Ball Corporation (NYSE:BALL) Q4 2022 Earnings Call Transcript

Ball Corporation (NYSE:BALL) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Greetings and welcome to the Ball Corporation Fourth Quarter 2022 Earnings Call. At the start of the presentation, all lines will be in a listen-only mode. As a reminder, today’s call is being recorded Thursday, February 02, 2023. I would now like to turn the conference over to Dan Fisher, Chief Executive Officer. Please go ahead, sir.

Daniel Fisher: Thank you, Carlos and good morning, everyone. This is Ball Corporation’s conference call regarding the company’s fourth quarter and full year 2022 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 Russian 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 operating earnings. The release also includes a table summarizing business consolidation and other activities 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’ll reflect on 2022 briefly and Scott and I will discuss key drivers and financial metrics for 2023, and then we will finish up with closing comments, the outlook and Q&A.

Let me begin by thanking our employees and stakeholders for their hard work and support. As I reflect on 2022, I’m struck by the magnitude and pace of change we have navigated. The commitments we are prepared to achieve, and the prompt and decisive actions that were made by our team in a fluid and ever-changing macroeconomic and geopolitical backdrop. Our full year in fourth quarter comparable net earnings reflect our EMEA, aerospace, and aerosol operations coming in as expected offset by the impact of our Russian business sale, softer volume in North and South America. Planned inventory management impacting fixed cost absorption and the effect of high cost inventory and the timing effect of customer sell group. Global beverage can shipments including Russia increased 0.8% in 2022 and decreased 6.1% in the fourth quarter.

Excluding Russia, global beverage shipments increased 2.1% in 2022 and decreased 0.9% in the fourth quarter. North America beverage can segment shipments decreased 0.3% in 2022 and decreased 7.1% in the fourth quarter. EMEA beverage can segment shipments excluding Russia increased 8.6% in 2022 and increased 11% in the fourth quarter. South America beverage can segment shipments decreased 6.3% in 2022 and decreased 4.2% in the fourth quarter. Other non-reportable beverage can shipments increased 48.2% year-to-date and 48.5% in the fourth quarter as a result of continuing to provide support to domestic European customers. Our global extruder aluminum bottle and aerosol business continues to benefit from new refillable, reusable bottle offerings and higher recycled content aluminum bottles for personal care products.

Shipments in this segment increase 12% year-to-date and 14.5% in the fourth quarter. And our aerospace team increased their backlog 20% year-over-year. In response to the previously discussed unfavorable swing in beverage can volumes relative to our early 2022 expectations and as a result of our sale of our Russian businesses, we optimized our global cost structure, deferred certain projects, and took actions to right size our North and South American manufacturing plant systems by consolidating high cost less bit facilities into scalable facilities capable of delivering our customers a portfolio of can sizes, enabling category and pack size innovation to our customers in a more agile way moving forward. In EMEA, newly constructed facilities will ramp up during the first half of 2023 and provide much needed cans to our customers across the region.

It is also important to celebrate the accomplishments achieved by our team during 2022, including shipping nearly 115 billion innovative aluminum cans, bottles and cups to our customers, delivering numerous environmental space science and defense technologies to study the impact of humans and the environment on our earth. Weather satellites that protect life and property from extreme weather events on orbit defense technologies to ensure the safety of our homeland, the war fighter, and our allies, and deep space marbles like the James Webb Space Telescope to view previously invisible images via the Ball built mirror assembly and optics. Joining the World Economic Forum’s First Movers Coalition to lead collaboration across the aluminum industry to prioritize circularity and decarbonize the industry, achieving aluminum stewardship initiative ASI certification across our global footprint, remaining on the 2022 Dow Jones Sustainability Index, North America for the ninth year, receiving an A minus in the CDP’S climate change questionnaire in 2022, which recognizes the company’s commitment to maintaining best practices in corporate climate citizenship through its net zero carbon emissions commitment, renewable electricity coverage and ongoing assessment of climate related risks and opportunities.

Receiving a perfect rating on the human rights campaign’s annual corporate equity equality index CEI, receiving a 2022 ranking of 90 on a 100 point scale on the 2022 disability equality index DEI, reflecting the meaningful progress the company has made in creating a workplace that enables employees with differing abilities to support its global mission and being recognized as the 2023 industry leader for the industrial good sector for the just capital and CNBC’s just 100 top performing companies on ESG factors, including ethical leadership, cultivating and inclusive workplace, use of sustainable materials and carbon reduction. And our global team supported 2,800 non-profit organizations across 30 countries and contributed 30,000 volunteer hours across our communities.

