Ball Q2 2010 Earnings Call Transcript

Jul.30.10 | About: Ball Corporation (BLL)

Ball (NYSE:BLL)

Q2 2010 Earnings Call

July 29, 2010 11:00 am ET

Executives

Scott Morrison - Chief Financial Officer and Senior Vice President

R. Hoover - Executive Chairman and Chief Executive Officer

John Hayes - President, Chief Operating Officer and Director

Analysts

Peter Ruschmeier - Barclays Capital

Claudia Hueston - JP Morgan Chase & Co

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Albert Kabili - Macquarie Research

Alton Stump - Longbow Research LLC

Mark Wilde - Deutsche Bank AG

Richard Skidmore - Goldman Sachs Group Inc.

George Staphos

Christopher Manuel - KeyBanc Capital Markets Inc.

Chip Dillon - Crédit Suisse AG

Timothy Thein - Citigroup Inc

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Ball Corporation Second Quarter 2010 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Dave Hoover, Chief Executive Officer. You may go ahead, sir.

R. Hoover

Thank you, Franz, and good morning, everyone. This is Ball Corporation's conference call regarding the company's second quarter 2010 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 in the company's latest 10-Q and in other company SEC filings, as well as company news releases. And if you don't have our earnings release, it's available on our website, which is at ball.com. Information regarding the use of non-GAAP financial measures may also be found on our website.

Joining me on the call today is John Hayes, Ball's President, Chief Operating Officer; and Scott Morrison, Senior Vice President, Chief Financial Officer. In a moment, Scott's going to comment on our financial performance for the quarter and for 2010, and then John will follow details about our operating performance.

Ball reported strong second quarter results. Increasing volumes across our Packaging businesses, strong operating performance and positive contributions from the strategic actions we've been taking during the last couple of years led to our improved results. During the quarter we closed our acquisition of the JFP joint venture plan in China, and we announced our agreement to sell our Plastics business to Amcor for $280 million in cash. We also increased our authorization to repurchase up to 12 million shares.

Also in the quarter, Ball published its second corporate sustainability report, highlighting progress on our goals in five key areas of focus which are: Packaging, energy, water and waste, safety and talent management. You can read the report and expanded details on ball.com.

Earlier this week, we announced the acquisition of Neuman Aluminum, the largest North American manufacturer of metal discs that are made into extruded aluminum bottles and containers used for personal care and beverage products. Well, we're very pleased with our strengthening performance this year. And with that, I'll turn it over to Scott.

Scott Morrison

Thanks, Dave. Ball's comparable diluted earnings per share from continuing operations were $1.38, well ahead of last year's $1.14, a more than 20% improvement. Volume improvements in our Global Metal Packaging businesses, efficient plant operating performance and disciplined cost controls contributed to the improved results. These positive factors were offset somewhat by a higher interest cost, a higher effective tax rate. A weaker euro negatively impacted diluted earnings per share by $0.02 in the quarter and $0.06 year-to-date. At present rate, the FX headwinds are expected to increase in the second half of the year.

The Plastics business is now reflected under discontinued operations at our financial statements. The sale resulted in a charge of approximately $76 million in the second quarter. The bulk of this charge is related to goodwill impairment. 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.

Turning to some key financial metrics. Interest expense in the quarter was up as expected due to the acquisition financing from last year's purchase of the four metal beverage plants. And an extra month of interest expense from carrying both the new bond issued in March and the 2012 notes we redeemed into April. We still anticipate full year interest expense to be approximately $140 million.

Given the improvement seen to date in our North American packaging operations, we expect the full year tax rate to be around 33%. At current exchange rates, year end net debt is expected to be approximately $2.4 billion, essentially where we ended 2009, or on a comparable basis, we're down over $200 million due to the AR securitization being reflected on the balance sheet. Even without the cash flow, we would have historically generated in the second half of the year from our Plastics business, we expect free cash flow to be approximately $0.5 billion in 2010, excluding the impact of the AR securitization coming out of the balance sheet.

As stated in this morning's press release, and as a result of our strong free cash flow, we expect to repurchase an excess of $400 million of our stock during 2010. As of today's conference call, we have acquired $250 million of stock this year. Our balance sheet, liquidity and capital structure are where we want to be, so expect us to return a majority of our free cash flow through share repurchases absent other significant strategic opportunities.

With that, I'll turn it over to John to talk more about the operations.

John Hayes

Thanks, Scott. The optimism we felt heading into the busy summer season has materialized in the strong second quarter results. In our Metal Beverage Packaging Americas and Asia segment, profitability for the quarter exceeded our expectations with EBITDA of $114.5 million versus $74.8 million in the second quarter last year. This was driven largely by the impact of the acquired plants, excellent plant performance and strong volume trend in CSD [carbonated soft drink], certain specialty sizes and the emerging Craft Beer category.

Key U.S. retailers led significant promotional activity around the Memorial Day holiday, and that activity provided a volume lift relative to our expectations throughout the quarter. These promotions were in place for the Fourth of July holiday as well, but it appears that they have subsided somewhat. Best practice sharing and plant floor information system upgrades continue to drive efficiency gains in our plants. Our strong position in the specialty can arena and focus on innovation are providing opportunities for our customers to launch new products in the U.S., and our ability to respond to the growing needs of the Craft Brewing segment, all have contributed to improving volume trends.

