Greetings, welcome to the Ball Corporation call regarding agreement to sell Ball Aerospace. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, you may press star followed by the zero. As a reminder, this conference is being recorded today, Thursday, August 17th, 2023. I would now like to turn the call over now to Dan Fisher, Chairman and CEO. Please go right ahead.
Thank you, Tommy, and welcome to the Ball Corporation call to discuss today's announced agreement to sell Aerospace. Please advance to slide 2. 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 results or outcomes to differ are in the company's latest 10-K and in other company SEC filings, and are also reflected on this slide. In addition, today's transaction is subject to regulatory approvals and customary closing conditions and adjustments. If you do not already have today's release regarding the agreement to sell Ball Aerospace, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found on ball.com/investors. Please advance to slide 3. Thank you for participating in today's call.
Joining me on the call today is Scott Morrison, Executive Vice President and CFO. We will offer a few introductory comments, provide an executive summary of today's transaction, then open up the call for Q&A. Today's call is about the announced transaction, therefore, we do not intend to provide interquarter updates on the company's financial performance. Earlier this year, we initiated a process to assess options for our aerospace business. Today's announcement to sell Ball Aerospace to BAE Systems for $5.6 billion is the result of that process. The value achieved recognizes the aerospace team's success, leveraging its talents, asset base, capabilities, and program execution to accelerate growth fourfold in recent years and position the business as a vital mission partner to the U.S. government. Since 1956, generations of Ball Aerospace colleagues, past and present, have transformed a business of humble beginnings.
Founded with a $35,000 cash investment from Mr. Ed Ball, a son of one of the company's founders, and Ed's collaboration with seven former CU scientists, starting out in a cinder block, one-story building in the countryside outside of Boulder, Colorado, became Ball Brothers Research Corporation. Ball Aerospace today employs over 5,250 talented people, offering innovative capabilities in a world that needs rapid, scalable technology solutions and vital national defense capabilities. The complementary culture fit and mission-inspired innovation of Ball Aerospace and BAE Systems is well-positioned to elevate the business and our mission partners' success to new heights. Please advance to slide four. On slide four, we have provided an executive summary of the transaction. Ball has entered into a definitive agreement to sell its aerospace business to BAE Systems for $5.6 billion in cash.
The rationale for today's announcement, announced sale is very straightforward. The transaction achieves a premium multiple and is a beneficial outcome for all stakeholders, strengthens our balance sheet, providing flexibility, drives significant return of value to shareholders, accelerates our low-carbon best value initiatives to enhance organic growth across our global aluminum packaging businesses, and BAE is well-positioned to invest in Ball Aerospace in excess of our existing plan. Advance to slide five. Turning to more of the details from a valuation perspective, the purchase price of $5.6 billion in cash is expected to generate approximately $4.5 billion in after-tax cash proceeds. The pre-tax price represents an implied multiple of 27.1x Ball Aerospace LTM comparable operating earnings of $205 million, and 19.5x LTM comparable EBITDA of $284 million.
We anticipate the transaction closing in the first half of 2024, following the required regulatory approvals and customary closing conditions. Relative to use of proceeds and following a successful closing of today's transaction, we expect to promptly pay down debt to achieve 3x net debt to comparable EBITDA, the low end of our target range. Pivot to executing a multi-year share buyback, utilizing our share repurchase authorization programs, while also continuing to pay our quarterly cash dividends. The precise timing and amount of repurchases and the opportunity to increase the dividend payout will be determined based on market conditions, timing of receipt of proceeds and other factors, and position Ball for enhanced organic growth across our global aluminum packaging operations. Advance to slide 6. Ball going forward, will be a pure-play aluminum packaging leader, diversified across the beverage, personal care, and household products industries.
For both single-use and reuse occasions. Over the past 15 years, we have developed a world-class sustainability organization using data and key initiatives to inform key stakeholders and enable the greater use of circular aluminum packaging. Our low-cost global footprint of 67 facilities, innovative portfolio, best-in-class customer base, and manufacturing capabilities, continue to derive solutions to our customers and consumers for single-use, limited reuse, and refill aluminum packaging. With 2022 net sales of $13.4 billion and EBITDA of $1.7 billion in 2022, excluding aerospace, the business is poised for improved earnings growth, increased free cash flow, and EVA generation, following a multiyear investment cycle, which is largely concluding in 2023. We look forward to dedicating our resources to accelerating the low carbon, best value package initiatives we are undertaking to grow aluminum packaging sales and accelerate substrate mix shift.
