Ball Corporation (BALL) Earnings Call Transcript & Summary

Next up, following our beverage panel and beverage packaging panel is Ball Corporation. So it's a nice segue. I already introduced Dan Fisher to you. Thanks again, Dan, for your participation on the beverage panel. In the audience is obviously Ann Scott and Brendan Potthoff from Ball's wonderful Investor Relations effort. And joining us on the stage anew is Scott Morrison, Senior Vice President, Chief Financial Officer for Ball Corporation. Scott, you've been with the company since 2000. And obviously, Scott has been Chief Financial Officer since 2010. I can't believe it's rather like it is yesterday. But thank you, gentlemen, for being part of our panel.

I guess the first question I've had for company is, as you look back at last year and early this year to the extent you've already commented or feel willing to comment, what were the 1 or 2 biggest surprises? And it's not so much kind of a walk down memory lane, but what were the things you took away that will be learnings and things you will manage against and manage proactively to leverage going forward?

I would say the 1 surprise is that the -- Dan talked about this on the last panel. This tailwind from sustainability is definitely accelerating and accelerating probably at a faster pace than what we would have thought. And the conversations that we're having are broader and with companies that have never put their package in aluminum. So that's 1 surprise. There were some operational things that we weren't clicking on all cylinders, frankly, in North America. I think we've -- I think that's largely behind us. But everything else, it's been pretty good. And the growth in our aerospace business too, it continues to surprise to the upside in terms of what that means for the next several years. I don't know, Dan, do you want to add in?

Yes. I would say the growth in the sustainability tailwind, just to piggyback on that comment, and how it manifests in the operations is you're -- and I got a number of questions yesterday and even last night at dinner, how do you transition an operating team, a leadership team, 12,000 employees into a growth mindset basically over an 18- to 24-month period. And I think we fundamentally had to change planning paradigms, change the thought process that this is an increase to your cost center versus an investment. So a lot of those conversation internally may not have shown up on stakeholder calls, et cetera, but spent an awful lot of time just galvanizing the team and getting folks in the right headspace so we can step into these opportunities moving forward. And I probably underappreciated how much time and energy, maybe Scott and John felt the same, but we're spending a heck of a lot of time on that. And knowing that we're going to be bringing onboard thousands of new employees, how do we preserve -- we're in our 140th year at Ball, how do you preserve your culture and build on that moving forward? So a lot more time and attention on things like that as it relates to this transition into growth mode.

So one of the questions I've had for companies to start. Somebody who is new to Ball, doing some work on it, they see the stock price. It's obviously -- congratulations, it had a very, very nice performance over the last 12, 24 months. But what is it they're actually buying? So if you have -- what is the elevator pitch in terms of what people are buying in Ball right now looking at the next 5 years in your view?

So I think we've got the substrate that's going to win disproportionately. And with the innovation that we have, 40 different sizes that we can make, the footprints that we have, and then you have this tailwind of sustainability and package mix shift and the organic growth that will give us and this really has been -- this business, you look -- I mean, I've been around about 20 years, you look at any kind of cycle or any kind of thing that happens that looks disruptive, right now, coronavirus, those things tend to be, I mean, that's a minimizer, but they tend to be blips. And the business is incredibly sustainable, consistent, throws off cash, and has more organic growth than it had a few years ago. So I think that's what they're buying. And our aerospace business is growing faster than that used to grow. So I think that's what they're buying.

I was going to cover this a little bit later, but since you brought it up now, it's probably a good segue. You had mentioned and not to minimize things that have periodically come into the market that are blips. One of the things that I know you get frequently asked about, maybe it's a blip, maybe it's not, is new entrants and that sort of thing. What's your view on new entrants? How investors should see what would likely be some new entrants at some point? Because I've never seen it not happen in the market that's growing to have good returns, but how would you have us think about it, if a blip shows up?

No, I think you're exactly right, George. I think that is something that we -- you would expect to see. When you've got a growing market, we've got a business across the industry that earns pretty good returns on capital. And then you get more organic growth. I think it would be foolish to think that, that's -- it's not going to change in some way. We've dealt with new entrants in most of the markets that we're in. We've got new entrants in Europe versus a few years ago. We've got another entrant in South America versus a few years ago. So those are things that are going to happen. These are really regional markets. When you get down to it, you're shipping a lot of air, when you're shipping a can. And so you're trying to cover a big geography, it really has -- it can have a local or more regional impact. But even that because most of the customers that we're dealing with are national or globally, then it tends to be not as disruptive as what people think. And I think people tend to overreact to those kinds of things. Going back to the blip, people tend to overreact in the short term. But long term, it doesn't -- the market continues to grow. It doesn't change the long-term fundamentals at all.

