Ball Corporation (BALL) Earnings Call Transcript & Summary

All right. Well, thank you, everyone, for joining. Good afternoon. My name is Adam Samuelson. I'm the Packaging and Agribusiness analyst here at Goldman Sachs. I'm thrilled for everyone who joined the final session of our Industrials and Materials Conference this week. We are thrilled -- last, but certainly not least, Ball Corporation is with us here today. We're thrilled to have their newly appointed CEO, Dan Fisher. He's also been the President for several years already. But thrilled to have Dan with us. Before we jump right into Q&A, I want to remind the audience, we'd love to make this interactive. [Operator Instructions] Getting questions on -- during the session, we'd love to take more. So please do send those questions in, and we will get to those. But Dan, thank you so much for taking the time today. Do you want to go?

Thank you, Adam. Yes. And I appreciate that we're batting cleanup for you here. So I know that I'm the last thing between you and, hopefully, your weekend. So thank you for the invite and looking forward to talking about Ball today.

Great. Well, good. Well, I guess, first, Dan, just to set the stage because you reported first quarter earnings last week, gotten a lot of investor questions on different elements that I'd love to just address a few of them and use that as a jumping off point to talk about longer-term, kind of strategic positioning. But maybe just first, we think about the performance in the quarter and the outlook for the year, received a lot of questions from investors around the performance first in North America. In the first quarter, volume growth -- didn't really change your outlook for full year volume growth. But can you just talk about kind of what you saw in the first quarter and why that really didn't make you change your -- see any difference in the outlook for the balance of the year?

Sure. Thank you, Adam. I think just jumping right into North America specifically in the growth rates. We reported 3.4%, I think the industry was right in line with that, maybe a tick higher. It's pretty simple. At the end of the day, we saw our customers take price at levels we hadn't seen them take in decades, and there was little to no promotional activity. And so those 2 contributed to a lower growth rate than candidly, we were hoping for in the quarter, but it's easily discernible and explainable. And the thing that I would take away from that is if our baseline is 3% to 4% growth without any promotional activity and with significantly price -- significant pricing from our customers, then that will tell you that -- it gives me a great deal of conviction in kind of the medium to long-term 4% to 6% growth that we've leaned into and we continue to steer toward.

Okay. Great. And so -- and as you think about the balance of the year, just relative to the full year 8% kind of volume target, are you -- are we going to be at or above that level in the second quarter? I just want to make sure investors are properly calibrated to how the underlying market dynamics kind of layer into your business.

Sure. Difficult to comment on quarter-to-quarter. There's certainly a path to get to the 8% to 10% for full year. Much of it lends itself to my comments on how I address the first quarter. Northern Hemisphere, it is Memorial Day through Labor Day. And typically, that's when our customers gear up and want to fight for share position. That's always been the case historically. There's an awful lot of innovation that's coming out in seasonal packaging. And so I think you're starting to see promotional activities, at least in terms of commercials and media. But in terms of price on the shelf, that will play a role in how volume is stimulated in shorter time intervals. So there's a path there, whether or not it shapes up and pans out for the full year. We really need the next couple of quarters to kind of play out because those are our seasonally large quarters.

Okay. And so maybe keying off of that, something you just said and it has both shorter-term implications, but really underpins the longer-term kind of investments that you've been making, have been around the innovations that your customers are making in different categories that has mixed implications in terms of what you're selling them and how they're packaging their beverage. Can you talk about the categories that you're seeing that innovation and how that impacts your mix as we go forward?

Yes. I think what's happened over the last handful of years, if you try to point to growth and what's been a differentiator of the growth trajectory since maybe roughly 2018 for the North America market in general, and subsequently some sustainability tailwinds that we've seen more and more in Europe, we've seen -- and we've been on allocation. We've fundamentally been oversold for the last 4 to 5 years. The import numbers last year will point just how much we've been oversold in terms of domestic supply. So how our customers react to that is they're going to put out innovation, they're going to put out products into profit pools. And as some of the larger beverage companies -- excuse me, CPG companies have defined themselves as beverage companies, they've all went themselves to more of the ready-to-drink cocktails, things like hard seltzer, energy drinks continue to surprise to the upside and they have for the last decade. But innovation has led the way in terms of new products. What underpins, I believe, the longer-term growth story is that doesn't leave a lot of room for the large CPG companies that have heavy PET mix to shift into aluminum. And so as we get to a more stable supply base, and we actually have some capacity to sell into those customers, they will start to move their supply chains and increments with some of the base products. And that's really the largest category and the largest channel that's available to us for growth. And that's why we continue to believe in our medium and our long-term growth trajectory in the Northern Hemisphere, in particular.

