Ball Corporation

Greetings and welcome to the Ball Corporation Second Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this call is being recorded today, Thursday, August 1st, I would now like to turn the conference over to Mr. John Hayes, CEO. Please go ahead.

Thank you, Leila, and good morning, everyone. This is Ball Corporation's conference call regarding the company's second quarter 2019 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 don't already have our second quarter earnings release, it's available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of today's earnings release. The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Now, joining me on the call today are Scott Morrison, Senior Vice President, CFO, and Dan Fisher, Senior Vice President and Chief Operating Officer, Global Beverage. I'll provide some introductory remarks. Dan will discuss the global beverage packaging performance. Scott will discuss key financial metrics. And then we'll finish up with some comments on our aerosol and aerospace businesses, as well as our outlook for the company. Growth in our businesses continue at or even above our expectations. Overall global beverage volumes were up approximately 5% and our aerospace revenues were up more than 30%. Across the globe, canned demand continues to increase as sustainability progresses from a special interest initiative to a mainstream lifestyle. And innovation and execution drive more customers to seek out solutions in all of our divisions. To say this is an exciting time to be at our company, and we've said it before, may be an understatement. With this strong growth, we have experienced short-term cost to serve this growth, particularly in our North and Central American and South America beverage can businesses. In fact, we probably left a point or two of volume growth on the table as we're unable to deliver to and service our customers at the level we typically expect of ourselves. To stay on top of this growth and mitigate our line conversions, auto pattern freight, and other short-term headwinds, we plan to deploy additional capital to de-bottlement existing lines and build new capacity and in order to provide for even greater growth and flexibility to supply our customers' needs at the levels that they demand. Scott and Dan will discuss our investment opportunities to grow profitably across our various geographies and businesses. In aerospace, the team continues to deliver on its growth ambitions. Contract performance is strong, hiring is up, and we expect to pursue further investments in this business to keep up with the strong growth that we continue to see. Now, from an earnings perspective, Our results were up despite tough year-over-year comps given the 2018 steel food can business sale and conclusion of the end sale agreement to South America. As I mentioned, our North and Central America segment was challenged with previously discussed U.S. aluminum scrap headwinds and sequential project startup costs. All other segments were at or above our expectations. We expect these near-term cost headwinds to mitigate as we progress through the second half of the year and continue to expect year-over-year improvement in each of our main geographies. Now, key highlights of the quarter include, as mentioned previously, overall global beverage can growth of approximately 5%, driven by 13% specialty can growth. In fact, growth in our three key regions, North and Central America, Europe, and South America, grew 6% when you exclude the declines we experienced in Asia. Dan will get into this later. Today's specialty cans represent over 42% of our mix on a global basis. The growth was prevalent in our largest markets, with North and Central America up approximately 4% year over year, South America up 12%, and Europe up 7%, while EMEA was down slightly due to continued difficult macroeconomic issues in this region. We received antitrust approval for the sale of our China beverage can businesses. and we expect the transaction to close later in the third or fourth quarter, depending on other governmental approvals around tax closeouts and foreign exchange flows. Our aerospace revenues were up over 30%, and operating earnings were up 55%. While we don't expect this level of growth to continue, we do expect revenues to be up nearly 25% for the full year, and operating earnings should continue to grow at revenue growth rates. And aluminum aerosol was up low single digits with new product innovation work continuing. We continue to focus on raising awareness on sustainability, the benefits of aluminum packaging, and proactively investing in and offering aluminum packaging solutions to our customers. One interesting note regarding our growth is that while many new products continue to move in the cans, our growth to date has not been meaningfully impacted by any conversions of existing brands from plastic or other substrates to aluminum beverage cans, particularly in the non-alcoholic categories, including CSD and water. That said, there have been several public announcements regarding such conversions that Dan will discuss, and they will begin to hit the market later this year or early next year. In addition, this fall we will launch our new infinitely recyclable, brandable aluminum cups that will make their commercial debuts and college and professional stadiums during the fall football season. With an addressable market of over 90 billion units globally, a third of which are in the U.S., we are incredibly excited about this new innovation product launch. Stay tuned for further media announcements. So in summary, we continue to see strong growth across our various businesses, and while we have been challenged with short-term costs to serve this growth, we believe these headwinds will begin to moderate and dissipate as we move through the second half of the year. We have many exciting opportunities in front of us that set us up well and set our business up well going into 2020 and beyond. We will continue to execute our long-term strategy of deploying capital and supportive growth opportunities, increasing EVA dollars and earning overtime through higher revenues above our cost growth, driving more mixed shifts, especially containers, growing new innovative aluminum packaging products like the cup, and expanding aerospace, all with return of value to our shareholders' mindset. And with that, I'll turn it over to Dan.