We will have an enterprise goal with regional playbooks. Advance to slide 7. Moving to capital strategy, near term and long term. As we mentioned briefly before, the immediate benefits of the post-close net proceeds and the higher level of free cash flow being generated by the packaging businesses in 2023 and beyond, are expected to reduce the company's leverage from 4.6 times net debt to comparable EBITDA, to in the range of 3.0 times post-close. Progressing to the lower end of our target leverage range provides the opportunity to increase share repurchases and deliver a higher level of sustainable return of value to shareholders over a multiyear period. As a result of the aerospace sale, we project EVA dollar accretion to be in the range of $250 million.
Our ability to generate higher returns on invested capital in our global packaging businesses as throughput escalates on newly deployed assets, will also maximize shareholder returns as we run lean, tight, and with an eye on accelerating our ongoing initiatives to accelerate low carbon, best value aluminum packaging, particularly in EMEA and North America, where packaging legislation and customer substrate shift is aligning in aluminum packaging's favor. Please advance to slide eight. Today's transaction reinforces who we are and where we are going. We are a focused global aluminum packaging company, striving to accelerate our strategy, to preserve our planet and deliver value by creating circular solutions for our customers. By operating a lean, agile, and results-driven organization, we will unlock innovation and untapped potential and accelerate our low carbon, best value global aluminum packaging initiatives, which will drive higher sales, free cash flow, and comparable earning per share.
As you saw in the prior slides, our disciplined capital allocation mindset remains, though the flexibility gained from the successful close of today's transaction strengthens our position to return shareholder value creation faster. Please advance to slide 9. As a focused, high margin, highly cash generative global aluminum packaging business, today's announced sale accelerates our low carbon, best value initiatives to enhance organic growth across our global aluminum packaging businesses. Turning to more of the details, advance to slide 10. As we conclude our scripted comments, I would like to take a moment to thank our employees. Words cannot express our appreciation for our 5,250+ Aerospace employees. During the period of our business assessment, the team acted with great professionalism, with their eye always on executing on our customers' missions and supporting one another.
To BAE Systems, we also thank you for seeing in Ball Aerospace what we have for over 65 years: excellence, humility, passion, high execution, and growth potential. Our complementary cultures are a perfect fit. Please advance to slide 11. In summary, our use of net proceeds will drive immediate value for our shareholders. Our ability to execute our strategy by operating a lean, agile, and results-driven organization that value our people, culture, and ownership mindset is happening today. By leveraging our scale, footprint, portfolio, customer base, and plans to accelerate our ongoing sustainability initiatives in coordination with our value chain, our future is bright. Our sales volumes, diluted EPS, free cash flow, and EVA dollars will grow, and we will look to future growth through the best return of value outcomes for our fellow shareholders. That concludes our scripted comments. Tommy, we are ready for questions.
Certainly, thank you very much. If you'd like to register a question, please press the one by the four on your telephone. You'll hear a three-tone prompt to acknowledge your request. If a question has been asked or you'd like to withdraw your registration, there's the one followed by the three. Once again, it's the one, four for any questions or comments. One moment, please, for our first question. We'll proceed with our first question on the line from George Staphos with Bank of America. Go right ahead.
... Hi, thanks. Dan, Scott, and to everybody, congratulations on the news today, and best of luck with the transaction. I guess just factually, before... I'll ask two questions, and I know they're gonna be a lot, and out of fairness, I'll turn it over after that. Just factually, BAE had figures for the aerospace segment in its slide deck. Do you concur with those figures?
I have not seen that slide deck, to be-
Okay
... to be honest with you. I've, I, I started my day, as you can imagine, in a large town hall with our aerospace employees, ensuring that I think it's a 2024, versus a, LTM comparative, George, is what Anne telling me.
There are 2023 and 2024 figures, you know, but I, I, I don't wanna put you in an uncomfortable spot, Dan.
Yeah.
If, if you haven't seen them, you haven't seen them. If you agree with them, it'd, it'd be helpful to know, but that wasn't really the substance of my question. I just want to get some, some tax on the board, so to speak.
Yeah. I, I think at this point, I, I think our teams have been working very closely. As you can imagine, things have-
Okay
... moved very quickly. I know the $5.6 billion, and I know that the, the multiples that I just shared are correct, and if they're using 2023 and 2024, I would assume, they're also based off projections that we both agreed to.
Okay. Thank you for that. My two questions: You know, look, because of what aerospace is and what has been built into, aside from the normal regulatory review, what other authorities would need to approve this transaction? If you can give us some color and have those boxes, to some degree, already been checked. Then, you know, you point to, you know, you're going to be a lean organization, you're going to accelerate Ball aluminum packaging growth. Those have all been sort of consistent themes within Ball. And the packaging business and the aerospace business have always been run somewhat independently. How does this transaction actually do allow you to do any more acceleration, any more focus, since packaging's already been in that, in that sphere for a while?
