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, huh?
It's been a year.
Okay.
Lots happened in a year.
Lot's-
So Dan's been at Ball since 2000. He's he was President and CEO since April of 2022. In the back, we also have Scott Morrison, who's announced his retirement, actually, is retired officially. And we have Howard Yu as CFO as well, and Ann Scott and Brandon as well. So welcome again.
Thank you.
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, you know, we'll 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, she'll beat me up for getting this wrong, but north of 50 businesses. And what's, what's enabled us to do that and iterate and change with the times and the business and the requirements of, 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.
Why they're coming and staying for a long time now is they really believe in the circularity benefits and the story in 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.
Like, 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 2024 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 set out to accomplish this year, we're going to. We're gonna 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 right-sized our footprint in a way that we've taken out 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 end consumer inflection with volume, I think you're gonna 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 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 gonna make us better operationally. So we're excited about those major changes.
Okay, great. session1@ rwbaird.com, 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, you know, lots happened, right? So-
I would say yes.
Yes. The industry is not used to much happening all the way up until-
Right
... you know, the mid, let's say, 17, 18 of last year, the last decade, right? Any investor that looks at it sees a lot of variability in terms of volumes. 3 years ago, there was capacity announcements almost, you know, monthly.
Right.
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 baseline as well?
Yeah, it's a lot of variability, even for us...
Mm-hmm
... and how our customers were behaving and what was happening. Take COVID aside, prior to COVID, we started to see a really nice inflection and substrate shift out of plastic, out of glass into aluminum. So we were riding those tailwinds into this massive inflection of at-home consumption. Believe it or not, that was not that long ago.
Mm-hmm
... 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 2021, 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 or were 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 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 gonna 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-
Mm-hmm.
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 and make money, they're not having any fun right now. And a lot of them, I'd say the overwhelming majority, are not selling cans and are not making cans. And so that has also been eliminated from the mix in the competitive landscape. So we're feeling like we're in a very balanced position. The overwhelming majority of the contracts were extended during COVID. Everyone was focused on assured supply. So you're not gonna have big blocks of volume that really come due until 2026, tail end of 2026, 2027.
So as all of this shakes out, the end consumer becomes a little stronger. The industry's in a really healthy spot right now.
Where is demand now versus 2019 level in North America, the way you define it? You know, maybe clarify how you define North America as well.
Yeah. I would say versus 2019, can penetration's 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'll end 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.
Mm-hmm.
It's up industry-wide versus 2019. I think the important thing to understand is, at least in the U.S., in that footprint, the 15-20 billion range of inflection of growth has all stuck-
Mm
... with the domestication of cans. What's 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.
Mm-hmm.
So glass is further off, plastic's further off, if you take water out of that equation. Cans are winning, just like in aggregate, the end consumer's 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, 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-
Mm-hmm
... network? Yeah, we're where we need to be, relative to the Kent closure and announcement-
Mm
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 gonna happen, we believe, over the 12-18 month is, that'll find a home, and most likely, that'll 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, we're fit for purpose in terms of the utilization rates.
Mm-hmm. Beverage is one of those end markets that has a lot more innovation, typically, than food. And they're usually fast cycle products. You know, it was craft beer years ago, hard seltzers, and now it seems to have rotated into, you know, ready-to-drink cocktails and so on and so forth. How are you positioned against those dynamics, and, you know, is it just as simple as one category falls off and it's replaced by another? Or, you know... What does the backlog also look like for new products going forward?
Yeah. So in the short term, it's gonna be more of a trade-off because of the end consumer.
Mm.
So if something wins, it's probably gonna 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 substrate. So we'll benefit from any new innovation. What's actually happened over the last couple 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, 'cause growth will be a bit harder to come by-
Mm-hmm
...given the backdrop and the macroeconomy. What will help customers is innovation, and that's what we do. Outside of the category mix, there's functional drinks that, you know, lower calories, all of that, is real and is happening. The ready-to-drink cocktails off a small base are 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. That's because, and you're seeing a ton of articles as recently as the last couple weeks, rPET is being demystified in a very real way.
It's 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 gonna be able to backslide. You're gonna have to continue on that path, and for a lot of our customers, aluminum is the path in which they're gonna be able to-- They're gonna lean into that, and they're gonna 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 gonna shift? I think it's nearer term than at any point that I've seen here, as we've moved into this circularity sustainability story.
