Ball Corporation (BALL) Earnings Call Transcript & Summary

Great. So we'll go ahead and get started. For those of you I haven't met yet, my name is Mike Leithead. I head up the chemicals and packaging efforts here at Barclays. We're happy to have Ball Corporation, Dan Fisher, President and CEO; Scott Morrison, CFO. We have Ann Scott from the IR dream team here as well. So before we start, we're going to run through some of these audience response questions. If you can man the clickers, we'll run through these pretty quickly. So I guess question one, do you currently own this stock? Yes, overweight; yes, market weight; three, underweight; four, no. [Voting]

Fortunately, you guys can participate in the...

I would be 1.

Okay, fairly balanced. Looks like we've got some opportunity here. Next question. What is your general bias towards the stock right now? One, positive; two, negative; three, neutral. [Voting]

Okay. Fairly balanced again. Next question. In your opinion, through-cycle EPS growth for Ball should be above peers, in line with peers, below peers. [Voting]

Okay. Got the most neutral crowd so far. Everybody's pretty in line. Next question. In your opinion, what should Ball do with the excess cash? Bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown or internal investment. [Voting]

I swear. These are three -- the most balanced responses. Next question.

It's like asking my household, what are we going to have for dinner?

In your opinion, on what multiple of 2023 earnings should Ball Corp trade? Less than 10, 10 to 12, 13 to 15, 16 to 18, 19 to 21, higher than 21. Now hopefully, this isn't as balanced because -- I hope there's nobody saying under 10. [Voting]

Okay. It's again fairly balanced. Next question. What do you see as the most significant share price headwind facing Ball Corp? Core growth, margin performance, capital deployment, execution strategy. And then we have one last one on ESG after this, wrap up. [Voting]

Okay. And then last one. Does ESG play an active role in your investment decision relating to the company? Yes, it's a positive factor; yes, it's a negative consideration; no, it does not play a role in our assessment right now; no, but we plan to incorporate ESG in the future. [Voting]

I don't think these are all the right results, I swear. But we'll leave it at that. Well, look, appreciate you guys joining us again. Shoot, a lot has changed since last February when we sat here. I mean, I think we sat here maybe day 1 of [ the invasion of Ukraine ], or day 0.

So maybe to start off, can you just level-set where the Ball organization is today? Where you feel you're well positioned to return to kind of long-term growth rates here in 2023?

Yes, we were just talking about the fact that I was watching the tanks roll in on the TV out there, which wasn't a big deal, writ large, for a lot of companies, but it was for us because nearly 10% of our earnings came from our asset base in Russia. So walking out of here, that was sort of all-consuming at that point last year. And kudos to our leadership team in Europe that dealt with sanction after sanction after sanction and kept those assets running. And we exited that, I think, in a place where very few folks did. Certainly didn't get the value that, that business was worth 366 days ago, but we got $535 million of cash out and were able to pay down some debt with that. And so, that was a remarkable exit. We saw elements of an incredible growth trajectory meter a bit right around the May, June time frame. We grew 6% in May last year in our North America business, and it went to negative in June. A lot of that had to do with the well-publicized nature of how our customers treated price and inflation and passing that through, lack of promotional activity in the peak season. So with the combination of the Russia business that we had to deal with from a structural standpoint, and a metering or a rebasing of sort of our planned growth, we had to then take consideration of how we were going to manage our working capital, finished goods, raw material stock. We made a couple of announcements relative to some facility rationalizations that were, I think, overblown relative to the connective tissue to growth. It had a lot more to do with the fact that those were aged assets that we were not going to recapitalize over the next 3 to 5 years. And we had an opportunity to simply shutter 2 legacy facilities that were less agile, more costly and that we weren't going to recapitalize. So we took that as an opportunity. And we started to get ready, candidly, for 2023, taking structural actions to the tune of $150 million relative to SG&A and fixed cost adjustments. We will benefit from the PPI catch-up of what happened last year, and that will be net $200 million. So we positioned the business in 2023 to get back in line with what folks understand Ball do, and that is to return capital to our shareholders. We'll be doing that in the form of delevering this year in conjunction with our dividend payout. We're going to generate $750 million of free cash flow this year, and that free cash flow generation will start to tick up considerably in '24 and '25, and then you'll start to see a return to share buybacks and continue to evaluate leverage position. But the growth story is still in place. We expect to grow in the range of 4% next -- this year. Sorry. I keep saying next year, but we're here in February. And we took a lot of body blows last year, candidly, and I think we're going to deliver body blows this year. And I think the business is on its toes. And fundamentally, what you've known about Ball historically is what Ball is going to deliver this year and beyond. So we're in a really good spot. And aluminum still is by far and away the best circularity story amongst packaging. We're opening doors in the reuse and refill space at an accelerated clip in our aerosol business, traditionally, the aerosol business that folks know. And Scott and I are going to talk to the person who runs this hotel and try to ask them what exactly these compostable plastics are because I'm quite certain they're going to end up in the trash because you can't compost plastic. But other than that, I'll turn it over to you.