Not all customers are created equal. It's not as if when a new entrant shows up, we didn't know about it nor did we have an opportunity to potentially do that same infrastructure build for them.

When you talk about the 8 billion units roughly of capacity that's coming on over the next couple of years. From what I remember, relatively little in terms of conversions, some of the things that we're talking about in the prior panel, perhaps water hits in a larger way. We'll see how that plays out or if it were anything else that would be kind of substrate conversion. A, could you give us a bit more color, what might be in your numbers or that figure for conversions? And what's the trying not to drink from the Kool-Aid from like the earlier panel discussion joke? If something really does hit, how -- what does that do in terms of your need to add capacity over kind of a reasonable period, say, 2, 3 years?

I Yes. Good question. I would say the starting point here is we are not serving the market, maybe just in product portfolio that's desiring cans today, probably North America to the tune in excess of 2 billion units. So some of it is just -- we need capacity. We're underserving existing customers and so is the balance of the industry. And then there's a couple of things that are fundamentally happening. We do have some contracts that we'll be stepping into with appreciable increases in volume because filling investments are increasing at a pretty significant rate. We have a major customer that's historically done 100% of their filling in Europe that's going to introduce filling capacity in Arizona, and that will be tethered to our Glendale facility. And they're growing at a very healthy clip and have for 30-plus years. And then lastly, what we've seen over the last 2 years, and we've commented on this publicly, is the number of new products that are being introduced in cans has increased from roughly 35% of all new products to north of 70%. And so we're in with virtually every customer in North America and every segment in every market, and we know what products are going to be launched, replacing some bets on which ones are going to win. But there are contracts to back those up. So we've got really good line of sight to 75% to 80% of the 8 billion, and to your earlier point, about still water. Really, nothing has been factored in for that, and nothing's been factored in from other traditional brands that haven't quite launched or made a substrate shift. I mean we know about things like the bubbly product took off from 1 large CSD participant. There's going to be a counter on the other side, if you could factor in some correlation, if there will be a share shift in stomach on that in the cans. So all of that kind of factors into that. But candidly, I wish we had that capacity today. It'd be interesting to see just how many cans we're shifting.

In 2 years, what odds would you -- what probabilities would you give us that away from beverages that there'll be something packaged in aluminum that we've never seen packaged in aluminum, that's a mainstream product? And if it's very little, maybe it's 3 to 5 years.

Yes. I think the biggest, and I commented on this in the last meeting, when you're fundamentally sitting down in front of really large CPG companies that haven't had any exposure to aluminum, and you tell them the facts really about recycled content and circularity and with the real CO2 footprint discussion, means very quickly if they're considering shifts from beverages into aluminum. They know that they have not just a couple of aisles within retail space. They've got -- but again, whether they're making shampoo bottles or anything else, yogurt cups. Anything that's made in plastic is a challenge for them, and they're getting pressure. And they'll throw things out, hey, can you do this? Can you do that? I think what we're laser-focused on right now is the opportunity here now is immense. And so what we're doing is trying to partition all of those inquiries, pushing them into a joint venture group, or venture group, letting them figure out whether or not that's something we want to pursue or not. But somebody will invest in it. Somebody will begin to put additional materials or other materials and other substrates into those aisles and categories. It will happen in the next 3 to 5 years, I'm certain.

Any questions in the audience around conversions, new product opportunities, that sort of thing. Yes. Question at the back.

I'm just curious from your customers' perspective, like some of these things that haven't been offered before in aluminum. Like, how do they view the -- or how would the cost difference play out in terms -- from their perspective?

Yes. From their perspective, very small. I mean you're talking pennies. The issue, though, to the retailer, it can be significant, and it's all about economies of scale. So if you're just talking about still water, I mean, it's the filler. It's the infrastructure, it's how big the network is, it's all the investments they're in. It's the shipping patterns. It's all of that can be somewhat prohibitive. We can sell the same product to one customer that wants to get in a particular space versus another one at the same price. And based on what their supply chain looks like, they may have to charge the retailer 20% more, 30% more than the other. So it's not the difference in the packaging. It's the difference in the supply chain and the economies of scale. And so that absolutely needs to be addressed.

Michael?

Can you use aluminum for health and medical devices at all?

I'm sorry.

So can you use aluminum for health and medical devices?

Sure. I mean for tubes and things like that, and -- you could. I mean that's not -- to Dan's point, we're laser-focused on what we're doing today with cups and can and bottles and other products like that, that are -- have been not traditionally put into -- I mean, they've been in other substrates. It's not something that's a focus. We're going to look at all those different categories and what those opportunities are, but that's not really the focus, but you could do that definitely.

