Ball Corporation (BALL) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. I'm Debbie Jones, the paper and packaging analyst at Deutsche Bank. I want to thank you all for being here and thank John Hayes for participating with us today. John is the President and CEO of Ball Corporation, the largest metal beverage can packaging in the world. We are going to start, John, and have you do a bit of a walk around the world for Ball Corporation, and then the format is really going to go into a fireside chat. [Operator Instructions] So with that -- and John, again, thank you for being here. If you wouldn't mind, just kind of kicking off with a bit of a walk around the world for Ball, that would be great.

Yes. Thank you, Debbie, and it's good to be here. It's -- I was kind of reflecting on how to kind of start all this off, and I'll tell a quick story. Many of you who know Ball well know that over the last couple of years, we've had a pretty major refresh of our Board with a lot of new Board members. And so last October, October of 2019, we actually did a very deep dive in terms of the economic resiliency and durability of our company. And we went back as far back as the 1990s and looked at all the major various recessions, whether it was the financial crisis of '08, the aftermath of the World Trade bombing in 2001, the '98 credit-currency crisis throughout the world. And in every one of those times, it was quite interesting, it really showed the resilience that we had. Yes, we might experience a quarter or so of soft demand, but our cash flow would always remain strong. And I think it's very helpful for a Board, who is relatively new, to understanding really the drivers of our business to see that. Lo and behold, little did we know that 6 months later, we'd be living another one that will just add to the file as we go forward. But it's quite encouraging to see the resiliency and durability of our company. And so I'm going to quickly walk around the world. As you know, 80-plus percent of our business is a global beverage can business. Here in North America -- let me just take a step back, over the long term, and nothing, by the way, has changed in terms of our long-term prospects. In fact, as I talk here, hopefully you'll see this, if there's any risk, there's risk to the upside of it. This whole sustainability agenda, the whole new product development area, that continues to play a very important part. And with that as a backdrop, globally over the next few years, we expected, historically, our industry on a global basis had grown at kind of 2% to 3% rates, and we expect to double that at kind of the 4% to 6% rate. As we walk around the world here in North America, we were already at tight capacity. The market has been growing. In fact, in the first quarter, I think it was up, as an industry, 8%. We were not up nearly that much because we have -- we are -- we have been in short capacity. In fact, we're putting a lot of capital in and next month starts a new line in Fort Worth, Texas, followed by a new line in Rome, Georgia, followed by the end of the year, beginning of next year a new facility, a big facility in Glendale, Arizona and then a new facility in Northeast mid- to late the year next year. So we're putting in 6 billion to 8 billion new units. From a demand perspective, every can made is a can sold and in all the various categories. Because 80% of the cans produced and consumed in the United States are done off-premise, meaning at home, in your backyard, et cetera, and 20 -- and this is on the beer side, and 20% of it, of the beer, is consumed on-premise. All that on-premise has gone off-premise, and so it's provided a big lift for us. We are -- from an operational point of view, we are performing quite well, which I'm pleased to report. And so I think everything in North America is going very well. The only place that we saw softness, which is logical, was in the convenience channel, where people -- particularly during the month of April, when people were going in, typically, they'd go in before their shift. They buy a 16-ounce can of energy drink. And then after their shift was over, they go in and buy a 24-ounce beer, for example. We saw meaningful declines there, kind of 20% plus. We've seen it come back as we started to open up, which is good news. Down in South America, it's really a story of Brazil. Argentina and Chile and some of the surrounding countries continue to do very well. Brazil, when this first started at the end of March, we were off 60%. And the main reason was not because consumers didn't want to drink cans, it was because the channels through which they bought the cans were all closed. They were all shut down. Over 60% of all cans in Brazil are sold through very small, I think, corner grocery stores, little kiosks, little stores -- convenience stores that were all shut down. As that began to open up and as we had our conference call early May, we said we've seen a material improvement, but it's still down 10%, 20% on any given week or day. But we expected those trends to continue as it continue to open up. Despite the medical emergency that's remaining down in Brazil, those areas have opened up and we have seen the trends that we had anticipated, we see those coming through as well. Europe is kind of a mixture between the 2. And if you go to some of the more established countries where the can for the at-home market is quite prevalent, we've been doing very well. For example, in Germany and the U.K., where people still want to drink their beer and they just can't do it at the local pub, they're doing it at home. They're using the can. We're seeing very good strong growth there. When you see multipacks of soft drinks, you see the can doing well. Where we haven't done well is those areas where the can plays a more important part on the immediate consumption, places like the tourist areas in Southern Europe, whether it's Italy or Spain or Southern France. People are just not going on vacation yet. Now it's -- we're in a very important point in time because Europe is just starting to open up, and we'll see what happens there. But there definitely has been softness there and it's been a little bit more prolonged just because the lockdown of Europe has been a little bit more prolonged. So as we look out going forward, I think many of the trends we saw a month ago continue to improve. U.S. going very strongly. Mexico is opening up again. South America is improving. Europe is -- was strong in certain areas, but it continues to linger that softness in other areas. And until that opens up, we -- it's too early to predict. Our aerospace business, I'll also mention that, it continues to ramble along as well as can be expected. We continue to win work. We continue to bid on work. We continue to execute on the work, and we've said there's a long-cycle business we expect in excess of 15% top line growth over the next 3, 4 years. And obviously, with the deficits going on, people have question mark -- questions about how sustainable that is. We think it's actually more sustainable because we provide intelligence, surveillance and reconnaissance to our nation. And the single most important thing our government can do is protect our nation. And so we think that's going to remain a priority. So that's a quick summary of walk around the world. I'll just finish up by, you can't do this without the people and culture that we have. And we've had 20, 25 different cases of COVID within our facilities. None of our facilities have closed down as a result of COVID. We did take a precaution over a weekend with one of them. But as far as we know, none of the COVID cases received were directly related to people working at Ball Corporation, and that is a huge testament to the great work people have been doing about looking out for each other and making sure everyone is safe. And so with that, Debbie, I'll turn it over to you and happy to take questions.

