Ball Corporation (BALL) Earnings Call Transcript & Summary

Hi, everybody. Welcome. For those of you just joining us. I'm George Staphos, BofA's packaging paper/forest analyst. And next up and consistent with our theme this morning on beverage packaging, is Ball Corporation, the market leader in beverage cans. And we are delighted and honored that Chairman, President and Chief Executive Officer, Dan Fisher; and Chief Financial Officer, Howard Yu, are here to go through our discussion. We look forward to your questions, make it engaging. As you know, Dan was elected Chairman in '23, previously having been elected Chief Executive Office in '22, and became President of the Company in 2021, having joined the company in 2010. Meantime, Howard came to Ball having previously been Chief Financial Officer and Senior Vice President for Envista Holdings and Chief Financial Officer as well for Ormco Corp. So without further ado, I bring you Ball Corporation. And generally, what we're doing to start is we're just kicking off discussion to the extent possible with some commentary on what you said already about your outlook guidance and that sort of thing, then we'll get into volume trends, strategy and the like, and then wrap up. And again, look forward to your questions, everybody.

Can you relay to us again, remind us what some of the key considerations are in your guidance for this year, and where you're tracking relative to that to start the year, to the extent possible?

Thanks for the invite. Always nice to be here in Florida. We left ice and snow. So this is lovely. Of course, we're in conference rooms. So that negates the beauty of the scenery. Maybe the big topic -- the big topic for us, right, and I'll let Howard just jump in here at the outset, was we were steering toward guidance of aerospace divestment midyear. It happened a little ahead of that. So that actually formulates elements within our guidance as it relates to EPS, and the outlook and the trends moving into '25. So maybe I'll start there with Yu in terms of some of the broad strokes relative to guidance on share buyback and debt retirement and so forth.

Yes, absolutely. So George, on February 16, we closed aerospace. And at the time we put out the guide, we weren't sure exactly when that would close. But we liked the timing of it. We got into the market very quickly. What we said was that we'd go ahead and retire about $2 billion of debt, looking at the 25s and 26s first, as well as buying back shares. And so literally, the day it closed on the 16th, we're in the market, and tendered for the debt, as well as buying back shares, we started that under the 10b-18 program as well. And so as it relates to EPS guide, what we said was EPS guide would be around mid-single-digit plus. It doesn't change because of the timing, because what we lose in operating earnings associated with aerospace, we make up in interest expense savings as well as the share repurchase being accelerated and coming online earlier this year. So I think that EPS guide stays intact as well. As it relates...

Mid-single-digit plus, yes.

Yes, that's right. That's right.

And you were saying, Howard, I'm sorry?

I was just going to say, as it relates to all the other components of the guide, pretty consistent with what we said. We said the free cash flow component would be about $500 million in the year. That's after -- or considering $500 million of factoring unwind, which is going to be a headwind on our working capital. And so that's also consistent with what we said as well.

