Ball Corporation (BALL) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Kyle White. I'm the lead analyst of Paper and Packaging here at Deutsche Bank. Thank you all for attending and especially thank you, Dan Fisher, CEO and Chairman of Ball Corporation here participating in our conference. I got to say, I'm really glad you decided to join us because a good thing that the mine -- the playing down in my me today. If it was in Denver, I got to assume you probably would have canceled on this. I don't blame you. I probably would rather be drinking a beer out of aluminum cup there at Ball Arena watching the games and here today. So thank you for being here.

You bet. And I'm actually going to try to make the game in Miami. So it's good that was invited to the East Coast [indiscernible]

I was wondering why I didn't have the socks on your [indiscernible]

I've got to on or no shoes. Yes. It's a former basketball had it. We don't like the high stocks. But yes, thank you for inviting us, and I appreciate the opening. For those of you that don't know Ball Corporation, we are the nascent company, but we haven't been for 30 years. Our oldest business is actually aerospace and defense business, which is performing extraordinarily well right now. We have -- that business has been on quite a tear and thankfully, for the budget getting resolved here recently. And if you look to the details of that, got more defense spending in that than it's been earmarked for the past several years. So we're confident that the backlog that we have and the backlog that we've won but haven't booked yet will be will be invested behind and that means really good things for that business, and we'll continue to see benefits moving forward. Our aerosol business is doing great. I think endpoint movement into aluminum has been a real benefit, maybe an undertold story and what all has happened over the last handful of years. And now that people are actually having to go back to work. They're taking better care of their hygiene and their smell. So they're consuming those products at a higher clip, which is nice. So -- and then in our beverage business, which is our biggest business, our 3 regions. I know we'll get into more details of that today. 2022 was pretty disruptive. In my first year as CEO, and we dealt with a land war in Europe, and I think our men and women, you've read about some folks that thought they had secured a deal to exit Russia that is back on the table, but we were able to get out, get our cash out, not with 100% of the intrinsic value what that business was prior to Russia and the Ukraine, but a really good outcome there. And say 2023 for us is still -- there's still some uncertainty, but we've set up a conservative volume plan we've taken actions at the back half of last year that are serving us well. The things that we're in control of, we're on our toes. We're running for cash until we see a stable demand environment and look forward to returning a lot of value back to our shareholders in 2024.

Sounds good. Maybe just to start, I guess, sticking with the beverage can business, obviously, it's a big focal point. how would you characterize the current conditions as you see the lay of land, how has consumer demand, if at all, changed since last quarter and how the months have progressed?

Yes. Good question. I would say and how we entered the year what we expected to see, both in the first and the second quarter in all the regions, it's more or less playing out in a manner with which we anticipated. I think the biggest catalyst that has changed versus earnings call even a few months ago has just been the disruption of a singular brand in the domestic beer market in the U.S. The knock-on effect is there's a big loser. There are a number of winners. The problem is there won't be at least in the 90- to 120-day period that we're in. You won't see a one-for-one unit offset of the demand destruction because it's such a big brand in the way the 3-tier system is set up. Retail points will have to be displaced and reallocated to others, and then they'll have to ramp up their supply chains and just raw material ingredients and trucks and labor, et cetera. But that will play out in the second half different from a mix perspective, a customer mix perspective, but I think there will be a volume short far and you're seeing it across the beer space here in the second quarter. That's really the 1 anomaly. It doesn't necessarily translate one-to-one for profitability either because mix plays a role and price points on the different customers that are winning versus the ones that are losing all of that will play a role, but certainly been a bit disruptive to see how this is shaking out here, at least in the near term.

Got it. So it sounds like maybe a slight headwind on the beer related to the specific issue for 2Q, specifically. And maybe on the other hand, a positive in the second half, we'll see how things play out.

We will because it's -- there's definitely promotion activity by the one compromise marketeers that launched. But then there's really no reason for the other folks to price promote at this point because they're selling basically every can they can make at this point. So it will be interesting to see how share shift plays and how people want to take advantage of it. If you're the folks competing against the brand that had a misstep, I think you've got to be thinking this is kind of a once-in-a-lifetime opportunity to take share right now. So whether they do that through price mechanisms or they simply keep pushing volume in the same manner with which they're winning in the market. I think that will dictate a little bit of what the volume looks like in the second half of the year for that particular product category.