In China, both the overall market, as well as Ball saw strong double-digit volume growth rates in the quarter. Herbal teas and beer demands continue to be the main catalyst behind the volume improvement. The newly acquired JFP plants will play a pivotal role in being able to supply the growing demand for beverage cans in Southern China. We have a variety of opportunities to improve this new facility without spending significant capital, and the payback will exceed Ball's hurdle rate by the year end 2011.

Double-digit volume growth continues in Brazil. We've had a very close relationships with established partners there for a long time, and the three plants in our joint venture are performing well. We continue to evaluate further growth opportunities in this region. But as always, we'll do it in conjunction with secured customer contracts.

In our European operations, trends are also positive. Results in the quarter were EBIT of $72.5 million versus $64.8 million in the second quarter last year, on volumes that were up mid-single digits percent. This was offset by lower export volume and a slight FX translation headwind, which Scott mentioned earlier. A rebound in specialty can demand also provided improved price cost mix for the quarter.

We mentioned in the news release encouraging signs in Germany for the return of the beverage can. Several significant discounters in Germany began relisting beverage cans in their outlets during the second quarter, which helped to increase the total industry can sales in that country by more than 30% year-to-date and more than 50% in the second quarter. Obviously, that is on a base smaller than what we would like, but it is another step forward and we continue to work with retailers and others to bring back this important market.

As in the Americas, Asia segment we expect earnings improvement albeit on a euro basis in 2010 in that segment. Our Food and Household Packaging Products segment continued to perform very well. Volumes in the food side of the business were up low- to mid-single digits in the quarter, with aerosol volumes experiencing mid- to high-single digits growth both for the industry as well as for Ball.

Second quarter year-over-year EBIT of $33.4 million versus $35.1 million was down slightly but against a difficult year-over-year comparison due to inventory holding gains recorded in the second quarter of 2009. The segment had another solid quarter due largely to excellent operating performance, product mix and the improved volume trends mentioned earlier.

While food volumes have also rebounded nicely, the fresh packed crops are behind schedule by a couple of weeks especially the tomato crop. That being said, the Food and Household segment is running ahead of expectations and all indications are that this segment will have another solid year in 2010. We'll just look for some cooperation from the weather as we head into the pack season.

Dave mentioned Neuman Aluminum. We acquired that business this week, and it is a great strategic addition to our Food and Household Packaging segment. Neuman supplies more than 90% of the aluminum discs, called slugs, used to make extruded aluminum bottles in North America. It brings us technology, an entry further up the supply chain into an adjacent market. Neuman isn't a big acquisition in terms of size but it fits well within our portfolio, and we intend to leverage its capabilities to help us grow this segment.

Aerospace segment second quarter earnings of $18.6 million were up from last year's $14.8 million on essentially flat revenue. Strong program performance on existing fixed priced programs made up most of the difference. As we have indicated throughout the year, recent contract wins will likely not have a big earnings impact in the second half of 2010, but they do firm up the backlog and set us up nicely going into 2011. Those glimmers of future contracts awards noted in the first quarter conference call are slowly starting to move forward through the process. So stay tuned as we progress through the year.

In summary, our plants are running very well, packaging volume trends continue to improve and numerous opportunities exist for us to prosecute prudently. We're in a strong position operationally as we head into the second half of the year and we will expect to see good momentum continue into 2011. Dave?

R. Hoover

Thank you, John, and thank you, Scott, for your comments as well. We're pleased with our performance so far this year and while we expect the positive momentum to continue, we recognize that the world economy still faces challenges. But so far, so good for Ball. We continue to seek opportunities for growth both organically and through acquisitions, rest assured that we're going to remain focused on maintaining our track record of disciplined, balanced capital deployment.

Last year, from continuing operations adjusted for the sale of the Plastics business, we made $3.92 for the full year. In the first half of this year, the comparable earnings were $2.25, a very strong performance. And we're going to do our best to meet or exceed the first half performance in the second half of 2010.

And with that, Franz, I believe we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of George Staphos, Bank of America Merrill Lynch.

George Staphos

I guess the question I had to start with, could you go back through what the volume growth was, if you can provide or if you have it, if you could give us some color for the United States or North American beverage and also in Europe. And then separately, for both regions, what types of operating rates do think you'll be at for the whole of 2010?

