Ball Corporation (NYSE:BALL) Q1 2024 Earnings Call Transcript

Ball Corporation (NYSE:BALL) Q1 2024 Earnings Call Transcript April 26, 2024

Ball Corporation beats earnings expectations. Reported EPS is $0.68, expectations were $0.56. Ball Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Ball Corporation First Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brandon Potthoff, Investor Relations for Ball Corporation. Thank you, sir. You may begin.

Brandon Potthoff: Thanks, Christine. Good morning, everyone. This is Ball Corporation’s conference call regarding the company’s first quarter 2024 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 other company SEC filings as well as company news releases. If you do not already have the 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. In addition, the release includes a summary of non-comparable items as well as a reconciliation of comparable net earnings and diluted earnings per share calculations.

References to net sales and comparable operating earnings in today’s release and call do not include the company’s former aerospace business, year-over-year net earnings attributable to the corporation and comparable net earnings do include performance of the company’s former aerospace business through the sale date of February 16, 2024. I would now like to turn the call over to Dan Fisher, CEO.

Dan Fisher: Thank you, Brandon. Before we discuss Ball’s strong earnings and improved volume performance, I would like to thank all of the Ball team members that worked tirelessly to achieve the successful aerospace business sale on February 16, 2024. Sale proceeds were immediately put to work to reduce our leverage, strengthen our balance sheet and return value to shareholders. In addition, I would also like to share that Ann Scott has announced her retirement as Head of Investor Relations after 37 years with the company. Just this week, Ann’s first grandchild Isabella Ann arrived safely into the world. Needless to say, we all know what Ann will be doing in retirement, babysitting, golf and being a lifetime Ball cheerleader and will provide behind-the-scenes support to Ball through the end of the year.

So as she winds down her time as a full-time employee, feel free to extend your well wishes via her Ball e-mail. As you can tell from our call introduction today, our Investor Relations succession plan has been activated with Brandon taking the lead as the head of the department. Congratulations to Ann and her family on the new grand baby and her well-earned retirement and for your support of Brandon and Miranda as they take the next steps in their careers at Ball. Today, I’m joined on our call by Howard Yu, EVP and CFO. I will provide some brief introductory remarks. Howard will discuss the first quarter financial performance and key metrics for 2024 and then we will finish up with closing comments and Q&A. Our team delivered strong first quarter results following the successful and earlier than anticipated sale of the aerospace business during the quarter.

Global beverage can shipments increased 3.7% in the quarter, and we immediately executed our plans to deploy sale proceeds to deleverage and initiate a large multiyear share repurchase program. Reflecting further on year-to-date 2024 performance, aluminum packaging continues to outperform other substrates across the globe. In North America and EMEA, first quarter volumes exceeded our internal expectations as customers pulled forward volume in preparation for the summer selling season, following notable fourth quarter 2023 destocking. In South America, strong volume performance driven by our customer mix and warm weather continued in Brazil. For a complete summary of regional shipments for the first quarter, please refer to today’s earnings release.

Given seasonality, our customer mix and incorporating first quarter regional volume performance, we anticipate full year global shipments to grow in the low to mid-single digits range. Key drivers in 2024 are the benefits of deleveraging, repurchasing shares, improving operational efficiencies and fixed cost absorption, and leveraging our well-capitalized plant assets to grow the use of innovative, sustainable aluminum packaging across channels, categories and venues. In addition, to further actions to strengthen the balance sheet and reduce long-term liabilities. Based on our current demand trends and the previously mentioned drivers, we are positioned to grow comparable diluted EPS mid-single digits plus off 2023 reported comparable EPS of $2.90 per share, generate strong free cash flow, strengthen our balance sheet and return of value in the range of $1.5 billion to shareholders via share repurchases and dividends in 2024.

We look forward to showcasing our team and unveiling our future operating model and long-term growth plans at our biannual Investor Day scheduled for June 18 in New York City at the New York Stock Exchange. With that, I’ll turn it over to Howard.

