Ball Corporation (BALL) Earnings Call Transcript & Summary

We'll go ahead and get started. For those of you who I haven't met, my name is Mike Leithead, I cover Packaging and Chemicals here. We're really pleased to have Ball Corporation. We have Dan Fisher, Ball's President and CEO Elect. Dan has been with Ball in a number of growing leadership role since 2010. And Scott Morrison, Ball Executive Vice President and Chief Financial Officer; and Scott has been with Ball since 2000. So great to have you guys back in-person at this conference.

I guess maybe to start off, Ball obviously reported a pretty strong finish to 2021 now is kind of approaching the middle or end of February. Can you just talk about how you're seeing business trends so far as we started the year?

I think we're seeing growth across every region, with the exception of -- and we talked about this, obviously, January, we had 10% to 15% of our labor force that was out with the virus and folks are back. So January was bumpy. It was bumpy for everybody. February, we're seeing continued tailwinds on sustainability in our packaging business in both Europe and North America. And we just need to catch a break in terms of whether it's peak season down in South America. It's the second year in a row, they're not having Carnival. So some challenging circumstances within Brazil in and of itself, but we're halfway through the quarter, so let's see how we finish out.

Great. And then I do want to touch on the start. Obviously, Russia, you guys have decent-sized business there, obviously, in the news the past week or so. Can you just kind of touch on that business, how you manage to kind of operate it, ring-fence it with some of the risks today?

Yes. We're fortunate that we've been there. We acquired that business back in 2016. It's been around for nearly 30 years. So they know how to deal with the circumstances like this. It's a self-contained business, 3 manufacturing plants, all of the aluminum supply is in Russia. It's a dollar-based business. We're not seeing -- we're having constant, as you can imagine, conversations with our customers. They're still pulling cans, there's still a robust demand channel there. So obviously, things are changing by the minute. But as we sit here today, knock on wood, that business continues to kind of hold its own in line with our expectations.

And I think, as you said as well, just -- I mean it's a locally sourced operated and sold business. So there's not much, if any, kind of cross-border...

Very -- we do. Yes, that's right. It's self-contained. I mean we make tins, we make cans, the aluminum supply there. We have an engineering force there. Everywhere else in the world, we have a global engineering force. So we're -- we announced publicly that we were building a greenfield facility there. It will be up and running in about 24 months. That's still ongoing, and there's been no pause or no disruption there. And obviously, like the rest of the world and everybody else, stay tuned, we'll continue to learn as we go.

Great. And then maybe if we could move to the other hot topic of wage inflation. So can you just touch on how the company is handling both input inflation and you also touched on some supply chain disruptions. And as you talked about in the fourth quarter, PPI adjustments, some of your new contracts and your commercial cost recovery, maybe how we should see that phase in over the course of this year.

Yes, maybe I'll give you like a general outline of the business and for those that haven't followed our story. So raw material, aluminum, it's pass-through. So if you put that to the side the impacts of inflation on labor and other components, energy, et cetera. We have mechanisms in each region that vary in terms of the timeliness of the pass-through, but the economic configuration of our contracts enables us to keep the economics held in North America. We've talked about a $120 million headwind, excuse me, for the business. The majority of that last year in 2021 came out of North America. Maybe, Scott, you want to add some color to that and how we're getting on in terms of recovering that.

Yes. So we have -- in all of our multiyear contracts, we'd have some kind of an escalator, PPIs escalator typically on all the nonmetal costs. And that comes -- it's in arrears. And some of it's we'll get January 1, some of it we get April 1 and by July 1, everything is caught up. So we took a lot of inflation last year. We get essentially all that back this year.

And so then the things that we're dealing with as it relates to inflation. Obviously, we're entering into what everybody believes to be an inflationary period. That's not something we've experienced for 30 or 40 years. Scott and I sit on a governance group that evaluates every significant commercial contract that comes across our desk. We provide parameters for the commercial team then to go out and negotiate that. And it's safe to say, we're looking at things now and white sheet of paper and what's going to work, what has worked? Is it going to work going forward. And we're going to -- where we can, we're going to make tweaks and ensure that we're protecting ourselves in the elements that may not be recoverable at this point in some of those contracts.

Great. And maybe if we could dig into the North America can business, that's obviously where a lot of investors are focused. It's a big profit driver for the company. Can you maybe just flesh out what you're seeing either by customer or by category, just how you're seeing the market evolve over the last, say, few quarters or year here?

