Ball Corporation (NYSE:BALL) Q4 2023 Earnings Call Transcript

Ball Corporation (NYSE:BALL) Q4 2023 Earnings Call Transcript February 1, 2024

Ball Corporation beats earnings expectations. Reported EPS is $0.78, expectations were $0.77. 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 Fourth Quarter 2023 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 Dan Fisher, CEO. Thank you, sir. You may begin.

Daniel Fisher: Thank you, Christina. Good morning, everyone. This is Ball Corporation’s conference call regarding the company’s fourth quarter and full year 2023 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company’s latest 10-K and in other company SEC filings as well as company news releases. If you do not already have our earnings release, it is available on our website@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.

Before we discuss Ball’s strong earnings and cash flow performance, I would like to remind call participants that on August 17, 2023, the company announced an agreement to sell its aerospace business. The transaction is subject to regulatory approvals and certain closing conditions and adjustments. Relative to the company’s aerospace divestiture, which is projected to close in the first half of 2024, certain forward-looking financial metrics provided in today’s earnings release and conference call commentary may differ from those expressed or implied due to the timing of a successful closing of the timing of the proposed use of proceeds. Today I’m joined on our call by Howard Yu, EVP and CFO. I will provide some brief introductory remarks. Howard will discuss 2023 financial performance and key metrics for 2024, and then we will finish up with closing comments and Q&A.

Our team delivered strong operations-driven fourth quarter results and for the full year. We achieved double-digit comparable operating earnings growth and generated $818 million in free cash flow. 2023 also delivered a dynamic set of strategic decisions and factors that influenced results and sharpened Ball’s vision for the future, including our decisions to sell aerospace for a premium valuation and to reduce fixed costs by adjusting our manufacturing footprint and factors that influenced year-over-year results, such as a large U.S. customer experiencing major brand disruption, an $86 million comparable operating earnings headwind due to the Russian business sale, and the effect of Argentine hyperinflation and currency devaluation. Late in 2023, we also had the good fortune of welcoming Howard to Ball.

Many of you listening have already had the pleasure of meeting with Howard at multiple conferences and our investor community welcome reception in November. His financial expertise, engaging nature and fresh eyes are adding value out of the gate and activating another stage of continuous improvement actions at Ball. Over our 144-year history, each year has presented its opportunities, challenges and changes, and the legacy of how the Ball team continuously adapts to position the company for long-term success is the reason we are all here today. I’m proud to say that the resiliency of our team and our chosen substrate, aluminum packaging, combined with improving plant and program execution, more than offset the earnings impact of challenges experienced in 2023.

And there were and are many more things to be done to make the most of our opportunities. Reflecting further on 2023, our customer mix and inflationary effects on end consumer demand drove our shipments. Global shipments ended 2023 down 3.3%, excluding Russia sale impact, and shipments would have ended the year roughly flat versus 2022, absent the U.S. brand disruption issue. All-in, the aluminum package industry continues to outperform plastics and glass packaging. For Ball, continued volume strength in Brazil and better than expected volume in North America to close out 2023 offset regional softness in Argentina and EMEA. For a complete summary of regional shipments for the fourth quarter and full year of 2023, please refer to today’s earnings release.

Looking ahead, our global teams are energized by recent commercial wins and other constructive customer discussions to continue packaged mix shift to cans. We will continue to advance sustainability of aluminum packaging by accelerating our pathway to carbon neutral and leveraging the scale of our footprint, innovative portfolio, and value chain partnerships to expand opportunities for our customers over the long-term. Given seasonality, our customer mix, and the April 2024 anniversary of the U.S. customer brand disruption, we anticipate year-over-year volume growth to favorably inflect after first quarter 2024 and accelerate further in 2025. Significant opportunity lies ahead to offset the financial impact of the projected aerospace sale and to drive compounding value creation for our fellow shareholders.

