John A. Hayes - Ball Corp. Daniel W. Fisher - Ball Corp. Scott C. Morrison - Ball Corp..

George Leon Staphos - Bank of America Merrill Lynch Adam Jesse Josephson - KeyBanc Capital Markets, Inc. Matthew T. Krueger - Robert W. Baird & Co., Inc. Tyler J. Langton - JPMorgan Securities LLC Brian Maguire - Goldman Sachs & Co. LLC Anthony Pettinari - Citigroup Global Markets, Inc.

Mark William Wilde - BMO Capital Markets (United States) Philip Ng - Jefferies LLC Debbie A. Jones - Deutsche Bank Securities, Inc. Chris D. Manuel - Wells Fargo Securities LLC C.A. Dillon, III - Vertical Research Partners LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Thursday, August 3, 2017.

I would now like to turn the conference over to John Hayes. Please go ahead, sir..

Thank you, Malika, and good morning, everyone. This is Ball Corporation's conference call regarding the company's second quarter 2017 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied.

Some factors that could cause the results or outcomes to differ are in the company's latest 10-K and in other company SEC filings as well as company news releases. If you don't already have our second quarter earnings release, it's available on our website at ball.com.

Information regarding descriptions of our segment reporting, year-to-date depreciation catch-up recorded in the second quarter that relates to the finalization of the fixed asset values associated with last year's beverage acquisition, and the use of non-GAAP financial measures may also be found in the notes section of today's earnings release.

The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Now, joining me on the call today is Scott Morrison, our Senior Vice President and Chief Financial Officer.

And also, we are welcoming Dan Fisher to our quarterly earnings calls. Dan assumed the role of Chief Operating Officer of our Global Beverage business late last year, and he's doing a fantastic job leading this.

Given where we are and where we are going, we thought it's important for you to hear from him on many of the activities that are occurring in this business. I'll provide some brief introductory remarks and comments on our food and aerosol segment. Dan will discuss the global beverage packaging performance. Scott will discuss key financial metrics.

And then I'll finish up with comments on our aerospace business and the outlook for the back half of 2017 and beyond. Our second quarter results from operations were right on top of our expectations despite challenging U.S. tinplate performance. Volumes in our U.S.

food can business declined low double digits in the quarter, and tinplate manufacturing inefficiencies led to lower absorption and redundant costs in the quarter related to the closure of our Weirton, West Virginia cutting and coating facility and contemporaneous startup of our new Canton, Ohio cutting and coating facility.

We're disappointed about the performance we experienced in this segment.

However, we believe the underperformance is behind us and expect each of the remaining quarters for our food and aerosol business to be up year over year due to the incremental progress we've seen at our Canton metal service center, improving manufacturing metrics, and the ramping up of new aluminum aerosol capacity in Europe and India to keep up with our customers' growth.

Supply and demand is very tight in the global aluminum aerosol business, and our team is living hand-to-mouth during the second quarter, lending support across regions to one another as they tried to keep pace with the expansion of our highly sustainable and lightweight ReAl product line.

Going forward, we will continue to generate cash from our tinplate operations and continue to invest in our growing global aerosol business. I'll let Dan Fisher review the global beverage can business in a moment.

However, one year into the largest acquisition in our company's history, we are seeing the growth in comparable EBITDA and free cash flow materialize in global beverage. Initial transformational actions are driving synergies and cash flow is on the rise.

We're not without our challenges, particularly in some of the more volatile regions in which we operate, but our three largest regions, North and Central America, Europe, and South America, are all on track, so far so good.

Combining the expected improvement in both food and aerosol and our continued progress in global beverage, and then layer on current and expected growth in our aerospace business over the next several years, and we remain confident in our team's ability to deliver on our commitments while behaving as owners to ensure the best long-term outcomes for our company.

With Dan, Jim Peterson, and Rob Strain at the helm of these businesses, we're in very good shape. To highlight some of the work being done during the second quarter, we further improved our G&A cost structure with the ramp down of the Charlotte, North Carolina, regional support center. We ceased beverage can production in Reidsville, North Carolina.

We negotiated with the Works Councils in Recklinghausen, Germany and ceased production of beverage cans and end in those facilities on July 31. We saw month-on-month improvement at our Canton, Ohio metal service center.

And our aerospace business cleared critical program milestones, hired more staff to service contracts that will ramp up through the second half of 2017, and stayed on time and on budget with facility expansions. Our multiyear value capture plans are on course.

And as previously mentioned, we expect to recognize $150 million of the expected synergies by the end of 2017. And balance sheet optimization programs are producing benefits equal to or better than our expectations.

Our plans for 2017 and beyond are right on track to capture planned cost savings and grow comparable EBITDA, cash flow, and EVA in all of our businesses. And with that, I'll turn it over to Dan..

Thanks, John. It's a real pleasure to join the earnings calls and have the opportunity to highlight all the very good work being executed by our global teams. I want to recognize Carlos Medeiros, who moved from our South America operations to replace me here in North and Central America, and Carlos Pires, who took over for Carlos in South America.

We have high expectations for both gentlemen and are excited to have them in these new roles. As John said, we're pleased with our second quarter results. Pro forma global beverage can volumes grew in the quarter.

The beverage can is winning in traditional and craft beer, sparkling water, energy drinks, teas and wine, and we're leveraging our industry leadership role to further position the can as the most sustainable package from an environmental, social, and economic perspective for our customers, consumers, and communities.

Our North America volumes grew just over 2%, largely driven by imported beer demand, growth in craft and sparkling water, and consumer demand for smaller sizes of their favorite traditional beverages.

