Ball Q1 2024 Earnings Call Transcript

There are 12 speakers on the call.

Operator

Greetings, and welcome to the BOL 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brandon Potthoff, Investor Relations for Ball Corporation.

Operator

Thank you, sir. You may begin.

Speaker 1

Thanks, Christine. Good morning, everyone. This is Ball Corporation's conference call regarding the company's Q1 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.

Speaker 1

Some factors that could cause the results or outcomes to differ are in the company's latest 10 ks 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 atball.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.

Speaker 1

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. You, Brandon.

Speaker 2

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 a 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 Anne Scott has announced her retirement as Head of Investor Relations after 37 years with the company. Just this week, Anne's first grandchild, Isabella Anne, arrived safely into the world. Needless to say, we all know what Anne will be doing in retirement, babysitting, golf and being a lifetime Ball cheerleader.

Speaker 2

Anne 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 email. 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 Anne and her family on the new grandbaby 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 Yoo, EVP and CFO.

Speaker 2

I will provide some brief introductory remarks. Howard will discuss the Q1 financial performance and key metrics for 2024, and then we will finish up with closing comments and Q and A. Our team delivered strong Q1 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.

Speaker 2

In North America and EMEA, 1st quarter volumes exceeded our internal expectations as customers pulled forward volume in preparation for the summer selling season following notable Q4 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 Q1, please refer to today's earnings release. Given seasonality, our customer mix and incorporating 1st 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.

Speaker 2

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 $1,000,000,000 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 18th in New York City at the New York Stock Exchange. With that, I'll turn it over to Howard.

Speaker 3

Thank you, Dan. Turning to our results. Q1 2024 comparable diluted earnings per share was $0.68 versus $0.69 in the Q1 of 2023. 1st 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. 1st quarter comparable net earnings of $217,000,000 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 and A costs associated with the aerospace sale and higher year over year undistributed costs, which are detailed in footnote 2 of today's release.

Speaker 3

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 Q1 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.

Speaker 3

We continue to anticipate sequential earnings improvement during the seasonal summer quarters, driven by modest volume improvement, improved fixed cost absorption and effectively managing risk. In EMEA, the business continues to navigate varying consumer and 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 1st quarter driven by strong demand in Brazil and our customer mix.

Speaker 3

The Brazilian can market was up 18% in the Q1. 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 Q1 of 2024 and up through the February 16 date of sale, our former aerospace business made $27,000,000 of comparable operating earnings, which is included in the comparable net earnings of $217,000,000 that I referenced earlier. Moving on to additional key financial metrics and goals for 2024.

Speaker 3

We now anticipate year end 2024 net debt to comparable EBITDA to below 2.5 times. While we are currently at 2.2x 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 $650,000,000 a year over year reduction of $400,000,000 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 $1,300,000,000 by year end.

Speaker 3

Through today's call, we have repurchased approximately $350,000,000 in shares year to date. And earlier this week, the Board increased the share repurchase authorization to 40,000,000 shares. The new authorization replaces all prior authorizations. This increased authorization will enable meaningful share is expected to be approximately 21%, largely driven by lower year over year R and D tax credit associated with the sale of the aerospace business. Relative to the estimated tax payments due on aerospace sale, the approximate $1,000,000,000 tax due will be paid throughout the remainder of 2024.

Speaker 3

Full year 2024 interest expense is expected to be in the range of $320,000,000 Excluding the non comparable aerospace disposition compensation costs, full year 2024 reported adjusted corporate undistributed costs recorded in other non reportable are still expected to be in the range of $85,000,000 And earlier this week, Bald Ford 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 de risking 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.

Speaker 3

With that, I'll turn it back to Dan.

Speaker 2

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.

Speaker 2

Thank you. And with that, Christine, we are ready for questions.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from the line of Ghansham Panjabi with Baird. Please proceed with your question.

Speaker 4

Hey, guys. Good morning.

Speaker 2

Hey, good morning, Ghansham.

Speaker 4

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

Speaker 2

Thank you for that.

Speaker 4

Yes. So I guess maybe Dan you could start off with just an updated thoughts on the outlook by the various regions and obviously there's lots of issues with comparability and

Speaker 5

customer issues and

Speaker 4

so on and so

Speaker 2

a good question. South America, we saw the strength in the Q4 carried over in the Q1 and our partner did kind of won the day in the market down there. So 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.

Speaker 2

We lost over 18 months in sort of that higher inflationary environment. So that's positive. So that's inflecting in the right direction. I think we will probably increment higher this year versus our outlook in Brazil. And then Argentina is hanging in there.

