Ball Corporation (BALL) Earnings Call Transcript & Summary

Okay, everybody. Good morning again. I'm George Staphos, BofA's paper and packaging analyst. We are delighted to have Ball Corporation presenting at our conference again. With us from the company, Scott Morrison, Executive Vice President and Chief Financial Officer of the company. He's been with Ball since 2000 in a number of senior roles. He's been Chief Financial Officer and Senior Vice President of the company since 2010. Scott, thanks for being back with us.

Thanks for having us.

How are things? How's life?

It's good. It's getting better. Getting better. Last year s****. Yes, I mean, last year was crazy, but the world seems like it's calming down, a little more stabilized, a little more normalized output, a lot of supply chain issues that we had last year seem to be kind of in the rearview mirror. Even in our aerospace business, we had some supply chain issues. Those seem to be largely behind us. We had our Russia business that we had to sell last year. That was a challenging time. It was a successful outcome from our perspective where we got $530 million. But it was disappointing to have to sell it. But we're seeing the cost side of things moderate a bit. We'll get in our business, George, with the multiyear contracts, we have these PPI escalators, but they are a year in arrears. So we're kind of catching up this year for costs that we had last year, which will help us and then seeing costs moderate kind of on the go forward. So I think we feel pretty good about where we're at now and where the businesses are at. We had to adjust our cost structure last year when the growth didn't show up that we expected. And we're still working some -- through some of those things on the inventory side in North America. Do that in the fourth quarter, there'll be more of that in the first quarter and a little bit in the second. But then we see things kind of normalizing and improving so.

Understood. So as you look at the 10% to 15% target, I think the free cash flow guide was about $750 million. Would it be safe to say, recognizing it's only March 1, you feel like you have at least as many upward support as downward headwinds?

Yes. Last year it was like every...

Or how everyone say it?

Last year, every week seemed to be like another punch in the gut. And we kind of saw the bottoming, I think, in the fourth quarter and started to feel better as we got into this year. There was a little bit of promotional activity before the Super Bowl, which we hadn't seen any of that last year, so that was encouraging. We know our customers have talked about some of the larger ones that hedge their own metal. They have metal hedges that are elevated that will come off in the back half of the year. We think that -- if you had to hedge metal last year at this time, you were paying $4,000 a ton for metal, and now you're at $2,300 a ton. So it's a pretty significant decline so that we think that can make the can much more competitive. And so yes, I think we feel a little better.

Good deal. Good deal. And over the course of dialogue, everybody, certainly, if you have a question you'd like to ask, raise your hand. We have Linda in the back of the room at the ready with the microphone. So I guess one thing back to the why invest in company XYZ question that we're going to be asking everybody today and tomorrow, look, Ball has a wonderful track record over time. Last year was a tough year. At the end of the day, packaging and paper and forest is about 0.3% of the S&P 500. So for people who are listening on the webcast right now and are in the room right now, the 350 people who are in the room right now, why should they care about investing in Ball Corp aside from what's the 1 or 2 bullet points you want them to take away and why they're going to make money in that investment?

Well, I was talking to somebody outside who's known us for a long time. And if you go back, my 23 years at the company, we would do acquisitions every so often and kind of lever up and then delever, use that cash flow to pay down the debt and then flow lots of money back to the shareholders. In the last couple of years, we do acquisitions, but we had a lot of organic growth opportunities. I mean, we -- the North America market, so Canada, U.S., Mexico, grew from 115 billion units in 2019 to 140 billion units. So we saw a lot of growth. And so to keep up with that growth, we spend a lot of capital. Now we're in the phase of delevering from that capital spend. And I think the cash flow starts to definitely accelerate. This year, you said $750 million free cash flow, next year, it will be more than that because we'll dial back the capital again. And so it's kind of back to that -- we know that works. In my 23 years, we've created a lot of value by following that formula, and we know that works, and we're going to do the same thing. And so being disciplined in what we're spending money on and how we're spending money. And we've put enough capital on the ground to take care of us at least for the next few years. And so we feel pretty good about that ability to turn the cash machine back on and flow a lot of money back to the shareholders and get our leverage kind of where we want it.

One of the elements of the old Ball as well over time is when you do hit a period of difficulty, if you want to call -- and use whatever words you want to use, if you agree or disagree with that. We've seen management step in, buy stock personally. We've seen sort of directors within the company to raise ownership thresholds. Obviously, you bought personally some stock last year. What's going on that we might not see but that we could know about in that vein within Ball?