And in South America, John and Scott mentioned on the first quarter call that the South America team was feeling much more constructive about the market, and it materialized. In the second quarter, our South America segment volume grew 4%, with Brazil being up in the low single digits and continued growth in other South American countries.

The European business saw growth of approximately 1%, which was in line with industry demand. Demand for sleek cans continued, and our ongoing plant construction in Spain is right on track. We still have much to work on in terms of improving the margins in the business, and it will take some time.

However, we have a variety of initiatives, both near and long term, we are executing on that will help bridge the gap between the business we acquired and our expectations for this segment over the next couple years.

The €40 million annualized cost savings from the recent Recklinghausen closures is a very good start, and we have a variety of other initiatives underway to make the business more competitive from a cost and flexibility perspective.

You may have noticed in the release financials that the contribution from our equity investments grew quarter over quarter. The acquired beverage can JVs in Guatemala, Panama, and South Korea, as well as our legacy Rocky Mountain Metal Container JV and our Vietnam investment all performed well in the quarter due to better volume and mix.

We are not without our challenges, including the political and economic unrest in Turkey and Egypt and the carbonation tax in Saudi Arabia that are hurting consumer demand in that region. In the second quarter, our China volumes were flat versus the market growing at roughly 6%.

With China's overcapacity situation, Ball has and will continue to exercise a disciplined approach.

Despite these regional challenges, the managers in these regions and the entire global beverage organization is executing at a very high level, and every division is on track to increase the EVA dollars being generated on the invested capital they have employed.

Our global beverage sales, engineering, innovation, manufacturing, and finance teams have a roadmap lined with initiatives to leverage our specialty portfolio to existing and new customers, foster best practice sharing and process improvement, and drive innovation while optimizing our plant networks and existing equipment.

In summary, our global beverage business posted strong results, and everyone is laser-focused on keeping this momentum going, meeting demand and effectively managing their invested capital base to drive EVA dollar growth.

We're right on track in the next wave of transformational work to ensure we are fit from a supply/demand, cost, and flexibility perspective we'll accelerate in the second half of 2017. Thank you again to all of our teams around the globe. With that, I'll turn it over to Scott..

Thanks, Dan, and welcome to the calls going forward.

Comparable second quarter 2017 earnings were $0.53, which includes expense of $0.04 for the 2017 first quarter catch-up and additional second quarter depreciation related to the finalization of the fair values and useful lives for the assets acquired in the Rexam acquisition versus last year's $0.52, which was right on top of our plan prior to the final acquisition accounting getting recorded.

To keep the update as simple as possible, I would add $11 million of depreciation per quarter and making the offsetting change to segment earnings with $8 million per quarter in Europe and $1 million each quarter in North America, South America, and other for EMEA.

Refer to Note 4 of the press release financials for further explanation and catch-up depreciation reconciliation as of June 30, 2017. Second quarter comparable diluted earnings per share reflect the benefit of last year's beverage can acquisition and solid operational performance in both beverage and aerospace.

These benefits were partially offset by higher interest expense and a higher share count. Details are provided in Note 2 of today's earnings release, and additional information will also be provided in our 10-Q.

Net debt ended the quarter at $7.1 billion, which is right on top of our plan and a decrease of $300 million since the end of the first quarter, due to strong operational performance and working capital management despite our normal seasonal working capital build. The debt will continue to come down as we move through the back half of the year.

At current FX rates and given our euro debt exposure, our year-end net debt will likely trend closer to $6.3 billion, but this will not impede our plan to return value to shareholders via share repurchases and dividends during the second half. As we think about the remainder of 2017, nearly all of our previously communicated goals remain intact.

We expect full-year 2017 comparable EBITDA in the range of $1.75 billion, free cash flow to be in excess of $850 million after spending in excess of $500 million of CapEx. Post-split, the full-year weighted average diluted shares outstanding for 2017 will be closer to 359 million shares excluding the impact and timing of any share repurchases.

Full-year 2017 interest expense will be in the range of $280 million. The full-year effective tax rate on comparable earnings will be in the range of 26%, and corporate undistributed will be in the range of $140 million for full-year 2017.

And as I mentioned earlier, year-end net debt could be at the higher end of the $6.2 billion to $6.3 billion range due to the strength of the euro. The cash is really showing up and we feel really good about where we are at midyear. With that, I'll turn it back to you, John..

Great. Thanks, Scott. Our aerospace business reported improved second quarter results, driven by solid contract performance and the continuing ramp-up on new contracts. The team cleared a couple of significant program milestones in some big programs during the quarter.

And even though the contracted backlog is down slightly, please don't read anything into that, as the U.S. government has not been making decisions on outstanding proposals as it continues to focus on other priorities and backfill open decision-making positions in the various defense and intelligence communities.

Our aerospace business is winning in the marketplace, and we'll see a nice step up in the segment earnings year over year during the second half. Now as we look forward, we are on track to achieve the financial benefits from the acquisition.

Our aerospace business is hiring people at a rapid clip to staff the work won to date, and our food and aerosol team has a mandate to attack costs and improve manufacturing efficiencies to the Ball standards that we expect.

As Scott mentioned, our 2017 comparable EBITDA and free cash flow goals are intact and will be driven by global beverage demand, synergies, and aggressively managing the balance sheet. By 2019, we continue to believe that we can generate $2 billion of comparable EBITDA and in excess of $1 billion of comparable free cash flow.

When we announced our intentions to acquire Rexam, we said that we would rapidly delever, capture synergies, spend necessary growth capital on high-returning projects, and then return our remaining free cash flow to our fellow shareholders through share repurchases and dividends, and that is exactly what we are doing.

