Ball Corporation (BALL) Earnings Call Transcript & Summary

All right. Good morning. Gabe Hajde here, Senior Packaging Analyst for Wells Fargo. I'm joined by my colleague, [indiscernible], and welcoming Ball Corporation. Thank you guys for joining. Representing the company is Dan Fisher, Chairman and CEO; and veteran, Investor Relations, Ann Scott, is in the audience with us. So welcome to the CEO again. Thanks. And perhaps maybe before we get into the weeds maybe open up with a couple of just opening comments for anyone in the room that may not be familiar with who Ball is, what you guys do? I mean, I know, but others may not. Go ahead.

So we are the mason jar company, but we're no longer making mason jars. My mom doesn't fully realize that yet. So -- but we're the largest aluminum can manufacturer in the world, really big presence in aluminum packaging. We also do personal care, reuse, refill with our aerosol product line, which is a slightly different technology than the D&I technology that goes into coil the can technology. We -- our oldest business, believe it or not, is an aerospace business, it makes up about 15% of our revenue stream. It's been with us since the mid-50s. And we have -- that business has been on a really nice growth trajectory. We can't talk a lot about it because it's Intel related, but all of the things that are happening in theaters all around the world, we have products and instrumentation and satellites that are helping keep our troops and citizenry safe. And we've benefited here over the last handful of years from the -- and continue to going forward in terms of the circularity story and around aluminum, the antiplastic sentiment, decarbonization impacts that are happening and being regulated in parts of the world. We see that trend continuing to benefit from -- for the foreseeable future. And then the other thing to know about us is we've been in a capital allocation strategy geared and around EVA for 30 years. And that will continue to be -- that's how I get paid. That's how folks on the shop floor get paid. It's been a really nice alignment in terms of incentive compensation structure for our business. And we referenced this, our CFO presents quite a few times, and all of our folks know, it's about a 92% correlation to our stock price performance and our EVA dollar generation. And so -- when we do well, we get paid. When we don't do, well, we don't benefit from that.

And this is something like you said, it's been in place for 30 years and has been, I think, a differentiator for Ball and probably adopted quite honestly, I don't want to go, I guess, under or overlooked, if you will. I think I looked back at a lot of transcripts and a lot of folks kind of open up with the bevcan business for obvious reasons, but just sort of like the state of the union, where we're at across the different geographies, maybe some high-level touch point in terms of what you're hearing? High-level topics.

Yes, sure. Well, the world is volatile. I'm not telling anybody in the room anything they don't already know. But you think about Europe for us, in terms of substrate penetration, the can has the lowest penetration. I think some of it has to do and historically has been glass as a viable and a large product and product mix there. We're starting to see a really nice evolution and growth trajectory in Europe. This year, we'll grow in the mid-single digits there. We've made 2 significant investments in that part of the region because of the underpinnings of sustainability and growth. And in Europe, just Europe as a whole, there's an awful lot of conversation and awful lot of regulatory language and movement in and around circularity and decarbonization. We believe that all the conversations we have in the can will do well and continue to win. And it will also benefit -- right now what it's benefiting from is in-consumer sentiment. So they're transitioning out of glass in many instances in some regions into cans and certainly, the antiplastic sentimental places like the U.K. have seen CSD continue to shift toward our direction. South America is always a fun trip. I was down there a few weeks ago. I landed on a Sunday, they were voting on a constitution. That market has been really good for us. Argentina has been good for us, Paraguay, Peru. Brazil is the largest can volume country. They entered into a really disruptive period here in the last 12 to 18 months. They're the first to raise interest rates and really start to tamp down inflation. I think their economy is benefiting from that, and they've had record soybean production, they're producing more oil, unemployment's declining, payrolls are increasing. So -- we believe that once we get to the second half of the year, which is their peak season, kind of late Q3, Q4, you'll see volume -- a glide path into some nice volume trajectory, specifically with us and one of the customers we're with there. And then North America, there's a few things going on. One, it's the topic that everybody wants to talk about in the beer space. But we've seen prior to COVID, about '16, '17, you really started to see a movement into aluminum in our area really, Gabe, you've been following us for a while. It's like there was no growth fundamentally for about a decade. And suddenly, we were seeing mid-single-digit growth '16, '17 into '18 prior to COVID. And a lot of that the KPI that I guess, is most closely tied to circularity to circularity story, the PET shift and share shift, new product introductions were historically the can had about a 35% to 40% share of the substrate pack mix in North America. And new products came out about 35% to 40% of the time in cans. That has transitioned up until the end of last year. I think we closed closer to 80%. And what that's telling us and what we believe and we're seeing it in terms of the volumetric and the can share shift that continues as people don't want to build on an existing packaging problem. There are recycled content targets. There are a lot of goals and objectives that have been set out by the large CPG companies, and the can is a great solution for a lot of them. And we've continued to see that right now. I think you're in the throes of inflation and a recession and some pricing behavior by some CSD players that have kind of quelled the growth. But if you look underneath there about what people are consuming in pack mix, the can continues to win despite a little bit more of a challenging demand profile. Hopefully, that led you through it.