Speaker 2

Howard and I were down there about 4 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 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.

Speaker 2

I think the only country that's probably flattish to a little negative versus our going in assumptions 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 1, there was more destocking, I think, in Q4 across Pan Europe.

Speaker 2

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 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.

Speaker 2

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 1 major brewer that was dealing with labor negotiations. And so we had to build some safety stock to potentially navigate some challenges there.

Speaker 2

So think in the area of $15,000,000 to $20,000,000 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 right sized 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 $15,000,000 $20,000,000 out of 2 into 1 overwhelmingly for 1 customer.

Speaker 2

And so for us, we our shipments are reflected at a slightly higher rate, I mean the underlying scanner data. And then within our portfolio, within our portfolio, some of our customers, 1 in their areas, CSD in particular. Beer is soft, writ large versus I think what we even expected heading in to 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.

Speaker 2

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 6 months.

Speaker 4

Okay. Very comprehensive. And for the second question, it's really 2 parts. One is just a clarification. In Note A, you called out $17,000,000 of corporate interest income.

Speaker 4

What does that refer to first off? And then second, the 5 point $5,500,000,000 or so of net proceeds from the sale, it looks like net debt is down $3,800,000,000 sequentially, a couple of 100,000,000 for share buybacks. And I see the working capital, but I'm still having a tough time reconciling to that $5,500,000,000 or $6,000,000 Can you help with that also?

Speaker 3

Sure. 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 point 5 or over $5,500,000,000 And so that plays into the increased interest income associated with that.

Speaker 3

As it relates

Speaker 4

to Is that included in EBITDA? Sorry to interrupt, but

Speaker 2

Yes, yes.

Speaker 3

Yes, in the corporate line, that's right.

Speaker 6

Sorry, go ahead.

Speaker 3

Yes, and then as it relates to debt, yes, we anticipate that we would have paid down about $2,800,000,000 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 middle of March and so we paid that down. So you couple that with the $2,000,000,000 that we referenced earlier around proceeds and where that would go. And so that's why you see the 2.8 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 are going to go ahead and neutralize some of that interest expense as well.

Speaker 3

And then we have talked about a $2,000,000,000 share repurchase over the next couple of years. I think we said that we were initially targeting about $2,000,000,000 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 $1,300,000,000 worth of share buyback here in 2024 consistent with the authorization that was approved by the Board earlier this week as well and the 40,000,000 shares to be repurchased. And so and then everything else consistently, the CapEx, we anticipate that that's going to be about $650,000,000 in the year, consistent with what we said.

Speaker 3

I think our interest expense at around $320,000,000 is probably about $10,000,000 better than we had originally indicated and you're seeing that flow in as it relates to early timing as well.

Operator

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

Speaker 7

Good morning. Good morning. Hey, congratulations to Anne and to Brandon and Miranda. I think I can't say enough good things about Anne and the job that she's done over the years. So congratulations.

Speaker 7

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?

Speaker 2

I will take a shot at this and then ask Howard if he is. 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.

Speaker 2

Probably versus 5 years ago, we've lost a couple 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 2, 3 years enroll 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 a few that are negative.

Speaker 2

So I think it's really the underlying performance of the facilities in the region. They're doing a really nice job.

Speaker 7

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?

Speaker 7

Or just help us reconcile that.

Speaker 3

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 or 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%.

Speaker 3

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. And so that's the way we think about it. Mix as it relates to cans and ends, those things will obviously play into this, particularly in South America, and we're seeing that overall. So I think of it more in the context of the overall busy season for them and how successful it's been holistically.

Speaker 2

In the simplest way, we've talked about this for years years years you've heard us talk about. In Canon end shipments, right. So we shipped more ends in the 4th quarter than we did in the Q1. So the balance of the entirety of the portfolio really that's where the volatility lies in terms of leverage deleverage. It's not isolated within the quarter.

Speaker 2

You kind of have to look at it throughout the entirety of peak season. And that's the overwhelming gist of it. So we're happy with the leverage fall through with over the 6 month period.

Speaker 7

Got it. Got it. That's very helpful. I'll turn it over.

Operator

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

Speaker 6

Great. Thanks for taking my question. I hope you're well. Just wanted to get your thoughts on how volumes in North America should evolve now that you're anniversarying the Bud Light situation? We've also heard of some share shifts within the industry.

Speaker 6

So, yes, maybe you can just kind of give us your thoughts and if there's any category discussion that would be helpful or promotional kind of view as well. Thanks.

Speaker 2

Yes. So we've spoken about and I think it's well known within the industry that there was a share shift, 1 brewer to the tune of approximately 2,000,000,000 units. That's already happened. That's in our number. So we lost the 2,000,000,000 and multiple competitors picked that up and incremented up.

