Ball Corporation (BALL) Earnings Call Transcript & Summary

Thank you all for continuing to attend our GS Industrials and Materials Conference. My name is Adam Samuelson. I'm the Agribusiness and packaging analyst here at Goldman Sachs. We're very happy to have Ball Corporation to host today. Scott Morrison, their Chief Financial Officer, he's been gracious enough with his time to join us. We're going to do this fireside chat format. There are mics that we can have and take questions from the audience. Seemingly people have been shy today about that, but I'm hoping we can break that streak. As we get further along with Scott, thank you for joining us.

So maybe just to start and to levels that you guys reported your first quarter earnings last week. It was a solid start to the year. on the cost side, but maybe just lay out kind of how the thinking has evolved to where you are today versus the start of the year on demand and costs and earnings can use that jumping off point?

Yes. Thanks, Adam. Thanks for having us. It's been a good productive day. Yes, we started off the year. We had more modest expectations coming into this year. All of our businesses, we seem to talk about the North American beverage business all the time, but all of our businesses performed pretty well in the first quarter, and I think are set up to have a nice year. Work -- from a volume perspective, Europe for us is holding in reasonably well, kind of mid-single-digit growth we expect for this year. North America, we think, will be softer, kind of flat to slightly down, not a little bit. But we think the long term -- and South America is probably the most volatile region, and it always has been. It's the most volatile kind of month-to-month, quarter-to-quarter and starting off slow, but we think the back half of the year for a variety of reasons will get better. But we think the last few years have been a lot of choppiness with COVID and then lockdowns and on-premise being closed and cans driving big value. And then you had the war in Europe with Ukraine and Russia last year. There's been a lot of unique things that have happened, but we think all the benefits that the can has before COVID started in 2019, the can was growing nicely. We think all those tailwinds still exist. So long term, we're really excited about aluminum packaging. And we've got another choppy quarter here, I think, in the second quarter as we take our inventories right. But long term, we feel real good about the can and about the products that we're selling and the customers we're selling them to.

Okay. Well, maybe using that as a jumping off point, I mean, you said you have a lot of other businesses aside North America, but let's maybe let's start there, is it your biggest business. Maybe first. So you talked about, hey, that demand maybe not dramatically different than where you thought the in the year, but it's still softer. To help us understand kind of what you're hearing from your beverage customers especially around promotional activity. Markets didn't really grow last year. Then your volumes were down in North America in the first quarter, kind of how you're planning from a customer activity level as we get into the spring.

Yes, I think we're kind of a wait and see. I mean we're hearing things that sound positive. We've heard of things like higher aluminum price hedges rolling off in the back half of the year that should help their cost structure. We're hearing lots of things about them wanting to drive volume, we're getting pressure from retailers. But until you start seeing it and hopefully, between Memorial Day and Labor is when you see it in North America -- and so until we see that, we're not really counting on that. We're building our plan to a more modest -- I mean, the first quarter is a good example where our volumes were down, but all the hard work we did last year with cost takeout, both on the fixed and SG&A side, that's showing up in the first quarter. It's going to show up as we move through the year, and we'll have more of that. And so we're kind of doing the things that we can control and being aggressive on those actions. And then we'll hopefully be surprised with the upside. But until we see that kind of steady promotional activity, we're not counting on it.

And as you think about your different customers in North America, kind of how this thing with the lead times -- if they're planning on promotions and they're -- you're seeing that more bigger portion of volume or price rather for them price, for you volume, how far would you see in that in advance [indiscernible].

It's real tight -- I mean they don't carry a lot of inventory. So it's a couple of weeks. I mean you're going to get orders in a couple of weeks later, it's on the shelf. So there's not like we have 6 months of buildup to get to it. We've got plenty of inventory kind of coming into the summer selling season, so and you can replenish that pretty quickly. You get a couple of weeks, but not much more than that.

Got it. And so from a supply chain perspective, you're not planning on that picking up in a material way mark, that will impact kind of the price you cost structure in the second quarter. How would you characterize operating rates kind of where you sit in the system today and kind of how [ Technical Difficulty ] do you think that is?

I mean we're going to run our system so that we're in the 90% plus range for utilization. So we're taking curtailments here in the second quarter, both in North America and South America. South America is always much more of a seasonal business anyway. So you always take curtailments this time of the year to do maintenance and pull forward maintenance and things like that. But our game plan is to run our system at a fairly tight level. So -- but that will -- that will be a bit of a drag in the second quarter, as we mentioned on our call last week.

