Ball Corporation (BALL) Earnings Call Transcript & Summary

Well, welcome back, everybody. I'm George Staphos, BoA's Americas Paper and Packaging analyst. I'm joined by my team Cashen Keeler and John Babcock. And we are delighted to be hosting Ball Corporation, who's been at every conference that we've hosted over the years. And here from the company are Dan Fisher and Scott Morrison. Scott Morrison is Chief Financial Officer; Executive Vice President, has been Chief Financial Officer since 2010. Dan is currently President and will assume the role of CEO in April this year. Prior to his current role, Dan was Chief Operating Officer for Global Beverage Packaging from 2016 to 2021. So Dan and Scott, welcome.

Nice to be here. It's good to be here in person.

Interesting times. It's -- maybe it's appropriate to start with a longer-term question given that, Dan, you're going to be taking the CEO role in a month or so. 2022 marks the 30th anniversary of EVA at Ball, I've covered you basically for that period of time, and the 50th anniversary of Ball's IPO. You've managed, as a company, I'd say pretty well through the long term -- very well for those who didn't get the irony through a number of periods, a number of cycles. What's going to be the same about Ball and what's going to be different starting out in the new role?

Thank you, George. So great question. And for those of you that followed us and just building on George's comments, a couple of things that won't change are certainly the EVA mindset. I've worked for a number of really well-managed large industrial conglomerates through the years. And this is -- the 12 years I've been at Ball, this is it's so rare to have connective tissue on value generation and incentive compensation from the folks on the shop floor all the way to the folks in our office. And it's incredibly powerful. I can't remember -- I think last year, we had 92% to 93% of our employees were on EVA incentive compensation structure of some sort. And Scott will tell you that EVA dollar generation is a 92% to 94% correlation in terms of driving our enterprise value and our share price. So that's the biggest challenge for someone in my job is to articulate why we're focused on 1 KPI and why it means so much to the folks that are our employees as well as our institutional shareholder investors and everyone in between. So we have that, and there's no reason to change that. I think another thing that you often hear us talk about is we're a 142-year-old company. We've been a family company for all but 10 of those years, the last 10, but we still have the entrepreneur mindset. And in terms of the articulation of who we are, there are 3 things that we'll continue to be laser-focused on. And that number 1 is behaving like an owner; the second one is being innovative; and the third one is being close to our customer and how we define that and understanding our customers what they need, how they need to grow and that we'll organize around that. And so those are the principal things. And I think the last thing which is not a sudden move for us. We've started to lean into it more and more, but -- we are, by definition, now a sustainability company and a growth company across all of our portfolios. And you will see us investing behind tailwinds of sustainability both internally and potentially at some point in the future. If you see us deploying capital or stepping into another opportunity set, it will be with the backdrop of a sustainability wins with the underpinnings, obviously, of allocation and the EVA mindset. So not a lot is going to change. And we -- because of the behaving like an owner thought process, the 24,000 employees that we have, which we believe will be closer to 30,000 in the next couple of years, they're going to have to help drive the ship into where we go next. And that's always been the mindset. It's not about who sits in my seat. We're all temporary to some extent. But it's about folks believing in what we're doing, how we can contribute not only to our customers, but being good stewards of the earth as well. And so I think that you'll hear more and more about those underpinnings moving forward.

Dan, you made a number of really interesting points there. One, I wanted to sort of try to dig into a bit would be, you mentioned leaning into some of the sustainability initiatives and that it might require some investment. Could you share a bit more on what you are thinking, recognizing, we're live mic, and you maybe don't want to do that, but anyways, what can you share there?

No, thank you. Yes. In the simplest terms, we're -- 90% of our portfolio is aluminum related. And so we're the leader in the beverage can industry and we've been in that position in the last handful of years since the Rexam acquisition. We've laid out circularity goals and objectives. We've laid out 2030 sustainability objectives. They're going to require the entire supply chain to lean into enabling us to do that, we can't do it by ourselves. And so whether it's rolling mills or it's lower carbon aluminum on and on and on, we're going to -- materials of concern being eliminated from our coatings. We're working with our partners in the industry. We understand what are the successful attributes of our package versus the other substrates, and we want to continue to build on that advantage. And that may require us to facilitate investment in and around that to help steer that and own the story, and we very much believe that we need to own that.

