Ball Corporation (BALL) Earnings Call Transcript & Summary

Thanks, everyone, for joining. My name is Ghansham Panjabi. I'm the Packaging and Coatings Equity research analyst at Baird. The next presenter in our circuit is Ball Corporation. And from Ball, we have Dan Fisher. Welcome back, Dan.

Thank you. It's been a year.

It's been a year.

Okay.

A lots happened in a year. So Dan has been at Ball since 2000. He was President and CEO since April of 2022. In the back, we also have Scott Morrison, who has announced his retirement actually he's retired officially, and then we have Howard Yu as CFO as well, and Scott and Brandon as well. So welcome again. Dan, maybe we could just start off with an introduction of the company. Just to level set, and then we'll build off there.

Sure. A lot of people know us 143 years. Actually, we were talking about this earlier this week in a town hall. It will be 150 years in 2030. So an incredible trajectory, longevity. We've been in and out of Ann Scott, who's our Head of IR. She'll beat me up for getting this wrong, but north of 50 businesses and what's enabled us to do that and iterate and change with the times in the business and the requirements of the market has been our people and our culture that we're incredibly proud of. That's why people come and that's why they stay for a long time. And why they're coming and staying for a long time now as they really believe in the circularity benefits in the story and around aluminum packaging. We made a significant announcement earlier this year that we'd be divesting our aerospace business, which makes up just north of 10% of our earnings, and we secured a sale price as of today, which would be very close to 40% of our valuation. So we're selling a really nice business for a really nice price. Great people that we've scaled that business up, but it's in a position, and we've referenced this for decades now. I think there would come a time and there would come a place and a scale for that business where it would make sense for it to be in a different ownership structure. So we are moving through the regulatory and process right now. It's very constructive. We have said publicly as recently as last week, we're still thinking first half of '24 for that. With that, that will come $4.6 billion of net cash proceeds, of which we've also publicly iterated that we would take about half of that retired debt, get our gearing to in and around 3x and take the residual proceeds and be buying back shares for the foreseeable future. So we're in a really good spot. We've taken some body blows in the mass beer space this year, but everything that we've set out to accomplish this year, we're going to. We're going to have record operating cash flow. We're still spending money that we appropriated last year. We'll step into a much lower capital spend threshold. We've rightsized our footprint in a way that we've taken up, aged less efficient assets. So we are -- and you're seeing it now in our earnings profile, it's much better on lower volumes. So as we get to a little healthier in consumer inflect with volume, I think you're going to see a cash generator and a steward of really good capital allocation that probably mirrors where we were prior to COVID, more than the disruptive patterns and balances that took place here over the last couple of years. So super excited to be here and excited about the future. And as you indicated, we're losing a 23-year veteran in Scott, who's done more than enough in his time at Ball. And we've brought on board Howard Yu who has got a tremendous background is going to make us better operationally. So we're excited about those major changes.

Okay. Great. [email protected], and I'll also open it up to the audience, if you want to raise your hand.

If we build off of that, Dan, so North America, a lot's happened, right? So...

I would say, yes.

Yes. The industry is not used too much happening all the way up until the mid, let's say, '17, '18 of last year -- the last decade, right? And any investor that looks at it sees a lot of variability in terms of volumes. The years ago, there was capacity announcements almost monthly. And now there's capacity shutterings almost every earnings call and so on and so forth. Where are we in that -- with the oscillations in terms of demand? What's the new paradigm for demand? And what's the new supply base line as well?