Well, I think a number of us, I think most of us that are in the proxy bought stock in the last year or so. So we definitely believe in the long-term story. I mean I have fair amount of stock to start with, but I felt there was a definite opportunity because where -- the world was kind of dislocated. The world is definitely different. I mean we're going to have higher interest rates. We're going to have more inflation than what we had in the past. You're going to have a reshoring of a lot of supply chains. It will be a different world going forward. But I see our business being pretty attractive in that kind of world, too. So I think there's definitely more upside than downside.

Scott, what do you think the North American market grew at last year in terms of shipments? And globally, what do you think that number was?

Mid-single digits globally. Our Europe business has held up remarkably well. Last year, we grew upper single digits. This year, we're kind of starting off mid- to upper single digits. South America has been the most challenging coming into this year, but it's always the most volatile. And it goes through ups and downs more quickly than other places. But place like Argentina, where we grew almost double digits last year had 90% inflation. And so you can still see growth even in a place like that. Can penetration is still relatively low in a place like Argentina and so we see that growing over time.

North America -- yes, sorry.

And then North America, the big challenge was we kind of came into -- if you wind the clock back to the Q3, Q4 of '21, at that time, the growth was accelerating in North America. We were trying to get our hands on as much metal as we could to keep up with that demand. We thought it would grow close to double digits. And then our customers really didn't price promote and raise price a lot. And they saw -- typically, they'd raised price, 1% or 2%, their volumes were declined 1% or 2%, and we didn't see that kind of normal elasticity in the first half of last year. And we started to see in the fourth quarter where prices were raised and their volumes suffered. And they're starting to get some more pressure from retailers about the price increases, and they definitely took can pricing up more than other substrates. And so if we get a more normalized environment this year, we feel pretty good about what the possibilities are. But we're being more conservative coming into this year just because last year was challenging.

So would you say North America, just it was down 2%, up 2%? Not for you, for the market.

I think for the market, probably pretty flat to a little bit down. Energy did real well. Imports coming in from Mexico still did well. Big beer was softer, but we're still seeing growth in -- the good news -- another kind of good news point of why buy Ball is we're still seeing 80-plus percent of new product introductions coming in cans. So we don't know what product is going to win but we know it's pretty likely going to be in cans. And so I mean this is a good example. This is a new product. It's not our can but cans are going to win. And if cans are going to win, I think we're -- with the footprint we have, our focus on innovation, our focus on sustainability, I think we feel pretty good about our chances of winning too.

Can you hit the growth rates that you put out for this year without seeing a pickup in promotional activity? And when do we need to start seeing the rubber hitting the road? Beer, yes, it's actually, we're seeing it right now. But soft drink has been kind of tepid. Again, feel free to disagree, when do we not need to see the CSD and non-al promote more to...

Maybe the summer time. We got to get to Memorial Day. Last year, we saw really nice growth still in the first quarter of last year. And through May, I think May grew 6% for us, and then June dropped off 6%. Because there were price increases and no promotion. And so we felt that, and we saw the world kind of shifting when we got to our second quarter call. And I think we saw it ahead of what some of the other folks saw it, and we took action, took out a lot of cost. We closed a couple of facilities. We took -- had $75 million of fixed cost out, and we'll save more than that on the SG&A side. And so I think we put ourselves from a cost position to be able to be successful and grow our profitability nicely without a heck of a lot of volume upside. And if we get some volume upside, I think it will just be -- a lot of that will flow to the bottom line, we'll get the benefit of that.

On the [ $175 million ], are you comfortable that, that's at least the low water mark in terms of your margin benefit this year from cost outs? Or that's the number, don't assume anything more.

No, I said $75 million and another $75 million.

Excuse me, $150 million.

And I'm sorry, what's...

So in other words, that number, is there any upside to that in terms of other than what I just tried to put into the transcript for you, but [indiscernible] sorry.

I mean there's always potential, right? There's a -- you can always do more. There's always more you can do. Right now, we feel pretty good about where we're at. I think one of the things that we didn't do as good a job last year as we could have is when we announced the closure of those couple of facilities in North America. I think everybody thought that was, oh my gosh, the growth in cans are over for North America. We don't believe that the growth in cans is over in North America. We have the opportunity because of our footprint and because it -- we can close a facility. We can rationalize a facility and put -- take that throughput and put it into more efficient existing facilities with -- so we're not walking away from any particular region or market when we do something like that. So for us, you have the opportunity to take out fixed cost, get the operating leverage of putting that through a more efficient, more cost-effective plan. And over my 23 years, we've done this a lot at different times. And so when you have growth rates that are more moderate, because you're getting efficiencies in those other plants, you have the opportunity to do that from time to time. So people should not be shocked when that happens. I think we could have communicated a little better when we did it last year.

