Ball Corporation (NYSE:BALL) Q1 2023 Earnings Call Transcript

Ball Corporation (NYSE:BALL) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Greetings. And welcome to the Ball Corporation 1Q 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Thursday, May 4, 2023. It is now my pleasure to turn the call over to Dan Fisher, Chairman and CEO. Please go ahead.

Dan Fisher: Thank you, Tina, and good morning, everyone. This is Ball Corporation’s conference call regarding the company’s first quarter 2023 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company’s latest 10-K and in other company SEC filings, as well as company news releases. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the Notes section of today’s earnings release. Historical financial results for the divested Russia operations will continue to be reflected in the Beverage Packaging EMEA segment.

See Note 1 Business Segment Information, for additional information about the sale agreement and a quarterly breakout of Russia’s historical sales and comparable operating earnings. In addition, the release also includes a summary of non-comparable items, as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Joining me on the call today is Scott Morrison, our Executive Vice President and CFO. I will provide some brief introductory remarks, Scott will discuss key financial metrics and then we will finish up with closing comments, our outlook for the remainder of 2023 and Q&A. Let me begin by thanking our employees for working safely and efficiently, while fulfilling our customer’s needs.

Collectively, we delivered strong first quarter results amid tough year-over-year comparisons, driven largely by business divestments executed in 2022. In the first quarter, every business either achieved or exceeded their operating plan. Our aluminum beverage and aerosol shipments were in line with our regional expectations, and our aerospace technologies continue to be in high demand. Notable inflation recovery, benefits of cost-out actions, improved operational efficiencies and performance in every business offset higher interest expense and taxes. With near-term macroeconomic conditions continuing to pressure consumer demand, Ball’s year-to-date global beverage can volumes were down 1.4% in the first quarter, in line with our expectations.

Looking ahead, the breadth of retail summer promotional activity across our customer mix in North America and the continuing successful ramp-up of our two new facilities in EMEA, will be the key drivers of our ultimate 2023 shipment growth. We started 2023 with a conservative view on annual global beverage shipment trends, and we maintained that conservative second half weighted view. We have a lot of the year ahead of us and we look forward to serving our customer’s needs. As we sit here today, in advance of seeing quantifiable promotional activity, we are proactively managing our beverage operations in North and South America for cash and supply-demand balance, as we continue to bring down raw coil and finished goods inventories and return to our just-in-time supply chain management versus the just-in-case supply chain requirement during the pandemic and extended period of higher than planned growth for beverage cans.

Around the globe, beverage cans continue to win relative to other substrates and we continue to leverage our customer mix, scale, regional plant networks, innovation and capable teams across the organization to ensure the best near-term, medium-term and long-term outcomes for all our stakeholders. In our aerospace and aluminum aerosol businesses, operational performance and demand for our innovative products and technologies are accelerating. In aerospace, our technologies are well positioned to deliver unimpeachable data and monitoring capabilities for both environmental and national security needs. And in our global aluminum aerosol business, we continue to serve new categories and offer reuse, refill bottle innovations to a broader set of customers and occasions.

As we look ahead, all of our businesses will continue to unlock additional value for Ball stakeholders in 2023 and beyond. Consistent with our prior commentary in 2023, we remain positioned to deliver our long-term goal of 10% to 15% diluted earnings per share growth, inclusive of the Russian business sale headwind and we remain well positioned to generate strong free cash flow to deleverage and return value to our fellow shareholders. As we indicated in our prior call, the second quarter will remain choppy in North and South America metal beverage as we continue to work through higher inventory and manage regional production with an eye on cash. In addition, the positive momentum in our EMEA, aerospace and aluminum aerosol businesses will continue.

During the Q&A, Scott and I will strive to provide additional clarity on the external environment and cadence for 2023 based on what we know today. Our global beverage teams continue to position our business to deliver the year and have an eye on the future. For the full year and incorporating year-to-date trends, our customer mix and excluding Russia, we now estimate low single-digit global volume growth for Ball, with North America being slightly down, South America volume up mid-single digits, EMEA volume up mid-single digits plus and our other non-reportable beverage business volumes up mid- to high-single digits. We appreciate the work being done across the organization and extend our well wishes to our employees, customers, suppliers, stakeholders and everyone listening today.

With that, I will turn it over to Scott.