Key drivers in 2024 will be the utilization of net proceeds from the aerospace sale to deleverage and repurchase stock, improving operational efficiencies and fixed cost absorption, 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 expectations and the potential timing and benefits of the aerospace sale proceeds, we are positioned to grow comparable diluted EPS, generate strong free cash flow, strengthen our balance sheet, and accelerate return of value to shareholders in 2024. We look forward to showcasing our team and unveiling our future operating model and long-term growth plans at our biennial Investor Day scheduled for June 18th in New York City at the New York Stock Exchange.

And with that, I’ll turn it over to Howard.

Howard Yu: Thanks Dan. Over the first few months of my onboarding and immersion, I have learned more about the business by visiting our teams in North America, South America, and EMEA, toured multiple manufacturing facilities to see how our innovative products are made, and attended several investor events where I’ve had the opportunity to meet many of you on this call. It has become more apparent what a terrific workforce we have around the world and what a tremendous opportunity we have in front of us to make an impact for our customers, shareholders, and communities. I would like to thank my global colleagues, investors, and analysts who have taken the time to give me such a warm welcome. Turning to our results. 2023 full year comparable diluted earnings per share was $2.90 versus $2.78 in 2022.

And fourth quarter 2023 comparable diluted earnings per share was $0.78 versus $0.44 in the fourth quarter of 2022, an increase of 4.3% and 77.3%, respectively. Full year sales decreased due to the pass-through of lower aluminum prices, lower beverage can volumes, and the sale of our Russian business offset by the pass-through of inflationary costs and increased volumes in our aluminum aerosol. Full year comparable operating earnings increased nearly 10% year-over-year, primarily due to the contractual pass-through of inflationary costs, fixed cost savings, and benefits of our prior year SG&A cost-out initiative offsetting the headwinds in the sale of our Russia business and lower volumes. The global operations team finished the year strong, hitting their CapEx, raw, and finished inventory goals, setting the stage for continued improvement of better fixed cost absorption in 2024, particularly after we anniversary the customer brand disruption and cease production in the Kent plant in the first quarter of 2024.

Versus recent years, we anticipate our production aligning with shipments as we step into incremental volume growth later in 2024. In North America, supply demand has tightened up following the footprint adjustments, and we continue to focus on lowering costs across our well-capitalized plant network and driving incremental volume growth without spending incremental capital. Exiting 2023, PPI remains a net positive. Non-alcohol global key accounts have started to gain traction in retail, and we continue to prepare for additional modest volume improvement after the first quarter and net of historic customer shifts. In EMEA, the business nearly filled the $86 million comparable operating earnings hole from the Russia business sale and continue to navigate varying consumer end demand conditions, particularly in Egypt, Turkey, and the U.K. The business is poised for year-over-year comparable earnings growth in 2024, largely in the second half.

In South America, our volumes increased 2.2% in the fourth quarter of 2023, despite ongoing weakness in Argentina. We continue to monitor the situation in Argentina and potential scenarios that could impact results. We remain optimistic about Brazil, with January volumes off to a good start as the summer selling season continues. Our non-reportable results led by aluminum aerosol 8.2% volume growth and double-digit operating earnings growth finished 2023 strong. Moving on to additional key financial metrics and goals for 2024. We achieved our year-end 2023 net debt to comparable EBITDA goal of 3.7 times, and incorporating the use of projected aerospace sale proceeds and strong cash generation in 2024, we anticipate year-end 2024 net debt to comparable EBITDA to be in the range of 2.7 times.

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. 2024 free cash flow is expected to be in the range of $500 million, excluding the [technical difficulty]

Operator: Ladies and gentlemen, please stand by. Your conference will resume momentarily. Again, ladies and gentlemen, please continue to hold. Your conference will resume momentarily. Ladies and gentlemen, your conference may now resume.

Howard Yu: Cash flow is expected to be in the range of $500 million, excluding the impact of taxes due on the projected aerospace sale. Our 2024 full year effective tax rate on comparable earnings, including the effect of projected aerospace sale, is expected to be approximately 21%, largely driven by lower year-over-year R&D tax credit. Full year 2024 interest expense is expected to be in the range of $330 million, including the impact of lower leverage following the successful aerospace closing. Full year 2024 corporate undistributed costs recorded in other non-reportable as expected to be in the range of $85 million and more first half-weighted versus last year. And last week, Ball declared its quarterly cash dividend, and we look forward to reinitiating meaningful share purchases during 2024 and beyond.