Yes. I would say historically, how we would have talked about our business. Specific to Ball, we're viewed as the innovator. We have the most can sizes. We usually are the ones that are getting into things like wine and cans, or craft beer and cans, et cetera, et cetera. The one thing that is different that some people are picking up on others aren't is the market and the white space for us is plastic. So anything and everything that's in plastic is an available opportunity set for us. And so there's a lot of products that already exist. So it's not necessarily just a new category or a new innovation that's required to capitalize on growth or sustained growth. We can capture it in a lot of base products that exist in plastic. And most recently, with the Ellen MacArthur Foundation, they published the top 10 CPG companies in the world that have all made recycling commitments or a percentage of recycling in their products. They're not going to get there without aluminum in many instances. And so that is fertile ground for us for the next decade, we believe.

Great. And I do want to touch on a little bit the innovation side of things. That's obviously new product categories, a big area of focus for you guys. I'm sitting here with my canned water, which you probably won't agree to be up here with me if I had a plastic bottle of water. But can you talk about the opportunity, whether it's the pipeline of new products coming, the canned water opportunity? Just how you see that over the next few years?

Since 2018, we have consistently been oversold in North America. And so there has not been a lot of capacity or oxygen for new product introduction to come online. And what's been interesting over the last handful of years as you've seen the beer companies, call themselves beverage companies. You've seen the CSD providers start to step into alcohol. So there's this blurring of the lines, but all of them are innovating at a far accelerated rate than they were a handful of years ago. And the thing for our business is, and we've cited this a number of times, new product introductions going back to 2018 in North America came out 1/3 of the time in aluminum. And that was basically our substrate composition within the aggregate market, if you look at PET Glass tags. Exiting last year, it was closer to 80%. So anytime we're talking to brand managers in any of these major CPG companies or disruptors, they're using aluminum to introduce and they're using the sustainability arguments to introduce. And so you connect that with the major filling equipment manufacturers, they've seen a similar pattern. So their backlog consists of 80% can filling lines versus 4, 5 years ago, 30% to 40%. So it's all connecting and that gives us a real underpinning of belief that this is not a '22-'23 thing, this is a decadal.

And if we think about product categories for a second, I think spiked seltzer surprised everybody in terms of its exponential growth. I know it's not a big part of Ball's portfolio. But if you had to look out over the next, say, 1 to 3 years, is there anything like that, that you think is out there that could really kind of surprise folks such as how fast it's growing and emerging as a category?

We -- yes, thanks for that question. We look at the alcohol space in aggregate. So ready to drink. We don't know which one of those innovations is going to work and what's going to land and what's going to be candidly, the rainbow unicorn effect. But before spiked seltzer, there was -- there were non-still water. That suddenly became a $10 billion can market. So these things happen more than I think the seltzer market. Craft beer was, I don't know, 10 years ago, it was 5% in cans. Now it's 65% in cans. So there are countless markets and opportunities. I think the biggest again, is plastic. Plastic in general, whatever is in plastic is an opportunity for us.

And growth of existing categories. I mean, the energy market is just unbelievable how strong it is. It continues to be...

It continues to surprise double-digit growth in perpetuity.

And maybe if we carry on about good surprises over the past few years, international, I mean I think we've seen demand accelerate in South America, whether it's some substrate share gains there. We've seen some new categories come to Europe or EMEA. How should we think about those regions growth profiles over the next, say, 2, 3 years?

So we laid out kind of our growth case 2 years ago at an Investor Day, and what we had earmarked at the time was for North America, we viewed long-term growth of 4% to 6%. In South America, it's a smaller business with more opportunity because of the substrate returnable glass opportunity that you cited more in the 5% to 8%. And then Western Europe and Russia kind of in that 4% to 6%. And each one of those has outperformed those growth targets in the short term over the last 2 to 3 years. I think we're still hanging our head on those growth projections. Obviously, South America historically has been somewhat volatile. What's unique about our business is when most folks in the packaging space talk about South America. They're talking about Brazil. We're in a half dozen other countries in South America, all of which have returnable glass shift mix opportunities that we're benefiting from across our portfolio there.

And if we could just round out maybe the aluminum side of the business. You're obviously drinking out of one of your Ball aluminum cups. You've got a nice aerosol portfolio. Can you just talk about the growth profiles of those over the next few years, kind of how you see that playing into the broader portfolio?