Howard Yu: Thank you, Dan. Turning to our results. First quarter 2024 comparable diluted earnings per share was $0.68 versus $0.69 in the first quarter of 2023. First quarter sales decreased slightly due to the pass-through of lower aluminum prices and lower volumes in North America, offset by the pass-through of inflationary costs and increased volumes in South America. First quarter comparable net earnings of $217 million were flat year-over-year, primarily due to improved year-over-year performance in North America, EMEA and South America, offset by lower year-over-year results in non-reportable other, which were driven by improved comparable operating earnings in our aluminum aerosol business, being more than offset by non-comparable SG&A costs associated with the aerospace sale and higher year-over-year undistributed costs, which are detailed in footnote two of today’s release.

In North America, segment earnings exceeded our expectations and offset notable year-over-year headwinds associated with the U.S. beer brand disruption and the favorable benefits of the virtual power purchase agreement termination. The earlier than anticipated closure of Kent plant, which permanently ceased production during the first quarter, also aided results and supply-demand balance across our system. Benefits of effective cost management and plant efficiencies across our well capitalized plant network will support incremental volume growth without spending incremental growth capital. We continue to anticipate sequential earnings improvement during the seasonal summer quarters driven by modest volume improvement, improve fixed cost absorption, and effectively managing risk.

In EMEA, the business continues to navigate varying consumer end demand conditions, particularly in Egypt. Overall segment volumes were up slightly in the quarter, following notable destocking by certain customers in late 2023. In recent weeks, demand trends have remained favorable and the business continues to be poised for year-over-year comparable earnings growth in 2024, oriented largely to the second half and driven by volume and mix. In South America, our segment volumes increased 26.3% in the first quarter, driven by strong demand in Brazil and our customer mix. The Brazilian can market was up 18% in the first quarter. We continue to monitor the dynamic economic situation in Argentina and potential scenarios that could impact results.

We remain optimistic about Brazil and our ability to deliver sequential earnings and volume improvement as we exit the summer selling season in South America. Additionally, in the first quarter of 2024 and up through the February 16 date of sale, our former aerospace business made $27 million of comparable operating earnings, which is included in the comparable net earnings of $217 million that I referenced earlier. Moving on to additional key financial metrics and goals for 2024, we now anticipate year end 2024 net debt to comparable EBITDA to below 2.5 times. While we are currently at 2.2 times at the end of the first quarter, net debt to comparable EBITDA will nudge slightly higher by year end as the company starts payments of tax due on the gain of the sale of aerospace.

2024 CapEx is targeted to be in the range of $650 million a year-over-year reduction of $400 million, and largely driven by carry in capital related to prior year’s projects. We are on track to achieve our free cash flow target. Share repurchases are expected to be in the range of $1.3 billion by year end. Through today’s call, we have repurchased approximately $350 million in shares year-to-date. And earlier this week the Board increased the share repurchase authorization to 40 million shares. The new authorization replaces all prior authorizations. This increased authorization will enable meaningful share repurchases during 2024 and beyond. Our 2024 full year, effective tax rate on comparable earnings is expected to be approximately 21%, largely driven by lower year-over-year R&D tax credit associated with the sale of the company’s Aerospace business.

Relative to the estimated tax payments due on aerospace sale, the approximate $1 billion taxes due will be paid throughout the remainder of 2024. Full year 2024 interest expense is expected to be in the range of $320 million. Excluding the non-comparable aerospace disposition compensation costs, full year 2024 reported adjusted corporate undistributed costs recorded in other nonreportable are still expected to be in the range of $85 million. And earlier this week, Ball’s Board declared its quarterly cash dividend. Looking ahead to the rest of 2024, we remain laser-focused on operational excellence, driving efficiency and productivity across our business and cost management and monitoring emerging market volatility. We are committed to maximizing the full potential of our company over the long-term.

We have executed on derisking the corporation through recent debt retirements, and we have no significant near-term maturities. The runway is clear for us to activate near-term initiatives to consistently deliver high-quality results and generate compounding shareholder returns. With that, I’ll turn it back to Dan.

Dan Fisher: Thanks, Howard. Given the strong start to the year in 2024, we anticipate growing our comparable, diluted EPS mid-single digits plus by offsetting the divestiture through growth in our aluminum packaging operations, interest income, lower interest expense and the benefit of a lower share count. Looking ahead, we are focused on executing our enterprise-wide strategy to advance sustainable aluminum packaging solutions on a global scale by accelerating our pathway to carbon neutral and unlocking additional value from within the organization by driving continuous process improvement and operational excellence. Together, we will strive to deliver innovative aluminum packaging solutions that can lead to a world free from waste and embark on a path to deliver compounding shareholder returns in 2024 and beyond.