How does it help you optimize your business strategy and packaging, specifically going forward? What two or three things? Thank you. I'll turn it over.
Yeah. We've, we've, as you can imagine, given the regulatory environment, that was. When we looked at the things that had to be true in our estimation and our eyes and with our legal counsel and support, could you get a deal across the finish line? I think we've done as much research and as much homework on that and had enough conversations, even at the customer level, to suggest that this has a high degree to get across the finish line. I'll reserve the right to get back to you on specific timing. It's effectively going to be, as you can imagine, the regulatory environment, the customer signing off, and then there is some uniqueness with what has to be submitted in the U.K.
All of those things, we believe are in line to be less than 1 year, and potentially faster than that. Then in terms of the efficiency, I agree. Right on the surface, some of this stuff, it's like, well, what's, what's fundamentally gonna change? I think when we look at the backdrop of the world as it relates to aluminum, things are moving much, much faster in parts of the world, Europe in particular. The regulatory environment is at a sprint, and our customers are needing answers, real answers, not theoretical answers, in terms of substrate and circularity. We believe that aluminum in the supply chain, and the carbon neutral position, and the way we get there and how fast we get there, industry participation is huge with regard to that.
There's a lot more opportunity in the medium term than there was a year ago, and I wanna make sure that enterprise-wide, we're consistent, that we're selling an aluminum portfolio. Right now, we're constructed as a beverage business and a cups business and an aerosol business, as you understand. When we're talking to, for instance, mountain towns in Colorado that are trying to remove plastic waste, they wanna know everything that Ball has to offer to solve everything from single-use plastic cups, to single-use plastic beverage, to very difficult recycling infrastructure or other substrates. We need to organize our way to accelerate the growth that's right in front of us. We need two things: We need a better carbon footprint story, one that is without repute, that we have the best.
We believe we have the best, but leaning into that and making sure that the cost profile and the economics of aluminum are in a position where it's a lot easier for our customers to move there. I think we'll be able to do both of those by post-transaction, focusing on this business with all of our, with all of our intent and all of our deliberateness, and a flexible balance sheet and an aligned business. There'll be more of this. I think we're gonna get out to, to you all, early in 2024 with an investor day to give you more clarity on that. I am really excited that we've got our feet under us, we're moving in the right direction, and aluminum has a lot of tailwinds that we're just going to be able to accelerate.
Thank you, Dan.
Thank you.
Now we'll get to our next question on the line. It is from Ghansham Panjabi from Baird. Please go right ahead.
Thank you. Good morning, everybody.
Morning.
Congrats on the sale. Good morning, Dan, and congrats on the sale.
Thank you.
I guess we'll no longer be able to ask questions on aerospace that you cannot answer, given your customer set, right?
It's the combination of that and the fact that, in all honesty, my 14-year-old girls think that daddy's not, not near as cool anymore 'cause I'm not associated with this beautiful aerospace business and brilliant scientists. Please go ahead with your question.
Yeah, thanks, Dan. Yeah, I guess so, you know, following up on the sale, and just sort of, building off of George's question, how, how does the earnings algorithm for the company change, if at all? You know, you've been very focused on internal growth the last few years, less so on acquisitions. Should, should we expect a change in terms of how the company once again allocates capital with acquisitions in mind? Thanks.
Nothing's going to change. I think when you look at the reality, when you look at the pro forma P&L, excluding aerospace, aerospace is not a hugely cash generative business. So when you look at our earnings profile as we retire debt, the EBITDA performance, our operating cash flow largely remains the same with or without. We'll have a lower capital spend rate. This should be a catalyst to do more consistently returns of value to our shareholders in line with share repurchases. Again, we'll look at the dividends. If that's in the right spot moving forward, we'll get our balance sheet in order. I think it provides us more flexibility because the challenge with an accelerated growth aerospace business that has much longer payback horizons is you got to continue to feed that.
I think relative to the opportunity set we see with aluminum packaging, this is the right answer, both for that business and for our business and our shareholders at Ball moving forward.
Got it. Thanks. Then just for my second question, you know, on the, on-- you know, I guess, w-why terminate leverage at 3 times? You know, why, why not 3.5 times? You know, is it just a function of giving you more, sort of an opportunity set for the future in terms of what happens with the stock? Or, you know, how, how did you get to that threshold? Then just lastly, the tax rate, does that change for the company materially, in any material way going forward post the sale?
Yeah, great question. I'll turn it over to Scott.
