen contracts in Europe, as well as North America, kind of have as a precondition almost to work.

That volatility in aluminum is borne by the customer and yet here that's not occurring.

So why would there not be a sort of a change in the contracts just too kind of keep that kind of rule of thumb that we've been seeing for the last few years?.

The pricing in Europe has always been a little bit different, but I think you're exactly right. I think the premiums that we're experiencing now, at some point, need to flow through the system. So it's always been a little bit less connected than it has been in North America and other markets.

But you could see -- I mean if we're paying double the premium this year versus where we were 6, 9 months ago, at some point you need to get that back..

And I think one of the issues, the premium historically had been relatively stable and so people never really thought about these big deviations that have been seen. So your point is spot on, that I think as we look at contracts going forward, that's one of the things that we're certainly going to be trying to address..

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

Well, I think you'd have year-over-year comps that are easier, but I'm not sure it's going to go -- we would be hopeful that it would go back to more normalized level, but I'm not sure it's going to go much further than that..

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

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

Just a follow-up on North American specialty cans. It sounds like volumes were strong.

If you were to look at specialty can margins, would you describe those as up year-over-year? Are they stable or is there any pressure there? And I think, on the last call, you referenced potentially a line addition in specialty cans in North America in the second half, if there's any update on that?.

Yes. The -- I would say, again, we talk about specialty as almost like one type of package, but it's 20 or 25 different sizes and shapes. I think from a profitability perspective, we really haven't seen any change in that.

We do have some plans that we really can't talk about in terms of putting a specialty container opportunity in North America that we're moving forward on. And that will be up and running sometime next year, so that's the only update I can provide..

Okay. Okay.

And is it possible to give capacity figures for the Holland and the Myanmar lines?.

Typically, when you add a new line, for example, on existing facility, you get, depending on the speed and other things, 750 million to 900 million cans, plus or minus, so it's going to be in that range. And then in Myanmar, it really is more about the demand of Myanmar than it is about the capacity.

We expect to be up and running in excess of a 0.5 billion cans in Myanmar. And as we go forward, we'll continue to incrementally build out that line to provide more capacity..

Okay. That's helpful. And maybe just one last one. I mean, we've seen some undisciplined supply behavior by Chinese producers within China.

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

Well we have seen a little bit, but not wholesale. In Vietnam, there's a Chinese producer that's manufacturing there and some other areas we look from time to time. It's certainly not as acute as in China itself. But there's other competitors as well, whether the Japanese, or whether even some European competitors that have been looking over there.

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

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

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

Are you seeing that momentum carryover into 3Q? And how has the promotional activity track thus far?.

Well in terms of continuing it, and we're only, what, 3 or 4 weeks into the third quarter and we haven't seen any appreciable change in the demand profile, I would describe the promotional activity as kind of average. As I said earlier, the beverage -- excuse me, beer cans were up, soft drink cans were done a little bit.

And I think that kind of nears the overall industry for both those categories. And so we did see some 4th of July, some promotional activity, but I would just describe it as average..

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

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

No. Because, as you all know, typically, when we add capacity, it's on the back of customer contracts. And so we feel good about the capacity additions we're putting in..

Okay. And then in China, it was pretty impressive that you were able to run your plants that hard. I would've thought your plants are running pretty full at this point.

Can you talk about some of the initiatives that you have placed to unlock more capacity and is that double-digit type trajectory sustainable as we head into next year, if there is demand?.

Well we are, as Scott mentioned, hand to mouth in Asia. And our folks have been doing a good job, but it's -- and anytime you're hand to mouth, it creates inefficiencies from a logistics perspective because you're shipping cans all over the place. We are -- while we have no specific things to talk about right now.

We do have to look about capacity in Asia, but we're not going to do anything unless we can make economic returns. And so as this oversupply exists, but at the same time, the growth continues very strongly, we're looking at ways of getting more of our existing system.

And then if we have to add incremental capacity, because generally speaking, particularly in the South of China, is where we're short of cans..