It does. I guess we'll kind of stick with North America. And thinking about -- is there, I guess, question about capitalization for your customers. And to the extent they want to embrace this shift, is there extra capital required on their behalf to change filling capacity capabilities and maybe what that looks like? Do you guys have any -- I know your customers aren't going tell you directly, but a view over a longer-term horizon what that might look like?

Yes. So a couple of things. Within the filling environment in North America -- first of all, yes, once you've -- there were a couple large CSD providers that had excess can filling capacity that they've stepped into over the last handful of years. So you're getting to a point where you need more capital. Where you're seeing that capital come in is into new co-packing, new filling locations. And we do have a direct line of sight. And there's 2 private companies that make about 90 -- 85% to 90% of the world's filling lines. In those filling lines, we have a direct line into what's being invested in the amount of volume that's going into glass, PET or cans. So we have line of sight and that is the unlock in the supply chain. So there's no reason for us to invest unless we see can filling going in. We're seeing it -- the place where we're seeing the most of it is in Europe. And that's why that's an underpinning sort of for why I'm more bullish in the short and the medium term for that part of the world. And you're seeing it show up. Private equity has gotten a lot more involved in this space -- in this filling space. The filling space and the co-packing space in North America is needed because that's where the disruptors -- that's where the new products are getting launched because they're not going to invest in their own vertically integrated assets. So fertile ground, you're seeing a lot of innovation coming because of the investments that have happened over the last 2 to 3 years. But to your point, yes, you have to have the can filling assets. It's a capital growth. It's not significant, but it's enough if you're talking about billions of units being shifted.

Is that part of what underpinned, I guess, maybe the investment in Nevada and the one that's sort of still on the drawing board for North Carolina?

Yes. Like...

Sort of aligned with the co-packing facility?

Aligned with the co-packing, Nevada is permanently on hold, but the co-packing in North Carolina will take the shape more similarly to what we've done in Glendale. So usually, you've got anchor tenants that are going to make the filling investments and you're going to position yourself to make sure that the freight is not cost prohibitive in terms of the total delivery economics.

Okay. I told you I didn't want to go deep on that we've done this one. But just promotional activity has been discussed, I think, across all 3 suppliers. Maybe more importantly, sort of what's embedded in your view for the market? And then specifically for Ball sort of what you're contemplating as part of your outlook?

Well, we're certainly contemplating right now that one beer manufacturer is going to deeply discount their product portfolio. But that wasn't in our plans, neither was the marketing disruption. In all seriousness, we entered the year -- in North America in particular, which has really -- has historically been really reliant on especially peak season, Memorial Day, 4th of July, Labor Day, big volumetric pushes in and around those holidays. We did not anticipate to see any return to kind of the buy-one-get-one-free environment and around those holidays. We've seen a pretty steady diet of pricing at a higher rate than CPI in the CSD category. A 12-pack -- everyone in the room that's been out and shopped for a 12-pack of soda, a couple of years ago, it was $4. Now it's closer to $9. Inflation certainly hasn't risen at that level, but they've benefited from that. And -- we believe that until something changes, we need to operate with the environment that's presented to us. And so we have been laser-focused on controlling our costs. understanding that demand is a bit outside of our control in that particular element in that particular category. There's reason to believe second half of Q3 and Q4 comps get more challenging. We're starting to see indicative measurements with which you would start to see behavioral changes, you need that to happen. The 2 largest players in that space -- or the 3 largest players, they haven't lost volume. So it is a volume business. The bottlers need volume, they need volume to cover their fixed cost until you see somewhat of a decline or a share shift away from them, then they're able to play this card on a continuous basis.