Okay. So as we think about that supply position, you alluded to the imports into North America last year and the levels that they're at. How do you -- with the capacity that you and some of your competitors are putting into place and the demand as you see it, how do you -- where would you think imports are by the -- in 2022? And how do you think that improving balance would enable some of that mix shift into cans that you just talked about?

Yes. Thanks. The -- so what I would say is the import number includes what a baseline of essentially fully served domestic can supply that are -- your typical products that were coming in from all parts of the world. Out of the $15 billion, I would say, $4 billion right now today is an industry number that's representative of beer, import beer. So there will always be an import level because, by definition, if you want to price it as import beer, it has to be import beer. So that number will always be there. The balance of the difference between $15 billion and $4 billion, candidly, plus whatever growth we're seeing in the market, that's going to start to be absorbed into our system and our competitor systems that are putting in product. Now depending on what can size, what channel, what category, all of that, that folks can innovate around or they could start to move their supply chains around, will provide them the opportunity for growth. One other thing that has to be true, not just the can supply and the can capacity, our customers have to -- they're essentially completely sold out in our 3 largest markets in terms of can filling capacity. So they will have to add can filling capacity. And that's why we always try to triangulate with our customers, our equipment suppliers and the filling suppliers that capital is moving in concert relative to the entirety of the distribution system. And so as those can filling lines come on, we're going to have a pretty good understanding with our partners why, what can sizes, what labels are going to go across there. At the end of the day, though, Adam, they're going to sell what the end consumer wants. And so the labels may change, but the good news is at least new products, in particular, those are coming in at such an increasingly concentrated position in cans that the underpinning of that growth looks very favorable for the foreseeable future.

Okay. And if you think about some of the -- where some of that base business would -- could shift from PET, is that carbonated soft drink? Is that -- are you talking water with the isotonics? Where do you see the bigger kind of pieces there?

I think things like -- exactly. I think it's CSD. I think it's sports drinks. I think it's elements like that where there is a large volumetric supply in plastic that could move. And it will start with -- most likely it will start with the higher profit pools. That's an easier transition as we've talked in previous settings. Large case water, given it's so cheap with the end consumer, that will be sort of the last thing that moves. Premium water, yes, the isotonics like you said, I think things in that realm are the ones that are most easily moved, and move without much of a profit dilution for moving out of PET.

Okay. So maybe if we shift geographically and we talk about down in South America. And you've seen volumes -- you continue to be making investments down there, as are some of your peers. The underlying demand environment does seem to have slowed more recently. And I'd love to get your kind of thoughts about kind of why you think that would -- why it's temporary. And what gives you the long-term confidence in that market in the growth for cans?

Yes. It's actually quite striking, the -- when we look at -- and we're everywhere in South America, which is probably a different footprint construction than most. Brazil is still the majority of the volume there. But even in Brazil, Southeast Brazil drove down because of simply volumetric consumption and end consumer pricing power was off over a 4- to 5-month period to the tune of about 30%. And our customers put up price because aluminum is U.S. dollar denominated. So the confluence of less purchasing power with the real, with the combination of a price increase, certainly contributed to, I think, a 15% decline in volumetric consumption. So when you think 20% decline, it's largely because people weren't consuming beverages. In the Northeast of Brazil, there was actually growth. There was low single-digit growth. In Chile, there was growth. In Paraguay, there was growth. In Argentina, there was growth. In Peru, there's growth. So I think we need to see how Brazil plays out, and there's 2 or 3 things that give me optimism. One, there's an election this year. And like clockwork, during election year, there's a stimulus package that rolls out several months in advance of that election. They're talking about a pretty significant stimulus package that would hit middle to late parts of the second quarter. They're talking about a street carnival in July. It typically falls in January, as you know. That's another opportunity to stimulate a different consumption experience. And the last thing is there's World Cup that's a later stage this year, I believe it happens in November. And about 60 days ahead of that, sometimes 90 days, you start to see a pretty significant demand pull from your customers to make sure they've got enough filled product in the event that we -- fingers crossed, Brazil makes it to the semifinals. So there are 6 or 7 countries, by the way, around the world where your consumption goes up if they make it deep into the tournament. So we're certainly hoping for that. But those 3 elements will certainly help. Unemployment is still remaining strong in terms of people being at work in Brazil. So I think the rest of South America, there's reason to continue to believe that those investments will do well. And then we just need to see how we get on in Brazil. If some of these things play out, we will see a really nice uplift in the second half of the year. We will see that uplift in the second half of the year, one way or another. But depending on the size and scale of that uplift, it's going to play out relative to a couple of these things I mentioned.