Okay. Great. That was really helpful. I thought I would start by just asking you as someone who you can think as probably one of the most knowledgeable people about metal beverage can. Is there anything in this COVID environment that kind of surprised you around people's preferences, people's behavior around consumption and metal packaging?

No. Nothing has really surprised me, but it's really important to understand in times like this, where the can is used, where it's strong, where it's not. For example -- and where it's purchased and where it's not. For example that I mentioned, in Europe where Southern Europe makes complete sense when you -- if you -- anyone who's ever been there, know the majority of cans are bought by tourists when they go to a little kiosk or go to a little corner store and pop in and buy a can of their favorite beverage while they're at the beach or while they're visiting the various sites in Rome, for example. So that's not a surprise at all. I do -- the resiliency, as I touched -- started off by talking about, didn't surprise us at all. I was -- I must admit, like everyone, when this first happened in our Brazil business, it was so soft. It did give us pause to think about what's really going on. But again, when you realized it was really the channels through which our cans were sold, that was the bottleneck, and it wasn't the can itself. I'd make a strong argument today that our prospects are perhaps even better because in many of those areas where we've been in lockdown as a society, we have seen individually how much trash we collect at our homes and how we dispose of it and what we do with it. And the awareness level of sustainability has only increased through this time. And I -- just anecdotally, I can tell you that through various research and other thing, we see that people often ask, the sustainability kind of put to the side as a result of this. It not only is not put to the side, I think it's front and center related to what's going on in the world.

That's helpful. And you mentioned, I think, a couple of times, I think Brazil is an area that's been hit a bit harder. What do you have to think about in terms of managing such an aggressive contraction in the short-term and kind of minimize the impact?