Yes. We spend a ton of time on the cups, so maybe I'll talk a little bit about the aluminum aerosol business, which is a really interesting opportunity set for us. So it's a different technology. This is a drawn iron technology that's an extruded aluminum. So think about a slug that gets punched. It's thicker because it handles aerosol applications. But it has been a beautiful entry point for us in personal care and water for reuse purposes. So if you're thinking about brands like Proud Source or PathWater, some other products that are now showing up a couple of brands in target in terms of personal care products that are refillable. We're hearing hotels, eventually the plastic toiletries, et cetera, will be regulated out, they are already beginning to be regulated out, and these are great applications and vehicles to build on. And that wasn't present a year, 18 months ago for our portfolio. So you'll start to see us making incremental investments. It probably won't be that material, Scott. But certainly, a really nice opportunity to build on sustainability tailwinds with that technology.

And on that, I mean, again, we've talked now for 10, 15 minutes about a lot of different growth opportunities for Ball. And maybe if I could throw one to Scott. How does that point you think about capital deployment? So can you just kind of talk about your current pipeline of growth capital projects and then just how we should think about that pipeline over the next few years.

Yes. We said we'd spend about $2 billion this year, and that includes about $300 million of maintenance CapEx. All of it is on very good EVA returning projects, most in the -- most of it is in the can business, both in Europe and South America and North America. We've announced a number of greenfield facilities that will come up over the next few years. So I think that CapEx stays at kind of that level into 2023 as well. It's really constrained -- the whole supply chain has to work together in terms of equipment suppliers, in terms of making sure we have the metal. So all that kind of has to come together. So I think that's the pace we'll continue to be at for the next couple of years with the things that we've already announced.

Great. And you just mentioned your EVA framework, and I think and would be upset if I didn't mention 2022 is the 30th anniversary of Ball kind of using this metric as kind of the backbone for how you think about things. So maybe you could just give people in the room and on the webcast just a quick refresher who aren't as familiar with the story, just kind of how you drive your business and manage off of that.

Yes. It's been obviously a great thing for our company. We'll celebrate 30 years of using EVA. It's the primary financial metric that we use. It's the primary financial metric that all of us get paid, and that's not just Dan and I, but people all the way down to the plant floor, and non-Union plants in the United States have some of their pay tied to EVA. And we know that over time, if we increase EVA dollars, there's a 94% correlation to our stock price. And so we know it works with a great metric to use in our kind of business where you do have some big capital throws, but if you can get returns on that capital above your target, our target is 9% after tax and all the money that we're deploying is well above that. We think it's a great way to drive our business. We talk about kind of joke that it makes the meeting shorter because we don't do things that are strategic or for growth sake, it has to be -- it has to generate EVA dollars.

It's the single hardest thing for a company to do is to align the biggest institutional shareholder with a person that's working in your manufacturing facilities, and this is the best vehicle I've seen at work in other really big, really well-run businesses. And like I'm a huge believer in this, and nothing is going to change relative to that mindset.

Great. And I did want to ask you guys, there's obviously a lot of growth, but I want to ask you guys really just around managing that growth. So if I look at 2019, your CapEx was $600 million. This year, it's $2 billion, as you said. I think in 2019, you had 18,000 employees roughly, you ended this past year at 24,000. So I mean a real step-change in growth and mind you, during a pandemic. So can you just talk about just from an executive level, how has the team managed to manage all that? Have you needed to change kind of how you manage the procedures and things to streamline things? Just how you make sure you execute despite this -- or with this rapid growth, I should say.

I'll take a shot at it. And so a couple of things. One, and we had a global town hall last week. And for those of you who have followed us or for those of you who haven't, we follow kind of a Drive for 10 vision statement, and it really hasn't changed for 142 years, but we can memorialize it in the document. And I think the 3 fundamental underpinnings in the who we are statement is we're customer-focused, we're innovative, and we expect people to behave like an owner. It's as much the person on the shop floor's company as it is Scott and mine. And we encourage time and time again for folks to behave like an owner. And when you have -- when there's a decision to take, take it, ask for forgiveness, not for permission. And I think that has enabled us to eliminate the bureaucracy, grow at a rate and a pace, give autonomy and decision rights down to people. We have made some organizational structural changes. We've centralized our engineering functions, so that we're not prioritizing projects by customer or by region. We're prioritizing them for Ball, and that has been a huge value for us to efficiently execute, standardize and deploy capital over the last 2 to 3 years. We've been able to hire and train folks in a uniform fashion. And we've learned a lot through that process, and that's been incredibly helpful. Our culture is the strongest point of our company, and that's why we have incredibly low attrition rates still to this day. But just from a governance standpoint, I mean we're doing some things different. But I think Scott and I constantly are like, we're available 24/7. We're not going to slow down the process to do the right thing.