And with that, Malika, we're ready for questions..

Thank you, sir. And our first question is from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead, your line is open..

Thank you. Hi, everyone. Good morning, thanks for taking my question and all the details. Congratulations on the progress. I guess I wanted to drill into the guidance a bit to see if there are any subtleties that we should be mindful of over the rest of the year.

So I think in the last investor conference, Scott, you said EBITDA would be $1.750 billion-plus. In this press release, it's in the range. And the 20% to 30% EPS growth target hasn't, I don't think, been explicitly mentioned.

I'm guessing issues in EMEA, food cans, and obviously the depreciation increase are some factors that are maybe weighing on the guidance. But if you could affirm that or correct anything that's wrong there, I'd appreciate it, and then I had a couple of follow-ons..

Yeah, no, George, I think you have it exactly right. If you look across the businesses and the performance, North and Central America, Europe, South America are all on track, as well as China and aerospace. Food is trailing our expectations, and EMEA is a more volatile region, and right now they're experiencing some tougher times.

Given that and the $90 million of additional depreciation and non-yield-related amortization, I think we'll be below that 20% to 30% EPS range that we gave, but above our long-term goals. And our focus has always been on driving cash and EVA dollars, and we're doing great on those fronts. So that's the story, I think you have it exactly..

All right, Scott.

And, Scott, just you said above the low end of the 20% to 30% goal, did I hear that correctly?.

No. I said below the 20% to 30%, but above our long-term range..

Got it..

Our long-term goal is that 10% to 15%..

Understood, thank you for that. And then, Dan, I guess welcome to the call as well, some questions for you, to the extent that you can comment.

Realizing EMEA is volatile and therefore by definition is going to be hard to project, are you seeing any change in trends early in the quarter that would suggest some improvement? And then to the degree that you've been working on this, how are you finding the company's ability to sell complexity and generate a return from selling the complexity to your customers, any willingness for them to use a more sophisticated and more complex packaging mix in the future?.

I would say, and I'll ask John to maybe comment on the second part of that.

But for EMEA in particular, in Saudi relative to the carbonation tax, we've seen different sorts of tax and different sorts of revenue grabs from governments in the past, and there's always a short-term inflection point until you can work through exactly that impact in terms of substrate mix, pack size, and supply chain or retail prices.

And there hasn't been – here we are, three, four weeks into the third quarter. I haven't seen significant change to what we experienced in June. Keep in mind that tax went into effect basically the first week of June, so it's still very early.

But historically, whether it's sugar taxes or anything along these lines, we see the demand profile come back in markets like the Middle East, where we like the long-term and mid-term trajectory..

Okay..

And, George, to answer your question about the customers and profit pools, I think that's where you're really going, yes, we continue to see our customers using our containers, particularly on the specialty side, to change the profit pool opportunities that they have in front of them.

And whether it's soft drink here in North America, whether it's beer both large and small in South America and even Europe, we continue to see that.

And we continue from a – from our position, we continue to try and push that because I think it's important that we're driving value and volume into our customers, because if we can help them with the price points that they have and improve their profitability, it's better for the can and it's better for Ball Corporation..

Okay, I will turn it over. Thanks very much..

And our next question is from the line of Adam Josephson with KeyBanc. Please go ahead, your line is open..

Hey, good morning. Thanks, everyone, just, Scott, one on the cash flow guidance. Obviously, you're getting better working capital.

Can you just talk about what exactly has improved along those lines, what your working capital expectation has changed by, and how sustainable whatever those improvements are?.

Sure, I think as we move through the year, it's been really fun to see the alignment and energy all of our teams have in getting after, whether it's managing inventories, payable terms, receivables. Having EVA as our primary financial metric is a powerful tool.

And if you get people aligned around that and what it means in the different levers you can pull, it's fun to see what our folks, whether it's treasury, sourcing, operations, legal, IT, all working together to drive the improvement.

So we're seeing it really across the board, and we're six months into this year and feel better about the cash flow that will show up this year..

Is there any particular bucket that you would focus on, receivables, payables, inventories?.

It really is, Adam, across the board and it's in different geographies and different opportunities. What's exciting to see is leaving no stone unturned. So I think we're going to see nice benefits this year, and more of that will flow into 2018 as well..

I think just to give you context, let's just focus on the inventory for a moment. The demand side of our business has been good in those three main regions. We have had, as Dan said, some volatility in some of the other regions.

But the ability to use our system as a network and the plant floor systems that we've talked about and being able to optimize the days on hand of not only raw coils, but also finished goods, and having better capability, being able to predict the demand profile of our customers, that all helps drive down inventories.

On the receivables, we've done some creative things with some of our customers to help drive the DSO down in there. And then on the payables side, we've been working with our suppliers too, so it really is all across the board..

Okay, thanks, and just a couple others, one on European beverage margins. If I add back the $16 million of additional depreciation, margins would still have been quite a bit lower than a year ago, appreciating that the asset mix has changed.

Were those margins ex the higher depreciation as you were expecting? And if so, why were they so much lower than last year?.

Yes, they are in line with expectation. I think we've commented on this. The business that we acquired had a different capability mix and in line with that is a different profitability mix. We're changing both the flexibility and the capabilities in Europe.

I think the first step was closure of a high-cost, basically obsolete capability footprint in Recklinghausen. So if you add that back to your first half run rate that we experienced this year, you're getting a lot closer to where we had been historical. And as I said in my comments, we're not done yet.