And then just one last final one. The aluminum producers have continued to shift more production into auto and aerospace.

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

We've -- there's been a lot of talk about the automotive business, and it remains to be seen where that's going to go. It depends on the customer what the customer wants to do, really, and how long they want to go on their contracts. There hasn't been any appreciable change in how we're contracting for aluminum or what we're doing..

Yes. The only thing I'd add as well is, remember, the North American market is not exclusively but largely a soft hole market. And so the contracting of the rolled aluminum is often done by some of our major customers..

Our next question comes from the line of Tyler Langton with JPMorgan..

Just with Europe, I was wondering -- in terms of taking out costs, could you provide just a little more detail, I guess, on how much you've achieved as of now in relation to your goals and how much sort of is left potentially..

I think we're making a pretty good progress. And part of it is small often depreciation for projects that had kind of run through their life. But a lot of it is efficiencies that we're getting out of running the business as a Pan-European business out of Zürich. And I think there's more to go in terms of manning and efficiency.

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

And just a follow-up on the premiums.

I mean if European premiums remained where they are now, I guess would there be any incremental hit as you head into 2015?.

Well, you'd have a tougher comp in the first half of '15, but since they've been elevated in the second half of '14, that would balance out..

And then I guess sort of just last question. I know on U.S. bev cans, you've kind of benefited from the closures in the previous 2 quarters.

Is there still room to reduce cost there or is that kind of the cost space roughly where you think it should be?.

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

But our folks continuously focus on taking inefficient costs out of the system, and we've been spending a lot of time on the freight and logistics side, the whole warehousing side, there's a lot of opportunity to optimize that. And so our folks have done a wonderful job, and it's part of the mantra. It's just to continue trying to cost-out.

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

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

Yes..

Our next question comes from the line of Debbie Jones with Deutsche Bank..

Just a few questions on Europe -- I know you kind of talked around this a bit, but can you just comment on the sustainability of the 13% EBIT margin? I mean I know that you're going to see some premium headwinds in the back half, but it just seems like you previously had said 11% to 12%, so it was a little bit better than I was anticipating..

Yes. If -- remember, when you go back and look over the past number of years, there's a seasonality aspect of it. And our margins are usually a little bit higher in the second and third quarters relative to the first and second. So when we were talking about that 11.5%, 12.5%, that was really on a full year basis..

Okay. That makes sense.

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

I don't think anything appreciably. We don't think too much about Russia, because Russia's, from a logistics point of view, is very far away from the other parts of Europe. And Ukraine, I know that there is one plant in Ukraine and -- but the overall Continental European market has been regionally strong.

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

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

Okay.

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

Well we're taking our time. As you see, we're performing very well and we're having conversations about that, but we have made -- to answer your question, no, we've not made any decisions..

[Operator Instructions] Our next question comes from the line of Chris Manuel with Wells Fargo..

Most of my questions have been answered, but I wanted to kind of hone in on a couple of areas if I could. One being as -- recognizing you guys are very, very disciplined, when you go to put capital in you don't build a lot of spec capacity or do things of that nature. But -- and you go about that the right way.

So when you put a new capacity or you're in the process of putting new capacity in the Netherlands, in example, given some of the premium issues, can you use that as an opportunity to -- and appreciating you don't want to talk in too much detail about contracts, but can you use that as an opportunity to maybe change some of the mechanics of how you do contracts to protect yourself from things like LME premiums and things of that nature? Or do you kind of have to follow industry dynamics and then work as a whole.

Maybe a little color would be helpful..

Well, I don't know. I think they're a bit separate. I hear where you're going with that in terms of how to use this capacity as leverage. We're sold out in Europe right now, in fact, we're real tight in Europe right now, and so we need the capacity to come on. How you negotiate contracts with customers, I think, is separate and apart from that.

And it's a competitive world. So if we were trying to do certain things in competition or not, we'd have to deal with that. So that's the way we think about it..

That's helpful.