I would say our teams have done a fantastic job about the capital. Several years ago, when we built Goodyear, we kind of stumbled and we're about 6 months behind on that. I think we've learned a lot from that. And our teams have done a fantastic job on the capital we've deployed. Pittston is up and running. Glendale is up and running. We exited last year with 4 lines and each of those facilities up and running. They're spectacular facilities that have hit every point on the start-up curve. So we're real happy with the capital we're deploying and the returns we're getting off of them.

One thing that we have learned that's not internal as much as it's the ecosystem. When you're in growth mode, you don't need suppliers and customers, you need partners on both sides of that equation. And we've leaned into longer-term agreements and more strategic dialogue as you're deploying this capital, better be having those conversations, these are 30- and 40-year assets. So I think that mindset shift, and it really wasn't much for us because we've never really been that effective at tactical deals. So that was a huge benefit to our culture and how we're already behaving, but it further cemented that in heading in this growth path.

Great. That's awesome. If we could hop back to the businesses for a second. I think the one area we didn't touch on is aerospace. So can you just talk about, obviously, that business has improved its earnings or its growth trajectory over the past 3, 5 years. Can you talk about how that business has changed, how it's evolved? And then again, how we should see it over the next few years here?

The biggest thing you can see in our financial reporting is we've quintupled the backlog over the last 4 years. So we're a much bigger business. As a result of that, we've been -- we've grown our aerospace population from about 2,600 employees 3 years ago to nearly 5,500 employees. So we've been hiring about 1,000 people a year for the last 3 to 4 years, netting 600 to 700 through attrition and mostly retirements. That was a massive undertaking for a business that wasn't hiring here at that rate for a while, and that team has done a phenomenal job. How we were able to accomplish that. I think that we generally get that question. We have exquisite capabilities. And so we have proven over the last 3 to 4 years with our customers that they'll ask us a question to solve, we'll present them with a solution, and we're not presenting them with the solutions that we've already developed and we have a massive overhead structure to support it. We're presenting them with a solution that can and many times be evolutionary or revolutionary, what we had to learn how to do was play the game, write the white paper, sit in front of the appropriate people. And so we've learned that, and we're executing against a lot of that alpha and beta technology. We've seen a lot of that -- those products that are now in use and now we'll be able to expand on the opportunity set and build out multiple systems. And the team has done a terrific job. So I think as you see us exiting '22, '23, '24, you'll start to see the manifestation of all this work and this backlog being consumed and better returns coming through.

And with that, I do want to touch on the ESG or sustainability component of that. Because again, I think a lot of times when people think about sustainability, they focus more on the can side of the equation. I think you spent a lot of time talking about the shift from plastics and obviously, there's a great story there. But I understand as well, kind of you have some interesting opportunities in aerospace around some of the environmental intelligence side of things. So why don't you flush that out for folks because I don't think many investors probably know much about that.

Good. As we're trying to flesh it out, so within our aerospace portfolio, we have a small business that's a civil business. And think of methane satellites, et cetera. We have the leading climate technology and climate censoring capabilities. And that is starting to become used for things outside of aerospace and defense. And so if you think about a world where there's a lot of 2050 carbon 0 footprint goals out there, who the hell is going to audit that and how do we make sure that, that's a real thing. We believe that we've got some technology that can be commercialized to pursue that avenue. And it's early days, but it is a real interesting path and avenue for us to, again, what you'll consistently hear from us is we are a sustainability company and an EVA company. And so we'll put capital to work and we'll fund opportunities that generate EVA dollar generation in excess of 9% after tax cost. At the same time, if you don't have sustainability tailwinds in your business, you have headwinds and you better figure out how to capitalize on that movement for decades to come.

