Ball Corporation (BALL) Earnings Call Transcript & Summary

Great. So look, we'll go ahead and get started. Appreciate having Ball Corporation here with us today. For those of you who I haven't met before, my name is Mike Leithead. Head up the chemicals and packaging efforts here at Barclays. Happy to have Dan Fisher, CEO [ of Ball ], and Howard Yu, who heads up -- CFO. You've been here for how many months now, Howard?

5 months.

5 months. So a new face, but obviously, a great addition. So before we go ahead and get started, we'll just run through some of the [ ARS ] questions fairly briefly. So if we can fire up. The first one. So do you currently own the stock? One, overweight; two, market weight; three, underweight; four, no? Okay. opportunity here for new investors. Next question. What is your general bias towards the stock right now: positive, negative or neutral? Okay, a mix there. In your opinion, through cycle EPS growth for Ball will be above peers, in line or below. Mostly above. Next question. In your opinion, what should Ball do with excess cash? And this is probably a good question for Howard right now, considering we have a nice check that just came in the door last week. Bolt-on M&A, larger M&A, repurchase activities that pay down or internal investment. Shared repurchases and debt paydown win there. Next question. In your opinion, on what multiple of '24 earnings should Ball trade at? You have a wide range there from less than 10 or higher than 21. Fortunately, you too, don't get to hammer the sixth button here. Okay. Most people think 16 to 18x. And then last question or is this the last question? What do you see as the most significant share price headwind facing Ball Corp, core growth, margin, capital deployment or execution strategy. Core growth. Okay. Well, we'll dive into that. And I believe that's the last question, unless I'm mistaken. So great. We'll go ahead and get started with all the fun questions. Again, happy to have you guys here.

The group really struggled the first 3 or 4, but they got it right.

Building some momentum there. Exactly. Well, look, Dan, Howard appreciate having you guys I guess, a lot's changed. Maybe it hasn't in some ways since last February. To start off, maybe just can you level set where Ball is today why you feel like you're pretty well positioned to deliver strong earnings growth and cash flow in '24?

Yes. I do think a lot has changed in the last year. Number one, we get us in our oldest business here, you referenced that. We sold a really, really terrific business for a great price, and that all came to conclusion last Friday. So we said goodbye for now for a lot of wonderful long-standing employees, about 5,000 folks. We sold 15%, 16%, 17% of our business, nearly 40% of our market share. And I think with that cash infusion, which is Howard, $4.5 billion basically billion after tax, who are already in the market tendering for retirement of debt, get our balance sheet in a really terrific spot. And as early as Friday, we were in the market buying back shares. So we agree wholeheartedly with the sentiment to buy back shares and retiring debt and getting a nimble, flexible balance sheet for the future. So all of that's in process, and it's consistent with what we said we would do back in May time when we made the announcement of the agreement in principle. And then I think the other major difference for us is we've shed a lot of high cost, less agile fixed cost structure plant. We've got -- and we've made investments clearly over the last handful of years that we put world-class assets in place. And then all of that is going to give us a really nice putting for win. The core growth comes back and all signs point to a different behavioral pattern with our customers. They're all going to need to do something other than pulling on the price lever given that the end consumer is weaker, you're hearing it in retail, you're hearing it in QSR channels on and on and on. But that typically is a good signal for us and a lot of communication we're seeing and the early indications in terms of volumes and year-over-year growth is manifesting at small levels, but it's really the first time in the last couple of years that we've seen that. So things are being put in place. We're an aluminum packaging business, we believe in the circularity and the sustainability at the carbon journey that we're on. We are -- there's been a lot of investment. Things like a zero carbon smelting operation technology is now in operation in parts of the world. And so we're really excited about the trajectory of the sustainability attributes that aluminum has our ability to sell that at scale, which I think is a differentiator. And then the need for folks to grow generally comes with a need to innovate. And we are also hedge holders above kind of the competitive landscape in terms of innovation and selling that innovation at scale. So we're in a good spot. I think you'll hear more from Howard. And we're doing what we said we would do. We've got more upside than probably do downside and there's a probably more predictable backdrop in terms of our volume. We're all in on aluminum. So that's what all is today and will be in the future.