Understood. And a broad question, to the extent that your strategy may vary from geography to geography or country to country, how might it or will the story about innovating, leading, leaning into sustainability pretty much be the same whether we're talking about Europe or North America or Brazil?

At a very high level, I believe it will be a very consistent thematic underpinning our beverage business, in particular. And that is -- and even our extruded impacted business, it's -- our biggest opportunity set our biggest growth white space. Historically, we would have articulated categories, wine and energy, et cetera, and those are all still burgeoning and growing. But plastic is our greatest opportunity set. Single-use plastic is our greatest opportunity set, and that will underpin what we believe to be a decade's worth of growth, if not more. And so that underlying theme exists in Europe, it exists in South America and it exists in North and Central America.

Understood. And I definitely want to come back to that during our discussion here. One question that you've obviously been getting a lot. We have to sort of kick off with next, which is what's happening in Europe and in particular, Russia as has been said a number of times today, our thoughts and prayers go out to everybody who's been affected in the region. What are you doing? What concerns might you have in terms of managing aluminum supply, input pricing and most importantly, your operations that you have in Russia? How are you -- what would you tell us about that? And obviously, there's some follow-ons.

I think a lot of those questions will probably be the best answered by Scott.

Yes. I mean we're -- we have 3 of our 22 plants in Europe are in Russia -- it's pretty self-contained. Russia is has been self-contained for a long time, given past sanctions and things that have happened. And so we continue to operate today. Our concerns are similar to yours. We have 1,000 employees there, and we want to make sure they're safe and taken care of. And we really -- we follow our customers. We serve big global customers there. And so our -- we've kind of followed the lead of our customers. Our customers continue to operate and so we continue to supply them. we're able to collect receivables, pay payables because like I said, it is pretty self-contained, but it's changing its dynamic, right? So we're reassessing every day what's going on and what we should be doing. But as of today, we'll continue to operate, but we're evaluating it daily.

So consistent conversations with our customers who we're serving, and obviously, our sole focus right now is the well-being and the safety of our employees. And then we also have a big presence in Serbia that abuts Ukraine. And so it's extending beyond that. And obviously, the knock-on effects for energy or what, I guess, what everybody is talking about specific to Western Europe. And so this all happened last Thursday. So we're managing it, and we've got a tremendous team on the ground there and I think their priorities and their focus are in the right place at this time.

One question based on what you said and one question that we've gotten that I respectfully need to ask while we're here. So on the energy side, you'll handle it in your normal way through passthroughs, I would imagine. Are there any limitations in your ability to do that? And the second question where we're relaying what concerns or what are you doing to manage against the risk that the facilities possibly could be nationalized over time? How big of a risk is that in your view? And I know it's fluid.

I think on the energy side, we're able to hedge most of our European energy. There's some -- a minority of markets where you can't hedge it. And so obviously, there, we're more exposed. We can pass that through, but sometimes there's a lag in that pass-through, but it's relatively small. In terms of nationalizing assets, can industry is not something typically -- I mean we've operated in lots of countries over the years and it's not an industry that countries tend to go after. They tend to go after the primary industries more. So I don't think that's a big deal. I think the disruption in the supply chain is the biggest issue. How long does this go on? How cutoff does Russia become from the rest of the world? And that will determine how Europe deals with Russia on a trade basis. That's probably the biggest risk that probably every company that operates in Europe is going to have to face.

What we've talked about at a high level is, first of all, we've been in Russia for nearly 30 years. So there have been instances, maybe not exactly acute to this one, but there have been other instances in the past, and we've been able to navigate that. We will take care of our employees, but that's what we're going to do. So that's our primary focus at this point.

Any questions from the audience, as we progress here? I want to say to Ann Scott, and Brandon Potthoff in the back and we see our friends from Investor Relations back there as well. So let's keep moving then, before we leave to sort of larger picture questions, aerospace and global aluminum aerosols, what's the setup for those businesses as we look to '22 and beyond? And recognizing, again, there's maybe not so much you can say about this, I would imagine, you know where I'm going. Your aerospace business probably has some increased activity given what's been happening? Can you talk a little bit to that given your exposure to defense?