Yeah, Ghansham, on the leverage, I think that 3 times gives us just more flexibility to return value to shareholders, to look at, you know, the low carbon aluminum side of things. It gives us more flexibility, and it's a higher interest rate environment, so taking off some debt makes sense. The second part of your question was? Tax rate. It doesn't change materially.
Okay.
It's really, it's really more of a function of where we earn profit. That, that drives it more than this.
Got it. Thank you so much. Congrats again.
Thank you.
Thanks.
Thank you very much. We'll get to our next question on the line. It's from the line of Michael Leithead with Barclays. Go right ahead.
Great. Thanks. Good morning, guys. Again, congrats on getting this one done here.
Good morning.
Dan, can you just speak to the genesis or background of the deal? Were you looking to sell? Were you approached and ran an auction? Just any context to how this came about would be helpful.
Yeah, so, we, I think stepping into this role, and what transpired with the Russian event and the European backdrop, and raising inflation and interest rates, you know, our stock got compressed. Got compressed to a point where it was quite clear that the value of this aerospace business was not adequately reflected in the value of our stock. You know, we needed to do our job as owners to make sure that we had the appropriate share value for the assets that we held, and they were in the right spot, in, in the right home. We evaluated, we ran a process. Given the nature of our business, very difficult to find out publicly what it's worth, unless you were to entertain a process. Through that process, we looked at everything.
We looked at RMT structures, we looked at mergers, we looked at partnerships. The 3 items that we agreed to with the board, myself and our CEO, our President CEO of the aerospace business, were threefold. 1, we had to get the best value for our shareholders at the conclusion of this exercise. If that meant for us to keep running the business, then we were going to keep running the business. 2, we needed to make sure that we had the right culture fit if we were to do anything, and we-- I believe we've accomplished that.
Third, thirdly, as a patriot and as someone who's got a lineage of veterans in my family and others on the board, this is a national asset in a world that's becoming less and less safe, and this needed to sit in a business that was gonna catalyze the existing capabilities and improve upon them and accelerate them. We were able to accomplish all three of those through this transaction, and it turned out that it was an outright sale, which was the right conclusion for all three of those. Very rarely does all of that come together as nicely as this has, but our partners at BAE and the leadership team at Ball Aerospace.
Our board, the management team, we all thought this was head and shoulders ahead of, of anything else. Really excited about the outcome here and being able to, being able to talk about this today, not only for the aerospace business and the transaction, but the future of Ball Corporation.
Great. That's super helpful, color and context. Then just briefly, I, I appreciate Ball Aerospace was run a bit separate from the aluminum packaging businesses, but can you just speak to any stranded costs you expect to incur?
There's very little, and we will address that over a period of time. There are elements, and it is, it is really, from an infrastructure standpoint, it is, it is run standalone, and a lot of it has to do with cybersecurity, firewalls, et cetera. We have some complementary systems, an HR system, some aspects of financial systems that we'll have to online, but it'll be very clean in terms of that.
Great. Thank you.
Thank you.
We'll get to our next question on the line. It is from Phil Ng from Jefferies. Go right ahead.
Good morning, this is actually John Dunigan in for Phil.
Hi, John.
appreciate the information, and, and congratulations on, on getting the deal, announced and, hopefully, done before.
Thanks.
I wanted to, I wanted to start, I know you said you have high confidence in, in getting over the finish line, Dan, but, you know, it's a foreign company buying a U.S. defense business. I'm just wondering what the, the potential breakup fee is if the deal is, is blocked for any reason by, you know, any, any major customers or regulatory standpoint?
I, I won't go into... there is a fee associated. I won't go into the details of it, but I, I will clarify this. This is being bought by a U.S. company. Yeah, the holding company, the PLCs in the U.K., but.
Got it.
Who's purchasing it is the U.S. company, and obviously they're doing business with the federal government and the defense space, and have been for years. That's not. How the question was framed, I would think about it slightly differently in terms of the risk of a foreign national ownership structure.
Got it. Appreciate the, the clarification there.
Yep. Yep.
I, I know you, you had mentioned in the in the press release that, you know, you'll make the determination on a potential increase, dividend payout ratio. I mean, at this point, is it, is it safe to assume a kind of a pro rata decrease in the dividend based on the lost aerospace earnings? You know, is there anything else we should consider as we're thinking about our models for next year?
We're not thinking of decreasing the dividend by any stretch. I mean, from a free cash flow percentage, 95% of the free cash flow of this company comes from the packaging side of the business. It this transaction doesn't really change that at all. You know, moving down lower in leverage, spending less capital, it just provides us with more financial flexibility to look at increasing the, the dividend as we go forward, not decreasing it.