Photo by Mykola “Kolya” Korzh on Unsplash

Drive for 10 continues to be our vision. We know who we are, we know what is important, and we know where we’re going. Together, Ball will one, execute our strategy of preserving our planet and delivering value by creating circular aluminum packaging solutions for single use, limited use and refill, and providing exquisite environmental space science and defense technologies. Second, we will provide our employees and communities the resources and opportunities to succeed. Third, we will be our customers and suppliers partner of choice to enable organic growth, achieve sustainability goals, drive innovation and technology development. And four, we will be a disciplined capital allocator by unlocking value and efficiencies from existing operations with limited future capital investment.

And in doing so, generate free cash flow, grow earnings and EVA dollars, and be good stewards of our cash flow to do leverage and return value to our fellow shareholders. Consistent with our commitment at our Investor Day and on our third quarter earnings call commentary in 2023, we can deliver our goal of 10% to 15% diluted earnings per share growth, including the Russian business sale headwind. The next quarter will remain choppy as we work through higher cost inventory, complete the optimization of our North and South American manufacturing footprint, ramp up our new Kettering U.K. and Pilsen, Czech Republic plants in EMEA. And last, the previously disclosed 2022 customer contract breach in South America. We’ll benefit from the previously identified and executed SG&A actions while continuing to receive the PPI cost recovery throughout 2023, which overall will lead to a back half weighted year.

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. We also continue to reiterate our investor field trip long-term goals for global volume growth, fueled by sustainability driven substrate mix shift, product category impact size innovation. Our global beverage teams have positioned our businesses to deliver the year and with an eye on the future. In 2023, an excluding Russia, we estimate in the range of 4% global volume growth for Ball with North America flat to slightly down, South America volume up mid to high single digits, EMEA volume up high single digits, and our other non-reportable business volumes up mid to high single digits, as new EMEA capacity ramps up and exiting 2023 exports from Saudi Arabia into EMEA wind down.

Our global beverage businesses work will be complimented by our aerospace and aerosol businesses continued success. We appreciate the work being done across the organization and extend our well wishes to our employees, customers, suppliers, stakeholders, and everyone listening today. And with that, I’ll turn it over to Scott.

Scott Morrison: Thanks Dan. Full year 2022 comparable diluted earnings per share were $2.78 versus $3.49 in 2021 and fourth quarter comparable diluted earnings per share were $0.44 versus $0.97 in 2021. Full year sales were up due to the pass-through of higher aluminum prices and aerospace performance offset by currency translation and inflation in Europe and fourth quarter sales were lower largely due to the sale of our Russian businesses. As Dan mentioned, fourth quarter and to a large extent full year diluted earnings per share reflect higher aluminum aerosol results, lower corporate expense and a lower share count more than offset by higher interest expense, higher comparable effective tax rate, comparable operating earnings declined in North and South America and EMEA attributable to the sale of our Russian business, cost inflation and unfavorable earnings translation.

I would like to take the opportunity to proactively address the year-over-year results in our North and Central America segment. 50% of the North and Central America operating earnings decline in the fourth quarter was driven by unfavorable swing in fourth quarter volumes versus 2021. We were up 5% in fourth quarter of 2021 and down 7% in the fourth quarter of 2022. And the other 50% reflects the confluence of unfavorable fixed cost absorption that was planned entering the fourth quarter, customer mix and the timing effect of high cost inventory ahead of customer sell-through. This larger than expected headwind is the byproduct of volume declines, aluminum price volatility, and our proactive decision to greatly reduce production to meet current market conditions during the quarter.

The segments earnings are anticipated to rebound late in the first half of 2023 as high cost inventory sells-through and volume production stabilizes across the consolidated plant system. And after July, segment earnings will accelerate further as we enter the busy summer selling season and all of the contractual inflation recovery will be effective. As we explained on our third quarter earnings call, during 2021, we ramped up our metal purchases to meet what we expected would be strong 2022 growth in North America. We did this at a time of rising metal prices. And while we are largely protected from metal price changes in our P&L, it does impact the cash flow and the amount of metal payables. Earlier this year or earlier last year, when we saw that volumes would not materialize as expected in 2022, we began to reduce metal purchases.

This also coincided with declining metal prices, which reduced the metal payables even further. And again, typically not a material P&L impact due to our inventory hedging. The net result is less billed in the accounts payable than originally planned. The result was a use of over $900 million in working capital for full year 2022. This will normalize in 2023 as both metal prices and our metal take should stabilize. As we sit here today, some key metrics to keep in mind. We ended 2022 in a solid liquidity position with over $500 million in cash and $1.5 billion in committed credit availability. 2023 CapEx will be in the range of $1.2 billion, driven by cash outflows related to prior year’s projects. We will generate free cash flow in the range of $750 million in 2023 and initially focused on deleveraging.