Yes. A lot of variability even for us and how our customers are behaving and what was happening. Take COVID aside, prior to COVID, we started to see a really nice inflection in substrate shift out of plastic, out of glass into aluminum. So we're writing those tailwinds into this massive inflection of at-home consumption. Believe it or not, that was not that long ago when we were all sitting at home, and we were drinking most of those packaged goods out of our cans. So there was an inflection and insurgence there. Everyone was importing cans. We were also, at the same time, standing up capacity so that they were domesticated because you can't make any money and our customers certainly couldn't with that. That's all been accomplished. And then we headed into first part of '21, where we saw a demonstrable change in pricing behavior largely with the CPG companies in the CSD environment, but really everyone. And for the longest time, the algorithm was our customers would take a pricing decision based off CPI. So if I think I can margin up a little bit and my brand is strong or I've got innovation. Maybe I'll take the price up a tick north of the CPI, Others would hold the line and then folks that wanted to take share over defending positions would be slightly below. That algorithm was completely broken for the last 18 months. And you can see it in 12-pack fridge packs, which is how we consume those beverages in North America. So 150% price increase on some of that pack mix that has a direct impact to volume. Underneath that, so we slowed this time a year ago, even before that, we said, recognize this is a new behavior. We can defer, delay some of the footprint decisions and announcements that we're going to make. We also had the opportunity as we were ramping up new assets that we become more efficient in our existing network, and we could optimize that. So we started to take those decisions to balance, be fit for purpose longer term. The rest of the industry, I think you're seeing it as well. They're all behaving similarly. There were a handful of new entrants that came in and new entrants in terms of folks that don't make cans anywhere else in the world. And so a big European manufacturer, they came in. I wouldn't consider them a new entrant. I think they'll have a decent go of it here, but the folks that thought it was easy to sell cans, they're not having any fun right now. And a lot of them, I'd say the overall majority are not selling cans and they're not making cans. And so that has also been eliminated from the mix and the competitive landscape. So we feel like we're in a very balanced position the overall majority of the contracts were extended during COVID. Everyone was focused on a surety supply. So you're not going to have big blocks of volume that really come due until tail end of '26, '27. So as all of this shakes out, the end consumer becomes a little stronger. The industry is in a really healthy spot right now.

Where is demand now versus 2019 level in North America, the way you define it, maybe clarify how you define North America as well.

Yes, I would say versus 2019, can penetration is up in every market with the exception of Brazil, which has a unique returnable glass dynamic. So when the economy inflects to a more inflation recessionary environment, some of that composite goes into returnable glass. We've started to see it shift back to cans. We think where we're in the year and heading into early next year that we'll be at or above can concentration or can penetration in every region of the world with which we operate. We're significantly up in Europe. We're returning to at or like levels in South America in terms of unit volume. And North America is flattish versus second half of 2020. It's up industry wide versus '19. And I think the important thing to understand is, at least in the U.S. in that footprint, the $15 billion to $20 billion range of inflection of growth has all stuck with the domestication of cans. What stopped is the acceleration of that growth. But even within that, people are shopping at grocery stores, less products and less goods are going into that cart, less volume, but the dollars that are being purchased on packaged goods for beverages are overwhelmingly going to aluminum. So glass is further off, plastic is further off, if you take water out of that equation. Cans are winning just like in aggregate, the end consumer is not. And so once that moderates and we see a stronger end consumer, all of these trends will transition back into growth, both from a substrate standpoint. And we believe a healthier end consumer will have some organic growth component behind that as well.

What about your operating rates in North America now versus 2019 pro forma for the announcements you've made.

Operating rates in terms of plant utilization network. Yes, we're where we need to be relative to the Kent closure announcement that happened last week. The one thing that I should clarify is with the mass beer volume destruction, we're sitting on that capacity. So we've idled that capacity. So we do have more. But at the same time, what's going to happen, we believe, over the 12- to 18-month is that will find a home, and most likely that will find us as a home because we're with all the other brewers. So temporarily, I'd say we're a little underutilized because of that. But everything else in terms of the market, market dynamics were fit for purpose in terms of the utilization rates.

Beverage is one of those end markets that has a lot more innovation typically than food. And they're usually fast-cycle products, it was craft beer years ago, hard seltzers. And now it seems to have rotated into ready-to-drink cocktails and so on and so forth. How are you positioned against those dynamics? And is it just as simple as one category falls off? And is it replaced by another? Or what does the backlog also look like for new products going forward?

Yes. So in the short term, it's going to be more of a trade-off because of the end consumer. So if something wins is probably going to come at the offset of something else in terms of beverage consumption. Cans will win because new products are being introduced at a much faster rate than any other substrates. So we'll benefit from any new innovation. What's actually happened over the last couple of years is when some of our customers have been able to make a lot more money on their existing portfolio without innovating. There's not been a lot of innovation. So I think we're getting to a point where what you saw before COVID starts to come back into play because growth will be a bit harder to come by, given the backdrop and the macro economy and what will help customers is innovation. And that's what we do. Outside of the category mix, there's functional drinks, lower calories, all of that is real and it's happening. The ready-to-drink cocktails of a small base still growing at 50%. But I will tell you, I think where the growth opportunity for us is going to be substrate shift more so and more pronounced going forward than it has been historically. And that's because -- and you're seeing a ton of articles as recently as the last couple of weeks. rPET is being demystified in a very real way. So like these claims are not actual truths. And as a result of that, people are having to sign up, whether it's SEC regulations or what's happening in Europe in terms of the transparency behind their carbon neutrality goals. You can't -- you're not going to be able to backslide. You're going to have to continue on that path. And for a lot of our customers, aluminum is the path in which they're going to be -- they're going to lean into that and they're going to make good on those promises. So we've talked about this. You've followed us for a while, this whole sense of core brands, when are they going to shift? I think it's nearer term than at any point that I've seen here as we've moved into the circular and sustainability story. So to me, the innovation and around pack sizes and around core brands, I think that's where the growth is going to come by more so than in the short term with new category or new drink innovation.