Well, you have to have a conviction of what's going on in the markets. And we quickly realized that this wasn't a can issue. This was a channel issue. And so we were caught -- remember that down in South America, that we are entering their winter. So the seasons are inverted. And we were coming off a very strong "summer season" in the winter months from the Northern Hemisphere, and we were going in. So we used a lot of the downtime for maintenance and repair and for some other things that we typically do about this time anyway. And we had conviction and perseverance that this was going to be a short-term issue. We had contingency plans if it weren't. Fortunately, we did not have to execute on those, but we have just been able to manage it day by day and location by location.

We talk about kind of on the volume growth side of things, one thing that's been driving the business for some time has been specialty can growth. Can you talk about how that's performed in the current environment? And then just where you think that's going in terms of driving growth for the industry over the next couple of years? And is there any risk that, that gets commoditized?

Well, first, the question, what we've seen is the specialty growth continues to be strong around the world. It varies a little bit. Here in North America, certainly, it slowed down a little bit, but it's still growing. And it slowed down because the channels, as I talked about earlier, the convenience channel, it was -- it slowed down in there. Standard cans have actually been growing, but it's not been at the expensive specialty. I want to point that out. It's been incremental growth because as we've been at home more, then buying more 12 and 24 packs, that's provided additional growth to the standard can. But specialty, in our system, is about -- I forget the exact number, but it's in the kind of 46%, plus or minus. Down in South America, 100% of the growth is coming from specialty. If you go to Europe, the vast majority of the growth is coming in specialty. Even here in North America, you think about spiked seltzer and the amazing growth that they've had, that's all -- that's for the at-home channel, and that's all specialty growth. So we continue to expect that there's been no fundamental change, although the standard can here in North America has benefited from the stay-at-home rules. With respect to your question about will it be commoditized? We've done our own self disservice by talking about 2 products, standard and specialty. The reality is we make over 40 different sizes in North America alone. And there's a whole spectrum up there. And we -- in every major region, whether it's Pacific Northwest, the Southwest, the Rocky Mountain region, Texas region, the South, Florida, Mid-Atlantic, New England, Upper Midwest, Lower Midwest, we have the ability through our scale and our geographic footprint to be making all those very different -- varied different sizes in multiple regions. And so as a result, that is how we've been trying to build the moat because, look, at the end of the day, we're in a great industry with -- that's big, that's defensive, that has growth and, if done properly, can make good returns. Our job is to protect the Ball Corporation by using our footprint to create those opportunities that other people that don't have the footprint of Ball can't do.

Okay. That's helpful. And one of the things you are doing right now is, as you kind of ramp up some capacity and continue to add capacity for the next couple of years, one of the challenges for you is going to be training and bringing people up the learning curve. Can you talk about how you address that one in the current environment? And then -- and how you plan to kind of attract people going forward and make sure that these things happen, and maybe not seamlessly, but in a way that's going to work for Ball?

Yes. And this -- it's a great question. And it's largely a North American question because we built our facility in Arizona 18 months ago or so, maybe a couple of years now. And that was the first new greenfield we had in North America in I think 20 or 25 years. And so in some ways, we had kind of forgotten about the importance of training. While at the same time, we were building plants in other parts of the world. We've built a plant in Spain a year before, in Southeast Asia, down in South America. So my point in saying that is it reawoken us to the importance of training. And so we've told the world that we're going to have higher start-up costs this year because we're going to be upfront, we're going to be spending more, hiring people earlier and training them more. In today's COVID environment, it has posed a little bit of a challenge, but anyone who's been in one of our facilities knows that social distancing, we can do quite easily given the size of our facilities. So we've been doing some of that. We continue to do classroom training, although it's a bit different. We've been really trying to leverage the virtual training. We had been -- a couple of years ago, we started putting our shoulder into this as a result of the facility and the growing pains that we had experienced and now we're able to leverage it. So I wouldn't say we're necessarily "out of the woods." We have all these growth projects starting up. But I feel pretty good about where we are right now relative to where we were before. And the other thing we also learned through all that process was not to take for granted what a great place to work Ball is for people. We were competing at that time in 2017 and '18 for oil patch people that would pay candidly. We pay very good wages and we provide full health care insurance. We provide pensions. And in robust economic times, people go for a few extra dollars an hour but they forget about the long term. And I think times like this remind people, but at the same time, we have to remind ourselves that not everyone understands it. So we have to go above and beyond to remind people that through this whole corona pandemic, we haven't laid off a person. In fact, in the United States, we've hired over 400 people over the last 3 months since this pandemic occurs. So we are very defensive, stable, resilient and durable company that treats its people well.