John Hayes

George, this is John. Why don't I try and tackle that. I think we mentioned on the first quarter call that -- I'll talk North American first, North American beverage. We ran our business as a system, and we've had volumes moving around within our newly acquired facilities and our existing facilities. So it's difficult to separate out. Having said that, we acquired relatively full-out plants from Metal Container nine months ago or so. If you take those out of the equation, our remaining plants were about down 3% or so for the quarter. But as we also said in the first quarter, as we go into 2010 and '11, in 2010 we stepped back in terms of some of our volumes over the last 18 months or so related primarily to the plant closures, remember Kent, Washington and Kansas City among others, and we're trying to be a bit more disciplined. Having said that, going into 2011, we expect to be up relative to the market as we rebalance our customer portfolio. Over in Europe, some of the trends that we saw, certainly in Western Europe continued. It was up high single digits, I think in the 8% or so range. Eastern Europe was a bit soft, I think the economy is not improving in Eastern Europe relative to Western Europe and there's a bit of a lag there. But overall, we were up mid-single digits. Our exports remain a bit soft but some of our bigger markets including the Netherlands and the U.K. were up quite nicely and there's been good weather in Europe in addition to the World Cup. So we feel relatively constructive as we go into the second half of the year, that the trends we saw in the second quarter will continue.

George Staphos

Would it be fair, John, that operating rates were more or less around the mid-90s in both regions?

John Hayes

Yes. As you know, the seasonality plays a factor in it but we were running hand to mouth in North America and Europe in the second quarter. And certainly, as we go into 2011, we expect it to be full out.

George Staphos

One, what opportunities are next perhaps for specialty can, either within traditional markets like CSD or perhaps even for Craft beers. And then one other concern at least that we've heard in the marketplace, is that given the high stepping-off point that's created by this year's retailer promotions that next year is up against much tougher comparison. It sounds like again that given some in the volume work you've been doing, you don't seem terribly concerned about that for 2011?

John Hayes

I don't think -- I'll tackle that last question first. I don't think we're terribly concerned, it's a bit premature to talk about 2011. But even with some of the promotional activities, let's remember that the overall can market is flat. So it's not like we've seen a big bump up relative to certainly last year's comps. And so as we go into 2011, I think the CSD and the beer people are looking at the value versus volume equation. We can tell you that the can had taken a little bit of share relative to other packaging substrates in some of those markets but I don't think any meaningful deviations have occurred. On the specialty side, we continue to see strong interest in a whole variety of different sizes. As you know, this year with the big CSD customer, we launched a 7.5-ounce container. We're seeing strong growth in some of the smaller sizes, as well as some of the larger sizes. Remember 2009, the larger sizes, largely on the energy drink side were impacted because of the housing downturn and the people were purchasing much less at the C-store [convenience store] level. We're seeing that starting to come back and so we continue to believe that our good position in the specialty side will continue to give us benefits as we go forward.

Operator

Our next question is from the line of Claudia Hueston, JP Morgan.

Claudia Hueston - JP Morgan Chase & Co

You've said the balance sheet is sort of where you want it to be, and obviously buybacks seem to be a priority. But could you just talk a little bit about where acquisitions fit and maybe just comment a little bit more on the motivation behind the Neuman acquisition.

R. Hoover

This is Dave. Acquisitions, as you know us, Claudia, and as you go back over many years, we've been able to find value, acquire it, integrate it, take on debt, pay down debt, buy stock and so forth. It's something we understand, know how to do. We are continuing to look for value-creating acquisitions. And as Scott mentioned in his comments, we think our leverage is certainly at a very comfortable level. So even though we said we're going to buy more than $400 million in stock this year, that certainly not going to be a hindrance to our being able to execute acquisitions. We're well-financed and in good shape, flowing a lot of cash.

John Hayes

On the Neuman Aluminum side, it's a very good business with technology that allows us to participate in this adjacent market. It does provide good opportunities to pursue the aluminum aerosol market, which you know we also do tin plate on the aluminum side, so there's a customer leverage point there. We acquired it on financial terms that are quite attractive and we're going to exceed our cost to capital in the first year. And also, it does play well into our initiatives around sustainability and recycling. So as we said, it wasn't a big acquisition and we paid approximately $60 million. But it does give us a lot of various options as we go forward to help grow our business in a part of the space that we understand quite well.

R. Hoover

Not only here but globally as well.

Claudia Hueston - JP Morgan Chase & Co

And then I was just hoping you could also just comment on Germany, and how we should think about sort of your ability to meet sort of the additional demand that seems to be coming online there?

John Hayes

This was very good news in the second quarter and as I said off of a very low base, it was still up 50%. There's a number of big-box retailers in Germany and the number three and number four retailers are the ones that have been listing, so that's good news. We'd love to see number one and number two but that's for tomorrow, not today. We believe as we look forward that we have the ability to optimize our system to provide growth in that market as we go forward. As you know, that's a very important market to us and we're going to make sure that we have the necessary capacity in place. I think you should not expect us to be spending capital in that region. We can do various speed ups and optimization projects, without adding a lot of capacity and get more out of the system. It varies by the seasonality of the business as well, but we feel quite confident that we'll be able to service that market as it continues to grow.

Operator

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

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

Given the World Cup, which I assume, at least somewhat impacted your European business favorably. Have you seen any sort of fade in Europe, post the World Cup, in terms of volumes?

John Hayes

Not really at all. As I said, in the first quarter of this year, Eastern Europe was strong. And in fact stronger than we expected, but that was off a very week comp in first quarter '09. Second quarter was soft a bit and all of our indications is more economically driven where the economies are not recovering as fast, and there's a bit of a delay relative to Western Europe. But that aside, yes, there probably was a bit of a bump. It was good to see the Netherlands in the finals and Spain in the finals as well. So there's probably a little bump but it's very difficult to quantify but the trends we saw in the second quarter continue into the third quarter.