And maybe just one more on sustainability, and it's really around recycling rates and some of the circularity a big selling point for the aluminum can is the recyclability about it, the infinite circularity. But one of the kind of headwinds here in the U.S. is obviously our recycling rates lagged some of the other regions globally. When you think about reaching a higher point and you've obviously laid out some targets over the next few years, kind of how do you think we get there? Is it -- do you need a legislative solution? Is it advocacy? Kind of how do you think about the pathway to get to those higher rates here in the U.S.

It's a great question. And the reality is where you have deposit states, the recycling rates are very good, where you don't, they are not. And so I think it will require some deposit legislation of some sort that's fair and equitable for all substrates. And in that arena, in that environment, we will win disproportionately because this actually has value. So our Chairman, the previous CEO, he is spending a lot of time in D.C. He's spending a lot of time with municipalities. We're trying to create relationships and partnerships to increase the technology of sorting and collection of aluminum. And I think we're -- you're going to continue to hear more and more of that because, as you said, we've made some pretty significant commitments on our 2030 sustainability goals and objectives to increase the recycling content in our aluminum portfolio to 85%. Today, we're probably somewhere in the neighborhood of 70%. And in order to do that, we need to access to the scrap. We need metal suppliers to increase the use of scrap in their alloy composition. And so we need to expand the ecosystem in a way that allows for us to continue to tell the story and control our own destiny.

Great. And then I have a few more, but I do want to pause if there's any questions in the room. I want to open it up. Otherwise, I'm happy to kind of keep firing away. I'll keep firing away. Maybe one for Scott. When we talk about capital deployment return to that, obviously, you have a nice pipeline of growth investments, but you're also returning a good amount of money to shareholders. So when you think about that balance, kind of how do you approach it internally to try to weigh those different options?

Yes. I mean, first and foremost, if we can find good EVA-generating opportunities. That's the most important thing. We're fortunate that we're going to generate enough cash and operating cash flow over the next few years that we can return a lot of value to shareholders at the same time. So while we're investing heavily in our business, we can continue to buy back our stock heavily and pay our dividends. We think about our capital structure as debt-to-EBITDA at the end of the year kind of at 3 to 3.5x. And so as our EBITDA grows over the next few years, you should expect us to bring more debt on our balance sheet and use that debt to replace retire equity because we'll be able to invest in our business, return a lot to shareholders and keep our leverage relatively flat. So we're in a good spot.

Great. We do have a question back there.

[indiscernible] And then any issues in your supply chain that you're trying to fix.

Our Russia business, there's 3 plants out of '22 in Europe. They are larger plants. And as Dan mentioned, they make cans and as it's pretty self-contained. I think the big -- it's a dollar-based business as most of the businesses in Russia are. We've been able to operate effectively as of today. We keep -- we have very minimal exposure. I think the biggest potential risk is -- are the knock-on effects of inflation, energy costs and things like that, that are going to hit Europe. That's probably where -- while we hedge a lot of the energy, we hedge a lot of the exposures. There's always some that are left open because you can't hedge them. And so that's probably the biggest risk would be knock-on effects of commodity prices spiking. But we think -- again, we think all of those are manageable too.

Then maybe one for Dan. Obviously, CEO elect at this point, you'll be coming into your tenure, your predecessor was there for 11 years in that role, what should Ball investors expect? Should they expect any change in strategy or management style? Or what should investors expect as you kind of take over the CEO role?

Yes, thanks for that. So to Scott's earlier point, one of the reasons that I've been around this company and stayed at this company is because of EVA and because of our Drive for 10 vision. I think innovation, being close to your customers and having the ability to behave like an owner is something that I value, provides you with autonomy decision rights and a purposeful phase work. EVA makes it really easy. The 95% correlation on EVA dollar generation is incredibly important because return of value to shareholders versus EVA -- they're not mutually exclusive. They're the same thing. If we make more EVA dollars the stock goes up, we're going to like the returns. It's -- I'm a simple guy. I like that. The one thing that I'm most excited about and I was with John and with Scott for the creation of this over the last handful of years is our strategy in all of our aluminum businesses is sustainability. We are a sustainability company. We have, I think, quite a solid reputation in footing in and around that. You should expect this if we're going to deploy capital, it's going to be in and around sustainability and EVA generative and accretive economic positions. And so I'm excited about our future, our employee base and our culture. No sudden movements from me, but probably doubling down on the things that are working really well right now.

Great. Well, if there's any last questions in the room? Otherwise, I appreciate you guys being here and hope to see you soon.