Sticking with this, I guess, those brands are already based on the data, taking share you service those brands. The other customer has a large self-manufacturing in the beverage can space. So I guess the question is, why aren't you seeing positive benefits as it relates to this today, given the share gains from those other brewers?

Yes. So to your point, I think it is a good point. So the customer that's had the impact on their main brand and actually all their brands is transferred in [indiscernible] a number of their brands. Half of their can volume is manufactured in their vertical. The other half is spread across the other merchant manufacturers. We've got the majority to share with that. It's just the size and the scale. So they grew by a factor of 2x more than the second player in the marketplace. So we are absolutely benefiting from the growth in the other players. It's just in a short period of time, it's not enough. They can't ramp up to fill up the size of the hole on the other side, and we have a majority of that hole on the other side.

Yes. I guess, longer term, is it an opportunity to take share on the beverage packaging side of things away from that self-manufacturer if things persist the way they are. I mean, I usually think you things are relatively temporary, but who knows? If it does persist longer term, would that be a share gain potential for you?

It is a -- if it is a permanent brand destruction, then that particular customer will have to look their the entirety of how they're distributing product, their scale, their breweries, all of that. In that way, it could be an unlock for us. I think it's an opportunity for places like lesser considered areas, it's an unlock for on-premise. So there's an awful lot of the 1 SKU that's consumed in a bottle. If folks don't want to be seeing carrying that bottle, the competitors are using a lot of aluminum bottles on-premise. So if they take share, it's actually a one-to-one white space substrate shift. And it's not cannibalization of one can or on aluminum product versus the other. It's an aluminum product versus a glass product. So that -- so there are pockets of real wins here if we get on our toes and help folks understand and see that opportunity and work with them to ensure that the supply chain is ready to activate against that. that could be a big win for Ball.

Yes. We see all plays out very interesting dynamics. And just for, I guess, sake of clarity, one you do have the joint venture in Golden, Colorado, with one of the brewers and competitors. And so any kind of volume -- well, some of the volume benefit if you see it could roll through that joint venture and may not actually show up in our North and Central America top line volumes because does roll that way.

That's right. I won't -- and it won't be in our EBIT. It will be in our equity earnings and a 50-50 JV structure that we have there.

Yes. Moving on to that because I think we belabored at that point to promotional activity. Another key focus for investors I guess what are you seeing here now that we're into the summer months and season for promo activity? What were your thoughts on Memorial Day if you saw any kind of green shoots as it relates to increased discounting on promo.

Yes. We didn't -- good question. It's -- so we didn't anticipate and you can refer back to our earnings call notes at the end of the first quarter. We haven't expected much in terms of the promotional landscape on the nonalcohol products. and it's playing out that way right now. And part of the reason is when we look at the landscape of the comp, the comps for our large customers in those categories. they've got ample headroom here up until tail end of Q3 and Q4 is where we'll have tougher comps from a pricing dynamic versus what they've laid in over the course of last year. So if we are thinking anything. I don't think it will be anywhere near what we've seen historically prior to COVID, but there will be tactical and regional, we believe, executions against some promotional activity, but it won't look anything near as significant as maybe the kind of the buy one, get 1 free typical behavioral patterns that you may have seen during -- especially during the Memorial Day, fourth of July, Labor Day time sequencing those patterns. Memorial Day, there was a little bit, but again, not much. It was really tactical in nature. I think April was soft in May was better, but I'm not entirely sure if May was anything that we weren't already anticipating.

Yes. Is promo activity on the nonalcoholic space more important to you in terms of driving volume relative to the beer space? Or is it relatively equal?

There's more volume in the nonalcoholic space just in terms of the number of cans and the segmentation. So it's more important for us across the industry. We have a sizable beer portfolio more than our competitors. So us versus our competitors, it matters to us. And there is promo and the problem is it's promo on product that's not selling. So by virtue of that, it's really not -- it's not having the intended effect. It's not hugely important at this point. At some point, you will want to see the underpinnings of growth supported by some pricing behaviors. And volume still, at the end of the day, matters -- matters for us, matters for our customers, manage for the brewers. So they can't see it decline -- and I will tell you one thing that is shaping up in the nonalcoholic space that is new in the last couple of weeks where we've seen it in the data is private label is beginning to garner some shares. So there's a combination of -- that's a recessionary behavior but it also points to the fact that there's been so much price taken and some of those pack mixes, that there's an awful lot of headroom for folks to step into that and garner some share.