Got it. And is the uncertainty that you're hearing from customers about they don't again, some might have cost that have to roll off before they can be more promotional, uncertainty on the consumer demand side, kind of uncertainty on price demand elasticity that might be different than it was pre COVID, just help me think about kind of what you're hearing from customers why they're not -- as brand owners, usually, they'd be pushing for market share and volume doesn't seem that way yet...

Well, they've been able to -- I mean they pushed a lot of price. On the soft drink side, prices are up fairly significantly and more on cans than on other substrates, but the can is holding in pretty well. And historically, you'd see almost a one for one, where if price went up 2%, volumes would go down 2%. That elasticity kind of broke last year. And I think it has to do with all kinds of -- you're seeing inflation everywhere in the store. So maybe that was part of it, that you didn't see the -- I think the can held up actually pretty well given how much price went up. And so I think we -- will we get back to more normalized behavior, I think that will happen. I think you're seeing stress on the consumer, and you're starting to see volumes get a little softer. And usually, consumer-facing companies are going after more market share and volume growth. It's been -- they've been able to grow their profitability. But if you add a little price promotion to that and have your costs come off, you should still be able to grow your profitability and then grow -- start growing your volumes. And obviously, for us, the volumes are the important thing.

Yes. No, that's really helpful. So maybe switch regions and I contrast what you just described in North America, your European business has actually been performing quite well. And maybe, obviously, you have some headwinds year-on-year to your profit dollars from the Russia business, which you divested, which is still in the year ago comparison. But the remaining European business kind of talk about the organic volumes that you're seeing, the investments you're still making kind of customer activity, demand, especially which countries near...

Yes, Europe has held up real well for us. It really -- differences that we may have versus our competitors usually come down to kind of customer mix. We don't all have the same customers. So in Europe, our customers are performing well. Turkey has been a little more challenging. The earthquake has really damaged their economy. That's been a little softer. But most of Europe is pretty strong. And the 2 plants we're building, one in the U.K. and one in Czech Republic are built for with some big anchor customers that we've supported for a long time, and they're doing well. So we expect kind of mid-single-digit growth in Europe this year. Those plants are starting to ramp up right now and performing well. And the European team has done a really good job of managing the business, managing the cost side. And we feel pretty constructive. We have the big headwind in the second quarter. It's the largest. I think we made $40 million in Russia in the second quarter of last year. So that's a big headwind. But our plan is to try to replace all the Russian earnings that we had for 9 months of last year over the course of this year, and that would be in euro terms. So that would be a heck of an accomplishment if we could do that.

Got it. And with that growth and that investment in Europe, I mean how -- maybe this is for the entire network with some of the actions you've taken. Talk about kind of talk about 90% capacity utilization, CapEx is phasing down, how much kind of optionality is there in the existing network as it sits today is inclusive of those 2 under construction facilities or opening facilities, that you can grow into that network with very proportionally.

No, I think we have -- because of the investments that we made both there in North America, we've got a period of time here probably a couple of year period of time where we can easily grow by putting incremental lines in those facilities at much less of a CapEx through. So we've had -- we'll have a step change down this year in capital. It will be closer to like $1.2 billion, [ $250 billion ] somewhere in there, down from $1.7 billion or so last year. It's going to take another step down next year. And then we see those -- we'll see the volume benefit of those new facilities, and we'll see capital going down, so earnings going up. and we'll be able to flow more back and delever and return value to shareholders.

Okay. So maybe kind of with that capital coming down, right, maybe think retrospectively, there's been a big capital cycle in this whole industry. You invested, your peers invested, some of newer smaller players made some bigger investments relative to their legacy size in North America, specifically. The demand, especially last year did not meet those expectations and the industry has had to retrench some. What -- what do you think people got just overestimated demand and inflation hit and this didn't work? Or how do you think about what -- where kind of the misconception was on how much capital is being put in the ground versus how much more market was growing...

I think it's a good question. Really, I think the thing that was different is the normal pricing elasticity that had been around for 30 years broke. I mean that's what I think no one expected that. I think that was the big surprise. Most of the capacity that's been put in -- we had 13 million, 14 million, 15 billion units are imported or -- during COVID. All that capacity that's gone on has replaced all that with domestic supply now. And so it's just got rid of most of those imports. And the market has grown significantly over the last few years. So I think it's -- I think we're not in that bad of shape from an equilibrium standpoint. I think the one surprise was the price elasticity didn't operate how it normally operate it. And so that was the surprise on volumes. So we're being more cautious this year.