Yes, I'll be careful with that one, but I will tell you this. I've got my security clearance now. What we do is incredibly important, I mean at the end of the day, you need to be able to communicate with the folks on the ground, you need to be able to see and you need to be able to hear. And you want to have the most sophisticated instrumentation in the world for when things like this happen, and we're a provider of a lot of assets in that world. And so this is absolutely something that we're able to demonstrate sort of our capabilities in a scenario like this. I think the aggregate knock-on effect for that business and the players in that space is, I believe that the defense budget is going to find a much easier path to move through Congress now, and there might be a little bit more money than we originally anticipated that budget fostering. And so that will be good for us, yes. And we've got an incredibly strong business. As many of you know that have followed us, our backlog has increased fourfold over the course of the last 5 years. We've doubled the size of our human capital. Denver is a very -- it's a luxury to be able to recruit talent, and we've been the beneficiary of that. And I think the team is poised to do really nice things. As we move forward, I think you'll see a nice lift in '22, but I think a bigger, more pronounced lift in the out years. I don't know, Scott, if you wanted to comment on that?

No, I think all that is accurate. And I would say the [ group ] on the aluminum aerosol side, the same sustainability message plays there, too, and selling into consumer products companies on single-serve plastic, shampoo and things like that or reusability in terms of the water side. So we're seeing a lot of traction there and putting further investments and seeing nice growth.

So the biggest change maybe from this time a year ago on the impact extruded business or our aerosol businesses, you're starting to see a lot more application relative to -- it's a refillable product. So water, a couple of major brands have made big inroads. We participate with those brands. And then the personal care space, I mean, there's a hell of a lot more plastic aisles of personal care than there is beverage can. So there's a lot of opportunity and you're starting to see kind of that refillable marketplace take shape, mostly on the coasts and a big presence in Europe. So probably more opportunity for that business and the growth trajectory than this time a year ago, and I think that will just compound itself moving forward.

Do you think aerosol, I forget what you said in the past, can grow at the same 4% to 6% long-term growth as for beverage cans?

I think certainly, it can. And it's obviously coming off a much lower base. So those are -- I would hope at least that.

Now in terms of the growth outlook, I think last year, you wound up shipping to beverage cans, roughly 112 billion, 113 billion units. You exited the year with 12 billion cans of capacity ready to deploy. Being very simplistic about it, that suggests this year is 125 billion-ish type of number, you keep adding 12 billion units at a clip. It sounds like you're going to beat your 145 billion unit goal by '25 by a year or so. So tell me where we're wrong with that math. Tell me what is overly simplified and any other thoughts that you would have in terms of us and investors sort of projecting out.

Yes. I think the history kind of predicts the future, and you've been following our story, George. So 2020 Investor Day, we started to kind of earmark or lay out where we thought the next 3 to 5 years, how it was going to play out and how the sustainability tailwinds were really taking root in a significant way, and that's how we characterize our 4% to 6% growth trajectory. It was 2x what the prior 10 years were. And I think and maybe, Scott, you want to comment on this, but we've been surprised to the upside over the last 2 years, and we've accelerated our capital outlay as a result of that. And so I think a lot of what you're saying makes sense. There are more opportunities for underpinning of that growth -- when we talked about that growth trajectory, there were things like at-home consumption, which is dramatically increased versus COVID and that's a behavior pattern that's not going to subside. We didn't have a large presence for still water in those growth components. So yes, I think there's a path to get in line with what we laid out several years ago and until there's not, then I think the case you've laid out is how we're looking at it and how we're organized around it.

Dan, when you look at the at-home consumption, has there been an actual pickup in the amount we are consuming of the products because we're home consuming? Or -- I realize it's both, right?

Right.

Is it more of that? Or is it -- you're actually seeing the share shift being the bigger driver? So it's going to cans in the pantry versus glass or plastic or what have you?

It's very hard to answer that question simply because that at-home channel is not being tracked with the same level of diligence as point-of-sale data. I think it's a mixture of both. And when we talk to our customers, it's a mixture of both. But if you look at -- I didn't think that we could consume more alcohol than we were per capita, but that's been disproven over the last 2 years. So something is happening in the at-home channel to drive that. Energy continues to surprise to the upside. Those 2 categories, in particular, I think we could probably articulate there's a case for the at-home piece of the consumption that is underpinning that. But at the same time, all of the new product introductions and we've cited this historically, all of the innovation, it's all coming out in cans. And that is a combination of large CPG companies recognizing we don't want to continue to build on a problem that we already have on the plastic waste side. And you're starting to see some move in terms of substrate shift on kind of the base products. But as you know, everyone has been on allocation in the can space. So I think there's more opportunity there and I think we'll continue to see this tailwind from at-home consumption is what it obviously can do extraordinarily well in that environment.