Speaker 2

And we've got line of sight to fill that hole this year. If you go back to previous call and the assumptions we laid into North America for 2024, we thought we'd be negative. Obviously in the Q1, not only for the lapping the major brewer disruption, but the dislocation of this volume and then we would which we've already won a couple of big chunks of business and you will start to see that flow in, in the back half of the year. So that's where we geared toward flat in North America. So lost the 2,000,000,000 pick up roughly a similar amount and you'll inflect in the back half of the year with volume.

Speaker 2

Obviously, the size of that volume and the mix of that volume now plays out within the next couple of quarters, but you should still see increments of volume lift here out through the balance of the year in North America. We think the industry is in that 1% to 2% growth range. Beer is a little softer, CSD is a little better, mix will matter, energy continues to grow, mix will matter in promotional activity in peak season and the health of the end consumer that's going to play out and determine whether it's 1%, 2%, a little north of that, a little south of it. But for us, we're really comfortable regardless of whether we're growing flat to down a little to up a little. We've got really good line of sight into the operating earnings and cash generation of the business.

Speaker 6

Great. Thanks for that. And then, we've obviously seen some volatility on the aluminum price side. Maybe you can just comment on how that would impact you going forward? I mean, I'm not sure if your customers I think they have some hedging programs in place, but would that also impact demand levels if they opt to push price to cover some of that inflation?

Speaker 6

And especially in Europe, I guess, I'm just curious if there would be any potential headwinds from metal premium pass through or and how would you kind of characterize that in the context of it sounds like Europe is getting better from a supply demand standpoint? Thanks.

Speaker 2

Yes. I think it's probably much ado about nothing at this point. We're coming off of incredibly low aluminum prices right now in a historical context. That seems to be the preferred package. There's a shift toward that in a number of parts of Europe.

Speaker 2

I guess the watch out is what's happening in the Middle East, right? I mean is that going to inflect significantly energy prices? Some mills and some aluminum is protected because it's nuclear power or it's tied up with other energy sources that aren't fed out of that part of the world. But it's certainly something that would impact the end consumer, not our customers' behavior patterns at this time. We're not having any conversations that would give us pause or concern.

Speaker 2

In fact, it's just the opposite at this point. They're more aggressively going in and working on taking share and they're using the can to do that. So I think it's a watch out. It always is. But what we're seeing right now is not of a concern.

Speaker 2

And overwhelmingly, what everybody has learned to your hedging question in particular, I think folks got caught a little upside down over the last 2 to 3 years in some instances. And I think they've paid a lot more attention to hedge strategy kind of protecting where they are. If they locked in hedges, they'd be locking in those hedges at kind of all time low levels. So I'm a little bit more encouraged by the structure of the industry and the behavioral patterns. And then obviously the watch out is what's going on in the Middle East and does that have any impact.

Speaker 6

Great. Thanks. And congrats again to Anne and Brandon as well. Definitely, we'll miss speaking with her and getting her perspective. But thanks again.

Speaker 2

Thank you.

Operator

Our next question comes from the line of George Staphos with Bank of America. Please proceed with your question.

Speaker 8

Hi, thanks very much. Hope you guys are doing well. Thanks for the details. Everyone said it, but I'd like to as well. Just Ann, congratulations first on your grandbaby, but also for being such a resource to all of us over the last number of years.

Speaker 8

You are the legend in the industry and congratulations to Brandon and Carmen on their increased responsibilities. Okay. So in terms of operations, Dan, you'd mentioned that you're still trying to claw back that 2% to 3% operating efficiency loss over the last few years. Where you stand in that regard? Forgetting about the actual plant closure benefits, what do you where do you stand in terms of that recovery?

Speaker 8

And can you give us a 1 or 2 kind of for instance in terms of how that lean or benchmarking is showing up on a day to day basis?

Speaker 2

Yes, we've got, George, latest numbers that I've seen, we picked up probably 1 of the 3% we've got back. And it's showing where it's showing up principally, it's showing up in reduced overtime. It's showing up in spoilage. The older assets that were retired, I would say have contributed 80% of that improvement. Okay.

Speaker 2

So there's still I think we've just scratched the surface on getting to the other 2%, 2.5 percent if you will across the existing portfolio of new assets. So we still have a bit of runway. I mean you could that's a meaningful number when you apply it to roughly 50,000,000,000 units. And so we're in early innings. But as you know, you need volume to manifest in order for those efficiencies to show up and we're inflecting here over the back half of the year.