I will not comment on that. I guess maybe Dan, you talked a little bit about North America and obviously, the actions that you took to kind of, to your point, get it in the right position for growth. I think on your fourth quarter call recently, you talked a little bit about returning to promotional activity in North America. Appreciate it's only February, but I mean, just can you talk broadly kind of what you're seeing, hearing from your customers so far this year?

Yes. The first -- and I think a lot of our customers have released earnings over the last couple of weeks, and they've leaned into this concept of returning to a more normalized pricing behavior. And I think what you should take away from that is normalized pricing behavior in the United States, and even to some extent in Europe, but to a lesser extent because they're not a pantry-stuffing society. Memorial Day through Labor Day were promotions, barbecues, all of that happens, and it's been traditionally a peak in terms of our volume. There's seasonality benefit to that. There was no promotion for the first time in 40 years last summer. You can, I think, attribute that to any number of things, the COVID stimulus and additional cash and on and on and on. But the behavioral disruption from our customers certainly manifested to lower growth rates during that peak period for us. And the first promotional opportunity in the -- at the beginning of the year in North America is always 2 weeks prior to the Super Bowl. So we actually saw, especially on the beer side, promotion. You won't see another real opportunity for promotion again until sort of late March in and around Easter. But that was a welcome sign, and so has the external commentary of our customers. So to your point, 1 point in the year does not a trend make. However, it is something that is a clear indication that the pricing lever that has been pulled repeatedly for about 6 or 7 quarters has come off and it came off dramatically in the last 4 to 6 weeks of 2022.

Great. That's helpful. And maybe just looping into that, I'll tie in a sustainability question. It's been an up and down kind of customer demand environment for the past 12 to 18 months for all the factors you talked about. But can you just kind of speak to your conversations with your customers around substrate shift, shift to aluminum? Has that changed at all? Or I mean, again, has that been a continued steady driver despite all of the, again, we'll call it market fluctuations, the past 2 years or so?

Yes, I think there are conversations and then there are data points, and we try to tell ourselves the truth with the data. And one data point that we've leaned on heavily over the last handful of years is the new product introductions in the U.S. relative to the packaging substrates. And cans went from about a 35% share 5 years ago to 85%, I think Q3 of last year. And they've come off 1%. So we're in this 80% to 85% range, which tells me that new products are getting launched overwhelmingly in the cans and aluminum packaging. That means that our customers don't want to build on the problem they already have with single-use plastic. And if you remove water out of the plastic calculation, you can really see that plastic has come down over the last handful of years. But we still continue to consume an inordinate amount of single-use plastic in water, and that's really the volumetric climb of PET still. We're -- there's nothing relative to specific conversations. There's a lot of ideation in and around new product development and new products. I don't know which one's going to win. That's always the question. What's the next spiked seltzer? What's the next -- I don't know. But at some level, I really don't care if they're all coming out in cans. It's -- something's going to win in a can.