So I think on those broad brush strokes, basically, the income pickup plus the aerospace earnings kind of neutralizes the EPS guidance to kind of stay within that mid-single-digit plus range. And then the other things, obviously, that make a difference is what did we expect in the regions in terms of the volumetric outlook. And what we've steered toward for us, flat in North America. I think the industry will grow a bit. We'll be flat. There was a contract realignment that's impacting us this year, a major brewer that decided to move away from sole supply. That decision was taken 3 years ago, 3 years ago plus. So we've already made some footwork -- excuse me, network optimization changes relative to that. One of the facility rationalization projects that we underwent and consolidated that into our new Pittston facility was all in conjunction with that. So we've negated those earnings losses. And then -- so flattish in North America. Then we picked up the volume we've lost in new contract wins. And you'll start to step into those over the back half of the year. So we'll be negative in the first quarter of North America. Remember the major beer marketing issue took place in April, tail end of April, so we'll have a difficult comp in the first quarter for that. And then we'll start to step into flattish volume in Q2 and then growth in the back half of the year to get us to 0. In South America, Brazil is off to a really nice start. So you need -- obviously, you need the first quarter and the fourth quarter in the southern hemisphere to go well. And we're in line, if not a little bit ahead of expectations. And we thought mid-single-digit plus in terms of growth for South America. We'll be lapping Argentina. We're the only can manufacturer there. So those are fairly difficult comps, but we're off to a relatively decent start there. We'll see, I think, a lot of the government intervention there in the October, November time frame has been the right recipe for that region, but they got a ways to go. So we had a pretty low base that we built into our plan for Argentina, and we're kind of at or a bit ahead of that. So nothing newsworthy, I think, in South America, other than we're kind of on plan there. And then in Europe, we anticipated -- we commented on it last year, when we look at the regional macro outlook, South America really went into a recessionary period via high inflation, raised interest rates first, then North America, and now Europe is going through that same manifestation from the macro and end consumer weakness standpoint. And so we saw Q4 was soft, we'll see Q1 soft, Q2 will be soft. Relatively difficult year-over-year comps there. And then in the back half of the year, we expect growth. We've got a nice diversified portfolio in Europe. I think what's happened over the last 2 to 3 years and how we came to that conclusion for that guidance, George, was in places like Germany and other -- 2.5 years ago when the tanks rolled into the Ukraine, there was that shock as it related to the natural gas pricing, and many countries subsidized their citizenry, and they've started to offload those subsidies. So now you're feeling 2.5 years on the full brunt of that inflationary pressure in a number of parts of Europe. So the end consumer is weak. But as these regasification projects come online first half of this year, there's more belief that things will get better towards the second half of the year in Europe. But it's soft right now, but it's in line with expectations. So nothing really noteworthy there in any of the regions. I would say maybe we're a tick ahead. But first 7 weeks of the year, not a year makes, as you know.

Thanks for that rundown, Howard and Dan. I mean I think I know the answer to the question, but I'll ask it. Nonetheless...

You probably know a lot of these answers, this is what I suspect.

Thank you. Well, no, the fact that I'm still here asking questions tells you I'm -- maybe a slow learner. No. But all kidding aside, back in the financial crisis, the beverage can kind of sailed through. Certainly, in this period, it's been much more volatile. What does that say about the can? What does that say about the products that can is now distributing? Or is it really more about where we are with inflation and what it means for the consumer relative to 15, 16 years ago?

No, I think it's a great comment. So it's a recession resistant product, it's not an inflation resistant product. I think it's what we've learned, and you go 30, 40 years of -- at least in Western Europe and in North America, of sort of 2%, 3%, 4% inflation environment, we can all navigate in that world, right? You can do that with productivity and efficiency gains within the 4 walls of your facilities. Then supply chain, optimizing the entirety of the supply chain, both with our customers and our suppliers. So all of those were able to offset a lot of that and keep an incredibly stable grounding or underpinning for the volume. And then we -- then what happened in the last couple of years was, of course, inventory builds because of the fragility of the supply chain, people went away from kind of their standard just-in-time methodology to just-in-case, and then back to just-in-time. And I think now we're in a much more stable environment moving forward. But the combination of inflation, and then the pricing behaviors, and then the stimulus money -- pricing behaviors from our customers, and the stimulus money getting poured into some economies, created a lot of volatility. Even in places like -- and you can start to see it in geographies, places like Brazil didn't do a lot in terms of stimulus money. In Chile, they have these safety nets of social security. They allowed citizens within Chile to take out 1/3 of their social security. And so we saw a 25% growth in Chile in 2021. So I mean, you see some volatility that's happening, and a lot of it had to do with the stimulus that was generated -- or mechanisms that provided in consumers with more money, more discretionary income. And the can was a great beneficiary of that. But I think now we've gotten back to pricing in line with CPI, those historical pricing behaviors by our customers, inventory levels exiting the year, both in Europe and North America, that were more representative of where we're heading into COVID. So we're in a much better operating position. And as you know, running can lines 24/7, if we can give our folks in the 4 walls of a plant some guidance as to what they're going to run the next 2 to 3 days, you will really start to see efficiency gains. And I think you started to see it specifically in our North America business even in Q3 and Q4 last year where we gave them a blueprint that was repeatable and they showed up by performing incredibly well in that backdrop.