Speaker 2

So we're counting on continued improvement. We'll talk more about this at our Investor Day and how we're structured in terms of the operating model and we could point to this in I think more granularity than we've talked about historically. But I would say roughly, we've shuttered the facilities to pick up 1 of the 3% and now we've got to work on the remaining assets that are in place to continue to grow into that too and we're early innings on getting it, but it is showing up incrementally.

Speaker 8

Okay. I mean, I guess we'll talk about it in June, but a pushback could be, okay, well, you got one point because you shut a facility and then the remaining 2 or 3 is going to be tougher to get at because it's got to come from ongoing. So if you have any comment on that, that would be great. If not, we could save it to

Speaker 2

June. Yes, I would say no, that's not true. It's going to be easier because this is roughly 1200 new employees that are 3 years of service in and they're learning how to make cans. And so this is incremental in terms of the learning curve. This is not different than at any point in time when we talk about an 18 month, 24 month ramp up on facilities.

Speaker 2

I think about it in that context. So if we focus, we maintain, we don't have attrition at the levels that you did obviously during COVID. We will gain on this and we will gain on this in a pretty methodical and pragmatic and very prescriptive manner. So I'm encouraged that we will get this back here over the 18 to 24 months.

Speaker 8

Thanks for that, Dan. Next question, so in Brazil and sort of piggybacking on what Anthony had teed up, was there any sort of operating issues in terms of the lack of profit leverage versus the volume leverage. Again, I know you said we should look at it holistically. Were there did you lose any share to your knowledge with any customers recognizing in a quarter where you're growing 18% or whatever the number might have been depending on the customer or the market, the answer is probably no. But any operating issues that we should take away?

Speaker 8

Any customer loss issues or things were very much as you expected in the quarter in South America and in Brazil?

Speaker 2

Yes. Thanks. So Brazil grew at 18%. We grew at 26%. So no, we didn't lose anything.

Speaker 2

In fact, you could say we incremented share positions. If this is 100%, George, just to be clear, it is end sales that were heavier mix in the 4th quarter versus the Q1. And so that's what it is. So we shouldn't have been up 60% earnings on 2% growth in the Q4. So if you kind of mix that end issue, which we've talked about forever and a day, it's just lumpy and it's incredibly profitable because of the tax jurisdictions down there.

Speaker 2

So like that's it. Yes, nothing fundamental. It's not Argentina. It's not anything that it's no pricing mechanisms and contracts. All of that's really stable.

Speaker 2

It's just fundamentally the end float between 4 and 1.

Speaker 8

Understood. My last two ones quick. Number 1, just piggybacking again on the aluminum question, recognizing it's a watch out, but not something you're terribly concerned about. I know over the last couple of years, 3 years, you've probably been working on supply chain clearly. With a lot of this inventory now showing up or a lot of this aluminum showing up in inventory in warehouses that might not be able to be used because of the sanctions, What are the risks and how are you planning against it that if there is some sort of mill disruption somewhere around the world that we don't see some spike, some tightening in aluminum, therefore, can sheet.

Speaker 8

What are your thoughts there and how are you planning against that? And then last, can you just give us a little bit more color on the payout that was related to the aerospace sales? Again, congratulations, it was obviously a favorable valuation, but kind of what went into that number? Thanks guys and good luck in the quarter and congratulations on 1Q.

Speaker 2

Thank you very much. So we've learned a lot. This may be a little long winded answer in terms of our price cost and managing the risk, managing tariffs, managing sanctions as it relates to your inventory supply. We've gotten a lot better at this since the tariffs were put in place in 2016. We've got 21 different metal programs.

Speaker 2

So metal that would be of concern on sanctions, we're really not shipping it to countries where that's even in conversation. So we'll be going to places that it can be used where there's trade relations with those countries that may have some concerning trade routes or unintended consequences for what exactly what you described. So we're managing those. We've de risked that over the last handful of years and we've gotten pretty good at that, understanding what's going on relative to those conversations and how we get out ahead of it. So it's less of an issue.

Speaker 2

I agree. I mean 4 or 5 years ago we spent an inordinate amount of time on things just like that because it wasn't in the ethos, it wasn't in our management patterns and our cadence of conversations, in our S and OP process. But I think it's pretty well under control. Not to say that the world's not going to change here almost suddenly and we need to manage it, but I would put this in the category of very low risk for us at this point in terms of just how we're managing our portfolio. Then I'll let Howard weigh in on some of the pro statement

Speaker 3

comments again. Sure. So I think 1st and foremost, George, that is a non comparable compensation component associated with the aerospace sale. Part of the variable performance based compensation plan for Ball employees. I think the way we think of it is the magnitude of the impact of this disposition causes the expense to be not normal.