Great. And if we maybe shift the conversation to the international markets a little bit. We talked about North America. South America has probably been a bit choppy. EMEA seems quite resilient, though, I mean, despite the inflationary pressures there. If you carve out Russia, I mean it still feels like demand there is pretty good. Can you just kind of talk about your outlook in those regions as we go into '23?

Yes. I would say Europe for us is -- it's interesting. It's -- obviously, there's energy policy and there's the ridiculousness that's taking place in a very sad way in the Ukraine. But the best medium- and long-term outlook for us is Europe, and largely because aluminum is so underpenetrated. We're sub-30% substrate penetration there. And if you look in some parts of the region where we're adding capacity, it's fundamentally tethered to not only substrate shift from plastic, but substrate shift from glass, which is not well understood. But that's the preference of the high-volume consumers, and high-volume consumers obviously are not older than 35. So there's this generational shift that continues to happen in the Nordics and Eastern Europe and places like that, that we will benefit from for the medium and the long term. And then if I was to shift to South America, Michael, I would say South America is exactly as you characterized. It's choppy. It's inflation. It's interest rates. It's all of those things. I think [ Lou ] is trying to get us footing in Brazil, which is the biggest country. But we're still seeing growth in Argentina, believe it or not, with 60% inflation every month. And we're still seeing returnable glass shift in all of the other regions and all of the other countries in and around. But we've gotten to a little bit more stable footing relative to can penetration versus returnable glass right now over the last 18 months, and that's not dissimilar to when we've seen higher inflation in Brazil over the last 30 years. There's inflection points where they will use the returnable glass, they will push that in an inflationary environment. And then as things normalize, you'll see the return to can. And so we would expect that back half of this year and into '24.

Great. Okay. And then maybe if we just round out the aluminum parts of the portfolio. The areas that maybe don't get as much focus sometimes, the aerosol, the aluminum cups. Can you just update us just kind of what the opportunity for growth is there? What you're seeing in terms of the market kind of going forward?

Yes. Aerosol is -- has the greatest opportunity it's probably ever had in the historical context of Ball owning that asset. And personal care, conversion of steel to aluminum; personal care refill, conditioner, shampoos, things of that nature, have really taken off in Europe. This product here is actually our aerosol technology that you're seeing more and more in terms of the refill in the water market. Still low volumes, but it doesn't take a lot of volume to really move the needle for that business. It's really, really good margins. Lower capital throws to incrementally grow. And so we're really encouraged by that product and that portfolio. And one of the things that I think is not as well understood in that market, one of the large European players was actually a Russian player. And so supply/demand has really moved in our favor over the last year. That's one minor benefit to the Russian business as long -- in conjunction with the things at our aerospace and defense business, too, are much more in demand now as a result of that conflict. But that business, we're excited about. We should see double-digit growth for the foreseeable future and nice returns on the leverage of that asset base. You may even hear us talk a little bit more about some tactical investments, some surgical investments in and around capital. Again, it's low capital throws for that business, but nice paybacks. So we'll probably be talking more and more about that in the foreseeable future. And then on cups. It is such an opportunity, and they're facing some significant challenges in terms of -- I mean let's be honest, greenwashing. And I know my IR representative is not going to like this, but I'll tell you. Hawaii has banned single-use plastic cups in Hawaii. And so when you go to your favorite hotel, you'll see compostable plastic cups. There is no industrial compost facility in Hawaii. So where do you think those cups are actually going? And so I think the more we tell this story, the easier it's going to be for us to step into a real solve for this product and a real circularity solve. It's not waste. And so that business is a rocketship if you get a modicum of regulation and/or a modicum of real understanding. But right now, it's on a slow, steady growth trajectory. It is still an earnings drag for us, but we're big believers in it at this point. And I think a couple of things are going to break our way here in the next year or 2, which makes that an incredibly viable product for our portfolio and for investors.

Great. And maybe I can actually tie that into maybe a bit broader of a question. You guys have done a lot of work and I think have been pretty adamant in public around recycling rates, circularity. I guess bottom line, how do you think we'd get to a higher rate here in the U.S.? I mean, I think that's kind of the key -- I don't want to say impediment, but a key catalyst that -- not just for cups, for cans, for all of your products. So what do you think needs to get done? Or how do you think we kind of get there over the medium term?