I really want to get into that point in a minute. I just want to cover maybe a couple of last sort of top line types of questions. Do you think South America is now back to what you would have expected in a normal year? And what are you hearing from your key customers there in terms of how they see cans versus glass in the pack mix? Number one. Yes, let's finish up with that, and then we got some operational...

That's a good question. So what has happened -- what happens historically in South America when you get into a higher inflationary environment, and it happened a couple of times in the last 20 years, is folks like our main customer down there have a fleet or a reservoir of returnable glass bottles. And we're still transacting the can with U.S. dollar-denominated aluminum. And so that, with currency volatility and the inflation associated with that raw material, really the mechanism to fight inflation for some of our customers as they go heavier to returnable glass as a percent of their share. And so from the back -- from Q3 of '21 till last quarter, we saw a 7% share shift from aluminum cans into returnable glass.

When was that, '23 or?

End of '21 to the end of '23, and now we're starting to tick back. So usually, we'll get bottom line here is like the end consumer is in a better spot. It's gaining strength, interest rates are coming down, payrolls are going up in Brazil, which is our -- the majority of your position in South America. And the other thing that is still a tailwind for us will be this returnable glass share coming back into cans. It's incrementing back, until it's fully there, and we're heading -- now we're heading into a period where, it's in the southern hemisphere, right, they're moving to off-peak where we do a lot of maintenance repair work, and we won't really know the share shift policy changes probably until second half of Q3 in terms of kind of the build dynamics and what's going into the market. But slowly but surely, we're seeing that return to what the historical balance has been.

One last sort of volume question I had there, I remember now, to the extent that -- some of your customers have been prepping ahead of any supply disruptions, operations disruptions that they might have, has that help the volumes for you at all? Is it a rounding error? And how does that answer vary at all 1Q relative to the full year?

Yes. So there's a -- there are 2 brewers that are dealing with the union negotiations right now. I think the Teamsters union in particular. And the reality is we're constantly working with our customers to manage safety stock levels to make sure they're prepped for any issues that may arise. It's really negligible right now. I mean there's been a little bit of that, that would be a touch favorable. As they navigate this, that will come off and they'll go back down to normal inventory operating levels. It's more pronounced with one customer than it is the other because it's their -- their fleet of breweries that's up for negotiation. Pretty early to tell at this point, but one of the brewers -- the Teamsters have already gone on strike as -- a week ago. They're operating that brewery. And you can operate breweries right now, 60%, 70% utilization is all you need in off-peak season. The challenge will be if this is still happening as we head into -- when they got to run full out and can you do that with temp labor or contingent labor. So we got time here for this to sort itself out. But I'd like these things to be stabilized heading into peak season, to be quite honest with you.

Talk to us a little bit, I know you'll talk more about this at the Analyst Day and over the next couple of quarters, but the opportunity you see to become more, pardon the phrasing here, operationally efficient, how are you going to use Lean, how are you going to use some of the other process tools that you have that both of you have used over time in your past positions and what that means for Ball on a going-forward basis?

Do you want to -- 5 months into the role what could be better?

Yes, no worries. George, I think that journey has started probably about 1.5 years ago here for Ball. And so you've seen some of the results, I think, Dan spoke specifically to those in the second half of 2023. I think we're going to lean into that is what we're fundamentally saying and that we think that there's a long path here with regards to continuous improvement. And standardization, taking our best-performing facilities and manufacturing plants and sharing kind of best-in-class, what winning looks like, and then bringing that to some of our maybe less efficient kind of facilities. And we've done a lot of that work by way of closures of the inefficient plants first. But now with the network of footprint that we have, we feel pretty good about that, particularly in North America. And so now it's taking the best-in-class and sharing those practices, standardizing it, documenting processes, ensuring that the rest of the facilities are also kind of with that benchmark.

Does that -- go ahead, Dan.