Speaker 3

And so we've recognized approximately a $4,700,000,000 gain on this disposition, which is unprecedented of course and not likely to ever recur. And so for that reason, we're treating that as a non comparable compensation component associated with that.

Speaker 8

Okay. Thanks, guys. I'll turn it over.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Edlain Rodriguez with Mizuho. Please proceed with your question.

Speaker 9

Thank you. Good morning, everyone. Again, congrats to Brendan and Miranda and Anne, we're going to miss you. Quick one on Europe, clearly better start to the year, better than expected. Like are you seeing any fundamental improvement in terms of consumer spending improving?

Speaker 9

Because everything else we hear about Europe, like we didn't think things were improving quite a bit. Like what was the surprise? Like what are you seeing there really?

Speaker 2

Great. Yes. So I think it's twofold. I wouldn't say end consumers are spending more. I would say the relative inflation versus payroll in the promotional activity for our customers is impacting and influencing volume.

Speaker 2

And the other piece is the I think there was an unwind to an unnatural inventory level by retailers, by our customers at the end of Q4. And so they built that up a little bit. So it's probably half of Q4 to Q1, if you will, inventory stocking getting back to a more normalized baseline. And then some really some more aggressive behaviors from the customers across Europe that has enabled a little bit more volume. It's not incredibly exciting, but it's better than we anticipated heading into the year.

Speaker 2

But I wouldn't say there's more spend by going into these categories. I would say it's a little bit substrate shift, a little bit favorable category. The can certainly winning the other substrates. That gap is widened probably more in Europe than in any other region relative to the trade offs from glass and plastic into cans. So we're the beneficiary of that.

Speaker 2

But I wouldn't chalk it up to there's just a lot more spend happening. I think we're the beneficiaries of the mix.

Speaker 9

Okay. Makes sense. And another one, in terms of like the share repurchase, I mean Dan, like how do you balance the pace of that share repurchase? Like with the commitment to buy back shares versus like a higher and higher share price, I mean, of course, it's like high class problem to have, but how do you balance the pacing of that?

Speaker 3

Yes. I think we're committed to getting back to it. I mean we had I think had a pause for a few years as it relates to share buyback and I think that we've consistently heard from our shareholders as well that returning that in some measurable fashion and in a consistent basis is important. And so we're just starting in this program, right? I think we've mentioned that we bought about $350,000,000 worth of shares here.

Speaker 3

And we'll be thoughtful clearly as to how the stock price is going and even as it relates to what vehicles we use to buy back some of that share. We do have a long history of utilizing different instruments. I mean the 10b18 when the blackout is not there and the 10b5-1 when the blackout is there. And then we'll look at things like smaller ASRs as well if the volatility and the economics work for us. And so we're looking at all those things holistically in conjunction with the board and we're being thoughtful about them.

Speaker 3

What we do believe that for this year, we'll spend about $1,300,000,000 worth of share buyback. Combined with our dividend policy, that will return about $1,500,000,000 back to the shareholders.

Speaker 2

And then relative to elevated stock price, I mean, we're very comfortable buying back our shares at this level still. That's absolutely something that we talk to our finance committee and our board with and we model things internally. And yes, we're very comfortable returning value back to our shareholders right now at these levels and even elevated above this. So, but it's definitely something that we'll look at. But where the stock is even trading up today, it's like we're very comfortable buying shares at this level.

Speaker 2

So it's a great question. And again, it's, hey, let's see how we get on here over the next 3 to 6 months. But I think we owe it to return value back to our shareholders at the levels that we're talking about for the foreseeable future. And it's just a good it's a really good mechanism and behavior to return value. If we're generating more free cash flow, generating more earnings, we have plenty of dry powder to do things as they present themselves in terms of bolt on M and A, etcetera.

Speaker 2

So I think we can do all of it. And that's kind of how we're looking at it at this point.

Speaker 9

Okay, perfect. Thank you, guys.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Speaker 10

Yes. Thank you. Good morning, everyone.

Speaker 2

Good morning, Ed.

Speaker 10

Good morning. Let me extend my congratulations to Anne on her retirements and addition to the family. Maybe I wanted to come back to the cash flow side first. Maybe, Howard, I just want to clarify, because you bought that you retired about $200,000,000,000 of debt in the quarter. I believe that was higher than what had been initially kind of targeted, maybe there's some timing component to that.

Speaker 10

Did you also reduce the factoring programs on receivables or is that a cash outflow that is still yet to occur? There's obviously a lot of moving pieces on the balance sheet. I'm trying to make sure we understand what has happened and what has not in the cash?

