Ball Corporation (BALL) Earnings Call Transcript & Summary

Great. So we're going to go ahead and get started with our next session. I'm very pleased to announce that we will have Daniel Fisher, Ball's President and CEO; and Ramon Arratia, the company's Vice President of Global Sustainability, here with us today. Thank you so much for joining us this year. For a quick background on Ball. It's the largest manufacturer of aluminum beverage cans globally. It operates through 4 segments: beverage packaging North and Central America, beverage packaging Europe, beverage packaging, South America and aerospace. The company supplies aluminum packaging products for beverage, personal care and household products industries in the U.S., Brazil and internationally and generates revenues primarily from can cells to beverage companies for a variety of drink categories. The Ball's Aerospace segment develops products and technologies for the civil, commercial and national security aerospace markets, among others, which are sold to government agencies or prime contractors for the most part. The company has about 315 million shares outstanding, closed at just under 57 yesterday for about an $18 billion equity market cap, $9 billion of net debt for a total enterprise value of about $27 billion. So we're going to be conducting a fireside chat today, and we really appreciate you joining us. So Dan, so just for those of us here who are less familiar with the company, can you provide a little bit of background around what the company does, its primary businesses, major regions, category mix to kick us off.

Absolutely. Yes. and thanks for allowing us to tell our story here. So if you're in the states, you would probably know us, we're 142-year-old company, we're the old Ball Mason Jar company, and we've been in and out of 50-plus businesses through the years. And so I think you'd be questioning how we ended up getting into an aerospace business. Our aerospace platform is actually our oldest business and started in the 50s with a grant and an around polished glass for the Hubble telescope. And that business today is north of $2 billion in revenue and you've characterized it correctly. I don't think if we started today, we would have [indiscernible] an aluminum packaging business in aerospace and defense business together. But there are aspects of it that seem to work really well for us, and it's a very similar culture. And it was started in Boulder, Colorado, and we moved from the Midwest about 30 years ago when we got out of the glass business. So we're all in Denver now. So that was the impetus of the move here. In aluminum packaging, we've really leaned into that. That's 85% to 90% of our revenue and our profitability is generated by our aluminum packaging business and what we've seen here in the last half decade, in particular, maybe a little bit longer is the great. It's got just a wonderful circularity story in terms of the infinite recyclability, the elevated recycled content, the limited carbon footprint that it has, and it started to be accepted in a number of different areas where historically was dominated by other substrates, specifically plastic. And I think with the anti-plastic sentiment around the world and the difficulty to recycle it, et cetera, it's given us really nice tailwinds. We acquired our largest competitor at the end of 2016. And as a result of that, we have 40-plus market share in the 3 largest aluminum packaging regions in the world, the EMEA region, the North and Central America region and South America. So we have a significant presence there. We sell to the largest CPG companies in the world. And our biggest differentiation as we have. So we have cultivated and created and invested behind a supply chain that's nimble, that's agile, that's expansive that has a lot of capabilities. So if you're a customer that wants to launch a new product or a new innovation, you can do that in a pan-European manner, all across Brazil, all across South America, all across the U.S. through our supply chain and our footprint. We're widely recognized as the innovation house within. So we develop a lot of white space and new category introductions are overwhelmingly created by us. And so the things that when you get to know us better, it's our customer mix, who our partners are typically are the ones that are the most innovative. And we are a heck of a lot more of a differentiator than we are a best cost producer and we have strong long-term relationships and it's a heavy cash generative business. So very stable. And even in times like this, it's still remarkably stable business, the packaging business. And then we've introduced new concepts and new products centered around the aluminum cup. Again, for the same reasons of anti-plastic sentiment, it's a product that we designed from the outset to have 90% recycled content. So checks the boxes depending on where you are in any world area relative to recycled content, regulatory targets or anything that's being contemplated on that front? And then we have a personal care product and aerosol business that you're seeing more and more refill, reuse, and that would be the product line and the offering that we enter into those markets. So our view is, although we have -- the majority of our products are single use. We have a real belief here that regardless of whether it's single use or multiuse, aluminum is the best substrate for it given the recycling content of the infrastructure that's already in place. So maybe I'll leave it there.

Yes. That was great. A lot to unpack there. So just starting high level, looking at overall packaging alternatives to the cans, primary competition would be from PET models like you mentioned, and then also glass bottles, but might be a little bit of different end markets. Can you talk a little bit about what the pack mix share looks like today between the various alternatives and what you've seen kind of shift over time. I know the majority of new product introductions and extensions are coming out in cans. Is that what's going to drive the continued share shift or any of the other factors there?