And does -- in that kind of context, just as aluminum prices have come off some, more recently, how quickly would that filter through to your customers and maybe help that consumer affordability potential?

Fairly immediately, it will. The aluminum in particular, as that comes off, yes, that will -- because it's a U.S. dollar base, that will make it easier to consume. So that volumetric number of down 15%, that's the one that you'd be paying attention to, relative to that comment. And I agree with that. There's -- so there's optimism and reason to believe as that lowers, it gives us even more ammunition in the back half of the year to see things kind of moderate to a stronger growth trajectory.

Okay. And I guess, as you think about kind of where you've made investments in Brazil, and you've talked about more opportunities for further investments, does the -- does that -- the steepness of that recovery and improvement in the back half of the year impact the thinking on timing of those investments? Or you have enough conviction on the long-term market that you would look at doing that either way?

Yes. Thank you, Adam. I think this is how EVA transitions and plays out for us. So if we communicate, we're going to be investing in a specific location and those markets move, and there's a better use for those assets, it's incumbent on our internal employees to behave like owners and tell us there's a better use for these assets. And so as I mentioned, other parts of the region are growing, and they may be in a more stable environment, candidly, than maybe the southeast of Brazil is, but we will moderate where those investments are. I still think the growth is there for South America, but it may take up a different composition. And we will invest behind where we're going to generate better returns.

Okay. All right. That's really helpful. Maybe moving over to your third principle geography in EMEA. And I really -- I talked a lot about Russia on the earnings call and I don't want to belabor that point, so I'd rather focus on the continental business. And there's a contrast between the volume and the demand that you saw in the first half -- in the first quarter versus the cost dynamics that were at play. And I'd love to get your perspective on both. And just help us think about the path forward where how do we square that consumer, that volumetric demand versus the cost pressures? And how quickly can you kind of push the pricing to mitigate that?

Yes. I think in the first quarter, what you saw was you saw inflation really tick up post February 22 with the land invasion in the Ukraine. So the back half of the quarter was the earliest we saw any sort of meaningful inflection. Yes, there's inflation everywhere in the world and energy prices were up, but our growth was pretty resilient, as you saw, up double -- low double digits, 10%, in the first quarter. We had some FX headwinds that cost us $7.5 million or else we would have seen volumetric growth in earnings right on top of that year-over-year. And as we sit here today in the second quarter, we're still seeing decent growth in the region. So there's a level of resiliency there that is good. The one area that we've certainly seen, and we commented on this in our earnings call a few weeks back, versus where we sort of set the target this year and set the budgets, the additional inflationary headwinds for the business is roughly $50 million as we communicated as of the time of the earnings call. So that $50 million and the residual inflation that we were already seeing, we will get all of that back through our contracts in 2023. To your question, is there an appetite, is there an opportunity, is there an avenue for us to work with our partners and see if we can pull forward some of that inflationary pass-through, those are conversation that are going on in earnest. There is certainly an opportunity when there's willingness to have a dialogue to alter that. But the thing that I think the callers should understand and you as well is whatever those headwinds are this year, we're going to get it back. It's not dissimilar to what we experienced in the U.S. from 2021 to 2022. So the integrity, the economics are in place. But what we're dealing with is most of those contracts work with inflation in arrears. And if you're in a medium to high inflationary period, you need to pull those forward to tighter time increments. Those are the conversations we're having with our customers. A natural question then would be why would they do that? And the answer is because cans continue to grow and our customers and our partners need us to continue to invest to make sure that we're there for them when this continued growth shows up. And with the contracts, as they're constructed now with volatility from an inflation standpoint, we need a better structure, not only on the future contract but on the current one. And so that gives us some -- this is going to work with strategic partners. Tactical relationships, it will be much more difficult.