Speaker 3

Yes, no problem, Adam. So yes, we did retire $2,800,000,000 of debt. That was we had talked about it from an apples and apples standpoint about $2,000,000,000 but recognizing that that was anticipating the sale of Aerospace sometime after the 15 date. March 15, we had to do about €750,000,000 denominated debt that was retired. And so that equates to the essentially additional $800,000,000 of USD that gets us to the $2,800,000,000 in the quarter.

Speaker 3

As it relates to factoring, given the cash that we had on hand, we did move forward with the factoring in a meaningful way. We still we probably did more of the unwinding here in the Q1 than we would anticipate for the full year. And so that was to the tune probably about $1,100,000,000 But by year end, we're going to stay with our goal, specified goal and target of unwinding about $500,000,000 of AR factoring by the end of this year. So you'll see that going a little bit the other way throughout the course of this year as we have a $1,000,000,000 tax payment that we're going to have to make here in second half or actually in second quarter and through the second half as well.

Speaker 10

Okay. That's very helpful. And if I could maybe just follow-up as we maybe take a step back, because there's a lot of moving pieces within comparable EPS growth across the $2.90 last year that obviously had aerospace earnings in it. You paid off debt, there's interest income, reduced factoring expense, share repurchase, tax rate inches up. Maybe if we step back, can we think about the 3 core beverage cans kind of operating units?

Speaker 10

Globally, Dan, you talked about low to mid single digit volume growth. What should we think about the operating profit growth in those core business units off of that level of growth? Obviously, the Q1, especially North America had some capability, but help us think about what does that core operating leverage look like with that kind of volume growth this year?

Speaker 3

I would say overall, Adam, that we anticipate operating leverage to continue on here and you'll see that. What we've said as it contextualizes EPS is we've said, hey, mid single digit plus on a year over year basis. We've said that the aerospace sale would essentially be neutral for us on an EPS standpoint, given the operating earnings loss associated with Aerospace, but the pickup associated with the additional cash, whether it be interest income, reduction in interest expenses, we've retired debt, and as we go ahead and improve on some of these factoring programs. So we've said that for the full year, the EPS would be neutral associated with the aerospace sale. Think of it in the context of a 2 time leverage.

Speaker 3

And so that's the way we think of it within the P and L. And so that's consistent with what we've modeled. That's consistent with what we're going to see here through the duration of 2024.

Speaker 2

Yes, I think for the core beverage business, if you it's significantly higher than the historical 2x leverage if you were to back out the nearly $40,000,000 of onetime purchase power agreement. So it's still in excess of the 2x leverage. I think somewhere in the neighborhood of $100,000,000 of operating earnings we're going to get out of the beverage business and an improved result year over year and that obviously has the lapping of the $40,000,000 $30,000,000 $40,000,000 one time benefit.

Speaker 10

That is all very helpful. I will pass

Speaker 5

it on. Thank you.

Speaker 2

Yes.

Operator

Our next Yes. Our next question comes from the line of Phil Ng with Jefferies.

Speaker 6

Please proceed with

Speaker 11

your question. Hey guys, congrats on the strong quarter. And like everyone else, I wanted to thank Anne for all her help over the years. And congratulations to Brandon and Miranda as well.

Speaker 3

Thank you.

Speaker 11

I guess my first question is really the free cash flow power of the business, certainly noisy with the airspace sale this year. It can be helpful, Howard, perhaps to give us a little more perspective on how to think about CapEx as we look out to 2025 and beyond, maybe 2026. It's been a big growth CapEx cycle. So just give us a little more context on how to think about that, the free cash flow and certainly a high class problem to have, but how should we think about buyback as well? Pretty steady dose every quarter, more opportunistic if a pullback, Just kind of give us a little playbook on how you're thinking about the pace of buybacks?

Speaker 3

Yes. So sure, Phil. Let me go ahead and get into that a little bit. As it relates to free cash flow, I mean, I think the way to think of it is, hey, we're anchoring to a normalized free cash flow in the $900,000,000 to $1,000,000,000 range, right? That excludes some of the impact of the factoring unwind and we talked about that in the context of about $500,000,000 right.

Speaker 3

And so and I think that we can see that going forward on a consistent basis. Dan's talked about the operating cash generation of this business and how rich that is. And so we believe that that's going to help fuel the share buyback even in 2 years that you specified. As it relates to CapEx, I mean, the way we think about it here is getting CapEx in the ballpark of GAAP D and A on a consistent basis. I recognize that over the last few years that CapEx had been a little bit outgrown.