To me, the innovation in and around pack sizes and around core brands, I think that's where the growth is gonna come by more so than in the short term with new category or new drink innovation.
Okay, again, it's session1@rwbaird.com, and thanks for those that have sent the questions in. I will get to those, I promise. In an environment of higher for longer interest rates, what if demand is lower for longer? As it relates to your categories you're exposed to in 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 and operational efficiencies. You saw. I think the best representation of this was in our North America performance in the third quarter. Our volumes were off 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 gonna 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 sins over the last 2-3 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 gonna show up, and it's gonna force different decisions by our customers. In Europe, it's gonna 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, a higher carbon outlay, that's not a good recipe for customers to get to these carbon neutral targets that are being posited on them. Cans will help. We're seeing that.
We just 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 toward 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, but 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. Sounds like you're leaning back to Ball 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.
Mm-hmm.
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 gonna be hugely important, and then if we can innovate and help our customers that are category leaders and category captains start there and move those, I think over a period of time, you'll see a real incrementalization, and it'll step into volume, but it's not gonna 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 gonna be less at higher prices, so innovation's gonna matter, and that's where we've historically done really well. So I agree, there's some Ball of the old, but I would 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 of 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 of this, GLP-1s, and the potential impact-
Never heard of it.
And the potential impact on-
Thanks, Walmart
... soft drinks.
Yeah. We don't think it's a big deal. We haven't spent a bunch of time on it. I've got a couple board members who manage significant fast food chains, so we've benefited from their research. But the beauty about what goes into a beverage can is it can go zero 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 ado about nothing. A 1% decline in caloric intake by 2035, I think that's...
It's not something that I think I'm gonna 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, 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 twelve S leek cans. That comment, I would say, at times, is accurate. Spot prices would be below contract prices.
Is that the case now?
For 12 weeks 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.
Mm-hmm.
But I would also posit, 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?
Oh, boy!
It's been a huge pressure point this year.
Yeah.
You might have-
You might have heard of it. So how this is gonna play out, and what we've said publicly, I continue to believe it, you're not gonna 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 if there are resets on the retail shelves, and there's a couple 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 gonna be about, do people return back to the Anheuser-Busch family, and/or does shelf space reset, and does the other large brewer in North America step into that? Everybody's 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 and the huge retail shelves and that supply chain, you've 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.
Mm-hmm.
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'll be interesting.
Okay. All right. One of your peers was here earlier today, and they talked about PPI adjusters, specific to North America, turning negative in terms of giving back for next year. Does that-
Timing of that matters.
Mm-hmm.
So, our biggest PPI resets didn't happen until the third quarter, so we'll carry those over into next year.
Okay.
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's moderating, which is actually a good thing. It's not a pass-through mech, 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-
Yeah
... weaken relative to your baseline. What do you see happening in that region?
Yeah, I think what we're gonna 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-
Mm-hmm
... as they've tried to figure out their energy policies. That and weather does matter for us, and our pack mix, and it was an unseasonably cool and wet summer for large parts of the beer-consuming marketplace in Europe. So the combination of those 2 happened, but I will tell you, the end consumer is probably the bigger tailwind there, and 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 refineries coming online, and 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?
... you know, 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 18-24 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 aluminum's in U.S. dollar denominations in that part of the world, there's a 5%-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 12-18 months, as the returnable glass to cans resets, the economy gets better, the end consumer's better. And so we're very, we're very constructive on, on South America, ex-Argentina.
Argentina. Okay, we'll strip that out. If we kind of dip to the near term, you know, you just 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, you know, price cost or any sort of cost savings flow through into next year?
Yeah, 2024, so we will have—we've got, so the 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 gonna caveat this, too, with all of this is excluding an aerospace-
Mm-hmm.
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've got a softer first half in South America. We should see that recover. That'll be volume, and that'll 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 gonna all but claw that back this year. There is growth opportunity there, but the earnings inflection is gonna 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 2022, then you look at 2023 and 2022, 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, period, 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 we'll 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's gonna be in a good spot, obviously, post-aerospace. A lot of cash will be 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 this stock price. So we will spend money in line with GAAP D&A for the next 2-3 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 2-3 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 3.3 times from a gearing level, and we're gonna 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 at time.
Thank you.
Thank you again, Dan. Thanks to everybody for joining. The next presenter in this room is Regal Rexnord, and once again, thank you.
Thank you. Appreciate it.