Ball Corporation — 2024 Q1

Thank you for that.

Yes, good question. I think South America, we saw the strength in the fourth quarter carried over in the first quarter, and our partner did kind of won today in the market down there. So a really good start to the year. I think as it relates to Brazil, I think that economy continues to incrementally improve. We took a little bit of the refill glass back that we've talked about, we lost over 18 months and sort of that higher inflationary environment. So that's positive. So that's inflecting in the right direction. I think we'll probably increment higher this year versus our outlook in Brazil. And then Argentina is hanging in there. Howard and I were down there about 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 -- couple of months, and then that should unlock some of their FX policies, which will certainly benefit us and derisk the balance sheet in that part of the world.

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 $5.5 billion -- or over $5.5 billion. And so that plays into the increased interest income associated with that. As it relates to...

Yes, yes.

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

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

I will take a shot at this and then ask Howard to just -- I think it's twofold. Yes, it's the fixed cost absorption. Straight line from the immediacy of the closure of the facilities and its improved performance across the portfolio. I think we've commented on this before. Probably versus 5 years ago, we've lost a couple of points, potentially 3 points of efficiency across our portfolio of assets in North America, and now we're gaining on that. So you're seeing the combination of the fixed cost benefits of the plant closures and the higher-cost facilities, coupled with the fact that we're running better. So a lot of folks that are now 2 or 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. So I think it's really the underlying performance of the facilities in the region. They're doing a really nice job.

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

In the simplest way, we've talked about this for years and years and years and you've heard us talk about. And can and end shipments, right? So we ship more ends in the fourth quarter than we did in the first quarter. 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. 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.

Yes. So we've spoken about, and I think it's well known within the industry that there was a share shift one brewer to the tune of approximately 2 billion units, that's already happened. That's in our numbers. So we lost the 2 billion and multiple competitors picked that up and incremented up. 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 first quarter, 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 last -- the 2 billion pick up, roughly a similar amount and you'll inflect in the back half of the year with volume. 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.

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. 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. In fact, it's just the opposite at this point. They're more aggressively going in and working on taking share. and are using the can to do that.

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 over time. It's showing up in spoilage. The older assets that were retired, I would say, have contributed 80% of that improvement, okay? So there's still -- I think we've just scratched the surface on getting to the other 2%, 2.5%, if you will, across the existing portfolio of new assets.

Yes. I would say no, that's not true. It's going to be easier because this is roughly 1,200 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. 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 a very prescriptive manner. So I'm encouraged that we will get this back here over the next 18 to 24 months.

Yes. Thanks. So Brazil grew at 18%, we grew at 26%. So no, we didn't lose anything. 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 fourth quarter versus the first quarter. And so that's what it is. So we shouldn't have been up 60% earnings on 2% growth in the fourth quarter. So if you kind of mix that end issue, which we've talked about forever in a day, it's just lumpy, and it's incredibly profitable because of the tax jurisdictions down there. It's 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. It's just fundamentally to end float between 4 and 1.

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. So metal that would be of concern on sanctions, we're really not shipping it to countries where that's even in conversation. So it will 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.

Sure. So I think, first and foremost, George, that is a noncomparable 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. And so we've recognized approximately a $4.7 billion 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 noncomparable compensation component associated with that.

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 mechanism and then the promotional activity for our customers is impacting and influencing volume. 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.

Yes, Edlain, 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 on 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 million worth of shares here. 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 10b-18 when the blackout is not there and the 10b-51 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 then relative to elevated stock price. I mean we're very comfortable in 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 back shares at this level. So it's a great question. And 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 in behavior 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&A, et cetera. So I think we can do all of it. And that's kind of how we're looking at it at this point.

Yes, Yes, no problem, Adam. So yes, we did retire $2.8 billion of debt that was -- we had talked about it from an apples-and-apples standpoint of about $2 billion, but recognizing that, that was anticipating the sale of aerospace sometime after the March 15 date. March 15, we had to do about EUR 750 million denominated debt that was retired. And so that equates to the essentially additional USD 800 million of that gets us to the $2.8 billion in the quarter. .

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 as 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 -- 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 sales. Think of it in the context of a 2x leverage. And so that's the way we think of it within the P&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.

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 million of onetime purchase power agreement. So it's still in excess of the 2x leverage. I think somewhere in the neighborhood of $100 million 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 million -- $30 million, $40 million onetime benefit.

Congrats on the strong quarter. And like everyone else, I wanted to thank Ann for all her help over the years, and congratulations to Brandon and Miranda as well. I guess my first question is really the free cash flow power of the business, certainly noisy with the aerospace sale this year. Can it be helpful, Howard, perhaps to give us a little more perspective on how you 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 the pullback? Just kind of give us a little playbook and how you're thinking about the pace of buybacks.

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, say, we're anchoring to a normalized free cash flow in the $900 million to $1 billion range, right? That excludes some of the impact of the factoring unwind, and we talked about that in the context of about $0.5 billion, right? So -- and I think that we can see that going forward on a consistent basis. Dan has 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 into years that you specified.

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 million 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. We spend that GAAP D&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 and share buybacks, over $1 billion share buybacks for the foreseeable future.

Okay. That's great. And Dan, you gave a little more perspective on Europe. It sounds like still kind of a choppy environment, but good to see some restocking. How are your customers gearing up for the busy summer months. Certainly, there's big -- 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's recovery would be more back half-weighted. Give us a little more perspective why perhaps the back half is a little better than the front half?

Yes. Entering the year, it was really the comments were more macro related and 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. But we thought that there would be a natural tendency for inflation to come back and for the regasification projects that come online. So there would be more room for optimism in the second half of the year, and that's really what we heard from our customers as well.

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 America 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. And one of your larger peer 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?

Yes, I'll let -- Howard, why don't you cover the earnings, and I'll get back over to the union issues.

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

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 -- even with the shelf reset, I think the beer category is down. So I think 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, are they going to drive value -- excuse me, volume.

This is actually Stefan Diaz sitting in for Pam. And just to echo my colleagues, congratulations to Ann and 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?

Yes. It's 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&D that transition that hopefully in the 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. So that -- those will be the big unlocks.

Great. And then I believe your initial volume guide was for low single digits globally, and now you expect low single digit to mid-single digits. 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?

Yes. Peak season dependent. Just to be abundantly transparent. I mean if I'm talking about 3.4% growth versus 3.3%, I think the 3.3% starts to look like mid-range versus -- 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. 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 $1.3 billion. So we're really confident in the underlying performance and behavior of the business. Let's see how peak season gets on.

Great. 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?

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. 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.

Yes. Thanks. I just -- just a quick reminder, June 18, New York Stock Exchange is our Investor Day. Again, I'd like to thank Ann 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 the next quarter, if not before at Investor Day. Thank you.