Yes, great question. So each region, as you can imagine, is different depending on what the infrastructure was, that was created over the last 50, 60 years. So in Europe, there's actually -- we're sub-30% substrate shift or percentage of the market there. And it's largely because in a couple of areas, it's still a heavy glass market. The good news is, end consumers are starting to shift. We're starting to see that as a great growth market for us in places like the Nordics, in places like Eastern Europe. And so we feel like that's got really nice underpinning for growth moving forward for us in terms of the sustainability messaging. In places like the U.K., there's a big antiplastic push single-use push. And so we're growing there. So depending on what the market is and what the market dynamics and what the supply chain infrastructure was created, it gives you different opportunity sets. And then when you look at South America, South America is really the only market that has a significant returnable glass infrastructure, but cans have taken share over the last 20 years. Brazil is by far and away the largest volumetric consumption market, and it's primarily a beer market. But we've gotten to where aluminum has moved to about 50% of that market. And as consumers get more disposable income, retailers don't want to carry a perishable nature and the volume of returnable glass, you're starting to see continued percentage growth in that area and in all the countries around Paraguay, we've made an investment in Chile, we've made investments in Argentina. We have a presence there. We have -- we're in Ecuador and a number of other markets through distribution patterns. So we're really bullish on that market. It's volatile. So it helps to understand and have been there for a while. And then in North America, what you've seen is, it's probably about a 50% share of aluminum, Ramon, you can correct me, but it's widely different, right? So in the CSD area, it's heavier on plastic. In glass, it's actually glass -- excuse me, in alcohol, it's glass and cans and cans have taken the majority share there. And then the anti-plastic sentiment in North America in single-use. We've started to see since about 2016, 2017, 1-point to 1.5 point share shift. And it's largely attributable to the fact that new products are being introduced into cans at about an 80% clip, whereas 5 years ago, it was more representative of what our market position was for our substrate in the mid-30s. And so that's just building on itself in terms of investment in infrastructure, investment in can filling lines. And our customers are going to use that capacity to fill cans regardless what the brand is. So it's starting to build on itself. And then I'll tell you the biggest distinction probably within our packaging business is, Europe is being regulated in terms of what's happening in DRS legislation, deposit legislation. And North America is being subsidized. So you're starting to see different movements within the 29 countries that we serve in Europe and then how we're approaching things in North America. But it's all -- it's all moving to a more circular economy and the can has the best attributes to attain and continue to grow share in all the markets around the world.

Yes, that's really helpful. That makes sense. And so in terms of the drivers of the growth going forward, we've talked a bit about the sustainability tailwinds and the wider understanding of the environmentally friendly nature of this package, then growth in existing and new categories as well as product extensions coming out in cans, mix shifts, categories committing exclusively to can, things like that. Can you talk a little bit about what you see as kind of the main drivers from here that we should be thinking about? You mentioned regulation in Europe. How much is this factoring into your conversations with customers? What are they thinking about? What matters most?

What we're paying in a place like Europe, which you're really paying attention to are the big volume consumers are going to be folks that are a heck of a lot younger than me. So what you're really concerned is in consumer preference. And what's happened in Europe, there's a huge energy drink company that started there about 30 years ago, and they've made the can cool. So that's been very helpful. So what we're seeing are in consumer shifts and behavioral patterns where they live, they're more urban, how they consume the product, the recycling infrastructure that's been stood up. And so we're seeing penetration in the glass in parts of Europe that really weren't available to us for decades, but it's really more of an end consumer experience. So it's probably got less to do with what the category is because these CPG companies are going to figure it out. They're going to sell whatever the customer wants to drink, to make sure they stay on shelf spaces. In North America, it is -- you've seen a blending of the CPG companies. So folks that were just non-alcohol players are now stepping into alcohol and alcohol stepping in. So that really breeds a lot more innovation. And that's been a huge catalyst for new product introduction. And as I mentioned earlier in my previous comments, it's going into cans. So to some extent, I really don't care what the category is that wins as long as it goes into a can. And right now, overwhelmingly, it is, which is a very different place than say we were 5 or 7 years ago, where you really had to target what the new categories were, what the brand was going to win, you had to make sure that it got into cans. So there was a lot more leg work and effort on terminating those opportunities. And right now, it's like being with the big brand houses, being with the big CPG companies, making sure they know you're an innovation leader and you're bringing things to the table that gets you in the door. And then hopefully, they're pushing it through their distribution channel. So new products win and they grow to exceptional volumes in a much shorter period of time than a start-up brand that's being incubated and trying to create their own distribution channel.

That makes sense. And then you've alluded to it so far, but...

I would tell you one more thing that is becoming more and more prevalent than I'm excited about when I just -- I literally landed at about 2:00 in the morning. I'm a little tired. I came back from South America. The e-commerce channel in places like Brazil is really taking off. And of course, cans are the prevalent package. So as that e-commerce channel starts the manifest and takes up a bigger portion of the consumption behavior and the shift in how end consumers consume their products. That will be a huge advantage and benefit for our pack mix as well.