Yes. And what's your exposure to private label relative to branded?

It's small compared to the branded, but...

I guess, relative to the market, too, competitors.

Relative to the market, we're closely in line with -- we -- essentially, when you think about Ball, you should think about we're worth every we're in every market. We're in every category. I think we -- there is a competitor that has a bigger percentage of their pack mix that's in private label, but we're not far behind.

Yes. shifting to kind of supply/demand in North America. You guys have made a number of decisions to rationalize some water capacity. You have another plant in New York. There's a report that you planning to close it by end of August. Is there any more update you can provide as it relates to walk Hill in terms of potential cost savings related to that closure?

No. I think you principally got it. I mean, typically, we gear you to kind of a $25 million to $35 million fixed cost savings per plant. It's probably on the lower end of that, and you won't see any of that benefit until '24 really.

And then what is your view of the current supply demand in North America as it relates to both you and into the industry as a whole as well?

Yes. It's an ever moving -- it's a consistent question with ever moving variables. For us, we've been the principal actor in taking some actions. It was there, and it was modeled in over a period of time, which we've alluded to in a couple of our bigger locations. We had longer more costly, less mobile, less nimble assets that we shuttered once the COVID spike really returned a little bit more on were volume pattern. I've seen a lot of backing off of press releases relative to added new capacity by our competition, a little bit more rational approach given the market dynamic that's been presented. So I think what was communicated and commented on the theoretical nature of the ads versus what's actually happening and what we're seeing, this is a rational industry it has for as long as I've been in it. And the behavior and the signaling to me feels it's appropriate for sort of unit unknowns in terms of promotional activity, volume demands and some of the -- in the big market in North America. And I think everybody plans around this low 90% asset utilization number, which basically means you're oversold in peak season. And if you're in that environment, then that's a really good place to not only make money but to preserve the integrity of your contracts and commercial negotiations.

Yes. And you think we're in that low 90s right now? Or are there more actions that may be taken?

Not right now. I mean if you were to see something that we haven't seen and we haven't modeled historically, which is a much deeper recession maybe than the one we're in. we may need to take a look at something like that. But you always have the ability to curtail lines for the short term. So I think the permanency of the fixed costs that are in places and implants, coupled with the fact and the intention that Aluminum continues to win. So that gives you a medium- and long-term view that you're in the right spot and you can move into more demand in the medium, even maybe the back half of this year and it's 24%. And then you're in the right spot. If something else changes versus that outlook in that scenario, you can ask me that question then, and I think we'll give you a different answer potentially.

Yes. I guess sticking with that, what is the kind of the long-term growth rate in North America? Obviously, we're going through a little bit of a tougher per right now with some of the inflation, relatively difficult comps coming out of the pandemic. But looking ahead 2, 3 years out, what's the long-term growth rate for North America?

Yes. I think the industry is in this 2% to 4% range. And keep in mind, that's lower than kind of that mid-single-digit growth that we experienced from '19 to '22, but you put on a ton of unit volume, almost $25 billion of additional units in the way we identify North Central America and Canada. And so you're in a good spot to grow kind of in that 2% to 4%. And to your point, for the industry, I think the 2% to 4% is right. How will participate this year relative to that growth rate is going to be mix dependent. So when you're in kind of a flattish growth environment, it's like who's going to win in energy, who's going to win and beer, who's going to -- what are you exposed to in terms of your customer base. So you'll see some movement amongst the competitive landscape in and around that. But the pie as long as it continues to grow, we're all going to find a nice profitable way forward.

Yes. Shifting down to South America and specifically, Brazil. Just kind of what are you seeing in terms of current conditions, how the consumer is doing down there. Others have talked about some destocking in the channel. Are you seeing that? Or is that more specific to those competitors?