Okay. Again, it's [email protected] and thanks for those that have sent their questions in. I will get to those I promise. In the environment of higher for longer interest rates, what if demand is lower for longer, as it relates to your categories you're exposed to North America? How does that impact pricing? And how would you propagate that through in terms of strategy?

So one of the things that we have obviously been doing is the focus on being incredibly intentional about continuous improvement in operational efficiencies. You saw -- I think the best representation of this was in our North America performance in the third quarter. Our volumes were up 10%. Our dollar generation was exactly the same as the year prior. And our production was below our actual sales volumes because we're taking a lot of working capital out. And so we're not actually running to scanner data. So as that comes back and that normalizes, you're going to start to see a really nice inflection in earnings and margin expansion. So that's part of the strategy. It's like let's be the best operators in the world. Let's be relentless in that pursuit. Growth solves a lot of sins. And I think we've developed a few of those just over the last 2 to 3 years. So we can run our business better, and I think we're demonstrating that. So that the intentionality behind that. And then the other part is region by region. There is a different time horizon on the speed with which circularity is going to show up and it's going to force different decisions by our customers. In Europe, it's going to move faster. We have the smallest substrate penetration of any of our regions in terms of mix of can in Europe. There's an awful lot of glass there with higher energy costs, more expensive, higher carbon outlay, that's not a good recipe for customers to get to these carbon-neutral targets that are being positive on them. Cans will help. We're seeing that. We do stood up a plant in Pilsen, Czech Republic. We had a Board meeting there last week where we saw that plant running beautifully. We're seeing more and more beer coming into that space coming out of glass. So that's an opportunity there. So we're positioned for that in the future, and it's also a flexible asset, more agile, more efficient, all of those things are playing into it. And then I think the other part relative to the interest rate environment is, for us, post divestment of the aerospace business, we'll be gearing towards really the low end of our long-term range, 3%, maybe slightly below that. And then we'll see where the world is. If interest rates continue to tick up, if the world remains as unsettled as it clearly has been, we might be gearing lower. But we'll have plenty of operational cash flow and free cash flow generation spending less money on capital to grow into these opportunity sets while we're returning a lot of value back to shareholders. So that's the integrity in the strategy. everyone's bought into it. Everyone is working against that. I think our balance sheet reflects that. I think how we position our asset base reflects that and a little bit of volume won't hurt.

So you can't control the end markets, they are what they are. It sounds like you're leaning back to all of the old productivity, cash flow maximization, deployment of that cash. Is that fair?

We can control growth more than anybody else in the space right now because we have innovation. So it will be specialty mix and innovation. And I do think the opportunity set for our growth will be more pronounced in substrate shift and the intentionality behind that. So getting your carbon footprint in the right place, so you're fit for purpose, and that requires all of our supply chain partners to participate in that. That's going to be hugely important. And then if we can innovate and help our customers that are category leaders and category captain start there and move those. I think over a period of time, you'll see a real incrementalization and will step into volume, but it's not going to be because of low interest rate environment. The things that we leaned into for the last decade, the consumption behavior of our end consumers are -- it's going to be less at higher prices. So innovation is going to matter. And that's where we've historically done really well. So I agree, there's some ball of the old, but I want to also put to you that the assets that we have, the footprint that we have, the intentionality that we have behind what we're doing is the ball of the new, and that should be a more profitable, higher cash generative business. And so I'm excited about the ball of the new. I respect and appreciate the ball the old. I did really well in the ball of the old and returning to that will be helpful, but we can do better. We can even do better on top of that.

Sounds good. One of the questions from the audience is on you might have heard this, GLP-1s and the potential impact...