One of the things, just to add to this, is like, you may be thinking, well, aren't you doing that already? The reality is people come to Ball and they stay forever. And so when you have folks that are 30, 40 years in the job, whether you've standardized the process and, well, you're incrementing using the nomenclature of Lean, Kaizen principles, et cetera, we're moving to -- we've had, over the last handful of years in North America, we had a pretty significant wave of retirements. And what we found is when you have key folks leaving key processes in key jobs in a labor market that folks aren't coming off a farm with mechanical acumen, I'm on the board of another long-standing manufacturing company, all manufacturing companies are going through this. And you have to get the rigor and the structure and the process in place to ease the knowledge transition for folks. And so we've been on this journey, and we've seen some successes. So now, candidly, we're like we're going to centralize manufacturing into a function and make sure we're driving all of these learnings in a consistent manner. And it's not as much about gaining and improving on where you are. It's like you should not go backwards because you've lost Bob off the decorator and he's been there for 30 years. I mean it's -- let's lock in the standards and let's improve upon that baseline. And that's a different way for us to work, because we've relied so heavily in this beautiful culture and these people that love and care deeply about. It's like we need folks to come in and not take 5 years to get up to speed on those jobs. We need them to get up to speed in 18 months. And we've designed training programs in which they can do that. So it's knowledge transfer, it's visual learning. And it's also SOPs across the globe.

Bob got a retirement party, I hope.

Bob is probably on a consulting agreement to make sure he comes back and teaches us his value. So he's doing fine. The problem is people don't want to retire either, right? So they go until they can't work anymore. It's quite beautiful. So even the planning for retirement is much harder because we're not pushing folks out the door. If you're contributing, you want to be part of it, you're sticking around, and we value that.

I'm sorry, Dan. It doesn't sound like the aerospace transaction necessarily had anything to do with this, this was going to be a natural progression. Or yes, it's a coincidence, but listen, running businesses is a challenge, right? It's tough, right? And so when you've got 2 businesses to worry about, now with 1 broadly, it's easier to do that. How would you have us think about that?

It's much easier to do it. So the -- so we have a number of products within our portfolio that are aluminum, right in front of -- on a manufacturing basis, whether it's cups or it's aerosol, 80%, 85% of what we do in each of these plants is the same. So let's not bring to bear -- let's not have an operating model that's built around the differences. Let's build it around the similarities. And the fact that we have scale to the extent we do in this particular platform, with this substrate, let's take advantage of the wonderful acquisitions through the years, all the innovation, the sustainability leadership that's really catalyzed around an operating model that's going to take a really good company to a great company. That's the intent here.

Thanks, Dan. Any questions from the audience? Dan, I want to switch gears a little bit here. Can we talk a little bit about something the company has been at the forefront on, in terms of sustainability. So we love all of our companies, we love all of our sectors independent of ratings, right? The plastics and specialty companies talk a lot about carbon footprint as a reason why they collectively have the superior substrate for sustainability reasons, versus paper, versus aluminum. What data do you have that would -- and educate that discussion that we're having right now, number one. Number two, as we work in greater and greater recycling, how does that discussion change? And some of the things that play to aluminum's advantage with recycling, does it maybe also work at a competitive advantage versus the other substrates in terms of sustainability, health concerns and that sort of thing? How would you have us frame that?