Ghansham Panjabi - Robert W. Baird & Co. Incorporated

And just separately, one of your competitors in North America noted yesterday that they anticipate some share loss in '11, as part of contract renegotiations but they expect to recover that lost volume within three years. It seems like the entire industry is sort of moving volumes between each other, they somewhat diversified the customer mix, and that's helping to a certain extent. But is this some sort of new norm for the beverage can industry in your view? And more importantly, how do you manage your capacity footprint in the context of all these movements?

R. Hoover

From Ball's perspective, this was a bit of a deliberate activity over the past couple of years and we've talked about that in the past, certainly in the first quarter call. I think as we look forward over the next couple of years, most of our volumes are contracted under long-term contracts, so we believe that generally speaking, we're going to be entering into a period of relative volume stability, where over the past couple of years hasn't been as stable as it historically have been for Ball.

Operator

Our next question is from the line of Chris Manuel, Keybanc Capital Markets.

Christopher Manuel - KeyBanc Capital Markets Inc.

First, if we could ask a little bit about Neuman Aluminum. Could you give us maybe a little more color there? I'm sure it's probably going to show up in the Q in the next few days, but maybe how much you paid for the acquisition? Do you have any intentions through time? I know you just mentioned getting into the aluminum aerosol markets, but your -- I think this just makes slugs, if memory serves. Is there the ability to actually make some cans or bottles as well, or kind of what your plan is there?

R. Hoover

John just mentioned that we paid about $60 million for the acquisition. It does not have capacity to manufacture cans but it is a supplier to the people who do, and it was described as adjacent in the supply chain to that. I think it's fair to say that our long-term interest is in that part of the business, not only here but around the world. We just feel it's a good fit and place that we have a strong interest in. And we'll be prosecuting that interest but we haven't made any decisions yet to do anything, but certainly you shouldn't be surprised if we do. John, would you add anything to that?

John Hayes

I think that's a good summary. The long-term intent wasn't necessarily just to get in the slug business. It's probably something more. And as we develop those plans, people will probably hear about them.

Christopher Manuel - KeyBanc Capital Markets Inc.

The second question I had was, as you look at the beer market, I think you mentioned particularly being a little bit weak in Eastern Europe. As we look at some of the other substrates, they're down notably more than what you're citing as a little bit of softness, it's a lot more than just soft. Is there anything going on potentially from a substrate perspective of shifts between, say, cans to glass to plastic, et cetera, that's favoring the bev [beverage] can today?

John Hayes

I think not only in Eastern Europe but in many parts of the world, we have seen over the past 12 to 18 months shifts in packaging materials that have been favoring the can. We've seen it in Asia, we've seen it in South America, we've seen a touch of it here in North America. And again in Europe, as you said so. I don't think it's just unique to one area. But the can has been gaining shares because I think people are recognizing that it's one of the best packages in the supply chain from a value and sustainability perspective.

Operator

Our next question is from the line of Chip Dillon from Crédit Suisse.

Chip Dillon - Crédit Suisse AG

Could you first, just so we don't overcount the sales, you mentioned in the press release Neuman sales. But I would imagine some of those sales are already going to Ball, can you give us some idea of what that is?

R. Hoover

None of the sales go to Ball. And I think we said in the press release, annual sales the last time measured were about $128 million.

Chip Dillon - Crédit Suisse AG

Secondly, when you sort of stepped back and look at 2011, 2012, I mean obviously, this year has been more about assimilating Metal Container and you just increase your presence in the Chinese joint venture. Are you thinking more proactively about adding new lines as one of your competitors has kind of done, I guess, on an accelerated basis the last couple of years? And do you think it will be more likely we'd see activity in both China and Brazil or maybe you would favor one market over the other?

R. Hoover

I think you are seeing activity in both those markets from us. In Brazil, we opened a new plant the first of the year, we're installing a second line in that plant and are adding as we contract for business, long-term contract for business capacity. The new plant has room for at least one more line and there may be other possibilities. And in China, I think that market, particularly driven by the beer and the tea business, affords us continuing opportunity. We've been in China since 1985. And we've got a large market share there and certainly intend to continue to prosecute it. We also would look elsewhere in Asia if the opportunity will arrive, we can contract and if we can make a good return. So I don't think we favor one place over another, what we really look for is the opportunity.

Chip Dillon - Crédit Suisse AG

I think lastly, when you look at the Aerospace segment, which we don't focus on, I guess, enough on sometimes. You mentioned though that some of the recent contracts, and how that could actually help 2011. Is it too early to give us an idea as to how you could sort of see these contracts kind of phase in? Maybe when we look at year-over-year EBIT comparisons next year. Is it like more back end loaded or spread the improvement over the year?

John Hayes

It really is too early to comment. As we said, we have a variety of proposals out. We always expected -- come the third quarter that's when the rubber would be meet the road. And we're at that point right now and we feel constructive about some of them. Some of them have been pushed out to the right because of because the government's decision-making process, I'll call it. But it is premature to talk about, it's quarter-by-quarter certainly in 2011.