I realize it's a tough question to answer is where I was going to go next because of that circular issue you just mentioned. But assuming you had enough capacity -- but of course, then everybody worry there's too much capacity, so we don't want to get into that. But how -- where do you stand in terms of the proverbial innings of a baseball game in terms of the conversion in your traditional categories? And my guess is we're still coming in from the parking lot when it comes to the water conversion. But can you talk to that and what the opportunity in billions of units might be recognizing that's kind of hard to pin down, and we won't hold you to it.

The baseball analogy, since clearly, they're not playing. I'll maybe we should be like [ half ] times or quarters or something. But -- it's early in the baseball analogy of where the opportunity set is for us and what we've stepped into. And how you get to that conclusion is exactly like you said, we have been sold out since 2018. And you've seen innovation come out and that takes precedent over base movement because your customers can make more margin that way. So the folks that are innovating, especially in an inflationary period, those are the ones that can pass through price. And so innovation has taken root ahead of the substrate shift of the major brand and the core brand. So that's still yet to come. And the other thing that is the most pronounced, which is very early, is you're seeing more and more outward claims of recycled content from the large CPG customers. So they're becoming public, and they've become public more in the last 6 to 9 months than they have historically, where I think they've been trying to parcel out the challenges they have and call things are PET or chemical recycling or whatever you want to call it. But now I think they're making substantial commitments, external commitments. They're going to be held account to those and the can is going to play very well in that. And so I think over the next 3, 4, 5 years, you'll start to see increased momentum in and around that.

And we're having conversations with a number of brands that want to move but need -- they want the committed capacity, right, for -- because they're not going to move unless they know they've got the capacity for the next 5, 7 years, whatever. And so I think that's why we're so bullish because of all those conversations we're having that we're still in the early innings of this.

Yes.

Scott, I want to take that into some quantified questions as we look out maybe nearer term next couple of years. So I think you said recently that last year, the amount of inflation inefficiency and the like that you couldn't pass through but would was in the range of $120 million and the majority of that you're going to get this year. We then have the new units coming. Most of that, as I recall, in North America, I'm not going to ask you to give me an incremental margin per unit, but we can all come up with our own estimates. Doesn't that suggest that sort of the North and Central America's EBIT could be well into the 800s this year? And go wherever you want, but I don't want to put you in a...

I think you're directionally correct. I mean we get the vast majority of that inflation -- that net inflation that we absorbed last year is in North America. We'll get a lot of that back this year. Now it comes -- some is in January, some is in April, some is in July, but the vast majority comes by then. And because some contracts, the timing of these contracts is a little bit different, we'll get some in '23 on top of '22. And then you've got the new capacity coming in that's underpinned by long-term contracts where we have a commercial committee, where we approved the conversations before they go to the customer of kind of the guardrails of what the commercial teams can do. And every commercial committee, we've sat on in the last few years, the base pricing is better than the contract it's replacing. And so it's going to be a better margin business and more volumes in incredibly efficient plants. I mean if you go to -- it's too bad, we're still kind of COVID-limiting travel and visits to our plants. But if you go to a Glendale, Arizona or Pennsylvania, these new plants, it's a game changer in terms of how big, how efficient these facilities are. And they're ramping up, hitting the start-up curve. And so I think we're going to like it a lot.

Just one clarifying point, for those of you who are new to us, when we talk about margins, we're talking about dollars per unit because obviously, when aluminum is up 40% year-over-year, it can impact the percentage of margin.

Aside from size and maybe that's the biggest difference. How would one of these new facilities look compared to Rome, which we've toured in is a phenomenal facility?

I mean Rome is a big facility, too. These are larger. I think the line layouts -- because you could start from scratch, the difference in Glendale is you've got probably, if not the biggest, one of the biggest can plants in the world, connected to the filler that's, across the parking lot connected to the distributor that's across the other side. So in a plot of land, there's probably $1 billion worth of investments between ourselves, the filler, the end customer. And so the efficiencies you get out of that is just tremendous.