We very much appreciate the work being done across the organization and extend our well wishes to our employees, customers, suppliers, stakeholders and everyone listening today. Thank you. And with that, Christine, we are ready for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.

Ghansham Panjabi: Hey guys, good morning.

Dan Fisher: Hey. Good morning Ghansham.

Ghansham Panjabi: Good morning. First off, obviously, congrats to Ann, a huge resource for all of us and more importantly, a real class act and also our congrats to Brandon and Miranda also.

Dan Fisher: Thank you for that.

Ghansham Panjabi: Yes. So I guess, maybe, Dan, you could start off with just the updated thoughts on the outlook by the various regions. And obviously, there’s lots of issues with comparability and customer issues and so on and so forth. So what is the market – what do the markets feel like at this point?

Dan Fisher: Yes, good question. I think South America, we saw the strength in the fourth quarter carried over in the first quarter, and our partner did kind of won today in the market down there. So a really good start to the year, I think as it relates to Brazil, I think that economy continues to incrementally improve. We took a little bit of the refill glass back that we’ve talked about, we lost over 18 months and sort of that higher inflationary environment. So that’s positive. So that’s inflecting in the right direction. I think we’ll probably increment higher this year versus our outlook in Brazil. And then Argentina is hanging in there. Howard and I were down there about four weeks ago. They’re having a good crop.

They’ll get the proceeds from selling those agricultural commodities around the world here in the next couple – couple of months, and then that should unlock some of their FX policies, which will certainly benefit us and derisk the balance sheet in that part of the world. Yes. So we’re seeing growth. We’re seeing slightly ahead in South America, writ large, the only country that’s probably flattish to a little negative versus our going-in assumptions were – was Chile, but it’s really negligible in the grand scheme. As you know, it’s really all about Brazil. And that’s in a really good spot. Europe, we saw growth ahead of what we anticipated. A couple of things are working in a favorable manner versus where we entered the year in terms of our assumptions.

Number one, there was more destocking, I think, in Q4 across Pan-Europe and so I think some inventory levels got to a better position and look a lot closer to where they were heading into – or prior to COVID. And then we’re starting to see some pickup in the beer section in particular. So folks are going for volume a bit more than even we anticipated heading into the year in Europe. So that outlook looks great. And then the watch out, of course, is going to be what happens in what happens in the Middle East and how that influences energy prices and the end consumer. But all the underlying parameters are slightly ahead of what we assumed heading into the year. So we’re encouraged. Let’s see how we get on in peak season. And then Q1, I think, is the most challenging to architect and explain because of the year-over-year comparability.

But the pull forward into – from Q2 into Q1 for us had a lot to do with one major brewer that was dealing with labor negotiations. And so we had to build some safety stock to potentially navigate some challenges there. So think in the area of $15 million to $20 million was pulled in from Q2 into Q1 versus our original assumptions. The balance of it, though, Ghansham, is you’re really starting to see all of the structural changes and effects that we’ve made over the last 18 months. So we’ve rightsized operations, but more importantly, we’ve taken the higher cost facilities out. And so as you get volume running against a more productive and efficient portfolio you’re starting to see those benefits. So the timing impact, probably about $15 million, $20 million out of two into one, overwhelming for one customer.

And so for us, we – our shipments are reflected at a much – at a slightly higher rate in the underlying scanner data. And then within our portfolio – within our portfolio, some of our customers won in their areas, CSD in particular, beer is soft, writ large versus, I think, what we even expected heading into the year. So mix is going to play a pivotal role, I think, within the industry and player-by-player. And right now, we’re encouraged by the mix that we have. So it’s still going to boil down to Q2 and Q3. Our customers are still going to go for volume and peak season and a great start to the year and slightly improved performance across the world is great, and let’s see how we get on in the next six months.

Ghansham Panjabi: Okay. Very comprehensive. And for the second question, it’s really two parts. One is just a clarification. In Note A, you called out $17 million of corporate interest income. What does that refer to first off? And then second, the $5.5 billion or so of net proceeds from the sale it looks like net debt is down $3.8 billion sequentially, a couple of hundred million for share buybacks. And I see the working capital, but I’m still having a tough time reconciling to that $5.5 billion or $6 billion. Can you help with that also?