We're really close to this. I mean, I think realistically, we [ need more and ] more legislation. Single-serve plastic is going to -- is being legislated out in a lot of places already, especially along the coasts, both East and West Coast. So I think that can help. But I think to Dan's point, getting through the greenwashing that other people are doing on certain products and telling our story, there's -- this is, by far -- aluminum is by far the best circularity story there is. And I think we keep telling that story, you're seeing. We get a report every Monday on what's going on from a sustainability standpoint around the world. And I would say 85% to 90% of the legislation that is coming favors the aluminum container. And so I think over time we'll continue to win.

I -- we've done such a good job with aluminum that all of the discussions now with our customers are solely on carbon zero, getting there. It's like if you can demonstrate that you can get there, I think that is now the next leg in the stool that we knock over. And we've got great industry partners, we've got great technicians that recycle content, and recycling is the answer. But you've also got to demonstrate that you're going to have a supply chain that's going to continue to invest to navigate that carbon zero end state for your product. And I think we're doing both of those simultaneously. I'm encouraged by -- I was talking to the Governor of Colorado a couple of weeks ago. He's fully supportive of it. He's working on the circularity benefits. You do need deposit legislation. I mean, that's clear. The states that have deposit legislation, it's a 90-plus percent recycling rate. The ones that don't, it's embarrassing, but Colorado, I think, is somewhere in the 40s. People go out there to enjoy the outdoors, I think we're 42nd in terms of recycling rates. So it legitimately is deposit legislation can really turn the dime. And we've been hesitant to enter into that historically because we want to make sure that everyone is paying at the same rate because, if everyone is paying at the same rate, we actually have economic value. We don't want to subsidize other competitors and their streams, but we're starting to get more and more practicality in and around that. And I think as Scott said, coupled with the bans of plastic, you got to get additional recycling. And I think those, in conjunction with a carbon zero landscape, are the 3 linchpins that we're working against. Each one of them is as important as the other, depending on what audience you're talking to. But in every instance, we actually have a plan, and we have underpinnings for that plan. And I think we'll continue to see the aluminum packaging win short term, medium term and long term.

Great. And maybe if we can just tie it all together. I mean, we've talked about most of your businesses other than aerospace tonight. I do want to get to aerospace because there is a really nice story there in terms of backlogs and earnings growth. But just as we think about, for the company 2023 earnings growth, you talked a little bit about the cost side. You talked a little bit about the volume growth. Can you maybe help people? You just kind of laid out your reiteration of your long-term targets for 2023, just kind of the framework or the key moving pieces. Can I get your confidence level on delivering that this year?

[indiscernible]

Yes, I think the -- we took actions pretty early last year, and it was painful to do, but the plant closures, the cost take out, fixed costs and then the G&A savings that are at least the same size as or probably larger than the fixed cost savings. So we get the benefit of that. Dan mentioned the $200 million of PPI. What we're starting to see also is inflation -- our input inflation moderating. And so you don't have the problem with the ports that we had a year or so ago at this time. You're starting to see transportation come off. Oil has been -- oil is moderating. A lot of our coatings input materials are moderating. So that's kind of a perfect scenario of we're going to get the PPI catch-up and then our cost base is moderating. So I think all of those things, we're really focused on cash, cash generation. We said $750 million of free cash flow this year. We'll pay the -- our dividend and then use the rest, about $500 million, to delever. We need to see a path kind of getting back to 3.5x as kind of the next target, and then we'll see from there what the world looks like, what interest rates look like. But I know people in this room, everybody talks about how high interest rates are. I can remember when interest rates were a lot higher than this. So these are still not interest rates that you'd say kill growth. It definitely can dampen it a little bit, but these are still pretty attractive markets.