Speaker 3

And so we're returning back to that discipline of getting CapEx into the D and A envelope. And we think that that's going to happen here for the next few years as well. As it relates to share buybacks, look, as Dan said, I mean, we feel good about the price that it's at and we'll continue to buy. If there is any, for any reason at all, reasons for us to be a little bit more opportunistic because of the prices, then we'll look at that as well. And so I think that we have those full optionality.

Speaker 3

I think the greater point here, Danilo, is that we're going to return to a consistent buying back of shares, something that we had paused on for a few years here and we'll do that here in 2024, we'll do that here in 2025 and no reason to think that we wouldn't do that going forward beyond that.

Speaker 2

Yes, Phil, I would say, I would in the simplest manner, we are running our business, the expectation of running our business enterprise wide is that net income equals free cash flow. So as I don't want you to think about locking us in at $900,000,000 of free cash flow. As our margins expand, we will mitigate the working capital build associated with the growth. And if you're in that 2%, 3%, 4%, you should be able to manage that. We got room to do that.

Speaker 2

We spend at GAAP D and A levels and some years it will be less, some years it might be a bit more. But this we should be generating a steady diet of free cash flow and returning that back to our shareholders consistently. To your point, there may be some opportunities with a pullback where we can do some more. But I think you should be locking in that you're going to get an overwhelming majority of that free cash flow coming back to you in the form of dividends, share buybacks, overwhelmingly in share buybacks for the foreseeable future.

Speaker 11

Okay. That's great. Then Dan, you gave a little more perspective on Europe. It sounds like it's still kind of a choppy environment, but good to see some restocking. How are your customers gearing up for the busy summer months?

Speaker 11

Certainly, there's some big sporting events like the Olympics and the Euros and stuff of that nature. Are they gearing up for that? And then I think on your prepared remarks, you made some comment about perhaps Europe recovery would be more back half weighted. Give us a little more as to why perhaps the back half is a little better than the front half?

Speaker 2

Yes. Entering the year, it was really the comments were more macro related in end consumer and the strength of the end consumer. We got the benefit of the restock and a little bit more favorable behavior by our customers, kind of pushing volume. We thought that there would be a natural tendency for inflation to come back and for the re gasification projects to come online. So there would be more room for optimism in the Cup certainly is helpful.

Speaker 2

I'm more I get more excited about the soccer football drinking behaviors than I do about the Olympic drinking behaviors. So that generally moves the needle a lot more than the Olympics, if you will. So that will be helpful and we've certainly heard that from especially our larger beer customers and elements of Western Europe. So yes, it's really macro related and I think a lot of those things are still playing out in a more favorable manner with the watch out being what happens in the Middle East as it relates to energy prices and how does that impact the consumer. But we're encouraged.

Speaker 2

Nothing contractual is coming online. It's incredibly stable. This is just and we're starting to see increments of better pricing behaviors, a little stronger in consumer, substrate shift continues to manifest in a favorable manner for us, especially as it relates to glass moving into cans. So a bunch of small things kind of add up to a more improved outlook in the second half of the year and we haven't seen anything that would influence or impact that to the negative, if anything, maybe an increment higher.

Speaker 11

Got it. And then just one more for me. On North America, if I heard you correctly, you had some pull forward earnings from 2Q to 1Q. Do you still expect North American earnings to be up year over year in 2Q? And then give us a little update, I think there's been some movement in North America as well with the shelf space reset on the beer side.

Speaker 11

And one of your larger beer customers, I believe, is still dealing with some ongoing labor issues, I think, down in Texas. Any update on that front and how you're kind of managing that?

Speaker 2

Yes. I'll let Howard once you cover the earnings and I'll get back over to the union issues.

Speaker 3

Yes. I think that's right, Bill. I do think that year over year earnings will still increment upwards here in the Q2 despite some of the pull in from Q2 to Q1. I think as Dan said, it's probably $10,000,000 or $15,000,000 that improved the Q1. But despite that, we still anticipate that we'll have some reasonable growth as it relates to operating earnings in the Q2 as well.

Speaker 2

Yes. I think the shelf resets have been communicated really well from there's been a couple of folks that have won disproportionately and we anticipated that in our numbers. So nothing's moved up, down or sideways. I would say even with I'd say even with the shelf reset, I think the beer category is just down. So I guess it's less about the category reset and it's more about beer and how they get on with promotional activity in the peak season.

Speaker 2

Are they going to drive value excuse me, volume? And then, yes, we're connected with our plants in Texas with that particular brewer. They're doing a really nice job of managing it right now, but it's still ongoing. It hasn't been resolved, but we're certainly working with our partner to make sure that we're running what we can and it's been effectively managed. And I think this is a bit of the way of the world right now as it relates to some of the strength of the unions broadly speaking and kind of the manufacturing base.