Okay. And as you look at the region, I mean, you've got meaningful footprint in a number of different -- it's not one region, it's a bunch of different countries that you kind of aggregate in practice. Are you seeing specific countries or specific beverage categories where that growth is stronger? Where you've had -- there's been a number of announcements, you and peers and investments in the U.K. specifically. Can you talk about kind of where the differences in demand you're seeing across EMEA?

Yes, it's -- Europe has always grown. It's just growing at 2x. And the U.K., the Southern -- or the Southwest portions of Europe, the Southwest, it's more beer growth and how that product is being consumed. In the U.K., it's pretty significant anti-plastic sentiment there. And there's a number of new products that are moving into cans there. In the Nordics, it's pretty steady growth in that low single-digit range. And then in Eastern Europe, they're continuing to see more investment in can filling lines, et cetera, and the can continues to win. The thing about Europe is it's got the lowest can penetration of any region with the most room to grow, with the most regulation that's being contemplated in terms of producer responsibility. So yes, at some point, we won't be talking about Russia anymore. The balance of our European business has wonderful growth trajectory, and we're landing into that with investments in the Czech Republic that we've announced, in the U.K, in Kettering. And so you'll see continued growth and volumetric growth in a number of different categories, but it's still -- it's the anti-plastic sentiment and further new products being launched in the cans. So it's pretty similar backdrop as North America, in many instances.

Okay. Maybe switching away from cans. I'd love to talk about the aerospace business for a few minutes. And just -- you had a very good first quarter. I think there was also -- I mean, last year, you were dealing with some labor issues and the way the contract timing worked. Talk about backlog and book-to-bill in that business and the confidence you have in both the outlook for this year, but going forward, for that to continue to grow.

Yes. We're very pleased. Actually, the fourth quarter and the first quarter, you really started to see that business stabilize in terms of performance. So you've got a couple of quarters where you stack back to back, that it started to see some really nice positive growth and growth trajectory working off that backlog as you've indicated. That backlog grew from the end of 2021 to the end of the first quarter 2022 by nearly $700 million. So we're continuing to win jobs and get those jobs funded. We're still able to find folks that want to be part of all and who want to be part of our aerospace business. So it's on a really nice trajectory. Candidly, some of the stuff that we do is -- there are elements that the government, the Department of Defense and many of the agencies we work with, need. And it's being further pointed out in the escalation of activities in Eastern Europe and the Ukraine that they need more of it. And so the budget is moving along pretty quickly. The Department of Defense budget, it might actually have a little uplift with what's going on. And we should continue to see a larger portion of that budget going into the areas where we have a leadership position. So future is bright. I think the next 3 to 5 years in terms of what we have in backlog, what we're working against and the opportunity set in front of us should lend itself to some really nice increments year-over-year. And we've talked about maybe a little bit bigger step change in '23 versus '21 to '22. The team is doing terrific. And look, yes, I'm looking forward to report out against that lift moving forward.

Okay. All right. That's really...

One area, Adam, that -- just in aerospace, we've constantly spoken of the Department of Defense that we were a big supplier on the Webb Telescope that was launched, you'll start to see some pretty interesting images come out in the summer. That will be a catalyst for potentially further exploration that we can build on our current technology in our Civil business, which is much smaller than our defense department, but we've got a very leading technology in a number of areas, including climate sensor technology. And I think as folks start to try to figure out, like institutions like yourself, how you audit these zero carbon targets and greenhouse gas emissions and ESG community, I think we have a role to play there that we'll be talking about more and more in the future.

Okay. And elsewhere on -- in the portfolio, on the non-can side, I see it on the table right in front of you, are the aluminum cups business. And I guess, what I'm -- what I'd be interested is, I look at -- certainly I see the box, which should be available at retail, and I think about -- do the math on a unit basis and what the revenues of those are. And I could pretty easily kind of derive -- say the cup business could be one of your most lucrative businesses once it's at scale. And I'd love to just get your perspective about what -- where that business is going in '22 and what you're looking for before that maybe takes the next level up to profitability. Because it would seem like the unit economics, from what those cups are selling for, are incredibly compelling.