Chip Dillon - Crédit Suisse AG

And then lastly in Germany, you all talked about improvement there, how kind of far -- is zero a sort of a bottom and 100 was sort of where you were before the change in the deposit laws over there, how far back up has it recovered? And do you think you can get all the way back eventually?

R. Hoover

Let me put it this way. Back before the deposit, it was about a 7.5 billion to 8 billion can market, of which about 1 billion were exported out of Germany. So call it 6.5 billion, 7 billion of consumed in the country. It got down to low of a couple hundred million units afterwards. And it wasn't -- but two or three years ago, that was still only about 500 million for the year that were consumed in Germany. Through the first six months of this year, it's 500 million. So over the past couple of years, we've effectively doubled what it is. And so the future will be what the future is, but we're feeling a lot more constructive today than we have in the past relative to cans getting back on the shelves in Germany.

Operator

Our next question is from the line of Rick Skidmore from Goldman Sachs.

Richard Skidmore - Goldman Sachs Group Inc.

Just maybe a question for Scott, specifically, since the end of the second quarter, I think you said you had repurchased 250 million year-to-date of shares versus, I think, what was 140 million in the cash flow statement, so you've repurchased 110 million in the third quarter so far. Just wanted to verify that? And then what's your share count as of today?

Scott Morrison

Since the end of the quarter, we have repurchased another 110 million. That's how I got to the 250 million, year-to-date. And we plan to continue that, the purchases to get us to at least 400 million for the year. The share count as of year-to-date, I'll come back to you on that. I don't have the exact number listed today.

Richard Skidmore - Goldman Sachs Group Inc.

While you look for that, maybe, how are you thinking about the term loan. I guess the $250 million term loan that's either due this year or next, are you thinking of repaying that with proceeds from the Plastic sale or terming that out again?

Scott Morrison

If you look at our free cash flow, we always said this year, we've got about $250 million of term loan payments this year that would come out of free cash flow. The rest of that free cash flow being used to repurchase shares, and then the bulk of the proceeds from the Plastic sale to use to repurchase shares. So we see that payment coming out of free cash flow. And shares outstanding, as of the end of the quarter, were 91.5 million.

Richard Skidmore - Goldman Sachs Group Inc.

One question for John. I think you mentioned in your comments that you've seen some, perhaps development with cans in the Craft Brews, just wondered if you could discuss that a little further. Are you seeing that accelerate, are you seeing some of the Craft Brews move away from glass into cans?

John Hayes

The answer to both of those question is yes, absolutely. I don't have the exact numbers on, but the growth of the can in the Craft segment is quite strong. There's over 2,000 Craft brewers in America, but you're seeing a lot of the big ones to start to go in. Here in Colorado, there's New Belgium, there's Oskar Blues, that have really been pushing it strongly. We continue to see those trends improve, and in fact, several major publications over the last six months, there has been a various articles about the resurgence of cans as a premium package in the Craft Brewing segment. So I think all that chatter we hear from our various customers and new potential customers is bullish relative to Craft Beer going into cans.

Richard Skidmore - Goldman Sachs Group Inc.

As you see the discussion around the Craft Brews are some of the more national premium beers, having discussions with you with regards to moving some of their volume into cans?

John Hayes

We don't comment necessarily on specific customer types of things, but as an industry, generally speaking, the Craft Brewing Industry does have interest in cans.

Operator

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

Mark Wilde - Deutsche Bank AG

I wondered if you can just walk us through the impact of tin prices going up. I know there's not a lot of tin in tinplate, but if you could talk to us about the implications of those higher prices for both tinplate, and then the competitiveness of your packaging?

John Hayes

As you pointed out, tin is a small part of the overall tinplate. When we talk with our suppliers around the price of tinplate steel, we talk about the price as tinplate steel, not about necessarily the varied components of it. There is a level of -- the cost inputs play an important factor in that. But it's also about the supply and demand of steel generally speaking. So to summarize, we don't specifically talk about the cost of the tin going into tinplate.

Mark Wilde - Deutsche Bank AG

So based on what we've seen so far in the tin market, recently, you wouldn't expect that, that's going to be a real plus push element on tinplate. Is that correct?

John Hayes

Everyone faces cost going up and going down. And so the only thing I can comment is we buy tinplate, our discussions are around the cost of tinplate.

Mark Wilde - Deutsche Bank AG

As you're exiting the Plastic business, I wondered if you guys have any thoughts on sort of lessons learned from that business?

R. Hoover

We learned that if you invest money in places that don't make their return on the cost of capital, it's not as good if you do invest money in investments that's earn on their cost of capital.

Mark Wilde - Deutsche Bank AG

Just generally, Dave, I mean, any kind of things you walked away from and look at and say this is kind of a lesson we've learned as we grow in Packaging?