Speaker 2

So we had to also work with another major brewer in the quarter to work toward mitigating any supply chain shifts. And so I think we're all coming to a realization that this is probably par for the course moving forward and everybody's getting aligned to have more thoughtful conversations in and around when these contracts come up across the industry and making sure that collectively throughout the system we can manage them.

Speaker 11

Okay. Appreciate all the great color guys.

Speaker 5

Thank

Speaker 2

you. Yes. Thank you.

Operator

Our next question comes from the line of Pamela Kaufman with Morgan Stanley. Please proceed with your question.

Speaker 5

Hello. This is actually Stefan Diaz sitting in for Pam. Thanks for taking my questions. And just to echo my colleagues, congratulations to Anne and for Brandon and Miranda for the increased responsibility. Now that the aerospace deal is closed and proceeds are in hand, can you give any details around the potential innovation investments?

Speaker 2

Yes, a good question. So we're always I guess we have an underlying thought process that we're always investing. There's a combination of R and D that transitions hopefully into commercial innovation projects. And I think you'll hear this from just about everyone that the opportunity set for us is different by region, but innovation as it relates to getting a constructive package and vehicle that can really attack if you will plastic And the big linchpin there is going to be resealability. And I think there's a lot in that area that's being worked on and it's being worked on by everyone in the industry and all of our customers.

Speaker 2

So those will be the big unlocks. And then there's some pretty interesting stuff that's going to be coming out as it relates to new products. And it's also these are also applications that benefit substrate shift. I think that's the real focus of innovation more so than a unique graphic depiction, etcetera. It's like can you have a package that is easily transferable into whatever the benefits of the other substrate are and can you offset those and then you've got a far more circular and a better, I think, sustainable package that gets to plant that.

Speaker 2

And so that's where that focus is. And then in terms of new products, there's a lot that's happening in the CSD space. There's a lot happening, better health, lower calorie, lower sugar, that's all real and then very creative outlooks as it relates to alcohol categories, new alcohol categories and then substrate application for us. That's where the innovation is. But I would say nothing that would be incrementally different in terms of our spend behavior just because we have a stronger balance sheet.

Speaker 2

These are things that we're working on and working on with our partners. And as it makes sense and as it can be commercialized at scale, we're generally the right person, right company to do that. And so that's how we're looking at innovation right now.

Speaker 5

Great. Thanks, Dan. And then, I believe your initial volume guide was for low single digits globally and now you expect low single digit to mid single digit. Is the raise at the top end based on strong 1Q or do you expect better demand throughout the year now? And maybe what do you need to see to hit the top end of that guide?

Speaker 2

Yes. Peak season dependent. Just to be abundantly transparent, I mean, if I'm talking about 2.4% growth versus 3.3%, I think the 3.3% starts to look like mid range versus the so I would say we got out ahead of the gate. We had favorable mix in South America. We're a little ahead in Europe.

Speaker 2

Scanner Data is a little behind in North America. So the balance of that seems like net net net that's a little favorable Until we get through peak season on 70% of our business, I think I've ranged it appropriately. And regardless of whether it's low single digits or mid single digits, you're going to see cash flow generation, EPS mid single digit plus share buyback to the tune of nearly $1,300,000,000 So we're really confident in the underlying performance and behavior of the business. Let's see how peak season gets on.

Speaker 5

Great. Thank you so much. And maybe if I could sneak one more quick one in here. Can you just go through how April trends are benchmarking versus your expectations? And then I'll turn it over.

Speaker 5

Thank you.

Speaker 2

Yes. April is largely in line, a little softer than March, but in line with our expectation. And as you know, Easter fell a week different last year than it did this year. And so that plays into it a bit. So it's I think it's there or thereabouts.

Speaker 2

And it really a couple of weeks before Memorial Day is when things really start to pick up. So it's really the back half of the second quarter where it's most meaningful. Christine, that will be the last question. I think we're a couple of minutes over.

Operator

Thank you. This ends the question and answer session. I would now like to turn the floor back over to management for closing comments.

Speaker 2

Yeah, thanks. Just a quick reminder, June 18, New York Stock Exchange is our Investor Day. Again, I'd like to thank Anne for her incredible service to the company and certainly echo all the very nice comments toward Brandon and Miranda. And thanks to all of our employees. We look forward to talking to you again at the end of next quarter, if not before at Investor Day.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Earnings Conference Call
Ball Q1 2024
00:00 / 00:00