It just takes a little longer given Works Council constraints and things of this nature from a structural standpoint, but we're right in line with where we think..

Thanks, and one just on Brazil. Two of the biggest brewers were both down in the quarter, in one case high single digits, and then one of them said the beer market was down almost 3% in the quarter, yet the can makers and the bottle makers were all up in the quarter.

Can you help me understand why there might have been this disconnect between the packagers' volume and the brewers' volume in Brazil?.

Yes, the actual literage consumption for the brewers was down roughly 3% in the market. And so for us, again, we continue to experience the benefit from substrate penetration on can versus returnable glass.

And then depending on which customer you're looking at, they all had a different success story, as they always do from quarter to quarter, just depending on the promotional activity. So we benefited from mix and we benefited from the can and the penetration against returnable glass..

I'll just add on to that, but Dan raised a very good point because while overall literage was down, we've seen smaller pack sizes on the can go into Brazil at a higher rate than some of the larger sizes, so that's one thing. On the glass, obviously we're not in the glass business.

We shouldn't comment on it, but we do know that Dan had said that the can is up while the overall beer market was down..

Thanks a lot, John and Dan. I appreciate it..

Okay, thank you..

And our next question is from the line of Ghansham Panjabi with Robert W. Baird. Please go ahead, your line is open..

Hi, good morning. This is actually Matt Krueger sitting in for Ghansham.

How are you doing today?.

Good.

How are you?.

Good, good. I just wanted to ask. How does the recent weakening of the U.S.

dollar impact your EBITDA and free cash flow outlook for 2017 versus prior guidance? And then given the lowered EBITDA guidance for 2017, how does this change the timeline for your ability to deliver on the targeted $2 billion in EBITDA for 2019?.

Let me just jump out ahead of that and Scott can talk about the euro, but I want to be clear here. A year ago, when we gave out those ranges of free cash flow and EBITDA, we said that if things go our way and we get some tailwind that we're going to be at the upper part of that range.

And if we start to encounter some headwinds, we could be at the lower end of the range. We talked about the three largest regions, North and Central America, Europe, and South America, all doing well and on track, and aerospace as well.

Where we've been having our challenges, quite frankly, is on the food and aerosol side, where we are down year to date when we expected to be up, and that's not an immaterial amount. We expect it to get better, but we've got to get some giddy-up on the manufacturing side of that business.

And then on the EMEA side, Dan just talked about the 50% carbonation tax in Saudi Arabia. There has been a 40% increase in retail price points in Egypt because of the devaluation. Those are material headwinds to us. And despite that, we still think that we're going to be in the $1.175 billion range on EBITDA.

As it translates into cash, it gets down to, you have to look at interest expense and all those things that mutes some of the impact on the euro exchange and a lot of the working capital and just running our balance sheet much more efficiently with this combined organization. That's where we're getting the benefit there.

So with that, Scott, if you want to say anything more about the euro?.

No, those are the big drivers. The euro has a bit of a benefit from an operating earnings standpoint, but like John said, it's got negatives too in terms of leverage, interest expense, and other things.

So net-net, the business is pretty much in line with what we would expect absent some of the softness that we're seeing in a couple segments, and the performance we're generating is on track and cash flow is ahead..

And we expect to – the synergies plans are on track, and we expect to accelerate those plans in the second half, as we said in our earnings release..

Okay, that's understandable and very helpful.

And then given all the concern over the Brazilian economy's health, can you describe the South American intra-quarter trends by month for the second quarter? And then how has this region performed thus far during the third quarter?.

Typically we're not going to get into that. Quite candidly, I don't think it's helpful because every region has a level of volatility, and certainly South America does when you think about politically what's going on there. But what we've seen is steady progress despite economic and political difficulty down there.

As you know, the second quarter and even the third quarter are seasonally slow quarters. And I don't off the top of my head have month to month and I don't think it would be relevant anyway.

But the can, we wish it was stronger, quite honestly, but to be up a few percent in a seasonally slow quarter in a place where the economic and political discord continues, we'll take that. It's a little bit better than what we had anticipated six months ago..

Okay, that's helpful. That's it for me, thank you..

Thank you..

And our next question is from the line of Tyler Langton with JPMorgan. Please go ahead..

Good morning, thank you. I just had some questions on the closures. I guess I know you mentioned the €40 million for Recklinghausen. Could you just – I don't know if you've given updates for the savings from Reidsville and Charlotte. I think if you could, also just remind us in terms of when the savings from those closures should start to show up..

Both of those facilities closed at the tail end of the second quarter. And as you said, the €40 million, that's been guidance given.

And at our Analyst Day in December, we commented that typically a closure in North America and/or Europe, if it's a reasonably sized can plant, it's in the $25 million to $35 million range, and it's going to be right in that range..

For Reidsville?.

Correct..

Okay.

And then for those three, in Q3 and beyond is when those savings should start to flow through?.

Usually it would be – because remember, Recklinghausen, for example, didn't stop producing until the end of July. And when you close a plant, there's always a couple months thereafter where you get some kind of cost tail, if you want to call it that.

So I would think about Reidsville will get a little bit in the third quarter, a little bit in the fourth quarter. Recklinghausen is probably more fourth quarter, but more importantly it's 2018 and beyond..

Okay, that's helpful. And then just South America, and I know the year-over-year comparables aren't great, but I guess margins are strong and equal to the seasonally stronger fourth quarter levels of a year ago.

So I don't know if you can comment on what's driving those margins and how you think about them, if they continue to improve as you go into the stronger second half..