Okay. And I -- maybe just to help the audience and investors understand, you mentioned it. Are there differing, perhaps, objectives between kind of the 3 different stakeholders that are involved on the carbonated soft drink side? So you have a brand owner and a syrup producer, and then maybe how that plays in to the extent you can comment on [indiscernible]?

It's more closely aligned than you think. Volume -- the bottlers need volume more than the parent company and the syrup provider to some extent, because they still have discretionary spend within their marketing portfolios that they could still kind of balance that. And I think there's preservation of the pricing whether it's any franchise or -- like it's always about the preservation of the pricing. So they'll hold on to it for as long as they can. But if you're an independently owned bottler, that's your P&L, that's in your region. If you're ceding share, it's hard to get that back. You're going to have to spend more money to get that back. So I think the -- you need a bit of conflict actually within the system to really push this. Your question is valid. And I don't think it's there right now.

Okay. Similar line of questioning on the beer side, we have this kind of 3-tier distribution system. I think you guys were at a conference last week that mentioned it's causing disruption, as you would expect, kind of reverberating back to the supply chain. And again, just maybe for context, you have to build cans in the first quarter into the summer selling season because you can't possibly make as many of that are consumed in the summer selling season. So with that being said, given the disruption that we're seeing, perhaps maybe what we're seeing on the shelf was in distribution already. And then maybe from a timing perspective, you're experiencing it now, but it might take longer to hit the rest of the system maybe in the summer months? Or just how should we think about it?

Yes. It's fascinating. So the -- I think the -- at the -- when we entered into our Q1 earnings call, the marketing issue had just manifested in a pretty significant way. So I think the question mark was -- at that time was like is this just going to be short term? Is it fleeting? Does it come back? Do they reprice and push and discount? And are they able to push through the volume that they may be seeded for a week or 2? Well, it's persisted for -- going on 7 weeks now. Others have picked up slack in terms of velocity and sell-through. But the brewer that has had the challenge has 2x the capacity of the next closest person. So in the short term, you're not going to be able to fill that gap. For the company, I can't tell you what their systemic inventory position is, but it's faster for us to make cans than then it's -- than the speed with which they can fill them. So their inventory would be -- to your point, you'd be getting ready for Memorial Day and peak season. And so we're able to see that sooner and ratchet down our velocity in our cans. You're running, to your point, in peak season, you're running all out because you can't keep pace, but we can shift and we have shifted our label profile. So we're not -- we're in a decent inventory position relative to the label profile. I mean, it might be -- it might take a little longer to burn through them, but we're not sitting on 3 months of cans, if you will. We're sitting on the 3 to 4 weeks that may now take 6 weeks to unload.

Okay. Shifting gears, PPI escalators. This was a highlight coming into the year where you guys -- and I think the industry has done a really nice job of being efficient and recovering costs. I think the number was $200 million but it kind of comes in. That's an annualized figure. It comes on in different chunks based on when contracts afford that. Can you help us maybe dimensionalize what hits in calendar '23 and then maybe what carries over into '24? And then kind of a second corollary to that is -- you guys have talked about like a gently inflationary environment being the best backdrop for Ball specifically. Maybe why is that? And how should we think about it?

Sure. So the PPI comes in, think about -- the PPI basically works in arrears. So it's a catch-up mechanism. And we have had that mechanism in place the last couple of years, but unfortunately, inflation has outpaced the catch-up. And that probably alludes to the second part of your question, where if you have a moderating inflationary environment, you can offset the efficiency and productivity, what you're experiencing in year, and you're picking up the inflation from the back half of the year -- excuse me, the prior 12 months. And our largest expense within our COGS outside of aluminum is depreciation. So you've got the mechanism there that helps. PPI for us is -- the $200 million net that we talked about is 100% of it in our 2 biggest regions, in Europe and North America. You can't operate with a 12 months in arrears PPI mechanism in South America given the volatility. So it's not a bridge item, a thing, if you will, in terms of the economics. We've already offset that each quarter, we're able to mitigate that. 60% of the $200 million net is coming in North America and 60% of that happens in Q3. So -- in Europe, most of it comes in January. So you'll benefit from that. There's not a great deal of carryover from that. The carryover that will take place will be in the third and the fourth quarter of this year and the benefit that we get and then carrying that into the first half of next year.