Never heard of it.

And the potential impact on hard and soft drinks.

Yes. We don't think it's a big deal. We haven't spent a bunch of time on it. I've got a couple of Board members who run -- manage significant fast-food chains. So we benefited from their research. But the beauty about what goes into a beverage can is it can go 0 calories, it can go low calorie, it can go in that direction. I think food will be impacted more than beverages. There's also -- some of our customers will tell you it's like, "Hey, if people get in better shape, maybe they can consume or they can cheat a little bit on the beverage." So I don't think it's anything. I think it's much to do about nothing. A 1% decline in caloric intake by 2035. I think that's -- it's not something that I think I'm going to have a bridge item on anytime soon. So maybe leave it there.

Okay. All right. There's another question about -- I'm just reading it out. Spot can prices being below contract price. Is that something that's occurring in the industry right now as it relates to, of course, contract negotiations in the future?

Spot can price being below. There are times when it's above, depending on -- so here's the misconception. So there are regions of the country within our footprint that are oversold. There are also several can sizes that are oversold. So 12 sleek cans, there's too much capacity on 12 sleek cans. That comment, I would say, at times, is accurate. Spot prices would be below contract prices.

Is that the case now?

For 12 sleek, in some parts of the country. And usually, it's not in peak season. Usually, it's on the fringes at the end of the year, but it is so insignificant in terms of the totality of the marketplace. But I would also oppose it like we're selling above contract prices on other cans in our portfolio that we have a tighter demand profile for.

Okay. All right. Mass market beer. How do you see that evolving? It's been a huge pressure point this year. You might have...

Yes. You might have heard of it. So how this is going to play out and what we've said publicly, and I continue to believe that you're not going to know a lot about who's stepping into the opportunity or if it's recoverable by the marketing issue that took place by the other -- until you get to peak season next year because what happens in the second and the third quarter, specifically in North America is, people are brewing their beer at max capacity. So folks that have excess brewing capacity will have to brew more beer. This is not a can issue. This is a -- if there are resets on the retail shelves and there's a couple of big breweries, one in particular that really has the excess capacity that was shuttering capacity for the last 4 or 5 years, they've got to make a discernible pivot, buy more hops, buy more barley, add more labor, run those assets. The Constellation Brands, they've got a wonderful demographic build, right? So they're continuing to grow. They may be able to step into this by moving forward projects that were already cast, but it's really going to be about do people return back to the Anheuser-Busch family and/or the shelf space reset and does the other large brewer in North America step into that. Everybody is working on all of these scenario plans right now. The big reset in retail happens in the spring. There's a smaller one that happens. I would say on-premise, there's been an awful lot of shift there. So some of the customers will talk about, we've picked up a lot of tap handles. Yes, that happens very, very quickly. But it's when you're altering the pack sizes in the huge retail shelves in that supply chain, you got to turn on a lot of things within that supply chain to make that work and to step into that opportunity. So I think you'll see it in the summer next year. There'll be some of that. We'll benefit from it because we're with everybody. So it's all upside to us internally at Ball. But how fast and what the inflection point is, it will be interesting.

Okay. All right. One of your peers was here earlier today, and they talked about PPI adjusters, specific in North America turning negative in terms of give back for next year. Is that...

Timing of that matters. So we had -- our biggest PPI resets didn't happen until the third quarter. So we'll carry those over into next year. So that doesn't apply to us. I'm not seeing that. I'm not seeing a degradation in PPI pass-through. We're still doing an awful lot of catch-up in a lot of our businesses in Europe, South America, inflation is moderating, which is actually a good thing. It's not a pass-through and there's still inflation. We'll see how the fourth quarter works, but we're not concerned about it at that point, and we're not seeing that in our contracts.

Okay. Good segue into Europe. Volumes weakened a little bit, not by much, but they did a weakened relative to your baseline. What do you see happening in that region?

Yes. I think what we're going to see here for the next 6 months in particular, third quarter was a combination of certainly a weaker end consumer. And they've got -- I think the end consumer over there has pretty significant energy and utility headwinds as they've tried to figure out their energy policies. That -- and weather does matter for us in our pack mix and it was an unseasonably cool and wet summer for large parts of the beer-consuming marketplace in Europe. So the common nation of those two happen, but I will tell you the end consumer is probably the bigger tailwind there -- or excuse me, the bigger headwind for us. We've got a pretty tough comp in the first quarter of next year. So I think as we lap Q4 and Q1, the summer is going to be an opportunity for us, given what we experienced this year. And I do believe that the economy starts to stabilize even more heading into next year with energy and things of that nature. I know there's a lot of natural gas refractories coming online, things of that nature. So I'm bullish about second half in Europe, a little bit more pessimistic about kind of the next 6 months, if you will.