We talked about this before. It's unfair to look at that because it's an apple and a pear, because we have a network now.

In the past, we only had several plants, and so the on-season versus off-season fluctuation in margins was greater because when you're spreading your G&A and your fixed costs over a smaller amount of plants, it just becomes more volatile. When you have a network of 13 plants all throughout South America, it becomes a little bit more consistent.

Obviously, we just lapped the 12 months of the acquisition, so I think as we go forward that will become more clear as you see looking forward..

Okay, great, and then just final question, Scott, just on the working capital. I think previously you said better than $100 million. I don't know if you have any updated forecast for that number..

It will be better than $100 million, and we think the total free cash flow will be better than $850 million..

All right, great. Thanks very much..

There are a bunch of other puts and takes. That's why I'm not giving you a specific answer..

Okay, thank you so much..

Thank you..

And our next question is from the line of Brian Maguire with Goldman Sachs. Please go ahead, your line is open..

Hey, good morning. Just following up on Tyler's question, I'm wondering if at this stage there are any other footprint optimizations that you're looking at or anything that we could expect going forward there as you look at these markets as they've evolved over the last year or so..

In December of last year, when we had our Investor Day, we did talk about that we have a multi-year program, Dan, to look at and optimizing our footprint from a cost and flexibility point of view, and none of that has changed. Dan talked about, even in Europe, Recklinghausen allows us to get more flexibility and take a high-cost plant out.

We think there are more opportunities like that going forward, and we've also said that our plans are going to be accelerating at this point in time as we go into the second half. And so conceptually, we're continuing to look at these things all the time..

Okay. And in the past, you've talked about getting back into the market in the share repurchase program as you get more of a line of sight to the leverage metrics that you're targeting.

I guess relative to last quarter's call, has that timing in your mind been pushed out or pulled forward, or is it still roughly the same?.

We always said, as we got better line of sight in the second half of the year, and we're in the second half of the year and I think we have better line of sight, so I would expect it right on plan with what we thought we were going to do before..

Okay, I appreciate it..

And our next question is from the line of Anthony Pettinari with Citi. Please go ahead, your line is open..

Good morning..

Good morning..

John, you talked about challenges in U.S. tinplate and the operational headwinds as you transition out of Weirton and start up Canton.

Is it possible to quantify how much of a hit those transition costs were in the quarter relative to your initial expectations?.

I'd hesitate a bit because then you play left pocket-right pocket, but what I can tell you is we expected the second quarter to be flat to up relative to year over year, and we were not. And the vast majority of that was related to cost inefficiencies..

Okay, okay. And then at the Analyst Day, you discussed commercial opportunities that could create value in excess of the synergies, and I'm just wondering.

In the time since the Analyst Day, as you've spoken with customers, how's the commercial opportunities playing out relative to your expectations? Are there are any early wins that you can point to in terms of packages that are gaining acceptance or a new offering, or is this maybe a little bit more of a longer-term process?.

Well, it definitely is a longer-term process. And recall at the Investor Day, what we talked about is – I mentioned even earlier on this call about profit pools and improving the profit pools. There's a wide variety of ways you can do that. Obviously, different can sizes, price, tighter call-offs, ordering call-offs with our customers.

There's a whole host of things. To answer to your question directly, is on the specialty side, back not six months ago I think we told the world that in North America we were making – and don't hold me to this – but approximately 25 different types of cans. We're at 30 now.

We're at 30 because we continue to see growth in the opportunities of really differentiating on behalf – for our customers and on behalf of our customers, I would tell you, so we're having some good success there. And the standard 12-ounce containers on a global basis, as you know, that's a very competitive spot where we compete with others.

We're trying to be leaders in that, but you also have to be realistic, and I think it's much more longer term. As contracts come up, we have to recognize the regional supply and demand and the regional competitive dynamics of that. But on the standard containers, it is more competitive.

But as I said on the specialty, we're seeing more and more opportunities. You just have to be a hunter for them..

Okay, that's helpful. I'll turn it over..

Thank you..

And our next question is from the line of Mark Wilde with BMO Capital Markets. Please go ahead, your line is open..

Good morning. Dan, I wondered if you could just talk a little bit about what you saw in the second quarter in terms of a seasonal pickup in Russia and the Nordic region. I think when you bought Rexam, you said that there was a more pronounced seasonal pattern there..

Yeah, we saw – and I think we commented in the first quarter, we were slightly down year over year, but it's not a robust quarter in terms of volume in terms of the seasonality. And we were about mid-single digits up in Russia in the second quarter, so right in line or a little bit ahead of where we thought. The business is performing well.

They're right on track, really no news to report there..

Okay. And then you really hinted at potentially more footprint adjustment in Europe. And I'm always conscious that in a lot of countries in Europe, things are not as flexible from a labor standpoint as maybe we have here in North America. And I wondered if you're seeing any challenges with that that are different than you might have expected..

The challenges are consistent with what we've experienced historically when we've done this. I think in my prepared comments, as the market leader, we're constantly looking at supply/demand balance how we have historically. We're looking at market opportunities because there are parts of Europe that continue to grow.

And we've made the comments on our investments in Spain, and we continue to see growth in areas like Russia and Central and Eastern Europe. So we'll continue to make sure that our footprint is fit for purpose to capture the growth and benefit our customers and attack those profit pools, as John mentioned.

And there may be changes to the footprint in order to get that..

Okay. And then the last question I had, there has been a lot of back-and-forth over the last couple of quarters whether we're seeing any signs of improvement in China, and I wondered if you could comment on that..