I wanted to shift a bit towards the sustainability discussion. Can you talk about good discussions, frankly, that you're having with your customers around what their priorities are, not just for their packaging, but also the things that they kind of expect from a supplier from a sustainability perspective?

Well, we have our -- every couple of years, we put out an updated sustainability report and ours is going to be coming out at the end of June. And we've made tremendous progress on this journey, and we still have a long way to go, to be honest. But over the last few months during this COVID time, we announced we received ASI Certification for all of our European plants, which is awesome. We have game plans around doing it in the rest of the world. We received approval for our greenhouse gas emission targets related to the 1.5-degree Celsius target that the world has been focused on. So that's been great news as well. You're going to read a lot more about, in our sustainability report, about operationalizing, not just talking about sustainability, but about doing it. And we've recently as well, and it's currently undergoing final peer review, but we did an LCA study about us versus other substrates and the can performs as well, if not better than every other substrate in today's environment. And what I mean by that is people don't realize that we already have 70% recycled content in our products. Our challenge is to get it to 80%. You do that by focusing on recycling. And when you think about recycling, you get back to -- you look at those countries that do a very good job of recycling, and they focus on the collection side of it and they focus on the waste-handling side of it. I think in those that don't do well, you fall down in both those regions. And I think United States is a good example, where from a collection point of view, yes, we have curbside, but it's not consistent. It's not durable. It's not prevalent. And then for our increasingly on-the-go lifestyles, there is no collection there. And then when you get to the waste handling itself and you think about the thousands of municipal reclamation centers that, quite honestly, many of them are owned by municipalities where they're making choices and trade-offs between do they invest in recycling infrastructure versus providing first responder help. You know what the answer there is. And so we, I think, need a different point of view. And these types of things that not only our customers are asking us for, but more importantly, the consumer is asking us for. And that's why we're putting our shoulder into all these areas, and they are going to be fully -- more fully articulated and laid out in our sustainability report.

One thing I noticed when I read your last sustainability report was talking just about the environmental monitoring that your aerospace business does. And I kind of forgot that, that was something that you were part of that process. Can you talk about if there's been much of an increase in that side of the business with just this global focus on sustainability and what really that means?

Well, yes, we have over the -- by background, we for -- gosh, as long as aerospace has been around, we really focused on it. In fact, the origins of our aerospace business was really working with NASA, NOAA on everything from measure the height of oceans to ozone layers and everything in between. More recently, we continue to have projects come up. We're doing something right now on methane. Usually, when you're looking at and able to identify methane leaks, you can either do it in a very finite area or a very broad area, but not both. We've come up with technologies that can do both. We're working with the Environmental Defense Fund on a methane satellite that can monitor the amount of methane being emitted throughout the world. So there's a variety of things like that, that are going on. We did something more recently for South Korea to look at -- to monitor the pollution coming in from other parts of Asia. So I wouldn't necessarily say it's increasing because I'd say the infrastructure was already there. But I think the use of the data and the use of the tools is becoming more prevalent.

I wanted to just touch on a few other parts of your business that we didn't already. One is, if you could you give us an update on the aluminum cup growth and kind of what you're expecting there. There's been a little bit of a challenge with the COVID situation, but how should we think about that opportunity for Ball?