Understood. And then just on, again, some of the sort of controllable maybe you wouldn't phrase it that way, you still feel comfortable about the net $200 million on price cost this year being able to at least achieve that this year?

Yes. Definitely. I mean it's contractual, some of it started in January, another chunk comes in April 1, and then the last chunk comes in July 1. And so we'll get part of the benefit, but that -- some of that benefit will flow into '24 as well. So yes, we feel pretty good about that. And then we're starting to see the warehousing, transportation, coatings. They're not accelerating at the rate they were last year. And so I think that will be helpful. And Energy, European Energy, Europe was fortunate that this winter was not as cold. They did a good job of reducing usage. And I think they built an LNG terminal in Germany in 175 days, which -- that kind of would have taken 5 years prior to the crisis. But I think they're doing a good job of getting away from dependence on any particular place, and I think that will help European Energy.

But given that the markets broadly caught a break in Europe this year with energy this winter, what do you do now so that you're prepared in case you don't catch a break heading into '24?

We've done a lot of things with customers using -- being able to retrofit ovens to use different kinds of fuel. And so we've been -- we started conversations with customers much earlier last year when all this started to have kind of a Plan B, should energy be cut off or get crazy expensive. And so I think the things that we can control, we're working with our customers to make sure that we have backup plans.

Thanks, Scott. Any questions from the audience for Scott? Casey, if you just want to hang on for the mic.

Scott, Casey Johnson. Just a quick question. If you look at the move in aluminum prices having halved from their peaks, can you give us a sense for the consumer packaging companies, particularly the beverage companies, how much aluminum cost goes into the actual end product like the cost of the production of the can? So if we think of it having have, how much leeway do they have for this promotional activity that could be coming this summer?

I mean a pretty good rule of thumb, it depends on the size of the can and all that, but a good rule of thumb is 2/3 of the cost is the aluminum. So if you had aluminum at $4,100 high, I think at peak last year in early April at $4,100 a ton, now it's less than $2,400 and that's 2/3, 3/4 of your cost, it's quite a bit. It could have a pretty positive impact on what margin you kind of have to play with.

Scott, on that point, and again, maybe on some commercial questions. What opportunity do you see -- are we seeing any evolution here where 20-ounce PET, which has been kind of the Ball work and big source of profits at the C stores for the brand owners, maybe see some share loss to cans? Or I mean from what we saw 20-ounce was promoted last year during the summer. So what opportunities does a can have to maybe gain share in that channel with that sort of consumption occasion? And then what are you seeing in water at this juncture?

Yes. I think in the C-store, I mean, you go into a C-store today and you're going to see a heck of a lot more cans than you would have seen 5 years ago, 10 years ago. I mean it's definitely -- we are increasing the penetration. A lot of it has to do with different sizes. You're seeing a lot of -- 16-ounce cans to compete against 20-ounce PET. So I think there is a lot of opportunity for that over time. And our more innovative customers are using different sizes, different pack sizes, to like hit certain price points to kind of continue to drive that but...

You did resealability or no?

I don't think so. 16-ounce can, I don't think resealability. People talk about that from time to time, but it's -- I don't think that's as big a deal. I mean -- and we have the ability to reseal. I mean, this is a newer technology. This is an extruded aluminum technology that has flat water in it. And we have the Alumi-Tek bottle that you can reseal, but I don't know if resealability is always the case. It depends on -- I think that can help in the consumer or in the C-store because if you're buying it, you're going to ride your car maybe the resealability is a bigger deal there, but not always. And then on the water side, we're definitely seeing more brands. You got newer brands like a Mananalu or Liquid Death that are promoting still water in cans. They're getting more retail shelf space, whether it's Whole Foods or other retailers. I think you'll continue to see that. I think you'll see it in higher-end branded water. We're seeing it in -- we're definitely seeing it in stadiums and venues where we had a big push to go plastic-free in a lot of those stadiums and venues. And now that we have products that from our Alumi-Tek container to our cups, to cans. We definitely have a lot of traction on that front. And so we feel pretty good about the long-term potential of that. All those things take time. But I was at a hotel a couple of days ago at a different conference. And you got 2 of these when you checked in. And so they're getting rid of single-serve plastic. And I think that trend will continue. And so I feel pretty good about long term about all of our products being able to play. As people get more focused on sustainability and the problem we have with plastic waste, and we're in a good spot.