Latin America, Brazil.

If you remove Argentina out of that equation, I think everybody knows what's going on there, we're actually the only can manufacturer and supplier, and then it's been a great market for us the last few years. A little tougher dynamic, as you can imagine. Brazil has really turned the corner. That economy is getting much better. We're seeing an awful lot of volume. And there's a compounding effect on the favorability for the can in that marketplace because what's happened over the last 18 months to 24 months, which is consistent and synonymous with what happens in a higher inflation, recessionary environment in Brazil, in particular, there's a returnable glass float. And when inflation ticks up and aluminums in U.S. dollar denominations in that part of the world, there's a 5% to 7% shift that generally happens into returnable glass versus the other substrates. So that took place. We're seeing that now return. So it's a healthier environment from a volume standpoint, but the substrate shift will also return. So if all of that comes back -- now you've got some pretty healthy growth rates, and it's a compounding effect, at least for the next 12 to 18 months is the returnable glass to cans resets. The economy gets better, the end consumer is better. And so we're very constructive on South America, ex-Argentina.

Okay. We'll strip that out. The 20 -- if we kind of dipped in the near term, you reported last week, unless you want to share an update since last week, I assume everything is status quo. What about the variances for 2024 as it relates to price cost or any sort of cost savings flow through into next year?

Yes. '24, so we will have -- we've got sort of footprint announcements that we earmarked. There'll be a little bit of that, a little bit of carryover of a couple of facility closures that happened in the first quarter, then the Kent facility, there will be an uptick there. The biggest inflection and it's -- I'm going to caveat this to with all of this is with -- is excluding an aerospace divestment, which will bring on an annualized basis, about $100 million of interest expense down when we retire that debt. So this is what's right in front of us. We had a really -- we've got a softer first half in South America. We should see that recover. That will be volume, and that will be flow through there. In Europe, a little bit tougher comp in Europe. But as I said, I think the second half of the year in Europe will inflect nicely. That team has done a remarkable job to basically offset the $86 million that we lost from Russia. We're going to able to claw that back this year. There is growth opportunity there, but the earnings inflection is going to come from growth and more favorable leverage in that marketplace. So growth is somewhat growth dependent in that marketplace. And then North America, if you look -- you have to go back, you have to look at '22, then look at '23 and '22, we built way too much working capital. We've taken it all out. And what that means is we've run production below actual sales. And so the absorption lift will be fairly pronounced in North America next year. It's meaningful. ABI will then lap those difficult comps kind of May time frame is actually when that happened. I think there'll be better volume comps for us second half of the year versus the first half in that regard, but will carry over 6 months of PPI that we got in the second half of this year, we'll get the additional pickup, and the absorption gains and then we're running our plants so much better than we were a couple of years ago. All of that is going to materialize in just a more profitable business even at flat volumes.

Okay. And then just finally in the last minute we have capital allocation evolution going forward. Your balance sheet is going to be a good spot, obviously, post aerospace, a lot of cash flow being generated next year. How should we expect that to be evolved versus maybe what you've done historically, which is buy back a lot of stock, if at all?

I think it will be -- it will mirror that, especially at the stock price. So we will spend money in line with GAAP D&A for the next 2 to 3 years. We still have dry powder. We have efficiency gains in our plants. We can grow into a nice growth rate. I've earmarked sort of that 4% global growth rate that's still -- we can still grow in the next 2 to 3 years, maybe 4. I don't think we'll see that next year based on the commentary I just gave you. But with that, we'll flow a lot more cash. As you said, we'll retire debt down to 3x from a gearing level, and we're going to buy back a lot of stock. So think about capital outlays, D&A, maybe even slightly below that. About half of that is M&R capital that has to be done. The rest is incremental growth. So we'll be in great shape moving forward and the accelerant to share buyback will obviously take place with the divestment of aerospace. But we're already planning on because of the working capital performance to be buy back stock even without that in the second half of next year.

Okay. That puts us that time. So thank you again, Dan. Thanks everybody for joining.

Thank you. Appreciate it.