R. Hoover

No. I think a few things. I think about all that. We didn't get into it, thinking that we were going to perform as we have. The market has changed quite a bit over the last couple of years, and particularly on the CSD and water side, and as we look at in the future. So consolidation was an appropriate thing to have happened in the market. We did not believe that, where we were positioned, it makes sense for us to be the consolidator, and it's as simple as that. We had a great plants. We did make money and we flow a lot of cash out of that business over the years that we had it. But as we got to making the decision, I think, what happened for us is going to be very good as we look into the future, and what has happened for the person that bought this, the company that bought it, you've got help to them. Not that, that's our goal necessarily just to help our competitors or other companies, but it's a situation where we've got lots of good people in that business who worked really, really hard and the market just wasn't ever set up, so that we could earn. I think what you have to try to figure out is where you can have advantage in whatever you do. And in the kind of businesses that we're in, are slug it out, tough businesses. Cost is very important. You got to do everything as near perfectly as you can to satisfy customer need. But there's no doubt in my mind that we've got lots of opportunity now, particularly on the Metal side of the business all around the world. The things that we're looking at and the possibilities including organic growth, including acquisitions, and we're flowing lots of cash. The company's is in a wonderful shape. I can see it improving over the next few years, just from the hand that we're dealt right now. So borrowing some unforeseen events, this company is in good strong position, and that business just didn't fit our portfolio anymore.

Operator

Our next question is from the line of Tim Thein from Citigroup.

Timothy Thein - Citigroup Inc

Question on Europe. What was the growth rates of -- or what were the growth rates of specialty versus the conventional cans in the quarter and what is the composition of the total, i.e., how much is specialty now in Europe?

John Hayes

I don't have that rate in front of me, but if you define specialty as anything other than 33 centiliter or 50 centiliter, that's growing and growing at a rate to 2x to 3x the overall market. 50 centiliter is typically the beer package and 33 is the soft drink package. Beer has been a bit soft if you look at some of the results, the global brewers have put out, you can see it in there. So the 33 has performed well, but some of the other ones, 15 centiliter for soft drink has performed well, some of the larger sizes five, six, eight for energy drinks, things like that. And they've been growing at a rate faster than the 33 and 50's.

Timothy Thein - Citigroup Inc

Presumably then, if you look at the kind of EBIT improvement year-on-year, I'm guessing mix was a positive. What about, how was price cost if you just kind of look at it a year-on-year bridge? And you kind of rank it? You mentioned the FX headwind, but how would you kind of rank the other drivers?

John Hayes

Our folks has been doing a wonderful job in terms of cost optimization in our plants. We've seen a lot of very continued good improvement at the plant level. In terms of price, there wasn't a lot of price gains necessarily. So I think the majority of the gains and profitability had to do with volume and with cost improvements.

Timothy Thein - Citigroup Inc

And then switching to the U.S., you mentioned a lot of positive factors there, a lot of heavy promotional activity, bottle's talking more and more about changing the kind of the price park or the price park architecture. You can argue it's almost a countercyclical business. And despite all that, I think the industry, in general, if it grew 1%, it wasn't much more than that in the first half of the year. So as you look forward, I mean, is this going to be an industry that, kind of in the perpetuity is stuck at this 95 billion to 100 billion cans a year, and you just manage it accordingly? I know you wouldn't bill it as a, "growth industry." But I guess what gets this go -- where do you get growth going forward? And I'm just curious, again, how you would manage capital accordingly in that business?

Scott Morrison

I think in North America, as you're speaking, we don't view necessarily it as "growth market". You have to understand, you are who you are. We do think there's growth pockets. We talked about specialty, we talked Craft Brewing and we talked about the market share gains even in the Beer segment. CSD, some of the larger CSDs, customers are trying to figure out how to reinvigorate the growth. In fact, every one of them has specific plans in doing that. They're in the midst of implementing them. And as we go forward, who knows what it is but we also recognize it. Probably won't be a growth market in terms of the CSD side, but on the standard container. But on some of the specialty ones, we've seen growth in those segments offset some of the climbs we've seen in 12 ounce.

R. Hoover

I think as to how that causes us to allocate capital, you see us generating $500 million in free cash. Likely growth opportunities then in terms of where markets are growing, aren't right here. At the same time, we've got very good install base, a very good system. Our plants are very, very good. So when we do spend capital, it's to maintain the good positions that we have and/or one-off opportunities like the Alumi-Tek bottled can that we're manufacturing and/or the new small cans for soft drink. First on who we may commit capital for growth within a market, that overall, may not necessarily be growing. Remember, we've closed a number of facilities in this industry over the last decade or so, including a couple within the last two years. So I think what John said is you have to know who you are and where you are. We can make lots of money and pull lots of cash in a nice flat can market in North America. That's what I would tell you.

Operator

Our next question from the line of Alton Stump from Longbow Research.

Alton Stump - Longbow Research LLC

As we look at the market in Germany, if we were to see what's a couple of billion cans come back to that market over next 18, 24 months. I have a question, is there a capacity in place to respond to that? And if not, how quickly could you get capacity running up to respond to it?

R. Hoover

Let's not forget, we have our Lublin facility that we have not talked about turning back on stream. And that provides a lot of option value for us in that, and where we stand today is where we stood at the end of the first quarter. We've seen some growth in the market. Germany is quite helpful and it's been growing, but is it enough to turn on Lublin, right now? No, it's not enough. But we monitor that very closely, and we have plans in place that if the market does continue to grow quite strongly, that we can service the demand there.