We'll try to get 3 bottles in next year.

Yes, these are nice. This place gives you plastic water bottles like, I don't know, what that's about.

I don't know. We'll do that, and we'll also take the brown M&Ms out of the Ball. So on sustainability, no, fair points. You have a conversation with a customer and you say, you've got the sustainability goal. You want to take -- have your packaging materials reflect 50% recycled content by 2025 or 2030? But the other than aluminum, your other materials aren't even sniffing that.

Correct.

And so Mr. Customer, Mrs. Customer, how do you feel about your pack mix and your ability to hit those goals, what do they say back?

Well, I think a lot of them have large plastic businesses that they like and are profitable, but I think they understand to reach those goals, we're kind of scope, you got Scope 1, Scope 2, Scope 3 emissions. We're Scope 3 for a lot of those customers. Well, they can improve their Scope 3 emissions a heck of a lot by using something that's already got 74% recycled content. We get them there today. So I don't think that's lost on customers. And so I think that also is like another tailwind for our business longer term as people need to achieve those goals, I think we've got the right substrate to be able to help them achieve those goals.

We often get questions on how the contracts provide you and your customers mutual assurances and benefits. But the majority of our relations don't seem to actually have take-or-pays. There's been more of that, but it's still the minority, not the majority. So tell us how the contracts actually provide a benefit to Ball and how you then use whether customers are in their band or not for other benefits down the road, extensions, like, whatever you feel comfortable talking to?

Yes. I mean, the world is not 100% predictable. Some of our customers are better at forecasting than others. So you're always going to have some band that a customer can operate within. And that band, even if it's 90%, 10% is a lot in our business. And so you're still going to feel that. And it's typically for a particular location. And so you're always going to have some risk of what's happening in the market. But what the larger customers, what we feel good about is they have so many different brands that they can push. And so one brand may be not doing particularly well. We can easily change the label and run a different brand on the same can or a different size can. And so I think that ability to be able to do different things for customers, to help them win with whatever products are winning for them. We can mitigate some of those. The last couple of years have been definitely more volatile. We saw nice growth before COVID in the can. I think a lot of that was the sustainability tailwinds, new product introductions. Then you had COVID and you had unnatural things happening with off-premise closing and take home going through the roof, you had imports. I think we're now kind of in this year, all of that is more -- going to be more normalized and we'll see more normalized behavior. And I think the can looks pretty good.

All right. So the leverage really we -- our takeaway should be -- it's less about what incremental benefit you might get in terms of up charge or something else, it's more your ability to say, hey, you didn't hit your threshold, give us more share rightfully of some other labels. Is that simple...

I mean that's one angle. Another angle is we might build in rebates. And so if you're not going to hit those thresholds, you're not going to get those rebates. And so it becomes essentially a price increase, if you will. So some are -- they're going to take 5 billion units over 5 years. If they're running behind, do we extend the contract. Everything becomes a bit of a negotiation. But we tend to work -- our customer relationships, we want them to be partnerships. And so at any point in time, 1 partner may need something different and we're willing to work with those customers to figure out, okay, what's the best solution, what's the best long-term solution? We've been around 143 years. We're going to be around a little longer. And so working constructively with customers when they're having issues and it kind of -- it goes both ways.

How do you feel about your supply-demand balance going into '25 and '26? And why should we be comfortable with where you're at? You shut -- you delayed -- excuse me, North Las Vegas and Concord, you closed Phoenix in St. Paul. You closed Santa Cruz and all is for the records curtailed.

Curtailed. I think we'll be pretty tight. I mean these 2 plants in Europe come up this year, the vast majority of that volume is already sold. We're running our system to be north of 90% utilization. And that's our game plan as we look into '24 and '25 as well. So I think we'll be kind of right where we want to be from a utilization standpoint.

About 90 -- mid-90s or...

Yes, 90% to 95%, somewhere in that range, but we'll take some curtailments this year to get our inventories kind of back to where we want to in the first half of the year. But our plan is to keep it fairly tight. We're not breaking ground on anything new in the near term. And we'll grow into the capacity that we put in place in the last couple of years. And so I think we'll run pretty tight. I think most people -- most other can makers have delayed or pushed projects to the right. I mean, everybody saw the world kind of -- the crazy growth we saw during COVID moderated. I think everybody is reacting in a similar way. So I feel pretty good about supply/demand.