And back to my earlier question, I don't want to go where I shouldn't, looking to end, but you're not just skating by getting into the 800s in North and Central America. You'll be well into that number. recognizing we have to -- we can't add up all the good guys. Would that be fair or -- and if you say, George, we'd prefer not to comment, that's totally acceptable.

No. I think if it didn't start with it, then we'd be disappointed.

Okay. Understood. Any questions from the audience? If not, we'll keep progressing. One of the things we're looking at as we were preparing for the conference, given the valuation multiple that you trade at, which is higher than average. Certainly, you've earned that right over the last 20 years. When I do very simplistic, admittedly math, where I say, okay, if I had $1 billion, I apply it to growth or at $1 billion I buy back stock, growth investment wins out because of where the valuation multiple is. So recognizing that is overly simplified, what are the benefits from where you sit to continue returning value to the shareholder, given that right now you get more return accretion by growth investing, recognizing a limit to everything?

No, no doubt. I mean, first and foremost, we want to invest in our businesses because you're right, we're going to generate, to Dan's point, more EVA dollars, and that correlates to our stock price. We're just -- you can only invest at the pace of kind of the supply chain can keep up and customer contracts can be executed. So it's kind of -- to be honest, a bit of a physical limitation of how much we could invest here in any 1 year. So then on top of that, we've said we're going to keep our capital structure in the 3 to 3.5x total debt-to-EBITDA range by -- at the end of the year, it's kind of the time we measure it. And so as our EBITDA grows at a pretty good clip, we're able to put on more debt on the balance sheet and keep the leverage the same and return that to shareholders. And so we can do both at the same time in meaningful amounts. And so that's where -- that's kind of where we're at now, and I see that the same going forward. And if capital -- if we're able to accelerate the capital spend, we will do that. If the growth slows down, we'll take some of that back or slow it down, return more to shareholders. So we've got a lot of levers we can pull, and I see that going forward for the next several years.

Last question before we wrap up. Aluminum cups, I would have expected a little while ago that you'd be at a breakeven level a little bit sooner than where it looks like you'll be. If you could update us on what's been going on? I'm sure part of it is COVID and part of it is just the retail strategy, which ultimately is a good news story, but can you tell us when you expect update us on when cups will be profitable and where you stand and then we'll wrap it with that?

Sure. So first of all, I think we just started manufacturing cups this time a year ago. And as we develop the business case and begin to enter into the marketplace, the strategy was pretty simple. It was get into venues, get into music festivals, et cetera, et cetera, and drive traffic via social media because what you need is for as many people to experience the product and then to ask where do I buy it? And so the knock-on effect was always retail. Second, unfortunately, COVID kind of cost us a year. And what we decided to do was, as we were standing up the facility, well, let's go ahead and expedite the retail strategy. The good news there is the team has done a remarkable job getting us into the largest retailers in North America; will be in, I think, 30,000 points of sale by this summer, and that is incredible in terms of just the accumulation of storefronts and the acceptance of the product. And now we're kind of backstopping that with opportunities to get into food service in the venues, et cetera. And so our belief is, we've seen nice trajectory in terms of retail and retail velocity, but you got to drive traffic to that and driving traffic to that is what we're working on this year. And a lot of doors are open, and a lot of conversations are happening. And the belief is we'll be exiting the year kind of in that breakeven standpoint. And keep in mind, that's breakeven with a second line coming online this summer. And what that's going to allow us to do is actually have a full portfolio of SKUs. So you'll have the 24-ounce and the 9.1 ounce. So think beer, think single-serve cocktails, we don't have that right now. So even within the venues and places that we're operating, that allows us to build out the SKUs. We'll have more shelf space in the retail and all of that should benefit us as we exit '22 and step into '23.

Dan, did I hear you say breakeven this year for cups or exiting...

Exiting the year in a breakeven position.

Got it. Understood. So look, I thought I heard you say, Russia, obviously, a lot to manage, but manageable closed loop. The outlook for growth seems to be everything you've guided to and perhaps more. The returns are quite good, and you have the flexibility to deploy capital either to investments or buyback. And aerospace, cups and aerosols continue to fit the portfolio. And on the packaging side, promote the aluminum story, which is ultimately the strategy. Anything we left out?

I think that's good.

That's good. Thanks, George.

Everything is manageable in the short term, be it Russia.

Anyway, guys, thanks for being there in the audience. Let's thank Scott and Dan for a wonderful presentation from Ball Corporation.

Pleasure.