Great. And as we -- you segued perfectly into my next question around capital deployment and how we should think, really, about the next kind of 12 to 18 months. You talked a little bit about where you'd like leverage to be before you kind of reramp some of the buyback. As we get from '23 to '24, can you talk a little bit about growth CapEx, kind of where you think that kind of gets to? And just if we can kind of build the bridge, I know we're not -- too early to talk '24, but just kind of the key moving pieces as we think about a better free cash flow conversion continuing to move forward.

Yes, I think we're at a pretty good spot. We've spent a lot of capital in the last couple of years, and then we're finishing up the 2 new locations in Europe, and that gives us a nice platform to still be able to grow. We can put incremental lines in those facilities if we need to at the appropriate time. So I think the capital takes another step down. Last year, we spent just under $1.7 billion. This year, it will be about $1.2 billion. I see it stepping down below -- well below $1 billion next year. And so that's just going to add incrementally to that free cash flow. And the faster we can get there, the faster we can start buying back stock.

Great.

Two points to add to that is we get a lot of questions about, is 3.5x the right number? I think Scott and I, internally and with the Board, if interest rates continue to tick up, it feels like that's probably closer to 3, is where we would probably drive that to over '24 and '25. And then sort of implied in Scott's comments, internally, what we talk about for '24 and '25 is something a lot closer to free cash flow equaling net income. So a real step down in depreciation and returning that back to shareholders, which is really what we laid out in our 2020 Investor Day. It's like we're going to put capital in. We're going to see the volumes come up, which it has overwhelmingly around the world. And then we'll be strategic in capital deployment, but we're going to take that operation cash flow expansion and we're going to push it back to our shareholders, similar to what Ball has always done since eva, which is I think, Ann, remind me, 31 years this year? So...

Great. Well, I do want to save some time for questions. I could set up here and ask you questions for 1.5 hours. But any questions in the room? Yes, over there. I think they've got a mic, though. Swing over to you.

I was curious about the promotional environment. So you said beer was more promotional ahead of the Super Bowl than carbonated softdrinks. So is that because that market is more competitive? And should we expect that for the rest of the year and maybe going forward, that pricing will be firmer on the carbonated softdrink side, and more competitive, I guess, in beer?

No, that's a great question. So beer volumes were off in the second half of the year in a much more pronounced rate than carbonated softdrinks and energy. So I think some of the major brewers put forth price increases late October, early November, and they've essentially unwound that because they really saw an elasticity movement versus what they had seen up to that point. Once those elasticity paradigms break on that pricing strategy, that's when you start to see a little different behavior. I would expect CSD to -- my expectation was -- would be you would see -- in North America, obviously, you would see that more over the peak season, more over those normalized pantry-stuffing events. With the exception that there is one large beverage company that lost a pretty good amount of share over the last 18 months. So they may be a bit more aggressive. And all we need is one. All we need is [indiscernible] I think you heard most of that. But sorry. If you guys can't tell from here, it's blinding up here.

On CapEx, can you remind us of [ the cadence of ] CapEx [ in '23? ] how much of the $1.2 billion is from projects you already had started? So kind of the payment for projects that are in the works?

Maybe this is probably in the -- like $300 million, $350 million in that range probably now. I mean, things have definitely inflated from where they were a few years ago. And in terms of -- almost all of the capital that we're spending this year is on things that went in the ground or going in the ground early this year. The facilities in Europe ramp up here late in the first quarter. And so we'll be paying for that as we get to the end of the year. But most of what we're paying for this year are things that were put in the ground last year. We're not really starting, we haven't announced anything new in the past 6 to 9 months.

Almost half of that capital this year is -- 80% of half of it is the big facilities in Europe. We built them last year, we're paying for them this year, kind of how you look at that. And then the -- on the $350 million, if you break it down, $125 million for aerospace and $225 million for everything else, that's sort of your M&R. It's actually a bigger piece than most people think for the aerospace.

Any last questions in the room? I think we've got time for one more, if anybody has one. Going once. Going twice. Well, Dan...

Thanks, everybody. Thank you, Mike.

Thanks, Mike.

Thank you as always for coming. Appreciate it. And they will be around all day.

Awesome. Thank you. Appreciate it.

Thanks, Mike. Good seeing you.