Great. We'll look a lot to dig into there. Maybe let's start with the organic growth because that's obviously the key focus for a lot of people here. If we start with North America, can you just talk about what you're seeing on the ground in the industry right now? Any pickup in promotional activity and then maybe just help remind us, obviously, last year, there was a beer brand disruption of sorts. Just how we should think about anniversarying that...

I haven't heard anything about the beer brands and get to a more normalized rate right? The beer brand disruption for us for everybody that knows the big beer brand disruption happened like -- end of April, we have a significant share of that particular brewers business in terms of merchant supply nearly all of it with the except -- and the have -- 50% of their volume is politically integrated. So we've seen a lot of branding activity. We've seen a lot of marketing activity. It's all gearing up for the summer. So what happens this summer. I think will drive the balance of that brand and their ability to rebound. So I think there's a bit more of a wait and see on that, but usually, that's when folks have barbecues, concerts and college football and all of that is going to be meaningful for that brand in its recovery. I would say, in terms of promotional activity, there's more, but more importantly, promoting from $9 to $8.50, that was happening, $9 to $8.50 for 12 pack, sorry, those have described in the domestic market. It's deeper now. You're seeing a return to prior to COVID in terms of some of those behaviors, the buy 1 get 1 free entry stuffing events. That will be more -- it will be similar to what we've seen prior to COVID and again, it's not going to be meaningful until you get to peak season, which is April, May timeframe through Labor Day. But you're seeing early signs that more importantly, you're hearing it from all of our customers that they're going to need market share, they're going to need revenue, they're going to need volume in order to generate the return profile that they've signed up for. So that's always a good sign for us. We're seeing early indications. January is one of the more quiet, if not the most quiet months of the year, but we did see a positive inflection in terms of growth [indiscernible] a couple of years, both in the 4-week and the 12-week [indiscernible] 4 week into 1 week and so we're continuing to see that -- those Super Bowl. So all of that's moving in a positive direction. The wildcard, obviously, for everybody, it's like how weak is the end consumer. How aggressive do they have to be in terms of their promotional activity, that will play out here, I think, in the third quarter for us, which is the most important in the Northern Hemisphere.

Yes. Okay. That makes sense. And maybe if we then just kind of shift around the globe a little bit South America been a bit choppy, although maybe Brazil is improving a bit. EMEA has been actually surprisingly resilient until recently, there maybe a little choppiness. So can you just talk about kind of the lay of the land at those two regions?

Yes. So what we've seen exiting 2023 and into '24, take Argentina out of the equation which you can't for us because we're the only one that actually manufacture those cans in that marketplace. But we've seen a really nice uptick with our major customer in that market winning share. They want here at the end of the year. they're continuing to perform well here early stages of this year. We just got through Carnival in Brazil. So really good consumption patterns for beer down there. So we're off to a good start. And you really need the first quarter and the fourth quarter to perform well in Brazil in order for you to have a meaningful year or a chance to execute against your expectations for the year down there. Argentina, we didn't expect a whole lot, but so far, it's moving in a fairly positive manner. I think a lot of the actions that the new president has taken, I think, everyone is waiting to see what was happening down there, but it's been fair and resilient, and we've seen even year-over-year, I think we're off to a good start compared to prior year there. Chile is still a bit stagnant in the economy, but we didn't expect a whole lot there. So I'd say, overall, I think South America is off to a decent start. So we're bullish about that. And I think one of the things that's important to recognize and probably many in the audience know Brazil was a country that didn't actually stimulate their economy much during the pandemic and that's given them an opportunity, and they've had a couple of really wonderful crop years here in the past 2 years. And I think all of that has benefited them and their GDP growth is better than expected. I think they've lowered interest rates faster than we expected. So that economy is moving in the right direction. And you need that for ourselves [indiscernible] business group. In Europe. It's still in a bit of a malaise, I would say the end consumer is not wrong there. I think the inflationary pressures continue that is all built into our expectations, and I know that the regasification projects start to come online second quarter. So hopefully, we will see some of that in the -- because the inflationary pressures on the energy sector that is really causing consumer some angst in terms of their ability to purchase volume at similar levels to -- prior to the Ukraine event. But we're bullish on medium term, long term for Europe is still a wonderful market for us. It's the least penetrated by [indiscernible]. I think glass has challenges in terms of their carbon footprint. So we should be able to incrementally take share here over the next handful of years. And so I'm really excited about that market medium and long term, but there certainly the end consumer is in a difficult spot right now in Europe. We expect to see growth this year, but it will be second-half weighted.