The short answer is there's no facts that we can point to that says there has been meaningful improvement in China in terms of the oversupply situation. I think anecdotally and from a tone perspective, it feels more constructive. But it's premature to declare any kind of victory there.

We do know that the can market continues to grow, particularly on the beer side, but you're also seeing more can penetration in alternative drinks, whether it's herbal teas or energy drinks, et cetera. We know that very little if any new capacity has been brought on stream, and so we've slowly been whittling away at that overcapacity.

As we look out several years, it's up to us to be able to try and push some of these new categories because that's going to create the incremental demand that will soak up the excess capacity.

So while nothing meaningful has changed as we see it here right now, I think our tone as we look out over the next three years feels a little bit better today than it did say six or nine months ago..

Okay, thanks..

And our next question is from the line of Phil Ng with Jefferies. Please go ahead, your line is open..

Hey, guys, a question for Scott. The free cash flow generation for this year is obviously looking pretty strong, and a big part of that sounds like it's working capital savings this year.

Do you view the upside of your finding in working capital this year more of a pull-forward from 2018, or are you just finding just a larger basket of opportunities over that three-year horizon you've talked about?.

I think it's probably a bit of both, Phil. I think we've gotten after a lot of different programs, and they're coming to fruition probably a little quicker than what we initially expected, but I think we're also finding broader pockets of opportunity to go after. So I don't think it's necessarily just stealing from 2018 into 2017.

I think the total pool will be bigger over time as well..

Okay, that's helpful.

And I guess on the food can business, did you see any increased competition, because it did seem like you walked away from a little business during the quarter? How should we think about your volume trajectory in the back half assuming a normal pack?.

It's a good question. No, we did not see any meaningful competitive pressure. Let me talk about the volume declines because I think it's important to parse out. There are really three fundamental things that led to the food can declines. Number one, there was some timing with some customers that I wouldn't read into too much.

We typically quarter to quarter have timing issues of this, and it actually was a headwind to us in this quarter, but we expect to make it up. Another one, we have a large customer experimenting with an alternative substrate. And it's premature to say if that's going good or bad and it's not for us to do that, but that really started to hit us.

It's not in the traditional fruit and vegetable categories that we talk about, so that was a hit. And I would expect certainly through the balance of this year that we're going to continue in that specific situation that volumes are going to be a bit soft as they experiment with this alternative substrate.

And then we have another large customer in the private label area that's been experiencing their own difficulties, which has been impactful.

So what I would tell you is, as we sit here right now, we've got a headwind in a couple of different things, one of them meaning the timing of it I would not worry about, but the other two that we are keeping our eye on. And we expect volumes to be down, but there is no competitive issue relative to other food can suppliers..

Got you. And then just from an operations standpoint, you certainly have some issues.

Do you expect to get back on track in the back half outside of volumes on the food business? And longer term, do you need to do more cost takeout, just given the fact that volume has been a little weaker than expected?.

Yes and yes, and what I mean by that is we were investing in new technology in our Canton, Ohio facility, and that was coming up at the same time that we were shutting down our Weirton, West Virginia facility.

And what happened was we ended up not coming up in Canton nearly as fast as we were expecting to or would have liked, and that created the redundant cost. That is largely behind us. And as I said in my prepared remarks, we expect the second half, the quarter-over-quarter improvement to start showing up on that.

In terms of your longer term, this is a business that structurally is not growing, and you have to recognize what it is and who you are. I mentioned that we're running that business for cash, and we continue to have opportunities to take out costs.

Let's not forget though, however, even though year to date we're down a little bit, we expect to be up quarter over quarter. The margins in that business are not terrible. It still generates returns in excess of our cost of capital. It doesn't generate returns at our 9% after-tax threshold, but we see a line of sight of being able to get to that.

And that's where the additional longer-term cost takeout will continue to occur..

Okay, that's helpful, and just the last one from me. In your press release, you guys alluded to investing to accelerate synergy capture in 2018 and beyond. Can you just expand a little bit on that? And any color on how we should think about seeing that flow through, is that more of a 2018 event or more of a 2019 event? Thanks..

I think it's a little bit of both, and I think it's premature to talk about that. I think if you go back and read the transcript of the call in its entirety, you'll get a sense of the various areas we're looking at. We talked about G&A. We talked about footprint. We talked about commercial.

We talked about plant floor systems and the operating side of it. So I think it's all – and we're right on track relative to what we thought. We knew it would take some time, particularly in Europe, as Dan alluded to, on certain initiatives. We knew it would take some time to transfer some of the G&A, and now we're focused on reducing that G&A.

And so all the plans that we talked about at this time last year are largely coming to fruition..

Okay, all right. Thanks, guys..

And our next question is from the line of Debbie Jones with Ball Corporation (sic) [Deutsche Bank]. Please go ahead, your line is open..

Hi, this is Debbie, and it's actually Deutsche Bank. I wonder if you'd just go back to Europe. I know it's been addressed a couple of times here. And you can put the numbers around the closure, but it seems to me like there's just a lot of opportunity from switching from the Rexam business model to the Ball business model.

Can you talk about, now you've had this for about a year, what are the main priorities or things that you need to get done beyond the right-sizing of the footprint that you think can be done?.

I think there we – keep in mind, in our legacy Ball European business, we made some investments to create capabilities in line with innovation and customer needs to help attack those profit pools, as John said. I think the historical Rexam business did less of that, and so that's what we're attempting to address in our footprint changes.

That's principally the biggest thing is to innovate and have capabilities that are fit for the market and the growth and profit pools..