Well, we'd want to make sure that the yield remains where it's at, which would mean most likely an uptick in the... As the share repurchases happen, that the dividend would move appropriately.
All right, that makes sense. Thank you, guys. Appreciate it. I'll turn it over.
Yep, thank you.
Thank you very much. We'll get to our next question on the line. It's from Gabe Hajde with Wells Fargo Securities. Go right ahead.
Thank you, and I'll echo the congratulations,
Thank you, Gabe.
on getting this across as a deal. Scott, I guess clarification. In the past, you talked about R&D tax credits...
Yep
that were helping out the, the cash tax rate, that I think has averaged kind of 15% over the past five years. What you're saying is, is that you expect the cash tax rate to remain, below kind of statutory levels?
Well, we've been creeping up closer to statutory levels as the tax environment gets different. The losing the, the R&D credits, it, it adds about a point to our tax rate going forward. That can, like I said in the earlier question, it, it really is more dependent on where we earn the profitability, whether it's in South America, whether it's in Europe, or whether it's in the U.S. That, that can all can often outweigh the difference of the R&D tax credit benefit.
Okay. Thank you. Then I guess more from a strategic standpoint, one of the things that you talked about was potentially co-investing, I think, in an aluminum facility in New Mexico. It's sort of tough for us on this side of the table to think about the different possibilities for aluminum packaging. Maybe for surety of supply or various, again, strategic reasons from your vantage point, does this transaction kind of bring something like that back to the table in terms... Should we be thinking about you kind of backward integrating or partnering with some folks? Is that what you're referencing there, Dan, in terms of low carbon potential?
The low carbon comment, I, first of all, I, you have to think about it as the aluminum industry writ large. Because we have such an opportunity, everyone, within the supply chain, to continue to move to low carbon virgin aluminum, higher recycled content rates, even within our coating structure, getting to a water-based coating. There are things that have to continue to happen, to ensure that we are in an advantaged position from a circularity and a carbon position. The conversation that we had relative to the New Mexico mill was largely, inadequately answered by two new mills coming into the US. At the time, we were concerned that we needed enough capacity, and the investments that were made provided us with an opportunity to, and our partner, to, to not move forward with that project currently.
Those things will always be looked at. We've looked at them historically. We want to make sure surety supply is right. We want to make sure that we have the right material content, recycled content, green energy, to, to fill and fund those mills. If the supply chain wants to do it themselves, great! We don't have to participate. If we need to help, and it could be in the form of an offtake agreement, it could be the form of a small JV investment, we're entertaining all of those, and really nothing's changed in that regard. We'll have to use the right economic allocator, EVA, to make sure that that investment makes sense. A more flexible balance sheet certainly offers us the opportunity.
In places like Europe that need to move faster, we need to be having a more robust conversations with the supply base to make sure they're going to give us what we need and our customers what we need, to continue to advance aluminum.
Got it. Thank you.
Thank you.
Once again, on the phone, so you have any questions, it would be 1-4 on your telephone keypad. Our next question on the line is from Bill McGowan with, from Conning. Please go right ahead.
Good morning. Thanks for the call, and congrats on the sale.
Thank you.
Just wondering if you could provide any details regarding the nature of expected debt reduction. You know, like, what part of the debt stack would you be looking to target, term loans versus unsecured? I know you have some, the $1 billion November maturity, so any thoughts around that would be greatly appreciated. Just secondly, are you looking to target a specific credit rating post-close? I know you mentioned the high rate environment, cost of debt, so would there be any interest in attaining IG ratings? Thank you.
Sure. This is Scott. In terms of the maturity that comes in November, we, we actually did a, a debt offering a short time ago, so we have quite a bit of cash, and we'll generate a lot of cash in the back half of the year to take care of that maturity. The next maturity comes in March of next year, and that's at extremely low rates, so we won't refinance that until we get to the last day. Beyond that, we'll look across the stack of debt that we have and figure out what is the most optimal to retire or partially retire. In terms of credit ratings, I've been here 23 years, and we've had the same rating since the time I got here, and that's served us pretty well.
It gives us a lot of financial flexibility. I, I don't see us right now looking at a different credit rating than where we're at today.
Great. Thank you.
Yep.
Thank you very much. Mr. Fisher, we have no further questions at this time. I'll now turn the call back to you.
Okay. Thank you very much. I appreciate all the questions and the follow-up on this. We're really excited, really excited for our Aerospace employees, excited for Ball of the future. As we get closer to finality of this transaction, we'll get back together and let you know the timeline and more specific use of the proceeds. Until then, look forward to catching up with everybody here over the next couple of months. Thank you.
Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation. As we disconnect your lines, have a good day.