Yes. So there was a -- it's a good question. So I think the economy in Brazil is better than the interest rate that is currently being presented in that market. So unemployment is going down, payrolls are going up. Inflation is coming down. They're still holding on to the interest rate to make sure they've tamped down inflation enough in that marketplace. The destocking, it's a tough one to comment on from our perspective. We're not seeing this event. But keep in mind, just reflecting on what has happened in terms of the brewers that are in Brazil the third largest brewer file for bankruptcy right there at the close of the first quarter. And what they did in the run-up, they clearly understood they were in a cash crunch. I think they purchased a bunch of cans, build a bunch of cans. And so I think they're going to -- there's a destocking event happening with them and who's supplying them. We don't have any exposure to that. So I'm not seeing destocking per se, and it doesn't work like the 3-tier system, for instance, in North America. So we've got a pretty good idea, although it's on an Excel spreadsheet, how we keep tabs on how much inventory float in South America, but we're not seeing more or less inventory being held. We're managing that with our major customers down there and expecting a pretty decent pickup here in the second half of the year.

Yes. On that pickup in the second half, comps do get easier. You guys have talked about one of your large customers down there, having aluminum hedges rolling off that makes the can more competitive as a substrate. I guess the question is if conditions down there for consumer remain weak, what is the incentive for that customer to shift away from returnable glass back into the can?

So the end consumer wants cans. I mean that's been clear for 20 years in Brazil, right? The way they consume the product, the way they interface, especially during their summer seasons, it's where they're working some in this. And the merchants and the retailers, they really don't want to deal with returnable glass, but what's happened in an inflationary environment is an equivalent volumetric comparative would be returnable glass is BRL 2 for the equivalent of BRL 3 for an aluminum product. That's a significant difference for the end consumer. Once the cost position comes off and the hedge position comes off, they'll be able to price and they'll be able to push more volume through cans. So that's the vehicle and the lens that we're looking at it, and that's what we've been told by our customers as well and how they look at it. But it will be interesting to how it plays out. Again, I think Brazil's economy is much -- in a much better shape than maybe how we read about it or characterize it, but they just -- they have to get to economics that makes sense for them to push that package until that hedge rolls off. There won't be there. Yes.

Moving over to Europe. You guys are in the midst of bringing up 2 can plants over in Europe, 1 in the U.K., 1 in Czech Republic. Maybe just how that is going relative to expectations?

Right in line with expectations as to brag on that management team over there. They have done a wonderful job over the last since we acquired that business, we effectively acquired that and divested our business in the Rexam acquisition, and they have steadily delivered against the results absent a land war in Europe, which they're having to -- they're having to overcome about an $83 million earnings onetime decoupling event from '22 to '23. We've earmarked that and with the quarterly breakdowns of that. Most of it happens in the first half of the year. They're trying to get back to equivalent earnings year-over-year despite being down a significant amount of volume. So that just speaks to the ability for them to make more money on like-for-like can portfolio.

Yes. And what about demand wise? How are things trending in Europe? I know Turkey may be a small headwind, but Western Europe how a [indiscernible]

Good point. We're in line with our expectations. It may be taking a different form than what we thought heading into the year. And by that, I mean, some countries are a little better than we thought. Some countries are a little softer, net-net-net, it's right in line. You are starting to see the investment in the Czech Republic, for instance, this is a substrate shift out of glass into cans. So we're continuing to see that. We're seeing the plastic to can substrate ships still continuing in the U.K. where we're building our Kettering manufacturing facility. And the can continues to win in beer categories in the Southwest part of Europe. So -- yes. I mean incredibly resilient. This time a year ago, I was sweating thinking about energy and cost and inflationary headwinds and how can people afford to pay their rent and all of that and still maintain the growth trajectory that we were already on, given our commitments with our capital investments, but it's maneuvering quite nicely. It's been -- Europe has been pretty resilient in that sense.

Yes. I'll take a pause and see if anyone in the audience has a question they want to ask. All right. We'll continue on. A couple of questions here on aerospace and then move into a cap allocation. I guess what is the long-term opportunity that investors should know about aerospace as it relates to you? And then how does it fit within your portfolio? In terms of when might you -- if at all, is a potential spin-off something that could be on the horizon?