And you touched on it a little bit in your opening comments around just the cost actions you guys have taken. I think if you look back and kind of what your volumes have been in the past year or 2 in the market, I would argue EBIT or operating profit is probably hung in better than people would have thought. How do we think about then the eventual volume recovered, like you said, you've taken out some of the inefficient plants you've kind of upgraded. What sort of the operating leverage? Or just how should we think about when volumes do recover, kind of what that means for the P&L at the end of the day.

Do you want to take that?

Yes, sure. So I think as we've documented, we did do some plant takeout. I think there's four of them in North America and one in South America. In 2023, you saw the impact associated with that. I think we quantified it as roughly around $75 million. One of the facilities we're shutting here in the first quarter here, yet. And so we talked about the tailwind that we'll get associated with the big cost savings there as well. I think we quantified that and said roughly $30 million. And so -- and as Dan has pointed out, we're taking out the least efficient manufacturing facilities in that regard as well. And so not only are we taking out those [indiscernible] costs, but we're going to get that productivity gain as our overall supply chain and a manufacturing facility. And so we talked about it in the context of -- for every percent of growth, we get 2% of earnings. I mean we think that certainly in the short term, that might even -- that leverage might even be better.

I think if you go back another layer and you look at safety, safety performance will be better, quality will be better. Our delivery performance will be better, our inventory positions will be better, our productivity will be better. And then I think all of that should lend itself to our ability to win business because there's no reason for folks to go anywhere else. The M&R spend associated with aging plants. I think folks understand that as well. It's a lot more to maintain efficiency levels in a 50-year-old plant benefits in a 6-year-old plant or a 6-month old plan. All of those are going to contribute at various aspects of our cash generation and our ability to lever potentially at a better rate moving forward.

And Howard, maybe I'll stick with questions to you for a little bit. You obviously got a very nice check in the door on the aerospace sales fairly recently. I guess the main question I get from investors is how fast or how quickly are they going to deploy that capital? It sounds like you've heard Dan correctly. You're already in the debt market. You're already in the equity market. I mean just how should we think about the pacing of putting that cash to use?

Yes. So we've spent substantial amount of it already. I mean this is what we said we were going to do with that $5.5 billion of proceeds, we tendered for the 2025 and 2026. And so we'll retire much of that. The term loan there is also an opportunity for us to address some of that, and that would come up in 2027. And what we said was we'd spend about $2 billion in debt retirement and buying back that and then deploying a significant amount of cash as it relates to stock repurchases, and we started that and we're in the markets earning last Friday as well. And so we talked about a $2 billion number there over the next, let's call it, 2 years or so. We'll be fairly aggressive and prudent about how we buy back those shares as well.

And would it accelerated share repurchase being on the table or not kind of how you're thinking about things?

Well, we have a 10b-18, [ 10b5-18 ] in place now. And as we go into a blackout, we'll have to [indiscernible] viable for us, obviously, depending on the volatility and the economics. So we'll be, again, thoughtful about whether or not before that. I don't know that we would anticipate a significant amount of [indiscernible], if we did to buy one.