Scott Morrison: Thanks, Dan. I’d like to congratulate Dan on his election to Chairman of the Board and thank John for his service as Chairman. Dan was battle-tested on many fronts in 2022 and he has the skill set and drive to take the company to new heights. First quarter 2023 comparable diluted earnings per share were $0.69 versus $0.77 in the first quarter of 2022 and excluding the notable Russian aluminum packaging business sale headwind, first quarter comparable diluted earnings per share were flat versus the prior year. First quarter sales decreased compared to the same period in 2022, primarily due to the sale of our Russian business in the third quarter of 2022, currency translation, lower volumes and the pass-through of lower aluminum prices, partially offset by the pass-through of inflationary costs.

In the first quarter, net comparable earnings decreased compared to the same period in 2022, primarily due to the sale of our Russian business in the third quarter of 2022, lower volumes in North and South America, and increased interest expense, partially offset by fixed cost savings, lower depreciation expense and SG&A cost-out initiatives, as well as the contractual pass-through of inflationary costs. To reiterate our prior earning’s call commentary and to help frame some of Dan’s earlier comments about choppier second quarter performance in North America and South America segment earnings, we have been and will continue to proactively manage regional supply-demand balance across our system of plants in the near-term. After July, segment earnings will reaccelerate when the majority of the contractual inflation recovery begins and a larger portion of summer selling volume flows through segment results.

Also remember, the virtual power purchase agreement settlement recorded in North America’s first quarter results will not replicate in the second quarter. However, we estimate that North America’s second quarter segment results will be relatively in line with $183 million first quarter segment results reported today. In South America, customer and product mix is unfavorably influence — influencing the seasonally slower second quarter, and consistent with our prior commentary, we anticipate a more robust second half in Brazil, as customer hedges roll off and the fourth quarter summer selling season kicks in. As we sit here today, some very consistent commentary and key metrics. We ended the first quarter in a solid liquidity position with in excess of $1.5 billion in cash and available credit facilities; 2023 CapEx will be in the range of $1.2 billion, driven by cash outflows related to prior year’s projects; 2024 CapEx is targeted to be in the range of GAAP D&A levels.

We are targeting free cash flow in the range of $750 million in 2023 and focusing on deleveraging. Our 2023 full year effective tax rate on comparable earnings is expected to be in the range of 20%. Full year 2023 interest expense is expected to be in the range of $425 million, while the first quarter corporate costs appear lower than the expected run rate. We continue to anticipate full year 2023 corporate undistributed costs recorded in other non-reportable to be in the range of $90 million, with the second quarter costs being higher year-over-year, driven by announced key employee retirement costs. Including the $86 million Russia business sale, operating earnings headwind, comparable operating earnings should increase nearly $200 million and full year 2023 comparable D&A will likely be in the range of $550 million.

As we look forward and incorporating near-term demand trends, year-end 2023 net debt to comparable EBITDA is expected to trend in the range of 3.7 times, and in future years, we will drive that lower. Last week, Ball declared its quarterly cash dividend, and as Dan mentioned, reducing leverage is our key focus prior to resuming share repurchases in 2024. Rest assured, as fellow owners, we will manage the business through the lens of EVA and cash stewardship and we will effectively manage our supply chain and customers in this current economic climate to secure the best cash, earnings and EVA outcome for our shareholders. With that, I will turn it back to you, Dan.

Dan Fisher: Thanks, Scott. Given the economic environment and global dynamics impacting our world, it’s a great time for investors to get up to speed on Ball. Our significantly improved plan following a challenging 2022 is kicking in. We produce products that consumers use daily, we deliver unique technologies to analyze, observe and defend what we value most, and employee owners are showcasing incredible resiliency, while delivering earnings, free cash flow and high quality innovative solutions to our customers and consumers, and as leverage comes down and free cash flow expands, our return of value to shareholders will grow in 2024 and beyond. Thank you to everyone listening today. And with that, Tina, we are ready for questions.

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Q&A Session

Operator: Thank you. Our first question comes from Ghansham Panjabi of Baird. Please go ahead.

Ghansham Panjabi: Hi. Good morning, everybody. Thank you, Operator. Dan, maybe you can just start off with how the volume outlook by region has changed relative to your forecast three months ago. I mean, clearly, a lot has changed in the last few weeks, months, consumer spending in certain regions including the U.K., seem to be much weaker. So just curious as to how that’s impacted your thought process for the year?