I agree with all of those assumptions and backdrop. The specificity on the time line for when we reach the end conclusion that you laid out, it's still a bit early. We will be -- a couple of things that are working for us is, if folks can see this on the table, we actually -- this is a 24-ounce cup, this is a 20, this is a 16, this is a 12 and this is a 9.1. So our second line will allow us to offer the full product offering. And why that's important is this is actually the second or the third highest volumetric cup, because it's required for single-serve alcohol. So once we build this out and once we're on shelf, which we will be later this summer, we will be in 3 or 4 of the largest retails, we'll be in every store. So we'll have a much better vehicle to articulate the velocities. There will be promotional activity in and around it. There will be seasonal promos. And then one of the things that we've missed out on, unfortunately, during COVID was the opportunity to be in food service, to be in venues in a bigger way. And so all of that is coming. It's forthcoming over the next quarter or 2. We're getting just wonderful feedback continuously on the product and how neat it is and the drinking experience. And so as styrofoam continues to find a path to getting banned in some cities and some municipalities, this will start to just be a groundswell of an innovative product on shelf. People will understand where they can find it. They'll go to venues, they'll experience it. They'll go to food service, they'll experience it. We can offer the food service in the venues, a way to articulate a more sustainable environment and venue for them. And so wrapping all of that around, gets you to, I think, an outcome here over the next 2 to 3 years that we look back on this and we're like, "Wow, that was a fun journey, and I sure like having it in our portfolio as an investor."

Okay. So maybe that's a good segue and just a question on capital allocation. And I think one of the things that strikes me with Ball is you've pretty consistently invested in the business and returned cash to shareholders and you've pursued that investment-grade credit rating as a result. More recently, you did an accelerated share repurchase after the quarter. Can you talk about kind of -- you're going to seemingly buy back the stock anyway this year, but why you chose an ASR now? And what does that say about kind of how you would buy back stock in the future?

Exactly to your point, it's not a real surprise that we're doing this. We have -- our largest working capital quarter is the first quarter. So that's typically going to be our lowest -- we will be a bit conservative. I mean, if there's a buying opportunity, we run those models, and we'll take a look at spot vehicles. But when you get an opportunity to invest, it starts to be the second quarter and beyond. And I think what we're saying is it's a little head scratching on what's happened to our stock. We are big believers in the strategy we have and where we're headed. And so we spoke about this several weeks ago, and here we are, and we're executing that. And if you look at the operating performance in Q1 and what we're experiencing, I mean, there's a nice earnings lift. There is a really healthy balance sheet, nice cash generation. So it's almost like why wouldn't we do this?

Okay. And as you think about -- does that -- apart from maybe the changes on capital investment in Russia, which had been -- you had been expanding that and now we're not. What -- does that have any signal or intent on your confidence on the growth side and the new capacity and the pathway to getting -- to continue to grow the unit capacity of the company?

No. Adam, it doesn't for -- again, for the medium and long term, much like our conversation on South America, it's like, hey, maybe these 2 lines need to be showing up in other regions where we're going to get a higher return in a shorter period of time. You could see a little bit of movement on the time line of some of these projects, but the integrity in the medium to long term is quite intact. The one thing that we will do is we will return value to shareholders in the most optimal way possible. And so we're constantly having that discussion. We're having that discussion with all of our businesses. I think another thing to keep in mind is the supply chain and the actors within the supply chain, like Novelis' recent announcement of a new greenfield aluminum sheet, there are other folks that will point to the belief in this business and the opportunity set. So I don't have to be the prophet. If you just pay attention to what's happening in the supply chain and where the investments are and maybe what our customers are doing, not saying, we still really believe in what the capital that's being deployed is going to work for.

Okay. And on that Novelis point, I mean it was notable in their announcement yesterday, Ball was quoted and actually cited. And so just what role do you play in that project? Just help us -- when one company is announcing a capital project like that, it's less common to see the customer kind of already in the press release.

Yes. I think it's -- they're a really good partner with us. We do business with them all over the world. We certainly endorse this and you can assume that we have a meaningful obligation in terms of the contract. I mean, we're believers. We've been out there saying we're going long term. We're believing in this. And I think it gives -- it really starts to settle our customers and give them belief equally, not only that the metal is going to be there, but that Ball is going to be there with the metal and help them to transform their supply chain and move to the best sustainable beverage option for them.

All right. Well, great. Well, I think we're just up against the -- our allotted time. So maybe I'll choose to leave it there. Dan, I want to thank you so much for joining us. I want to thank everybody on the web for joining us throughout this session, for our whole conference all week. So thanks, everybody, and I hope everybody has a great weekend.

Thanks, Adam.

Thank you.