Okay. And then maybe last one to Howard on the financials before I'll come back to Dan. Part of the capital deployment is on the factoring side of things and unwinding some of that. I think there might have been some confusion from customers just how that flows into the operating cash flow and the free cash flow line. Again, I like to like a factoring online as almost a financing activity, although that's not U.S. GAAP, so. So maybe you can kind of help elaborate a little bit just so people better understand the free guidance.

Sure. So Mike, and I think you understand it well, for those maybe not as familiar with the factoring and the like. So what we said is our normalized free cash flow for 2024 will be in the range of $900 million to $1 billion. And so that's the way to think of it. We've also talked about unwinding some of the factoring. We talked about it in the context of about $0.5 billion or so. So that leads to the $500 million of free cash flow kind of the guide that we divide in the earnings. And so you're right. I mean in many regards mining back in more of a discretionary finance decision. But the way that we report those things and because it's part of working capital, we have to capture it as part of the operating net. Okay. If that makes sense.

And then hopping back, Dan, you recently announced, I think you guys are having your biannual Investor Day June '18. Dan, shaking your head, yes. So I didn't screw up the date in New York City. Would you hope to lay out for investors, again, like you said, you have a some portfolio changes. I mean just what do you hope to showcase at all that you hope investments can mostly a better appreciation of moving forward?

Yes. I think I've made a few comments here the outset, but I think we've got a really good company, a very good company. I don't think we've taken advantage part sale in the marketplace. I think we can be a great company. We have all of the recipe to be a great company. We're the most innovative. We can sell sustainability at scale. And you're going to -- we're implementing the Toyota production system. We're getting very focused in our commercial structure. We're changing our operating model. You'll hear a lot about the details behind that. Fundamentally, by jettisoning the aerospace business for a higher margin business. And our free cash flow is going to look a hell of a lot closer to our net income levels moving forward. And we're going to be able to with a lower gearing level, we're going to be able to manage our free cash flow at a rate that -- in a more consistent manner and at a higher rate of return for our shareholders. And I think we've been able to do for quite some time. but we need to be very disciplined as this world will not look like it was between 2010 and 2018. And in order to be a high-performing company, with higher interest rates and higher tax rates that it's like you have to run your business better than anyone else. And I think we can absolutely step into being a great company with a focus on the most circulated substrate and so that's really what you're going to hear in more detail, and you're going to hear it from a leadership team that I think is the best in the world, any company regardless.

And now -- if I just think about the portfolio post aerospace, obviously, Ball, long history of entering, exiting a ton of different businesses. Is this portfolio the right one for the future? Or is there any other changes that you could make sense over the next, I don't know, 2 or 3 years?

It is for now. And I say that there are a number of things, whether it's single use or multiuse or reuse, aluminum is the most circular package. And I think we've got a runway to get to a product that can get -- [indiscernible] your close to carbon neutral by 2030 in some aspects in of some of the product offerings. And if we do that, then it's going to be the unlock of the ecosystem and making sure that we have partners that can help us with the growth of the entirety of the supply chain, we're not going to make investments, significant investments, that's not what I'm saying. But I think we do need to create the catalyst and environment that enables aluminum to grow. And that's where our focus is here in the short to medium term and buying back a lot of our company.

Yes. And then last one before I turn it over to Q&A. You mentioned kind of the most circular substrate, and that's obviously a key focus for you guys. A heck of a lot has changed in consumer depend over the past few years that can maybe mask some of the end-demand trends and whatnot. When you talk to your customers, what is the engagement around the sustainability, substrate shift. I mean has that changed at all through all this? Or just maybe kind of talk about how those [indiscernible] are involved.