We're big believers in providing value back to our shareholders. So we've been out of and correct, we have 50-plus businesses in 140 years. I will get to your question. it's our oldest business. It's our largest EVA generative business in terms of revenue dollars per EVA dollars. And we've spent an awful lot of time growing it to a position where it is big enough now that it doesn't need the mother ship a ball, but it's always needed it. It's needed to compete against primes, the insurance of the size and scale of the projects that we bid on and that we win. It needs to have a backstop. And so it's getting to a point, and the backlog has been -- it's a phenomenal story. The team is performing incredibly well. And we need to recognize that if there is a better spot for it, and they can unlock a lot more value than being with them all, we owe that to our shareholders. We owe that to our employees more so. But we haven't come to that point yet, is the bottom line. And we've put a lot of money into that business over the last handful of years, and they are performing wonderfully. It doesn't consume a ton of management time. It may have consumed a little bit more over the last couple of years with supply chain hiccups and in others. But yes, it's a great business. It's the anti, a lot of other primes. So a lot of folks really enjoy living in Denver and working for that business. And for now, it's in the right spot.

Yes. And since it is one of our oldest businesses, I assume from a tax base standpoint, it's tough to sell.

Yes. Right. It is a jewel, and that's well understood. The tax base as it started from a $10,000 grant from University of Colorado back in '50s, in our [indiscernible] Polish glass business for the Hubble telescope. So it's got a -- if you were to do a transaction, you want to make sure that it's accretive to the shareholder and you're doing the right thing for them. And given that tax basis it would require multiple accretion on top of just the typical valuation. So that is a good point. And that's been something that we haven't seen a scenario where the juice would be worth the squeeze, if you will.

Yes. Moving to capital allocation. You guys are -- you have guidance of CapEx around $1.2 billion this year to have some growth investments in terms of plans that you're bringing up. As we think about more normalized CapEx level, past this hyper growth phase that we've been in and when you go back to the lower CapEx rate, what does that look like? And so we get there in 2024?

I think we will get there in 2024. That's exactly what the teams are managing toward. A couple of things is going to factor into that and maybe I can just bridge you the capital and the guidance we've given. We've talked about GAAP DNA. So with that, it will be about $700 million to $750 million for next year, $250 million of that is M&R related to just kind of run the plants and maintain the efficiency levels and the safety protocols that we have in our facilities. So anything above that towards that $750 million number is growth capital. As we sit here today, you mentioned the 2 facilities we're building in Europe. We still have probably 18 months of runway in the new capacity we put online in North America to gain efficiencies. And so we can step into this 2% to 3%, maybe even 4% global growth rate over the next couple of years without doing much. And so that's where we're landing. That's what we're gearing toward. And so I think we'll be able to return there in pretty short order.

Yes. And about how much capital does aerospace typically take on an annual basis?

It could be $75 million to $125 million. It's probably more in the $75 million to $100 million for their M&R, which means about $150 million to $200 million on the balance of the business.

Yes. And what's kind of the optimal leverage target for Ball in this interest rate environment that we're in?

We've talked about end of the year numbers, we do have seasonality, obviously, that plays into the summer months. So when you get to end of the year, we have earmarked and then managing off about a 3.5x gearing ratio, a little higher, a little lower, depending on use of our capital. I would say that was a number that we implemented in an incredibly low interest rate environment. So there may be a further steer down, maybe half a turn we will look at -- once we get to kind of in the range of 3.5x, we'll look to -- our stock is cheap right now. So I mean I think our shareholders would benefit greatly from buying back shares. But if there is a combination or an opportunity to do both, and that's really what we're shooting to do in '24 is to gear down a bit more and buy back a bunch of shares.

Yes. I think turning the corner in terms of getting past the growth that we've been seeing in the beverage can space in the amount of capital that that's required and now getting back to -- I don't want to call it the whole Ball, right, but this mentality of being able to have a stable level...

Ball's behind, whatever. It's fine.

Appropriate leverage and be able to return a lot of cash to the shareholders.

Yes, I agree.

Going back to some of the business dynamics. You guys have some headwinds in 2Q, I believe, as it relates to inventory and drawing down some of your inventories are allowing for cost absorption issues. Maybe when do you think you'll get past that and the demand that you're seeing in the profile or demand?