And as you think about kind of, your own kind of long-term planning on kind of substrate growth and beverage consumption growth in some of the different categories that are driving that. How is that thinking evolved and maybe where I think it's more likely to see more innovation and more growth than you have thought a couple of years ago?

Yes, I think all the benefits, all the tailwinds that we had going into COVID in terms of sustainability, in terms of circularity, in terms of this package being a great billboard for customers. All of those things are the same. None of that's changed. And so it's continuing to win versus other substrates. You're still seeing over 80% of new beverage products coming to market in cans. So all of those things will still hold true. That's why long term, we feel really good about the businesses that we're in, the aluminum, the aerosol business. And that's the growth because of sustainability. So all those benefits still hold, and we think none of that's going to change. We just -- we have to get to like a more normalized run rate situation. So we're starting to see inflation come back a little bit, come down, slow down, so that's good. And we're getting our escalators kind of on the lag basis. What we hadn't seen in a long time is 40 or high inflation 2 years in a row. And so we're catching up to that. And we have more of that, that comes in the back half of this year that will carry into next year. So we think we're set up really well to take advantage of the benefits of the can and will win long term.

Got it. Maybe we -- you touched on this a little bit, but think about South America. You talked about the demand there being more volatile. They have more confidence in the back half of the year, and there's a seasonality component on a volume basis on a year-on-year basis, that being a real significant grower in the second half of the year, kind of what gives you that confidence?

Our customer -- what our customers are telling us. I mean, what their plans are for the back half of the year, that's what gives us confidence that, that will -- they'll have a stronger back half than front half in South Americas based on what the customers are seeing in their business and what their activity and what they're planning.

And that's mainly beer...

Yes, mainly you have much more beer in South America but Brazil, Argentina, Chile, Paraguay, and the places we operate, it's much more of a beer market than a soft drink market.

And was there no brewer who had kind of Chapter 11 equivalent situation down there and you don't have exposure. So are some of your customers maybe more optimistic on market share kind of in the wake...

I think that could be part of it. I think -- yes, that wouldn't surprise me if they're looking at that as an opportunity from their standpoint.

Okay. All right. That's helpful. So we talked a little bit about kind of, say, PPI escalators 2 years of record inflation still catching up. As you think back over the last 2 years, where kind of not just -- there's been changes on the volume side, but margins in different regions for different reasons did not live up to initial expectations. Kind of talk about the confidence that we're down on the right side of that kind of that coin that we can see the historical operating leverage and earnings leverage falls give it has driven.

Yes. This -- the industry for a long time was pretty steady business, steady growth. I think everybody can operate on a normalized basis in that environment. when you get a big spike in volume and you're trying to add more volume, more capacity quickly. That's expensive. It creates unnatural things from a shipping standpoint and your cost, there's not as much flow through really what you want is kind of a nice steady business. And I think then you throw inflation on top of that, you throw the war on top of that. You throw a pandemic on top of that. I think now we're getting to a place that looks more stable. You're seeing inflation moderate, growth moderate to a place that's much easier to handle. And our capital -- kind of the capital spend cycle is coming down, our free cash flow will go up. And this -- I've been around a long time. And this business can throw off a lot of cash and you can return a lot of it to shareholders in that kind of a scenario. And I think we're getting back to that kind of dynamic as we look into -- out of '23 and into '24 and beyond.

Yes. And as you think about how the contracts with your customers have maybe evolved to recover some of that non-metal inflation? I mean is there any kind of thing you can share about how you've been able to extend customers, renew customers and update the contractual terms to maybe avoid some of these kind of situations in the future?

Well, you're never going to be able to account for every little blip in volume. Usually, at the end of the day, we're talking about the last few percent of volume. So you're never going to get the predictability of a business or the world that's going to account for all the volatility. What you hope to do is over time, see the long-term growth prospects, which we do with new product introductions, new categories, all of that sustainability goals that our customers have that we want to help them achieve through using cans. And so it's a long game, and so you want to make sure you're successful in the long run. You'll get things moving around quarter-to-quarter based on customers that are winning versus customers that may not be winning in that particular time period. But over the long term, we feel really good about the customer base we have, the asset base we have, and the dynamics of this business and the free cash flow characteristics this business has. And we need to deliver a little bit, and then we're going to really be set up for a number of years to be able to have nice growth without spending a lot more capital and flowing a lot more cash.