So yes, I was just going to ask a little bit if we could go into further detail around the primary sustainability aspects and attributes of the beverage can as it compares to the other alternatives. You've mentioned the recycling rates, recyclability, amount of recycled content. But can you just talk about specifically how it's positioned versus other formats and substrates here?

Yes. I might ask Ramon to go ahead and weigh in on that because he'll go into levels of detail that will be far more interesting for the audience.

So as we move from a society that recycles 30%, 40%, 50%, societies that recycles 90% and that is driven by legislation in Europe and it's coming to other regions. And in South America, we're already in the 98% in most of the countries. But we're going to see that certain properties, certain physical properties of the materials matter in that circular. So the property of meltings of being recycling easily, such as aluminum, just melting up 700 degrees. This is a big property with little recycling losses. The less losses you have in the recycling value chain that compounds every single cycle. And this is fast goods -- fast moving goods. Then you have compaction rates. Aluminum has 12:1 compaction rate which for reverse logistics, that's absolutely massive. So what we are seeing that, that combination of physical properties of aluminum that you can get to 90% of recycled content ideally in a decade or less. And our target is 85% recycled content globally. That is an unbeatable proposition that other substrates cannot achieve. And I think some of the brands are starting to come to terms with that reality.

That's really helpful. Can you touch a little bit on how the various alternatives stack up on the cost side at this point and where you see that going from here?

Yes. The cost on a can versus PET bottle or a can versus a glass bottle, it's really negligible. The issue, as you'll imagine, it's the distribution and economies of scale that have been set up. So if you're -- I think there are north of 600 billion single-use plastic water bottles consumed around the world. So they've got an infrastructure that's set up close to municipalities with many, many filling lines and incredibly efficient distribution pattern. So what you're going to have to do is you're going to have to replicate that over time. And as you replicate that over time, it becomes less and less of an issue in terms of the delivered cost to the end consumer and what our customers will have to charge. But that's a reality right now. And that's why I think you'll see products, especially in the water space that will -- it will be premium. It will be -- if you can charge more for it if it has some unique profile, they can figure out a way to step into aluminum and other things like that as they start to build up their infrastructure in the supply chain. The good news is, it's happening. It's not being subsidized, but there's enough of a value and a value proposition, as Ramon said, it's like our -- all of the scorecards in and around recycled content that all of our customers have, they can't get there without a bigger presence in aluminum. And so there's just going to be a lot more capital that's being deployed to stand this up. We're doing our part. Our supply chain partners are doing their part. But it's pennies a unit in terms of the actual package. It could be as much as a dollar worth of freight and distribution and fixed costs, et cetera, on getting the product from raw material all the way through to a retail shelf, and that's the impediment in the cost barrier right now. And it's far less obviously -- the bigger the value proposition to the profit pool on the product, the easier it is to make that conversion. And it also gives our customers the opportunity to start to reprice and rebrand and sell in sustainability, but they've got to have a brand to do it.

Yes. I think there was an article in the Wall Street Journal this morning about Coca-Cola's largest European bottler kind of doubling down on recycled plastics since they've made all of their commitments around that. So it seems like some are starting to made the shift, but some are kind of trying to still make it work. What are you hearing from some of your largest customers about making that shift from PET bottles into cans. It's more of the new products and extensions versus legacy products at this point? Or are you starting to see legacy product shifts as well?

We are -- the new products first, the legacy products are -- in many instances, those are [ sacrosanct ] profit pools. And it really boils down to -- it's really a U.S. phenomenon relative to the plastic versus the can because what you've used cans for historically, and it's largely the CSD providers. it's bridge packs, it's multipacks, it's pantry stuffing, you drive traffic there. They make all their money in the 20-ounce PET bottles in the C-store channel. So it's like they're going to hold on to that aspect, candidly, for Deer life, and we recognize that, but that's why 7.5 ounce cans and 16 ounce cans and other packages and package mix give them profitability and revenue levers to pull where they can increase their Can portfolio. And then some other houses will look at this as a real opportunity to drive share and shift sustainability. Behind closed doors, everybody knows they need more cans. In public, what people say is -- has a lot to do with -- at the end of the day, where the profit pool is. And so the conversations are -- they're better each and every year, every month, every year, they're better, and they lend itself to us believing that we got a medium and long-term opportunity set in front of us. But we're going to have to innovate and help to get folks that thinks differently, differently about the pack mix, the channel mix, et cetera. And I think things like this e-commerce channel will really open up opportunity for us. And then in the on-trade, off-trade, how do we start to slowly but surely manipulate those legacy products into profit pools that are greater than what would appear to be today in a can.