Yes. I think everything slowed down for the last couple of years. Fundamentally, it's I don't have to do much, I can put up my price and people are leaving us [indiscernible] to recycled content. But the reality is, both in Europe, Europe is where they are sprinting down the path of the reporting initiatives that are going to start in '26, but in '25 will be the baseline. So the conversation with the customers in Europe are -- they have intensified in a manner in which everything is on the table. We're talking about everything, and they need a carbon trajectory that's not going to go backwards at any point in time over the next decade. They're fearful of green washing claims and lawsuits and on and on and on. And so aluminum gives them a very safe backdrop to move into to enable progress and movement in a number of their claims, especially on the carbon footprint. 2027 is theoretically when the SEC starts to do things like that. So I think this reporting cadence has got all the customers moving in a far more aggressive manner toward doing different things within their portfolio, and we're having a lot of this now.

I'll pause here if there's any question from the audience. Again, I can talk to Howard for another 2 hours if they didn't cut me off..

Just to clarify the comments you made on most 1 week -- that's positive volumes? [indiscernible].

That's the industry? And so we had -- great question. I would expect and what we've laid out to get to our flat -- sorry, to get to our flat, it's going to be some negative volume comps [ first ] quarter transition to flattish in the second and third quarter and maybe a slight bit of growth in the fourth quarter as we exit. Right now, we're a little bit ahead of that. Some of it has to do with, I think you understand what's happening relative to potential spikes with [indiscernible] there's some safety stock movement that is a bit noisy right now. That's helpful for us. But I don't necessarily know that, that plays itself out over a longer period of time. That all neutralize in fact, to what we guided at the beginning of the year. But fingers crossed, we'll -- we've seen positive inflection here in the industry. We hadn't seen that for 2 years. That's off to a better start than I think even our competitors would tell you in some of their comments. So I think we're moving in the right direction. Our customers are behaving that way. they're signaling some of that commentary as well as recently as this week that they need to grow volume. And so we're going to benefit from that across all the product portfolio and all the customer mix.

Any other questions? I'll keep asking in case there isn't any other. Rounding out the aluminum portfolio, I didn't touch on the cups, the aerosol. So maybe you can give your latest kind of update there, just how those businesses are trending as we start the year.

Yes. So the Aerosol business over the last couple of years has been we've made some significant op model changes, leadership changes a couple of years ago. That business is twice as profitable as it was a couple of years ago. And a number of things have happened there. It's like we dramatically increased the cycle content in that package versus the competitive landscape that's giving us a nice advantage relative to a lot of the sustainability claims that those customers need to make as well on the personal care space. We're running our facilities better. We've made some nice incremental capital investments that's been a bit of us as well. So that's on a lovely trajectory. And in Europe, a lot of the conversations now are reuse single-use and for us, that's really our reuse opportunity both in the personal care space and on the beverage space. There's a lot of white space relative to that product offering that we can continue to step into. And then you've also got the steel 10-point aerosol transition into a minimum. So all of that has helped us grow kind of mid-single digits consistently. But what's more important is what's in the fall through on the leverage in excess of this 2:1 ratio that we talked about. Encouraged there. Then on the cups side, foodservice is the big opportunity, and we had sort of flattish volume growth year-over-year, but it's what's masked behind there is retail in [indiscernible]. Food service on the uptick. And the big opportunities on volume are there. We are still losing money in that business. We're very close to breaking even on cash, but we're losing money in that business not from a fixed cost standpoint, it's still going to be -- this year is going to be pivotal to see what we do medium term and longer term with that portfolio. We're still encouraged by all the market response, but this is not a -- consumer is pretty weak, and this is certainly a more expensive product to be competitive alternatives there. So the retail side is softening, but the food service is picking up steam, and you just need one or two big customers to make this a breakeven business and you've been a profitable business.

You need the Nuggets to keep going deep on the playoffs, so you can keep selling [indiscernible] there's no question, they'll do that. They have the best player in the world. Any final questions? I'll leave it there. Dan, Howard, appreciate it.