The other things obviously we're working on is, as Dan said, from a cost perspective, the optimization of that manufacturing is the most important. But there's a bunch of surrounding G&A that remember back – Debbie, you'll remember this.

Back in 2013 plus or minus at Ball, we went through and we reorganized ourselves within Europe to go from a regional structure where we had four and five pools of G&A to a centralized that had one European G&A.

We are doing the same thing right now, and that affects all the back-office support things, and we have a shared center office that we've opened up in Belgrade, Serbia that we're going to be moving a lot of the transactional processing to that, and there's a whole host of other things. But Dan is right.

The most important is get the cost of goods sold line right.

Then also the other thing that we haven't talked about which is important the way we think about this is really leveraging the specialty and growing the specialty and creating those profit pools for our customers where we have much more of an emphasis on that than the business we acquired historically did..

Okay, thanks. That's helpful. And then my second and last question on Brazil – or LatAm, you've had this business now for a year. And I think it's been a little hard to determine over on this side the seasonality of that business given its reporting and has before.

So could you speak to how the production schedule shifts in the back half of the year? And then part of my conclusion when I look at that is that you should see a higher roll-through if you're getting the synergies in the back half just given that that is a bigger part of the season for you on an annual basis..

So it's similar to our previous business. I think we've commented previously publicly that it's a heavier weight to the second half, two-thirds/one-third. It might be closer to 60:40, but somewhere in that range. So you should expect higher volumes in the second half as the ramp up for peak season, and then the peak season really hits in Q4..

I think, Debbie, when you look at the seasonality, the business we have now is not different than the business we used to have. It's just bigger, and that's what Dan is alluding to..

Yes..

That's fair. Thank you, I'll turn it over..

All right. Thanks, Debbie..

And our next question is from the line of Chris Manuel with Wells Fargo. Please go ahead..

Folks, I'm sorry.

Can you hear me now?.

Yes, we can..

Thank you. So I hit the wrong mute button there. I wanted to just center around two things. First, when we think about – Scott, you answered earlier getting back into the repurchase element.

But my question is if we look at where your long-term targets are, $2 billion-ish of EBITDA should come as a run rate out of 2019, essentially you'll be at your leverage targets as you improve the business.

Do you feel like you want to reduce a little bit along the way, or can you essentially shift gears into repurchase mode from here on a go-forward basis?.

What we said originally was that we'll get line of sight to get our leverage down to 3.5 times. That's when we would start buying back stock. So I think you'll see – we've got more deleveraging to go this year, but we see line of sight to get down into that range by the end of the year, and there will be more cash flow and deleveraging next year.

but we'll be opportunistic about it. I saw this morning before I came in here, it looked like it was on sale, so stay tuned..

Chris, I'll just add onto that. Forget about the journal entries of all the accounting that goes around the acquisition. This is a great cash generative business, full stop. Nothing has changed by that, and it's very consistent in terms of its cash generation capability.

That's why a year ago we said with confidence that we are going to integrate these companies. We're going to drive the synergies. We're going to flow cash. And in the absence of good investments, and we've had some good investments and will continue to, we're going to give it back. Nothing has changed in that perspective. And we have a line of sight.

As Scott said, we said once we have a line of sight that you can look out over the next 12, 18, 24 months in terms of the cash generative nature of this and you see how quickly our leverage comes down..

I'd say the only thing that's changed, Chris, is we're a year into this and we feel more confident about where we're at and where we're going..

No, that's fair. Look, the concept isn't that – we understand that the EBITDA is growing and that's naturally deleveraging. I was just thinking you're trying to absolutely reduce the debt level or not, is really where I was going..

I think we'll have an absolute reduction in debt, but I think we'll also – like we've done in the past, because we generate so much cash, we're able to reinvest in our business for growth opportunities.

We're able to bump our dividend from time to time, and we're able to buy back our stock, and we see all those things holding true as we move forward..

That's helpful. Okay, so my follow-up question is around where you are seeing further growth opportunities. On a global basis, it feels like your bev business was up a couple points. You have taken out some capacity in a very targeted location.

Where are you at with utilization across other facilities? Have you been able to free up capacity as part of what you're doing with integrating the Ball systems and the Rexam systems, or do you still feel that you see some white space out there to add capacity similar to what you've done in say Mexico or other places – namely I'm thinking about spots perhaps in Europe or more in Southeast Asia or other places? So could you give us a sense of where you're still seeing targeted opportunities?.

Why don't I take that first? You really have to go around the globe. I'll let Dan talk about the opportunities in terms of geographies and where we see future demand growth that can help.

But we continue – as you all know, over the last decade here in North America, for example, we've actually been able to take much of our 12-ounce capacity and capability that was underutilized and convert it to specialty.

We're finding that the facilities we acquired, and we knew this, but it's a little bit more difficult to do it in the existing walls of the facilities we acquired. And so we are taking a fresh look, not only here in North America, but also in Europe as well.

That's why when Dan talked about Recklinghausen, it was old capacity that was very difficult to convert. That was one of the reasons why we did that. But you should rest assured that we're going to continue to invest because there is growth even in some of these "more mature" markets, that we're going to have opportunities.

Because whether it's sparkling waters, whether it's the teas here that continue to grow, energy drinks, even wine, as Dan alluded to, we continue to see good opportunities here in North America and in Europe and outside of that. Maybe, Dan, I'll turn it over to you and let you talk about geographic growth..

And so just to follow up on John's comments, when you hear us talk, you're hearing craft beer, you're hearing import beer, you're hearing wine, you're hearing seltzer water. You're talking about categories, so there's growth everywhere. And there will be investments in and around that from an innovations perspective everywhere.