Okay. Sticking with costs and initiatives that you guys have done, again, within your own control. I think you did $75 million of SG&A, which I know was tough. And then $75 million, I want to say, from plant consolidation. And then we have a third one that's out there, I think the WARN Act hit. So that's really more of a 2024 event.

Correct.

If you guys have not, I apologize, but maybe size up. Is that relatively consistent in terms of magnitude of cost savings that we should expect from that? And then are you on pace, ahead, behind, on the other components?

I would say similar magnitude to the other 2 assets that were shuttered, 2-line can plant, same age, same fixed cost footprint, same labor profile. Refer the second question back to me?

The $75 million of SG&A cost out, do you feel like -- I mean, you guys -- you took the actions last year. So it's got a great line of sight in that.

We're on track and a little ahead of that. I think that everybody's laser-focused. Given the backdrop and some of the comments that -- and questions you pose in and around demand, I mean, we're all seeing it. We see it every day in the grocery stores. So kind of reminding our knitting and controlling what we can control, and we're finding areas of opportunity to become even more efficient.

Okay. I guess is there -- we talked a lot about specialty cans and -- or over the years. That's been an important part of the story. One of your competitors kind of baked a lot of that into a certain set of projections. How does that influence sort of, call it, the next 12 to 18 months for Ball? If there is this kind of semipermanent shift to more -- if brand owners choose to push price or hold price or whatever that -- however that dynamic plays out, standard toll on cans might be a little bit more cost effective. So is that good, bad? Do you have to make adjustments?

Yes. Great question. I think -- it's twofold. You can be competitive with those assets. Can volume, if it's taking substrate shift, great. Can volume, if it's mixing interdependent within higher-margin packages to some lower-margin packages, not great. But if the volume can more than offset it, you can run it. It can be more efficient, more productive, depending on the pack mix. It can be very good. If it's more planful as well, you're managing your freight, your logistics, your overtime, your spoilage, all of those things come into play. And we know how to make that can, and everybody knows how to make that can really efficient. So I think there's more benefit in terms of where the LME has moved than for them to -- I think they have ample room to move to get to a lower cost package and still margin up given inflation is coming off. They're getting the same benefits that everybody else is and the aluminum prices are coming down.

Okay. Europe, you guys are outperforming, I think, your peers or the market at least from what we can ascertain. Are there specific categories, is it customer alignment, maybe sub-geographies within Europe that you guys are doing well in?

I think our footprint, our SKU portfolio, and the customer base really helps us because obviously, Europe is 29 different countries. What you're seeing in the U.K. is -- the U.K. has been -- from a beer standpoint, people are just consuming less. I think the inflationary pressures, there was a shift from on-premise to off-premise, and I think now it's just less consumption. That's a heavy beer market. For us, we're more diversified. So we're not feeling near the brunt of that, that maybe others are. But then we're spread out across all of Europe, and we have a very diversified portfolio. So it helps insulate us from only beer or only CSD or only energy, or benefit from that. And I think some of the investments that we've made, you're seeing some pockets where there's actually a pretty significant substrate shift because in consumer preference out of glass into cans. I don't think a lot of people anticipated that was going to move that fast. But I think as things are starting to ramp up in terms of the regulatory environment and the conversations that are happening within Brussels, you're seeing can filling lines come in at a faster clip. And then it's just a matter of end consumer spending power, how fast they can turn those on and put products in and get them on the shelves.

And you mentioned the -- kind of reiterate the mid-single-digit growth, that's -- you feel pretty good about that, it sounds like?

We still feel good. And that's coming with kind of a flattish -- obviously, Turkish volume, which is included in our Europe portfolio, given the really sad events that took place there at the beginning of the year. So I think there's reason to believe there's more growth there for the foreseeable future. But what we're experiencing is mid-single digits. And this time a year ago, there was a huge question mark on us and our stock and the fact that we had such a significant presence in Europe and now it's an incredible positive despite all the disruptions we have with our Europe exit -- excuse me, our Russia exit. The underlying business, absent Russia, is phenomenal. And I think what we're trying to do in that business, for those of you who haven't followed it, our Russia business generated about $86 million of operating earnings last year, and the team is in line to offset all of that with the business that's been left behind. So that will be quite a trajectory heading into Q3 and Q4, where that's when actually the transaction took place.