Yes. Actually, it's going great. So let me give a step back and give context. We developed this and we started making the first commercial cups out of a pilot lab about this time last year, maybe in this -- a couple of months later, but summer of 2019. And we only have production capability of making about 3 million cups a year. So from that time to the end of 2020, when we expect to have our new commercial line that can make upwards of 0.5 billion cups running, the whole plan was to take that limited capacity and create awareness, awareness, awareness. And we figured the greatest way to do that was through sports venue and high-profile sports venue. So if you live in anywhere west of the Mississippi, you know, Nebraska, Colorado is a very big football game. That's where we launched it. We had it at the Super Bowl. We had it at Waste Management Phoenix Open. This summer, we were going to have it at many other very high-profile events, both sports as well as music-wise to create awareness so that when we had the production capability, we could hit the ground running. The good news is the awareness has already been created. We've done numerous market research on this. In fact, even today, if you go to ball.com and scroll down and look for the cups and click on it, you can buy 5 cups online for $5 right now. And at one point, we had to turn off the capability just because we were overwhelmed with the sales at one point in time. And we didn't even promote that whatsoever. So we're quite pleased with that. The biggest difference that has happened in light of COVID is we've accelerated our retail game plan. By background, the addressable market in the United States, we believe, is about 15 billion units, of which 9 billion is in retail and then the other 6 billion is in food service, everything from sports and music venues, but also universities and also fast casual, not to McDonald's, so to speak, but the more Chipotle-type places. We wanted to get in there first but to create awareness because the real prize is the retail. And when I say retail, it's on one extreme, it's dealing with amazon.com as a fulfillment partner, on the other extreme, it's selling it to the small mom-and-pop grocery stores and drugstores, and then you have the big grocery chains, the big drug chains, you have the Walmarts of the world, Targets, you have Costco. And every one of those channels has different needs and different size pack configurations. We've taken the time to accelerate our go-to-market strategy on all these. We've hired more of the people with expertise in special -- specialties in these. And so we expect where -- prior to COVID, we expected the retail market for us to really launch and hit that hard in late 2021. It's probably going to be closer to early to mid-2021, while at the same time, when these venues do open, and at some point they will, the conversations we're having with them and have pivoted from, gee, why don't you try the aluminum cup to, gee, this is a great pivot point for you to replace all your plastic beverage packaging with infinitely recyclable aluminum. So, so far, so good. The plant is right on schedule to be up and running by the end of this year, beginning of next year. And our demand profile as we sit here today is perhaps even a little bit better than we had thought without COVID.

Well, thank you for the update. We talked a lot about beverage. So I just wanted to see if you could give us a quick update on the strategy of the aerosol business. I know you had some things going on -- a lot going on in beverage, but also some things going on in the aerosol business as well that are interesting.

Yes. No, it's a good question. And when you think about what we're trying to do from an aerosol perspective, we're trying to replicate the global franchise we've been able to help build on the beverage side because while the business is different, while the end markets are a little different, it's still a consumer product that is sold to big multinationals that have major brands that they roll out new products on a global basis. And so instead of the big soft drink companies, the big beer companies, you're dealing with the likes of the Procter & Gambles and the Unilevers and the L'Oréals, et cetera. When they roll out a new product, they're not just rolling it out in France or the United States, they're rolling it out globally. And so to have that global footprint, we're -- as you know, we're quite large in Europe. We have a presence here in North America through a Mexican operation. Actually, during this COVID crisis, we announced the acquisition, although we haven't closed on it yet, of a small facility down in Brazil. In addition to that, we have facility in India as well. So as you see, we're building out that global footprint. Sustainability in that end market is just as important as the beverage market. It's a bit different because in beverage, it's really driven -- the sustainability agenda is driven by consumers because they're touching beverage products every day and throwing them away every day. On the consumer goods side, the -- whether it's a shampoo bottle or a roll-on deodorant, you're throwing those away much less, but it doesn't mean it's not important. Many of our customers have their own sustainability goals. We're here to help support them on a global basis to do that. So the strategy around replicating what we've done in beverage to the aerosol is near and dear to our heart, and we're right in the midst of it. The overall demand profile in those businesses is very similar for different reasons, very similar to the beverage side. We've seen some strength in certain areas, some weakness in other areas. But overall, I think net-net, we're relatively flat year-to-date.