But if you're going to talk about geographic and just overall market growth, Southeast Asia continues to be a very exciting place, a lot of growth there. We've been there. We continue to look at what's the right investment. Obviously, our Myanmar facility is coming online.

We've talked about and you've read recently the rebound in the economic situation in Spain. That looks to be a very attractive place for us. Eastern Europe continues to grow. There are other markets that are probably medium and long term that we're consistently evaluating, Africa, sub-continent Africa and other places.

What's the right time to get in, and with what customers? Our customers typically lead us into these markets if we don't push them there from an innovation standpoint. And then we've acquired a really big business, a very good business in South America, and the can continues to win in that market. So there are different aspects of the growth profile.

There's substrate penetration. There's overall market growth, then there's profit pool and segmentation growth. So any number of investment opportunities are in front of us. And we like the category. We like the beverage can in the foreseeable future, and it will present a lot of opportunity for us to continue to invest in and grow..

Okay, that's helpful. Thank you, guys..

Thank you..

And our next question is from the line of Chip Dillon with Vertical. Please go ahead. Your line is now open..

Yes, good morning, John and Scott..

And Dan..

My question has to do with how you guys might be thinking about the euro given its dramatic rise, especially in the last couple months or so. And I guess what you're suggesting is that maybe some of the headwinds you mentioned in a few of the segments might be offsetting any benefit you see there.

And then maybe also, Scott, you could talk a little bit about how the currency change may or may not be shifting what you expect from a working capital contribution this year..

The euro strengthening will help some. It's partially offsetting some of those negatives that we talked about, but it's not a huge impact. And if you look at it from an EPS standpoint, it's virtually no impact because of the debt that we have in Europe, the way we placed the debt.

So we actually have less volatility in our earnings per share now than we used to have before the transaction..

And even – I'll go a step further. Even if you think about our Russian business, that's fundamentally a dollar-denominated business, and so it's helpful on the margin. But it's also – you mentioned the steep rise over the last couple months. Who's to say it's not going to reverse itself in the near term as well? So there is some benefit to it.

We're not counting on perhaps where it is today, all that benefit showing up, and so there could be a little upside there, but the currency markets just have been very volatile recently..

Okay. And then secondly, John, you mentioned that there has been a little bit of chop in the backlog at aerospace, which up to now has certainly seen a pretty good last 12 months when we've looked at the backlog.

Do you feel or have you seen any change in tone with your obvious customers given some of the higher emphasis, at least from what I read in the papers, on defense spending?.

Well, number one, there has been no chop. What I said in my prepared remarks, just so we're clear, is we had $1.4 billion in backlog and it's off about $150 million or so just because we've been burning that down as we've been working on that work. We haven't been awarded new contracts just because of government priorities.

There's a number of senior staff level people that the positions haven't been filled yet, and so that has slowed down and pushed to the right the formal award winnings. But as I mentioned on previous calls, we have more opportunity in front of us than we've ever seen at Ball Corporation with our aerospace business.

Nothing fundamentally has changed with the customer, meaning the U.S. government, other than the decision-making in the government bowels, so to speak, has been a little bit slower than it has been in the past..

Okay, great. Thanks for that clarification..

Okay, thank you..

And our next question is a follow-up question from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead..

Thanks for taking my follow-on. First of all, if we think about the food can business, and recognizing it's obviously not the biggest piece of the Ball portfolio when you're running it for cash, it is still not earning your cost of capital. And, John, it has been a source of recurring – use the word you'd like.

The one that comes to mind is disappointment over not just a couple years, but several years. Is there a time at which maybe the strategy there needs to be rethought, or do you really see, A) a clear avenue to getting returns above cost of capital and a great existing fit with your aerosol business? So some thoughts on that would be helpful.

And then the second question I had, Scott, just in terms of corporate, I think you piggybacked or you were talking a little bit about this with Debbie's question. As you look at it, and on the one hand, costs are coming down, but some of those costs are coming out of the business units and being allocated back to corporate.

If you were in our seat trying to model that out for the next couple years, are there any guard rails you could give us relative to the $140 million this year? Should corporate come down next year, or does it stay relatively flat because it's basically inheriting costs that used to be at the business level? Thank you, guys, and good luck on the quarter..

George, let me hit the food business head on. First and foremost, you've got to play the cards that you're dealt. And this is a business that, as you said, let's put this in context. We could have great improvement in that and it doesn't really move the needle at Ball Corporation.

Having said that, we own it, and we've got to the best we can with it unless there is something left to do – something else to do. We think the best course as we sit here right now is to continue to drive out the costs and continue to run up the cash. We do see a line of sight getting to the 9% after tax.

But remember, that really has more to do with our compensation system, so we're well aligned on that. It's generating returns for our shareholders because it's generating returns in excess of our real cost to capital. We are always looking at our business about how to maximize it.

Recall that we've been in a variety of businesses, and we've gotten into businesses and we've gotten out of businesses. We just passionate about it, and it needs to perform. We do think there's a line of sight to getting there, and that's the strategy we're currently pursuing..

Thank you..

And on the corporate undistributed, George, what we're trying to do is drive down total SG&A costs across the company. So you're right, over time some of those costs could move from a business into corporate undistributed, but what we're looking at is the total cost to serve and total SG&A cost.

So I can't give you a real great line of sight to what that looks like over the next couple of years, but what we would hope is that we'd drive down the total SG&A cost..

All right, thank you very much..

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

Okay, great. Thank you, Malika, and thank you, everyone, for participating and we look forward to talking to you as we go forward..

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