And mid-decade or later is when you have this next tranche still in terms of next customer commitment that you have to review?

Well, we have to wait and see how those develop, too, right? You don't -- you're always having dialogue with those customers. And so there's -- how are they seeing the world, what are they going to do next. And so we try to time those things to be married up with our customers as best we can. So we'll see.

Okay. But we -- I guess what I'm searching for, we should take away that all the work you've done over the last number of years will not be dissipated by what is currently a weak supply-demand for you in the next few years.

No, I don't think it will. I don't think it's a weak -- you could go to certain regions. Now definitely, Brazil is starting off slower. So you'll see things maybe dislocated in a short time period, but I think supply/demand generally around the world is in reasonably decent shape.

Any questions from the audience as we're wrapping up here? There's a question in the front, if you can just wait for the microphone. Linda?

Scott, just wondering if you could maybe expand on the industry environment? What your peers are doing? And if that's consistent with your position at all?

Yes. I think -- I mean that's kind of the last comment, I think, at least what I've read publicly. Most people are looking at it the same way. I think they're keeping supply and demand in balance and projects have been delayed. So everybody seems to be acting in a similar fashion, I guess.

Scott, maybe a multipart question for me as we're wrapping. It's ultimately around capital allocation and free cash flow. So I guess the first question would be, what would you have us take away about the cup business and how you're looking at that, how important it can be to the earnings stream for Ball? Right now, it's a bit of a headwind. Second thing, what would you have us take away as the right leverage target for Ball through a cycle? And how are you evaluating that? And then lastly, if all goes well, free cash flow should be improving. Earnings should be improving. Way back when Ball had talked about $1 billion of free cash flow. Is that something that's on the horizon in the next few years? Would you be disappointed if you don't get to $1 billion of free cash flow, say, '24, '25 and you can go like this. We should stop.

[indiscernible] I can't remember too many questions. So cups, we are -- there's not more capital going to the cups. We can now make several different sizes, which we needed to completely displace plastic in certain venues, so we can make everything from 24 to 20, 16, 9 ounce. And so that allows us to do the whole gamut of whatever kind of beverages are being served, whether it's soft drink, beer, mixed drinks, wine. And so we needed those capabilities to really have arenas go plastic-free. So we have that now and we're selling it at retail too. But you're right. It needs -- we need kind of a big anchor customer. We need a foodservice customer. Somebody that's going to buy 100 million units of these things, not 10 million, 15 million at a chunk. So we're working on that. I think our team is very motivated. I was at this -- somebody was mentioning earlier today, they were at a ski resort and the ski resort had gone completely plastic-free, had aluminum cups. So I think we're positioned well to be able to take advantage of those kind of situations. They will come. They're coming a little slower than what we'd like but they will come. And so I feel pretty good about that. The profitability of the cup when we sell it, is quite profitable. So it's really a volume. We need to get to the volume. And I think we're making nice inroads and good traction. We won a large national commissary-type company. And so I think that will open up a lot of opportunities and venues that we can sell cups to. So we feel good from that standpoint. But it's definitely -- it's come slower than what we thought. COVID didn't help in on-premise and the venues got closed and all that. On the leverage point, we want to drive similar to -- what we have done over the years is make an acquisition, pay down the debt, flow a lot of cash back to the shareholders. In the last few years, we spent a lot of money on capital. Now we're going to delever. And the first goal is to kind of get us back to that 3.5x debt-to-EBITDA. I'm not sure we get there by the end of '23, but we have a pretty -- we'll get close and have a pretty close trajectory to that. And then probably in '24, use our free cash flow. Our free cash flow should go up, should be north of $1 billion because we're going to dial back the CapEx again. And we'll be able to both delever and flow money back to the shareholders in '24 kind of in a balanced way and same thing as we look out to '25. So I think kind of the like the old Ball, if you will, of those levering events and then delevering and flowing a lot of money back to the shareholders. That's kind of how we see ourselves over the next few years. And so the quicker we get there, the quicker everybody is going to like it.

Sounds good. Everybody, please join me in thanking Scott Morrison and Ball Corporation for a great presentation. And next up, we'll have a really good panel on beverages. So see you in a bit.

Thanks, George.