Dan, Scott, one thing I wanted to talk about pursuing maybe the retail aisle theme. Obviously, you've launched the aluminum cup. To the extent that you could comment, what is the consumer testing? What is your customer reaction? Why is it propelling the investment that you're seeing or that you're going forward with? And one of the questions I've had, and I'd be interested in your thoughts, you go on a website, on Amazon, you can get a 100-pack, party-pack for plastic cups for whatever, $6, $12, somewhere in that range. My sense is the aluminum cup will be a lot larger than that. Is everyone going to be buying aluminum cups at retail from your advantage point? Or what's going to be the target market?

Yes. Well, we're -- good question. I mean, some of the -- we get an awful lot of questions, are you going after plastic, et cetera, et cetera? And the reality is when we -- we've been working on this for quite some time, but in earnest on a business case, probably 5, 6 years ago and really what catalyzed further investment was this burgeoning compostable cup market at a price point that made sense in theory that we could get to and we could compete with and compete against. And I think what we've stepped into is serendipitous, right, in terms of the -- candidly, in a lot of these venues, the elimination of plastic, and a lot of venues on university campuses, et cetera. And so all of that timing really promoted us going into music festivals and venues and getting some pretty quick feedback, marketing insights there. We're running this product off of a pilot line right now, so we don't even -- we're not fully operational, but a lot of the feedback right now that we're getting is, yes, I would pay a little bit more for aluminum by, I think, north of 60% of the folks that are following that. I think people are recognizing, it's a great way to introduce recycling back into the mindset and what aluminum can provide. So there are benefits, obviously, to other parts of our business. But what's been interesting to us, and we're getting back into the B2C business in a way that we haven't been in for decades. At the end of the day, the proprietors of the venues, et cetera, they are like, well, what's the experience for the end consumer? And if you guys have -- it's cold and it's light. So they think it's akin -- when you look at it, it's just akin to a YETI or something like that. Are they reusable, and it's like, no, it's incredibly light. And it's a better pick, it's a better experience for the consumer, right? So it's fundamentally beer right now in venues. And I think that has plenty of runway for us for the next year to 18 months as we ramp up operations in our own facility plant. But yes, plenty of inquiries, retailers, plenty of inquiries for food service. Much like the rest of our products, we talk to retailers. Some see it has incremental revenue, some will put it right alongside plastics, some will park it in a different part. And so depending on if they think it's a different revenue stream or they think it's going to cannibalize, then that's how they will look at price points, and then we'll play that from an EVA filter and do what's right for our shareholders.

Is there a need for and this isn't meant to suggest that you do, I'm just asking it from a curiosity standpoint, sort of thematic-based advertising and trying to further hit the consumer? I've talked about this a couple of times. I was looking back at old YouTubes back in the '80s. Alcoa had some ads they ran for the can, Alcoa Can't Wait. And there are people in wide ties and strange haircuts talking about how the can was fantastic, hit on all the sustainability themes that you're seeing Ball Corp talk about now. So people, they're gravitating to cans. But what about for cups or other things like that? Is there a need for that, or, hey, it's taken care of itself, has enough momentum, we don't need to spend money on advertising?

It does have a lot of momentum. And it is a B2C brand, and it does need a lifeline and some lifeblood for that. And just like we spent this morning, and depending on who you're talking to, CO2 arguments, all of that, misinformation, and kind of this gives us a vehicle to advertise behind to tell and promote the aluminum story. So that's I think hugely valuable. I think the other thing that we're seeing in early stages. And I think the Super Bowl and the brand recognition with one of our customers that does a tremendous job and is viewed very favorably in terms of their leadership in and around sustainability is they've now figured out a way to connect a brand to sustainability. And that is, at the end of the day, you can be the leader in all of the indexes and all the score cards you want to, but if you can't get the customer to pick up your brand because of the sustainable attributes, even if it's the package, then they're missing out. And I think as that connective tissue happens, as other folks use this to some of the venues, or actually selling branding rights on the cups, very quickly, you get away from a cost more than x, it's the closed-loop recyclability, the economics therein, the experience that the end consumer has. And then we're able to tie in all of that to the aluminum message.

Okay. Any questions around conversions, branding, sustainability, we're going to switch gears in a second to -- question at the back.

Just on the sustainability side, in order to invest in your own brand around as they share the sustainability of the ecosystem on the producing side, do you see yourself having to make investments in noncore areas, especially around the collection of recycled goods, et cetera, that might come with a lower rate of return and sacrifice that short run economic gains for that long run sustainability brand, et cetera?