Okay. And then kind of building off a comment you made earlier about can penetration and we talked about it a little bit yesterday. But per capita consumption, and there's different reasons why they vary by geography, by country, et cetera. Can you talk about cold chain storage and just the European consumer, why it may not necessarily approach sort of what we see here in the United States, their ability to store product and things like that in multipacks? Not to say that the can cannot win, but just other things that we should be mindful of and then sort of how that drives the medium, long term.

Yes. I think the -- it's a connective tissue, the promotional behavior too. So we have pantries in the U.S. So we do have a pantry stuffing event when there's a buy-one-get-one-free. It's like that space doesn't available -- avail itself in many parts of Europe. So they behave differently in each country in terms of consumption. I mean, it's a heavy on-premise environment, obviously, in the U.K. and how you consume beer. It's a pub culture there. So there are historical contexts in and around why consumption is the way it is in different countries. But your point is valid. It will be high velocity consumption, it won't be significant pantry stuffing events.

Okay.

You were going to talk about refrigeration, but I think it's a number of those things. That's all true.

Yes. Okay. Shifting gears to Latin America, it's a really attractive or has been for you guys. I think 1993 was when kind of first cans were introduced to the market and it's kind of grown mid-single digits since then on a pretty consistent basis. What should we be looking out for in the outside world from the investment community to kind of see that reinvigorated growth because it's been challenged like you said? And -- is it political? Is it the economy? And I'm sure it's a combination of everything. And then specific to Ball, you guys are -- what's implied sort of in your outlook for the year is a pretty healthy ramp in the back half of the year. So you said you were down a couple of weeks ago, the confidence level or just kind of what you guys are doing specifically to make that happen?

Yes. So that's a -- what's unique about South America is they have -- they still have a returnable glass market in a number of the large countries that we participate in. When you get into an inflationary environment, where our customers' own vertically integrated glass assets where they already have the glass inventory they use that in inflationary periods and typically are pushing that package to offset the inflationary pressures, and it was manifested in a pretty significant ramp-up in LME. The LME has come off significantly over the last year, but just because the spot rates come off doesn't mean the hedge position of your customers have. And so there -- our customer -- our major customers are rolling off that, so they're seeing the actual cost benefit in the P&L. And what you'll start to see is the inflation that's built into the returnable glass environment is energy related. That's not really dissipating. The LME has come off. Now you've got a much more comparable cost impact in terms of what you can sell those products for. And so the second half of the year, once we get to peak season, you'll be able to make as much money, if not more, selling a can for the same price as you're selling returnable glass. So there's more incentive for our customers to lean into that over the second half of the year. And that's what our customers are telling us. Like you said, it's never -- there's no greater question-and-answer session than looking at somebody in the whites of the eye and them telling you that they're going to take the volume. So until something else changes, that's what we're thinking, and that's what we're believing and that's what our customers are telling us. I would say the one wild card -- and I think this is known for everybody in the room, so the one wildcard is going to be Argentina and how long they can keep at this inflation rate. And they have a presidential election in the fall. That's a really nice can market for us, has been for a while. It's still incredibly resilient. But that's the thing -- I would say that's more of the watch out for '24 and '25 and how that all plays out then, I think, the second half of our story in '23.

Okay. And then one thing -- again, I think you guys are actually a little bit intentional about customer selection and who you sell to down in Brazil. but there was a bankruptcy that obviously transpired here recently. Maybe just to remind investors or talk about exposure there comfort level. And maybe I know -- I don't want you to speculate on what may or may not be the outcome, but as the largest beer manufacturer may be down there a net beneficiary of that as a -- there's just kind of uncertain time period.

Yes. So the third largest brewer filed for bankruptcy at the end of -- into Q1. They obviously needed -- they were in a cash pinch. So I think they purchased -- we had no exposure to them. I think they purchased -- they were the big winners in the market in Q1. We didn't have any participation to that, but the benefit is we don't have any participation to that moving forward. They have a really strong position in one region of the country and, rest assured, the #1 and the #2 players are probably hell bent on taking some share position. It's an opportunity for them. And to the extent that our customer mix benefits, we'll obviously benefit.