Also, a call-out about tough year-over-year comps we face in the first quarter of 2024, driven by North America and corporate costs. Due to the 2023 favorable virtual power purchase agreement settlement, totaling approximately $30 million and a similar impact of the customer brand disruption, which does not anniversary until April of 2024, North America earnings and volumes will be down year-over-year in the first quarter. Looking at 2024, we will be laser-focused on operational excellence, driving efficiency and productivity across our business, optimizing SG&A costs, and offsetting stranded costs post-aerospace divesture. In addition to strengthening our balance sheet by deleveraging and other actions. We are committed to delivering value through share repurchases and dividends, and will communicate and stay close to our shareholders.

With that, I’ll turn it back to Dan.

Daniel Fisher: Thanks Howard. As we continue to make progress in 2024, we anticipate growing our EPS and 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 appreciate the work being done across the organization and extend our well wishes for a prosperous 2024 to our employees, customers, suppliers, stakeholders, and everyone listening today. Thank you to everyone listening, and with that, Christina, we’re 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 receive with your question.

Ghansham Panjabi: Thank you, operator. Good morning, everybody.

Daniel Fisher: Hey, good morning.

Ghansham Panjabi: Morning. Dan, maybe you could just start off just kind of giving us the base case for volume assumptions across the different geographies you have exposure to for 2024. I know you made some comments on the first quarter, but how do you think the full year is sort of going to unfold with all these ups and downs across the statements, Europe starting to decelerate and obviously comps in North America?

Daniel Fisher: Sure. Yeah, so I think in Europe, what you’ll see is — I think in both Europe and North America, you’ll see volumes get better. Sequentially, I think you’ll start to return to growth somewhere in the second quarter in North America and you’ll see growth in the second, third and the fourth quarter in Europe as well. As we’ve — North America is unique, obviously, because we’re lapping the difficult comp there, but we’ll get to flat for the full year in that range, maybe a little better. But you’ll start to see sequential improvement towards the end of the year and then heading into 2025 will be kind of in that growth range of 2% to 3%, I believe heading into 2025. That being said, Ghansham, it’s early days, but we’re a little ahead here in January, really in all three regions.

That should be noted. So, it’s only one month, obviously, but we’re actually seeing positive inflections in the U.S. for the last four weeks, slightly favorable. And for one week, we’re favorable. And that’s the first time in a couple years that we’ve seen that. So, knock on wood off to a decent start. I’m not overly excited, but it’s better than it has been. So that’s a positive. And then in South America, we believe like mid single digit growth. Brazil continues to be strong for us. Our exposure to the other markets will play a role. Argentina is a little ahead of what we thought it would be from a plan basis. But that’s still down year-over-year. But I think a lot of the changes that the executive branch made in Argentina, they’re coming off as a little bit more favorable than I think a lot of the world thought would happen from macroeconomic standpoint at the tail in the last year.

So, we’re a bit encouraged there, but it is Argentina. Let’s see what happens. So, 2% to 3% growth globally mid to high single digits for South America, low mid single digits for Europe and flattish with a lean that we could get a little bit of growth in North America for 2024.

Ghansham Panjabi: Great. You need Taylor Swift to push cans.

Daniel Fisher: Yeah.

Ghansham Panjabi: And then second question, the call kind of cut out during — I just want to make sure I understood the free cash flow was $500 million for 2024. And if so, what are the embedded assumptions in there? I know you gave cash interest, I mean, interest expense, because we’re having a tough time getting to that number with $650 million.