Yes. So I think a handful of years ago, the aluminum was gaining a lot of traction, the circularity story, the recycling capabilities of it. And then there was kind of a theoretical argument posed with virgin aluminum versus virgin plastic, plastic is better. 100% accurate. And there is no such thing as virgin aluminum products. It's like -- so it's like, are we talking pragmatism? Are we talking theory? So in the U.S. last year, I think we were in the high 60% recycled content in our products. That's the baseline. So already there, our goals that we've announced publicly is, by 2030, we'll have 85% recycled content in all of our aluminum packages. And so all of that's happening. You're seeing investments in rolling mills, et cetera. It's green energy. That's also on the backs of these new mills being built. So all of that gets us to a position that is -- the science would tell you that that's a position that no one can get to. rPET, it's maybe not what it's all cracked up to be, and so you're seeing a lot of that. The yield relative to aluminum, then it's like how many times is it recycled. Aluminum is infinitely recycled. So if you melt down an aluminum can, almost 97% of that goes back into circulation, whereas a third of a plastic bottle gets put back into another plastic bottle. So you really need 3 to get to 1. And it's -- the yield obviously breaks down over time to where you can't continue to do that. So it's the infinite recyclable nature of the product. It's really where the arguments lie. And I've already put 7 people to sleep here. So nobody really has the patience to go down this route. But the facts are starting to come out in a meaningful manner. And more importantly, there are challenges with chemical recycling. There are challenges with other of these technologies that they -- the cost of it increases, and some of the theoretical yields and the improvement there, it starts to break down in a way where people are really leaning into this is a very compelling story. And the things that we're doing along the journey are quite compelling. The last thing I'll tell you is everybody's got 2040, 2050 goals, 2030 in Europe is becoming more prevalent. The virgin component -- so I've talked about 85% recycled content, getting to that. So there's still 15% that would be virgin smelting capabilities. There are now technologies that are being invested in, in Canada and in the Nordics, that have carbon-neutral smelting operations. So the technology is there. So as we get to 2030, I don't have a to-be-determined or an engineering hole to fill, the capabilities exist today, and it's moving at an incredibly fast rate. They weren't here, I couldn't have made this comment a year ago. But we went to Davos and showed up, we're part of the First Movers Coalition, we've got a 0 carbon aluminum cup now, that's got an Aleris technology, virgin aluminum, that Rio Tinto and Alcoa have partnered in. And the 90% recycled content is already part of our cup. So we have a 0 carbon product already.

Everyone is still up. So just I took a...

They've had a lot of -- I see coffee cups in front of them. It's early. And it's incredibly chilly in here, as everybody can tell you.

I thought it was the scintillating discussion and questioning that was good for you. Any questions from the audience? We've got 5 minutes left and counting. Along with the $1.5 billion of operating cash flow this year and the free cash flow of $500 million, Howard, anything else that you would have us back to how do we mark your progress this year? Number one. Totally switching gears on you, there was an important statement made recently by an important politician suggesting that consumers give one of your larger customers a second chance. Has that affected your customers' expectations longer term at all? To the extent that you can comment.

I'll handle the Bud Light comment.

How did you know it's Bud Light?

So I think, George, maybe a greater appreciation here is recognizing that our refi risk by paying down some of this debt puts us out probably into 2027. So that alone is also meaningful. And then, of course, as a result of the cash generation that we create, our gearing ratio comes down substantially. So we've historically been north of 3, pushing 3.5. We'll be sub-3 for sure, somewhere in the 2.5 range this year. And so we talked about the macros and some uncertainties, having that gearing ratio at that pace, I think, is -- puts us in a good position overall and a strong...

Sub-3, 2.5-ish, somewhere in that range, okay.

I think the measuring stick, right, so what we're going to do and what we said is we will fill the earnings hole on a run rate basis by the end of the year from the aerospace divestment. So we'll be back to like-for-like earnings. And I think the other thing just to keep in mind is we sold our least profitable business that didn't generate a lot of free cash flow. So what we're left with is a very repeatable, predictable -- we were actually, with a lot of the aerospace growth, we were actually subsidizing a lot of that capital investment out of this portfolio. So now you're getting back to -- think about free cash flow in line with net income, CapEx at D&A, GAAP D&A levels, and that gives us $650 million. You bracket that $250 million of M&R, $400 million of growth, we got plenty along with our productivity to step into kind of that dynamic over the next handful of years. And by doing that, you're going to return a lot of value back to shareholders. And for those of you new to the story, 2014 to 2016, we bought back 15% of our outstanding market cap in terms of shares. So think about returning value, $1 billion of free cash flow every year, we've got a chunk sitting on the balance sheet, we're going to buy back that this year, we'll buy back that next year, we'll buy back that the year after.

And the op leverage, getting back to Lean and Kaizen and the like, 2x, less than 2x, more than 2x?