Dan Fisher: Yeah. Thanks, Ghansham. I guess, where we are at today, it’s been largely in line the first quarter and even what we are anticipating in the second quarter. Things that have moved around in regions have been largely related to customer mix. So the industry writ large — is largely in line. There’s been movement in quarters, some have benefited, some haven’t. We have done a little better than the market in Europe, we were a little behind in South America and we were a little behind in North America. The benefits of what we saw in terms of the things within our control, we outperformed almost in every spin category, operational efficiency category. So that all helped us to effectively manage our earnings profile in the first quarter.

We came into the year with a conservative view on things like promotional activity in the first half. We believe that you will see some benefits in the second half from that. But, again, we haven’t seen it and we are not counting on a lot of it. We put in place a very conservative volume plan at the outset of the year to underpin our earnings and our cash generation and that’s what our focus is. So we will continue to focus there. I don’t know if that helps you, but we are not seeing a lot of difference. We are seeing some movements and some share shifts by customer and by category. But it’s largely in line with what we anticipated heading into the year, at least for what we know in the first half. In the second half, I think this business, as you know, requires volume.

We are a volume business. So we will need a little bit of that uptick in the second half of the year, but we got a lot of things breaking our way and the things that we can control that will enable us to hold the cash and hold the earnings profile here for the majority of the year.

Ghansham Panjabi: Okay. Perfect. And then just so I understand this correctly. So you are benefiting from inflation recovery this year versus last year, right?

Dan Fisher: Correct.

Ghansham Panjabi: Maybe you can touch on where you are seeing — how inflation is tracking this year, 2023 versus 2022, and if there is any element of deflation, would that mean that in 2024 you would pass it on to your customers, just to clarify.

Dan Fisher: Yeah. I will take a shot at it. Just at a high level, we are definitely seeing some improved inflation in terms of the run rate and the cost structure, and to your point, the way these contracts work. Keep in mind that the majority of our PPI benefit, specifically in North America, isn’t going to come into the second half of the year. That will carry forward until it laps into the second half of next year. We will maintain the overwhelming majority of the lift that we are seeing on all of these inflationary pass-throughs as catch-ups. There will be a limited — right now as we are looking at the year-over-year components, it doesn’t look like there will be much movement one way or another, absent what we are counting on for the catch-up from 2022 into 2023, but this is — this will be evolving throughout the year depending on where the headwinds or tailwinds on inflation manifest. Scott, anything?

Scott Morrison: No. There’s not deflation typically built in our contracts. There might be something unique in certain contracts where it’s tied to maybe an energy index somewhere. But, in general, we are not seeing deflation, we are seeing inflation slow down and that’s…

Ghansham Panjabi: Perfect. Thank you so much.

Scott Morrison: That’s usually a really good environment for us. D Yeah.

Ghansham Panjabi: Yeah. Understood. Understood. Thank you.

Dan Fisher: Thank you.

Operator: Thank you. The next question comes from Christopher Parkinson of Mizuho. Please go ahead.

Unidentified Analyst: Hi. This is John on for Chris. Thanks for taking my question.

Dan Fisher: Hi, John.

Unidentified Analyst: Can you expand on the promotion — hi. Can you expand on the promotional trends that you are seeing around the globe, particularly in North America? And then also, can you please break down the various categories that you expect to drive growth going forward? Thank you.

Dan Fisher: Sure. Promotional activity is really a thing in North America specifically, given the pantry stuffing effects in the larger case packs. We are not seeing much of any right now. I think it’s reflected in the performance of our customers in terms of the revenue growth they are seeing and volume being flattish and so we are sort of tied to that volume being flattish component. Where you would — the one thing that is clear in the last 12 months to 18 months is the folks that have taken less price versus inflation or have held pricing. They are the ones growing share. And as share becomes more important, which we believe as the year moves on, there will be an opportunity for folks. If they are more focused on share gain, then you will see more activity, and I would expect to see, given the performance of beer with large being down, they have more impetus in a need to push volume than what I am seeing out of the energy and the non-alcohol spaces.

So I anticipate a little bit in the second half of the year across the Board, but I don’t anticipate much. And if there’s one area where you could see or anticipate some, it will probably be in the area of the alcohol categories, in beer specifically, because shares don’t make us down in that category.

Unidentified Analyst: Perfect. Thank you so much. I will turn it over.

Dan Fisher: Thank you.

Operator: Thank you. The next question comes from George Staphos of Bank of America. Please go ahead.

George Staphos: Thank you. Hi, everyone. Good morning. Thanks for the detail.

Dan Fisher: Hi, George.

Scott Morrison: Hi, George.

George Staphos: How are you doing?

Dan Fisher: Good.