Daniel Fisher: Sure, Ghansham. So, let me try to walk you through that a little bit. I think we have a tax payment that’s going to be associated with the aerospace divestiture that runs through our operating. And so, obviously, it’s going to impact our free cash flow. We have talked about a $650 million CapEx number that we anticipate as well. And then what we’re doing, and we talked about a little bit in the third quarter, but here in 2024 we will be unwinding some of the factoring the balance sheet AR that we’ve historically used. And so that will obviously be an outflow from a cash flow perspective. And so, we’re targeting, let’s call it roughly half a billion dollars in that as well. And so — but maybe to speak to the underlying business, we will continue to generate the operating earnings that you see roughly in the range of 15 to 18 in terms of a billion consistent with what you saw here in 2023.

Ghansham Panjabi: Fantastic. Thank you so much.

Daniel Fisher: Yeah.

Operator: Our next question comes from the line of Arun Viswanathan with RBC. Please proceed with your question.

Arun Viswanathan: Great. Thanks for taking my question.

Daniel Fisher: Sure.

Arun Viswanathan: I guess, first off in North America, just wanted to understand what you’re seeing as far as promotional activity and maybe you can just kind of reiterate or update your thoughts on how we kind of proceed through the first half and if there’s any been any offset from the Bud Light loss and in other — the other kind of brands that you’re seeing or customers.

Daniel Fisher: Sure. I think speaking to — I think your question leans a little bit into am I seeing any promotional activity? Is there anything different just in the domestic landscape here? I’d say what we’re hearing from our customers and it’s manifesting slightly, you don’t see a lot of promotional activity in January. You do as we — now the next two weeks as we lead in the Super Bowl is typically when you would see some traditional and we are seeing some of that. But I think writ large, what everyone of the large CPG customers is acknowledging is that they’re going to have to fight for top line this year. And that should benefit. It should benefit us. That should benefit the industry. We’re seeing some inflections of growth, as I mentioned in the four week and the one week that look different than I think the last 18 to 24 months.

So that’s all positive. And then relative to kind of filling the Bud Light hole, if you will. Yes, there’s some incremental volume that’s helping to net impact that. But for us, we do a lot of that product and they have a vertical. And so, we’re exposed to that brand. The things that were exposed to elsewhere are much smaller. They’re growing. They’re filling in some of the hole, but it’s not — it’s not material, I would say it’s incrementally better, not materially better. It’s still the best thing is going to be other products from that particular brewer to grow. And so, I think that with a combination of you are seeing that brand kind of bottom out and starting to increment up. So, all of those things we anticipated it looking like this probably for the last six to nine months.

And we’ve indicated that. There’s nothing meaningful different from a guidance standpoint that I could really share at this point. We may see a little bit more now that we’re heading into Super Bowl and some more traditional promotional activities. But I don’t think you completely close the gap on this until we see other brands, other products kind of close that gap for us here as we lap the April sunsetting of that marketing issue.

Arun Viswanathan: Great. Thanks. And then if I could just ask about one more follow up.

Daniel Fisher: Yeah, sure.

Arun Viswanathan: It’s on the portfolio, or at least the footprint. Do you think there’s more actions that are coming as far as supply/demand and maybe your own capacity footprint, maybe by region, is there a need to maybe adjust some of your footprint in Europe or North America? I know you’re not going ahead with Las Vegas, but what are some of your thoughts and maybe just kind of loop in. If you’ve seen any — or if you’re expecting to kind of announce like a larger scale cost reduction program within North America, or if you’re kind of satisfied with where you are. Thanks.

Daniel Fisher: Yeah. I think within North America, we’re satisfied. I think we’re seeing other industry participants kind of model our behavior. What we’ve done just at a high level, and I appreciate the question is we’ve really retired candidly older, less efficient assets that we’re going to require a lot more maintenance CapEx to get them up to where we need to be to perform in the marketplace. So we’ve got, if you will, a more fit for purpose structure in North America. And as you see volumes inflect, we won’t need cost out what we just need to do is continue to run these facilities as we are continue to ramp up the learning curve. Some of these are still new with new lines. And all of that will lend itself to a more productive and a higher profitable leverage fall through as we see the ramp up.