I don't think we would do anything that would be -- at this point, that we see things that we're looking in, that would be akin to what you're saying would -- however, we use the EVA, EVA filter, we get paid on that. Our stock's directly correlated to that. Yes. I mean, we would -- if we really had to do something like that, and if we viewed it as an investment, I mean, I think everything is on the table to continue the momentum, but we would look at that as probably in conjunction with there's more volume to be had, et cetera, if we were to do something like that. So that's how we would look at an investment, we wouldn't look at it just in isolation and take a loss, if you will, or devalue the company. We would do it in an effort to promote aluminum. And I think that you make a very real point. In North America, in particular, with the failures of some of the MERC's and the recycling system in municipality, whether it's us or the taxpayer or who, I think, at some point, right, we're going to have to get serious about investing in that infrastructure, we would be more than happy to play a role, but we would do that in the event that we would best benefit from it.

I want to switch gears. This year is going to be another busy year in terms of Fort Worth and Rome and Glendale and the Northeast plant. Good year, last year, you commented it was a 75% operating efficiency. So of that list of projects and high-class issues to be concerned with what's -- if there is 1 or 2, what's the most important part of operationally of all getting it right this year? Is it just finishing up that good year, or what would you have us takeaway in terms of this '20 being a successful year?

Execution. I mean really just, all those things you mentioned are mostly in our control. It's hiring the workforce to be able to do it. It's hiring the engineers to be able to assist in this growth. So to me, it's really execution. It's less external factors. And I think Colin and his team are laser-focused on the things they need to do in each one of those projects to execute successfully. And you mentioned good year. It was probably about 6 months behind where we wanted it to be. It's right on schedule where we hoped it would be at this point. And so -- and I think we learned a lot in terms of introducing too much complexity in that business early on. And we won't make that mistake again. And so I think it's really just execution.

Scott, I'm sorry, I lost. You said you were about 6 months behind, but you're right on...

We had that. So it...

Yes. But now you are...

So it's true around '19. But at the end '19, we exited '19 kind of right where we hoped we would be.

Okay. There was a comment that came up on the beverage panel from one of the panelists around aluminum supply not being a supply chain operating risk factor. Do you worry much about that at this juncture? Or do you feel that you'll have enough can sheet over the next couple of years to keep up with your growth?

There's plenty of can sheet in the world. I think what has been challenging over the last couple of years, a lot of the excess capacity existed in China, and then not necessarily knowing from month-to-month, what's going to happen in terms of tariffs, et cetera, and how to manage that. But there are a number of incremental investments that could be made in a number of rolling mills here in North America that could easily allow us to keep all supply domestic and step into the next 3 to 4 years worth of growth without any significant investments. At some point, if this trajectory continues, and more importantly, if still water or to create a paradigm shift, we would likely need some more investment around the world. That would be the caveat I would put in.

Did you say need or lead?

We would -- we may need to do both.

Okay.

Yes.

But for the next few years, what gives you comfort that those investments in the rolling mills to make the sheet is actually going to happen other than the opportunity exists? Is that the feedback you're getting from your safe buyers?

Yes, they're small in nature, and there just needs to be a little bit more dedication to can sheet. There has been an awfully big swing into automotive over the last handful of years. And so I think what you're finding is a lot of rolling mills are figuring out. That's a little bit more volatile environment than they otherwise would have participated or thought to participate in, and the yields on production aren't quite what can sheet is. So I think they're starting to figure out cost to serve and all those elements. And that's triggering a little bit more investment. And I think new operators coming in to some of these mills, 1 in particular, down in the southeast. That mill was underinvested for a considerable amount of time. So they've got quite a bit of output that, I think, we can all benefit from.

And Dan, the topic of aluminum scrap, and ultimately, passing through that differential in contracts was a copy that came up, obviously, a few times on the last year's conference calls. How did you ultimately change that in your contracts looking forward to 2020, other than just saying, it is what it is, if you want a can?

Yes. But there was -- there, fundamentally, we had 1 or 2 contracts that were outliers. And those, we managed the float on the scrap. And that market got massively decoupled versus what it was for decades. And so 3 or 4 contracts, I think, in total. One that made up roughly 75% to 80% of that exposure has now been passed back and reset, so the customer owns the exposure. And then the other handful of minor will be addressed here over the next couple of years.

Any questions around operations, contracts, process. What can you do, and this suggest that you need to, maybe you don't. How do you make the next number of lines, can plants, perhaps even more forgiving for the world you're going to be in terms of complexity and demand than would have been otherwise the case?