Yes. So historically, we've guided 1% volume, gets 2x the leverage. We haven't seen that in the last 2 to 3 years because of inflationary pressures and ramp-up curves and new facilities. And we've retired some aged assets that are lower profitable -- less profitable, higher cost, excuse me. So by adjusting the average cost structure of our fleet of assets -- in North America, there's a chance we should be doing a little better than that. I would say we haven't made those types of adjustments in Europe and South America. So the historical leverage ratio applies there. But we actually ended '23 with the best EBIT per can in North America that we've had in over a decade. And we believe we should be able to improve on that. So there are proof points there. You get back to a modicum of growth, leveraging that, stepping into the productivity gains, which should match the sales volumes, now you're in a really healthy environment in terms of to expand margins, expand free cash flow and return additional value back to shareholders.

That other question, any sort of benefit right now from what your customers are saying or like other?

Yes. If you've got dry powder, you're willing -- if you're gaining -- if you're gearing up to take share position or win back share, you do that in the summer. There's not a lot of beer drinking that's done, with the exception of the Super Bowl, when it's cold outside. It's not cold here, but it's cold in a lot of parts of the country. And so a lot of the investments that you're seeing, I think the proof points for a better volume outlook for the entirety of that customer, Mic Ultra is growing, Cutwater is growing, other things are growing, and everything was down initially. And so you're seeing signs of life within the entirety of the SKU. E-commerce channel, you're starting to see Bud Light gain back share. The can volume is coming back. Tap handles and glass bottles are the ones that are still the most off. So we're spending a lot of money. Whatever you think about Trump, I'll take anybody helping out that brand at this point. And so they're gearing up for peak season, summer concerts, football, all of that. They've laid the groundwork. Let's see how effective they are.

Last 2 questions. We're wrapping up here. One, obviously, Ball's had a very good stock performance track record over a number of years, last couple of years not -- nearly as good. What comfort would you give investors that that's -- you'll get back on your former footing, the good footing? And number two, again, you're in our seat, what 2 or 3 factors are you watching over the course of the year to gauge how you're performing relative to your mid-single-digit plus EPS growth and the other guidance that you've given us?

Yes. So I would just reflect on the consistency of the cash generation, how we're going to handle CapEx and how like we're going to spend at lower levels clearly than we have, we've got what we need, we'll grow into the growth rates over the next 3 years without much in terms of investment. I would say the proof point is if you look at '23 and the guidance we gave at '23, absent the Bud Light issue, so we lost 3 billion units and $100 million. So if you go back and look at our guidance, that means we beat every single metric and then some. And I think the guide that we gave holistically on what was going to happen in the marketplace was far more close to reality than certainly -- so I think we understand the market, we understand our customer and behaviors much, much better right now. And the minus 10% volume year-over-year in Q3 in North America and the flat earnings is telling you that all the things that we've done in terms of the footprint rationalization, gaining on efficiencies, controlling our costs, controlling the things we can, as volumes come back, we will be in a tremendous position to earn at a rate that we haven't earned historically. I think we're going to be in a much better position to earn at a higher rate, to generate cash at a higher rate. The disaggregation of aerospace is also helpful, and hold us to account on the EPS algorithm starts to look really good in '25, '26 and '27 in terms of the outstanding shares that we've bought, the average that we'll step into moving into '25 and '26. And there will be a continuous of this money machine comment that you may have heard historically from us.

So it's volume and progress on operations and how we track your progress on operations without it being the sort of quarter conference call.

I think in North America, looking to the leverage, that ratio should be improved. EBIT per can, I think, will be a helpful way to look at that. And then the working capital, managing that, continuously managing that better, I think those 2 elements should demonstrate that discipline. To your point, like we don't need a lot of -- we don't need a lot of volume right now to improve upon where we're at. After 2 or 3 years, you're going to need to get back to some modicum of growth in order to gain the productivity. But we've got productivity to step into over the next 2 to 3 years, especially in North America.

Howard, Dan, thank you very much. Great presentation. Thanks for all your patience. Please join me in thanking Ball Corporation.

Thank you.