And then the second, you said that you are pretty in a spot where you're sold out and tight in China, we've heard some discussion here and there about some incremental capacity or someone looking to potentially add a facility in I think the in the Weilin area, could you comment on your appetite, as it sits today, given that you're full and seemingly running at okay returns to potentially add capacity?.

Well, I think I mentioned this earlier. We are looking at that. We have nothing to announce right now.

But again, we are sold out in Asia, and as the market continues to grow mid-double-digit to teens, 15%, 17%, we want to capture our fair share of that but only do it if we can be economically sustainable, and our folks have done a very good job of -- from a cost perspective and a capital perspective of making sure that we're low-cost there.

And so, stay tuned on what some of our plants are, but we're looking at various things..

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

As you sit today, you haven't made any other capacity announcements, whether it's adds in different areas.

Can you maybe share where you're at in the process? Is that something still you're working on and you'll share with us in the future? Or have you thought about adding, whether it's different products or different components, aside from moving around some volumes?.

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

I think you should expect that we have plans in place and that we're going to be executing on them in the second half to optimize our business for the expected customer loss. Some of it includes -- I would not say we are going out in trying to look for new business just to "buy" business. We're looking at various costs initiatives.

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

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

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

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

There's always a variety of -- we don't parse it like that. But I mean the improvement is across the board, across the beverage business, from volume improvements and cost-outs. It's a variety of things. So it's a pretty strong operating quarter..

Yes. I mean, I think it's the only -- I'm with Scott. I don't think we parse it out the way you think about it, but you'll go segment-by-segment and you look at the margin improvement, I think we're up in every category, except the food and household for the reasons we've talked about before.

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

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

Are you still on track to accomplish that and can you sort of provide order of magnitude on what you think China operating earnings will up in '14?.

Well, we never really get into that. But I do think that we have some volume improvements. We have -- as I said, we have a little bit higher costs because the volumes have been so strong we've had to move cans all over the place.

And we also even have some currency headwinds with the volume improvements as well as the cost-out on the manufacturing side I think are more than offsetting certainly the -- some of those other headwinds..

Got it, John. Just last question. So your leverage ratios are moving lower even though you're not paying down that, given EBITDA's growing.

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

We look at it all the time in terms of how much stock we're going to buy back. The guidance I gave you on the call earlier of we expect to use most of the -- all that free cash flow to buy back stock and pay dividends. That's kind of where we are right now..

Our next question is a follow-up from the line of Mark Wilde with BMO Capital Markets..

Yes. I've got just few short ones. John, can you give us some sense of what kind of growth you're seeing in that craft beer business right now. I think you've got most of the can business in that market..

Yes. It continues to grow very strong, just a data point on that. The can as a share of the package mix in craft is now right around 10%, and that's a great testament to the work done largely by the business development folks. And so we continue to see very strong growth from the craft side.

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

There's been a number of craft brewers, they've been putting in new breweries in the Southeast region, and I think as we think about the capacity there, as well as them putting new can lines, and we're seeing good growth there..

Yes.

I mean what would guess your penetration would have been in that market 3 years ago, would it have been like 5% or even below that?.

Less. Less than 5%. I would be speculating, but I guess 2% to 3%. It's been growing strongly..

Yes. All right. So you're growing relative to the market.

The second one I had, just with kind of conflicts picking up globally, is there any impact in all of that for Ball Aerospace as you look forward over the next 3 or 4 years?.

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

When you think about -- the geopolitical environment is such that there is regional conflicts everywhere, and I think information and surveillance and reconnaissance around that is really important, and I think those are some of the strategic opportunities we may have in front of us..

Okay.

About half of that business is defense, is that right?.

Approximately, yes..

Yes. Okay. And then the last one I had is just for Scott. I noticed that the repurchase activity this quarter was the lowest that we've seen since the second quarter of 2010.

I just wondered whether we should read anything into that?.