And so one I want to understand, if you could just kind of characterize the M&A environment globally in aerosol. And then how do you kind of balance that with the need, what it looks like, to continue to add capacity and spend capital globally, just given some of the growth rates that you've expressed for the beverage can?

Well, we're a big enough company, we can do both. I mean from an M&A perspective on the aluminum aerosol, the industry largely is many small private companies that exist out there. And so at any given time, I think the acquisition we announced is probably a representative sample size of the types of things we'd be looking at. Certainly, there's not -- those acquisition opportunities that are 10x that size. Those are few and far between. But from a -- I think your -- the other question, Debbie, you were asking, really actually is a broader one about capital allocation. And the way we view it is our job is to generate as much cash from operations as possible. That includes our earnings. That includes our working capital. Then what we do with that capital is the important question. You can acquire things. And I think that's a lower priority for us. So yes, you're going to worry to have some of the smaller ones. But in terms of big bets, we have more opportunities on our plate right now than I've ever seen in my 20-plus years at Ball Corporation. So I don't think we have a need -- feel a need to do anything on the M&A front. We have a tremendous amount of greenfield internal opportunities that you referred to. We've been spending a lot of capital on that. Our debt is in very good shape. We're at optimal debt levels. We have no maturities until 2022. Our bank agreement goes to 2024, so that's not a priority. And so what we're going to be doing, in large part, is maximizing the cash flow from our operations. We'll be investing it in these good return internal growth projects. And all the excess capital that we don't have, we're going to be giving it back to our shareholders. And once in a while, a small acquisition will pop up like it's doing this year. But that capital allocation strategy I just mentioned has been tried and true at Ball Corporation for 20 years, and there's no reason to change it.

Thank you for that update. I just want to tell everyone there's a -- the time for -- no questions in the queue. If anyone does have a question, please send it now. John, I'm going to ask you one more question, and actually very curious what the answer is. When you announced the acquisition of Rexam, if you kind of compare your vision of what the industry was going to look like today in 2020 to what it is now, kind of taking COVID apart, how does that compare?

It's a great question. When we started out, we said quite clearly that we have a once-in-a-lifetime opportunity to position the beverage can as the most sustainable package in the beverage world. We wanted every one of our activities to align with that vision. And so when you fast forward to today, the only surprise in my mind has actually been a surprise to the upside where back then, people, quite honestly, would mock us and say, that's a great vision, but there's no way you're going to be able to achieve it. Many of our customers doubted it as well but the consumer didn't doubt it. And so I think the growth we have seen is -- and certainly, over the last 18 months is -- surprised us even to the upside. And I think it surprised a lot of people the upside. Shame on us, we're racing ahead to get our capacity more in line with that new reality. But we think this is a decadal tailwind relative to what's going on because -- and you'll see more in our sustainability report, given that I said from a greenhouse gas perspective, the beverage can performs at or better any other substrate. And we have a long way to go on the recycling of it even though we do a good job, and the leverage inherent -- operational leverage in greenhouse gas, leverage of putting more recycled content in our project, our products, makes the beverage can even more sustainable. And the consumer today in this world in which we live in, and I think COVID exacerbates it, only proves that this is really important to the consumer.

Okay. Thank you for that answer. It's been a great conversation. Thank you for participating. Thank you, everyone else for listening. And John, I hope to see you again at our next conference. Have a good day, everyone.

Great. Thank you.