Alton Stump - Longbow Research LLC

At this point, an idea of -- as we do look out within three to five years, how much of that loss 6.5 billion, 7 billion can market, do you think it can come back or it's too early to say?

R. Hoover

It's just too early to say. The can really hadn't been on the market in any meaningful way for approximately eight years. And so there is a bit of reeducation by the consumer. And because of that, it is just premature to predict anything.

Scott Morrison

But we like what's going on.

R. Hoover

Absolutely.

Operator

Our next question is from the line of Al Kabili from Macquarie.

Albert Kabili - Macquarie Research

I was wondering if you could clarify on Eastern Europe, specifically, what you saw, sort of, for beverage can volumes?

R. Hoover

Generally speaking, it was off mid to upper-single digits. It depends by country. I'm excluding Russia in this, although I think Russia was off about 8%, which is consisted with the rest of Eastern Europe. It really did. The weather wasn't as good there in Western Europe, but I wouldn't attribute it for that. It's just a function of the economies in that region we're on such a growth there. It came off very strong in the second half of '08 and '09, there's a lag relative to Western Europe, and I think we're just seeing that lag right now in terms of economic recovery.

Albert Kabili - Macquarie Research

In the latter part of the quarter or maybe recent trends, have you seen any pick up that is there? And if you could just comment generally about your volume trends throughout the quarter if there was any appreciable changes there?

John Hayes

No, there really were not any appreciable changes in volume trends through those, sequentially, through the quarter. I'm just trying to think by region. I can't think of anything on top of our head.

Albert Kabili - Macquarie Research

So Europe's still kind of trending down that mid- to upper-single digit, it sounds like?

John Hayes

Not Europe. That's just Eastern Europe...

Albert Kabili - Macquarie Research

I'm sorry, Eastern Europe.

John Hayes

Yes, Overall, Europe is up in mid-single digits.

Albert Kabili - Macquarie Research

And was there any appreciable difference between beer and soft drinks and can volumes that you noticed in Europe?

John Hayes

Nothing appreciable.

Albert Kabili - Macquarie Research

Switching to North America about cans, you mentioned promotional activity starting to taper off more recently, have you seen a corresponding slow down in your volumes as a result of that?

R. Hoover

A little bit, but this comes with ebs and flows. We've got the Labor Day weekend coming up in a month time. And with the chatter we hear in the industry that there may be promotions there again. And so it comes and goes, so I wouldn't read into it too much. The only thing that we can say is there was continual promotion from Memorial Day through 4th of July, and for the most part, it was discontinued after the 4th of July. But that doesn't it won't pick up again.

Albert Kabili - Macquarie Research

And then on food can volumes, I think you said mid- to high-single-digit growth, if I got that right, which would be quite a bit better than the overall industry. And I was wondering if you could comment on that and if you think that trend will be sustainable?

John Hayes

No, that is not correct. I think the overall industry was up 3% or 4% in the food cans, and we are consistent with that. Where we're up higher, and the industry was up higher, was on the Aerosol side. And that was in the 8%-plus-or-minus range of growth, not only for us but also for the industry where you saw a lot of destocking last year. People are starting to put things back in their garages and pantries.

Albert Kabili - Macquarie Research

And then as it relates to the earnings in the segment, it was quite a bit higher than I would have expected given the difficult comp. Was there anything out of the ordinary there that might helped earnings?

Scott Morrison

We had wonderful operational performance at the plants.

R. Hoover

The strong volume obviously helped too.

Operator

[Operator Instructions] Our next question is from the line of Peter Ruschmeier, Barclays Inc.

Peter Ruschmeier - Barclays Capital

On Germany, can you remind us Lublin. How much capacity is there if you decide to ramp up back up?

John Hayes

Lublin is in Poland, but we've never even started it up. But whatever it allowed us to do is service some of our Polish volume that's currently bringing serve out of Germany, we'd be able to do that. And given that we haven't started it up, as you all know, the first line you can get out of the blocks, probably 700 million cans and that would grow over time as you optimize that line, and then each incremental line is about the same.

Peter Ruschmeier - Barclays Capital

So would you consider putting more capital to work on the ground in Germany, John or Dave?

R. Hoover

I think what we do if it really start to take off, we'd optimize our system in terms of freight and other things, going across borders of between countries.

Peter Ruschmeier - Barclays Capital

And just to get this one question out the way, how do you think about new markets, India, other markets, do you put much emphasis on that or are you really happy with your current footprint in terms of growing?

R. Hoover

We're looking everywhere in the developing world. We've got strong positions in China and in Brazil, and they're both growing. But there are other parts of the world where there are lots of people and not many cans, and so we're looking all the time. We're also conscious of the fact that a building they-will-come strategy in this industry makes no sense. So if we go to some place new, we're going to have contracts at volumes over a long enough period of time that we believe we can get there and be solid. But we think over time, these economies are going to continue to keep growing. They're going to continue to create a stronger middle class that has more purchasing power. We're going to be following our customers, our good customers. I think from time to time, we're adding capacity on those markets.