Dan Fisher: Sure.

Howard Yu: Yes. So maybe – Ghansham, this is Howard. I’d say that the interest income is specifically just related to the cash that we got on hand. So we got almost $5.5 billion – or over $5.5 billion. And so that plays into the increased interest income associated with that. As it relates to…

Ghansham Panjabi: Is that included in EBITDA, sorry to interrupt, but…

Howard Yu: Yes, yes. Yes. In the corporate line, that’s right.

Ghansham Panjabi: Sorry, go ahead.

Howard Yu: Yes. And then as it relates to debt, yes, we anticipate that we would have paid down about $2.8 billion. Remember, the initial thoughts that we had in the quarter was that Aerospace was being closed sometime after March 15. And so there was a European euro-denominated debt that came due in the middle of March. And so we paid that down. So you couple that with the $2 billion that we referenced earlier around proceeds and where that would go. And so that’s why you see the $2.8 billion debt retirement as well as knocking out some of the short-term debt and revolver and things like that, that we had. Clearly, with the cash on hand, we were going to go ahead and neutralize some of that interest expense as well. And then we have talked about a $2 billion share repurchase over the next couple of years.

I think we said that we were initially targeting about $2 billion of share repurchase here in 2024. Given the timing of the sale, we’re a little bit ahead of that. And so now what we said is that we’re going to target about $1.3 billion worth of share buybacks here in 2024, consistent with the authorization that was approved by the Board earlier this week as well and the 40 million shares to be repurchased. So – and then everything else consistently – the CapEx, we anticipate that that’s going to be about $650 million in the year, consistent with what we said. I think our interest expense at around $320 million is probably about $10 million better than we had originally indicated, and you’re seeing that flow in as it relates to early timing as well.

Ghansham Panjabi: Perfect. Thanks so much.

Dan Fisher: Sure.

Operator: Our next question comes from the line of Anthony Pettinari with Citi. Please proceed with your question.

Anthony Pettinari: Good morning.

Dan Fisher: Good morning.

Anthony Pettinari: Hey, congratulations to Ann, and to Brandon and Miranda. I think I can’t say enough good things about Ann and the job that she’s done over the years. So congratulations. Just looking at North America, I think if you back out the energy benefit from last year, EBIT was up almost 25% on kind of flattish or down volumes. You talked about the fixed cost reductions from plant closures. I’m just wondering if there’s anything more than that or any kind of finer point you can put on that in terms of the cost that you’ve been able to take out as sort of the operational performance within North America?

Dan Fisher: I will take a shot at this and then ask Howard Yu. I think it’s twofold. Yes, it’s the fixed cost absorption. Straight line from the immediacy of the closure of the facilities and its improved performance across the portfolio. I think we’ve commented on this before. Probably versus five years ago, we’ve lost a couple of points, potentially 3 points of efficiency across our portfolio of assets in North America, and now we’re gaining on that. So you’re seeing the combination of the fixed cost benefits of the plant closures and the higher-cost facilities, coupled with the fact that we’re running better. So a lot of folks that are now two or three years in roll in a number of these plants and they’re performing better.

So I think it’s the combination of those two things. But one-offs, no. I mean, there were some – there’s always a few that are positive, and there’s always few that are negative. So I think it’s really the underlying performance of the facilities in the region. They’re doing a really nice job.

Anthony Pettinari: Got it. Got it. And then in South America, you had a great result with volumes up, I think, 26%, but EBIT up 10%. Can you talk about any kind of price cost dynamics in South America or the lag in the EBIT growth kind of lagging a bit. Is that Argentina related? Or just help us reconcile that?

Howard Yu: Yes. Sure, Anthony. Let me go ahead and take a shot at that one there. I think South America was in its peak season. And so the way we think about it was and we talked about it in the Q4 earnings as well, Brazil was performing very well in that quarter as well. So really, you got to think about it in the context of the entire season and some of the mix and timing will change. And so if you think about what we said in Q4, the performance we had in Q4 in South America, we had about low-single digit growth of something around 2%, 2.5% growth and operating earnings was up 60%. And so coupling that with the performance here in the quarter at 26% volume growth and then 10% operating earnings. If you look at it holistically for both those quarters, we’re up about 12% and over 40% as it relates to operating earnings.