Yes. We're planning on getting to a healthy position here at the end of Q2. And then I think Q3 based on some of the commentary at the beginning of this conversation is what's the demand landscape look like? And is there promotional activity? Is there a winner disproportionate winner in the beer space that we've got favorable mix toward. I think all of those will be incremental answers but we should be able to run at a sustained rate bean benefit from running as you described. It's like we will be able to absorb the fixed cost up of a steady stream of operating them moving forward.

Yes. And then on cost savings, you have some initiatives out there. We talked about some of the plant closures that you've made. You've also done some variable cost reductions or overhead reductions as well as you had the $200 million in net inflation recovery related to PPI. Do you still have kind of line of sight to realizing the $200 million as well as I believe it's a $150 million cost saving target that you guys laid out there.

It's all -- we're a little bit ahead on every one of the targets at this point. The plant closures we executed at the end of last year, beginning of this year, we've seen those savings. The SG&A, we took action in the fourth quarter -- third quarter, fourth quarter, we've seen those benefits steady run rate since the beginning of the year. PPI in Europe, that's about 40% of the net 200 that you indicated, the other 60% will come in North America business. You don't have the same you don't have the same in arrears mechanisms in the more volatile places in the world like South America, which is used to heavier inflation. So those time frames and sequencings are much tighter. So Europe, 40% the majority of it you've already seen come through in January in the first quarter. In North America, 60% of their benefit will come in July 1. That will be the start of -- it's the biggest chunk. And it's contractual. We have that customer, and it will be cemented. What's gone against us the past couple of years has been the continued inflationary pressure, which we've had to play catch up on. So if you get inflation to continue to stabilize where it is, maybe it transitions into even more of at the end of the year, that could be good, and then the carryover benefits in the '24 will be really good.

Yes. That was my question. Next question. So 60% North America, $120 million or so rolls in -- starts really rolling through in July. So does that roll into '24 and carry forward?

That's -- yes, it will be July till July, and then you'd revisit...

You still get a benefit that first half...

Got it.

Got you. I think I want to open it up to the audience again, see if there's any questions.

JT from Benefit Street. I have a question. You called out strength in the aluminum aerosol product. What is the plan for that sort of business going forward? Is that going to be a core operation for you guys? And how much of the strength is driven by underlying demand for the aerosol product versus a shift from steel base to aluminum based? It's a combination of both.

It's a great question. To answer your last question first, it's a combination of both. But the acceleration on the transition from endplate to aluminum, it's happening in a larger way with larger product offerings. So I think what those CPG companies are coming to the realization it's like it's better -- what we have done is we have increased the recycled content considerably over the last 2 to 3 years. We actually make the slugs in-house, so the actual material is constructed and developed by us. That's given us the final leg in the stool, which is okay, I like it, but it's not as good of a recycled story as, for instance, the beverage can is. And now it's getting closer to that. And so they've seen our commitment to circularity and sustainability on that business, which wasn't as present as it was in our packaging business. Our beverage packaging business. And now it is, and now we're starting to see some real nice wins and gains. So you'll continue to see that business step up. It's still 1/3 the size of our South America profitability, so just scale. So I think it is core in the next 5 years. It becomes a good-sized piece with nice trajectory and growth rate, and we will invest behind it as it grows. But you're talking about a business that does billions not hundreds of billions. So the footprint, the capital outlay, we've started to make investments in a refillable reuse space, that is perfect for that bottle because it's denser. It can actually take the wear and tear for multiple uses. So I think there's that burgeoning refill reuse market also that it fits lovely in. And so think about you're seeing some water products, if you go into Whole Foods and places like that, that are already in that package. So there's a lot of opportunity. It might not just be in the aerosol space. It might be in other things, personal care, water, others. So one -- we're really excited about that. And it's been an unlock over the last 18 months. We've got a new leader in there. He's been there for about 2, 2.5 years. We've got a great strategy and things are candidly breaking our way a little bit that way. So thank you for that question.

All right. I think we'll close there and leave it there. Thank you all for participating. Thank you. I really appreciate it.

Absolutely. Thanks, everybody.