No. I actually didn't know that. But -- usually, we try to buy -- I mean, frankly, we buy pretty heavy in the first quarter of the year. In the second quarter, we probably have more moderate pace, so you shouldn't read anything into that..

Our next question is a follow-up from the line of George Staphos with Bank of America Merrill Lynch..

I wanted to pick up on one of the question I think Chris had started in. And you've teed up given your comments on Asia and China in particular.

So if you have a market that is, well, if you have a customer base and a supply chain of your own that's sold out, and we have acknowledged in the past you've discussed the fact that prices had nothing where you would have liked them to be. And you're still making economic profit when prices aren't where you like them to be.

You're suggesting that the next move should be potentially to add a can plant in China, and I was wondering how you, if that wound up being the eventuality, how you would be able to preserve or turn to a contract where certainly in the last few years because of market factors, not your own, it's been less good of a market than you would've liked.

So differently, given your sold-out position, want opportunity you have to have instead of growing capacity, but rather using your sold-out position to optimize your customer mix?.

Yes. And, George, those are all fair points. The way we kind of think about it is, #1, China is such a large country. And so you have to look at the regional differences. So that's point 1. Pricing has come down, and as Scott mentioned it has stabilized.

Point 3 is our folks over the last 2 years have done a very good job, focused intently on making sure we're low costs from an operating perspective and from a capital perspective. And so if we were to be thinking about capital going forward, I think it's on an optimized capital base at a much lower cost basis.

And the question is, at the current pricing, can you make economic returns with that? And if the answer is yes, then you consider it. If the answer is no, then it gets into how do you improve either 1 of those 3 further from where you are today. That's the way we think about it..

That's fair. And gets me to one of the other questions that I had. I mean relative to where the industry was back in the mid-1990s, the beverage can business had become actually very good business for a lot of reasons. You are currently earning a lot more economic profit, both as a company, as an industry, than had been the case, given our mix.

But that also brings a challenge because it attracts capital. So what do you believe to be, if you can't get into the number, that's a question about productivity. One of the ways you keep out that capacity is by always improving your own cost position.

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

Well, again, I think we've talked about this in the past. The way that we look at it is, let's just pick on China, there are a number of smaller, more regional ones that are publicly traded and you're able to go and look at their public financial statements and we're able to do that and compare them with ours.

And we see that scale matters in our business. And we see that we can bring the global perspective to issues at a regional level. And so if we're having some operational issues in a particular plant in China, it's not just the people in the plant that can deal with it, we can bring to bear some of our experts around the world to help them on that.

Some of the regional guys don't have that. So what that ultimately creates is a scale issue where we can see it in the financial statements that our returns and margins are better than some of the local regional guys..

That's fair. I'll drop that line for now. I guess the last question I had and I'll turn it over.

Realizing that this maybe isn't the most realistic scenario because you're going to win contracts and your backlog is going to get better, but assuming these contracts don't come in quite the way you'd expect, when would we begin to see your margins in aerospace begin to fade? Right now, it's very rich because of where you are in terms of the contract terms, the life of contracts and so on.

Would that be a third quarter or of fourth quarter event? Good luck in the quarter, feel better, Scott..

Thanks..

I don't think it's necessarily a step change function quarter-over-quarter, but I do think that we've been -- in the first half of this year, and you've seen it both the first and the second quarter, we've been doing very well as we've closed out some of these programs. I mentioned that we have the WorldView-3 launch coming up in a couple weeks.

We delivered that in the second quarter, and so that de-risked much of it and we were able to get some benefit there. I think as we go into the third quarter and fourth quarter, you should not expect as much of that as you saw in the first and second quarter.

And then when it comes to the rebuilding that backlog, whether it's fourth quarter this year, whether it's first quarter next year, it's not -- we don't necessarily think about it as a point in time. But there's a number of opportunities for chasing that are going to be awarded in that timeframe.

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

And I'm showing no further questions at this time..

Okay. Well, thank you, everyone. Enjoy the rest of the summer, and we look forward to speaking to you in October. Thanks..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line..