Peter Ruschmeier - Barclays Capital

And then Dave, I was wondering if you could weigh in on the buyback again. I guess in the past, you certainly been willing to lever up at times for the right acquisition. And I guess, the question is the degree to which you consider levering up to buy your own shares rather than just using free cash flow? How do you think about the puts and takes?

R. Hoover

I have conversations with Scott Morrison about that all that time. No, I mean, seriously, what Scott said and where we are, we're telling a couple of things today. One is that we're looking all the time to buy things. But we're very disciplined about that, and we're going to selectively invest in our business and we're just good about that. But we're flowing enough cash in our balance sheet right now, and if there's anything we got a little less than that we need. So my judgment on this is we're just fine and that's why we're telling you, it's more 400 million this year. How much more? I don't know. But Scott could you tamper me a little bit?

Scott Morrison

No, I would agree. We're in a fortunate position. Our balance sheet is in great shape. Our capital structures is where we want it to be. So in these times in the past, we've already had the most net free cash flow to buying back stock until that next opportunity comes along. We've been able to buy things in the last year or so, and our cash flow has been so strong that our debt actually gone down. So we're in a good place, and we can be opportunistic.

R. Hoover

You've heard us say before if we get down to one share. I just hope I own it.

Peter Ruschmeier - Barclays Capital

Within your free cash flow guidance, Scott, can you comment on what you've incorporated for working capital for the second half of the year, I guess, normally it's a big source of cash, I would assume that, that's fair this year as well?

Scott Morrison

Actually last year was a use of cash. This year will be a slight source of cash for the full year.

Operator

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

George Staphos

In terms of specialty cans, realizing that last year there was some puts and takes. And obviously, there's some definitional problems in trying to quantify what the actual amount of volume by size, et cetera. What do you think your year-on-year changes out of year-to-date or in the quarter, especially cans, number one, both in the U.S. and Europe if you have that? And then are you out of capacity within your ability to produce for any of these markets, much need to put on some capacity for slim cans for example, if that products been doing very well?

John Hayes

George, my apologies in advance because I don't have the specific numbers in front us. But in North America, the specialty volumes have been growing approximately in the upper single digits if I remember it correctly. And yes, in terms of some of the sizes, we are bumping up against capacity constraints. And so what we've been doing as you know in the specialty side is typically, unless it's Alumi-Tek, as David mentioned earlier, we look to convert 12 ounce if that makes sense to do some of the smaller specialty sizes. And if there's real growth opportunities, we might look at doing something else if we need to. In Europe, I think, I mentioned it before, other than 33 and 50s, it has been growing more than 2x the overall growth. And it varies by country, and it varies by CSD versus beer, the CSD isn't growing a little bit faster than the beer has over, on specialty sizes, over in Europe. And so that's the key takeaways, I think.

George Staphos

John, I mean, one-time ago, there was something called spin flow which allowed, it never really worked well from what I can recall, but allowed you to change diameters on cans, at least, it supposed to happen on the fly, is there anything from a manufacturing standpoint where you could actually have a beverage can line that could swing pretty quickly between traditional 12 ounce and your standard if that is a -- I'm asking more on standard specialty can sizes?

Operator

[Operator Instructions] Mr. Hoover you're back into the call, you may proceed.

John Hayes

Actually the specialty can has been growing in both Europe and the U.S. at a rate, at least year-to-date, 3x the amount of that. And so we're seeing double-digit growth in North America, and a busy tired even in Europe.

George Staphos

When you bring on new lines and specialty, is there a way where the capacity can be structured so it really can swing between traditional 12 ounce and specialty sizes?

John Hayes

Yes.

George Staphos

You mentioned that you expect European EBIT will be up at least in euro terms, I guess, the implication is we could see depending on what happens on currency, flat to down European EBIT the second half is that what you're suggesting?

Scott Morrison

Yes. If you look at the currency last year, from May on, the euro really strengthened. And so unless that happens again, we have a fairly sizable headwind from a euro conversion standpoint. But we think were making more money in euros, which is the translation that's hurting us.

George Staphos

What do you think your normalize free cash flow is? Do you think that $500 million is a sustainable rate or is it more something around $400 million? And I realize it's difficult to forecast into the future like that, but what are your thoughts at this juncture?

Scott Morrison

We expect it to still be around $500 million as we look forward, and improving. We think our businesses have opportunities to improve the earnings going forward, and we don't see big changes as it relates to what our working capital needs are. John talked about some opportunities and specialty in new geographies that might pop up our CapEx overtime, but not meaningfully.

John Hayes

I think, we think the earnings improvement in the business will be able to help fund any incremental capital?

Operator

Speakers there are no further questions at this time, you may resume with your presentation or closing remarks.

R. Hoover

Thank you, Franz, very much and thanks for calling us back. But thanks to all of you to signing in for the conference call. We look forward to speaking with you after the third quarter.

Operator

Thank you, ladies and gentlemen. This does concludes the conference call for today. We thank you all for your participation, and kindly ask that you please disconnect your lines. Have a great day everyone.

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