Our 2023 full year effective tax rate on comparable earnings will be in the range of 20% and full year 2023 interest expense will be in the range of $415 million. Full year 2023 corporate undistributed costs recorded in other non-reportable are expected to be around $90 million. Including the $86 million Russian operating earnings headwind, comparable operating earnings should increase over $200 million in full year 2023, comparable D&A will likely be in the range of $560 million. Recall that in 2022, we returned over $830 million to shareholders. And as we look forward, year-end 2023 net debt to comparable EBITDA is expected to trend towards 3.5 times, and we may want to drive it lower. Last week, Ball declared its quarterly cash dividend and an alignment with our Investor Day commentary after we navigate the first half of 2023, we’ll address the path to resuming share repurchases.

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. We are happy to have 2022 behind us, and I’m excited and optimistic for 2023. And with that, I’ll turn it back to you, Dan.

Daniel Fisher: Thanks Scott. We will continue to be agile and decisive in the current environment. We must do what is right to ensure supply/demand balance, foster innovation and stimulate equitable sustainability policy which will further broaden the use of circular aluminum packaging solutions and provide continued fuel for our organic growth. In addition, our aerospace team will continue to partner with our customers to deliver world-class solutions for some of the world’s greatest challenges and opportunities. Yes, 2022 was an unprecedented year in Ball’s history, and I am encouraged about our ability to deliver the year with an eye on our future. Last week, Scott and I reviewed our 2023 operating plan with the Board and our business’ ability to deliver on that plan is on track.

We look forward to generating free cash flow achieving our long-term diluted EPS growth goal of 10% to 15%, deleveraging and returning value to shareholders. Thank you to everyone listening today. And with that, Carlos, we are ready for questions.

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Q&A Session

Operator: Thank you, sir. Our first question comes from the line of George Staphos with Bank of America. Please go ahead.

George Staphos: Thank you. Hi, everyone. Good morning. Thanks for the details as it going. So, I want to thank you, first of all, for all the details in terms of what you’re expecting in terms of performance cadence, particularly within North and Central America. Can you give us a bit more view in terms of what your underlying assumptions are in terms of your volumes as it will progress through the first half, the promotional activity and programs from your customers? What you’re seeing in terms of innovation from customers right now? And if you were in our seats, as analysts and investors in your stock and we saw something not materializing or something developed that would undermine your expectations, what would it be?

Daniel Fisher: Yeah. Thanks George. So, as we sit here today, the volumes in EMEA are in line heading right out of the gate in North and Central America. They’re in line. I think we’re a little soft right now in South America versus my commentary on where we think the year is going to end up. The biggest element that, I think, misunderstood, George, relative to our expectations on volume and why we’re a little bit more bullish is aluminum prices have come off. But that doesn’t mean that’s necessarily the cost position for our customers. So, as they lap their head positions heading into the second quarter and the second half of the year, with the price increases that have gone into aluminum beverage packaging plus the actual costs coming off, there are significant profit pools that our customers are going to be able to step into.

As I said, right out of the gate, we’re a heck of a lot closer to what we anticipated in terms of volume. In North America, in particular, given the December falloff on all in consumer products that has changed the behavior patterns initially this year with a lot more price promotion and in cap. Will that continue for the balance of the year, I would suggest it will given the other backdrop that I gave you relative to costs. But the Europe continues to be incredibly strong. North America is off to a good start. I think there’s a little bit of a wait and see in terms of the volatility in South America. But having said that, the real cost positions that some of our major customers down there will lap in terms of hedge positions will stimulate optimism in the second half of the year.

The PPI, pass-through, we’re in good shape. All of the cost actions and the footprint reductions that we’ve talked about are in good shape. Maybe I’ll turn it over to Scott just for some of the positive signs relative to inflation and currency and some of the other things that are starting to move in our direction from a more stable environment. But 2023, as we sit here today, I’m feeling really confident about.

Scott Morrison: I’ll touch that and then why don’t you touch innovation as part of this question. Yeah. George, I think why we feel optimistic is we are definitely seeing input costs moderate. And whether it’s European energy is not going to be as bad as what people predicted. We’re largely hedged in Europe, lower than where the spot price is today. That really squeezed us last year. We’re getting all the PPI pass-through. We started to see freight rates, warehousing, lots of input cost moderating. And so, as we sit here today, we feel pretty good about kind of the cost input side being in a much more stable place. You kind of had long-term rates kind of peak. Short-term rates are still ticking up a little bit, and so we’ll feel that in our interest expense for 2023, but we feel much better. Dan, why don’t you talk about the innovation.