Okay. So maybe that's part of what's built into the second half that...

We don't have much of that. This may be a little bit more of a -- it will be interesting to see how it plays out because to your point, you're already maxing out your production and your current assets based on the plan that's already in place. So this would be a knock-on effect. We will help -- certainly help where we can to help our customers win in that particular marketplace and that transaction pattern, but it may be really nice tailwinds for us heading into '24 and beyond is where I could see the uplift.

Okay. I apologize in advance for the preamble here, but we talked a little bit about it yesterday. Part of the Ball story that's really resonated with investors over 20 years has been EVA, the focus there that we talked about. And the catalyst for shares has been well-timed market consolidating acquisitions. And quite frankly, looking out in the future in terms of divestitures and where you guys want to hone in your capital. Heading into this most recent growth phase, I think Scott's talked about, hey, we've done a couple essentially, the equivalent of $1 billion, acquisitions through organic growth. Typical business theory would tell you, organic growth carries a lower risk and therefore, you may assign a lower return requirement to that versus an acquisition. That being said, an acquisition, oftentimes is immediately accretive. So it can be tempting. My question is really, you guys have spent a decent amount, $3.5 billion, of return-oriented capital. Framing up for us, and again, I appreciate that it's somewhat growth and market dependent. But I think you guys are probably 125 billion, 130 billion units of capacity. We assume that there's global growth of a certain rate kind of when do you start to really hit stride in that sort of capital base?

No, it's a good question. So to your point, over the last 2 to 3 years, we've deployed capital and started in North America, we're seeing it being put in the ground in Europe right now and 2 significant facilities. The combination of -- I would characterize Europe as really all incremental and organic growth and North America as growth plus efficient recapitalization of some aged assets. So that will transition, and you're starting to see it in terms of the underlying performance in our North America business. You'll see the efficiency gains for the next 2 to 3 years, incremental step changes in cost structure running our plants better. The other thing that happened in North America, which has got less to do with the capital deployment has been the labor force in North America, and we've had roughly 1,500 new employees that are a combination of folks having retired, backfilling them and the new assets being put in place. So now you've got 1,500 new can makers that are hitting their stride as well. So I think the combination of that, plus not running your assets at 100-plus percent utilization, all of that gets you to the historical growth percentage, unit volume growth percentage, that we guided everyone and then a 2x operating earnings return on that. Could manifest and do better returns as you're stepping into Line 3 and Line 4 of fixed cost plants in Europe and North America, plus the efficiency gains by the labor force that are really gaining their stride. You saw a little bit of that in Q1. So we're really encouraged by that. You'll see that return then manifest into -- we're not going to need organic growth capital to near the extent we had for the next 2 to 3 years. And then Ball has always been a good allocator of capital in our EVA formula. And typically, you've seen it in the years between 2014 and 2016, where we bought back a lot of our shares. You'll be turning to that level of discipline because we have productivity opportunities based on what I just described and all the assets we put in the ground, we don't need the organic capital that we have. So we'll be gearing down and buying back stock for the next 2 to 3 years based on what we see in front of us.

Okay. Just maybe a last question, we're coming up on time, I think. In that regard from a seasonality perspective, again, not to try to sharpen the pencil too close on the next quarter or 2 or something like that. But just working capital is a consumer of cash typically in the first half. Again, historically speaking, things have been volatile. As you look out kind of in the crystal ball, would that imply mid-2024 we can start to have that discussion once you get leverage where you'd like it? Or could it be sooner than that? Just help us think about that.

It won't be before 2024, but it could be sooner than midyear.

Okay. Understood.

Yes, the goal here is to get to in the range of 3.5x gearing by the end of this year. And then you're right in line with our historical belief that we'll continue -- that's probably a gearing level that's a little rich for the current interest rate environment. So we may be doing a combination of gearing down and returning value to shareholders and, knock on wood, we'll be in a position to do that maybe sooner rather than the midyear.

Okay. Thank you, sir.

Thank you.

Appreciate the opportunity.

Yes, I appreciate it.

Thank you, everyone.