Thanks, John. Across our global operations, our team is navigating tremendous growth, complexity, and incredibly tight supply-demand conditions. Sustainability and new categories are fueling customer demand and looking ahead. When existing products convert from single-serve PET to cans in 2020 and beyond, given the recent announcements, by two of the world's largest beverage brands, the growth for beverage cans will accelerate. In the near term, and until we have more assets up and running, costs to serve the surging growth dampen North America's performance. Given the U.S. aluminum scrap situation we called out last quarter and pushing our existing plants and new lines to the maximum to keep customer in cans. Turning to growth. Our second quarter global beverage can shipments were up 5%, and excluding declines in China and EMEA, global volumes were up 6%. However, comparable operating earnings were down slightly year over year, due exclusively to the previously disclosed U.S. aluminum scrap issues and continued U.S. line inefficiencies. Completion of the South America ends manufacturing agreement, macroeconomic issues in EMEA, and some EuroFX earnings translation headwinds. All in, these issues impacted comparable global beverage earnings, $55 million in the quarter, with roughly $35 million in the North America business, $14 million in South America, and $5 million in Europe. Across the globe, our teams kept pace with tremendous growth in Europe, Brazil, and North America, which, as John mentioned, is still experiencing operational and logistical inefficiencies given its tight U.S. industry and higher than anticipated growth in Brazil. The unfavorable impact of US aluminum scrap, logistics, and customer ordering complexities have largely been addressed in contracts renewing in 2020 and beyond. Before I move on to the segment commentary, a brief update on some internal talent moves. After decades of successfully leading numerous ball regions, we recently brought Colin Gillis over from Europe and he will now be leading our North America operations. And Colin's European role will be backfilled by Ron Lewis, who was joining Ball from Coca-Cola European Partners, where he was their chief supply chain officer. Ron worked in the Coke system for nearly 20 years, and we have known him throughout that time. His experience and leadership will be a great addition to our team. Moving to the individual segments, Ball's North American segment volumes were up 4% in the quarter, Continuing double-digit growth in spiked seltzers, wine, craft beer, new water brands, and developing categories of fitness energy drinks and spirits and pre-mixed cocktails and cans led to year-over-year growth in specialty. Inventory levels for our specialty portfolio are low, and every plant in our network is running at maximum utilization. Given the combination of strong growth, The upcoming transition of traditional products such as still water from single-serve plastic to cans, the demands on our existing operational assets are such that we will not be able to sustain current growth rates without additional investment. Conversions, line speed-ups, and additions at existing facilities in Georgia and Texas are in process. We look forward to offering new products and more specially aluminum can and bottle capability to support our customers' growth. Following these investments, our plant teams will gain some operational breathing room across the system, allowing us to get costs in line and with previously negotiated contracts favorably resetting at the beginning of 2020. I fully expect strong earnings momentum across North America in late 2019 and beyond. Turning to our South American segment, volumes were up 12% in the second quarter, led by incredible strength in Brazil. As mentioned earlier, the completion of the ENDS manufacturing contract required as part of the Rexham transaction led to just slightly lower second quarter earnings. Higher than anticipated Brazilian volume growth led to incremental logistics costs. Comps will improve as we move toward the fourth quarter, which is the seasonally strongest quarter for South America. Our expansion in Paraguay is on track for a late 2019 startup. and the 2018 expansions of Argentina and Chile are performing to expectations. And similar to North America, overall South American industry trends remain strong with cans. New product and brand launches for beer, wine, energy, and still water in cans, as well as multiple brewery expansions, will support additional investment across the industry. And specific to Ball, a new customer's multiple brewery expansions will support additional capital in Brazil, including a multi-line Greenfield facility. European beverage earnings were up 16% in the second quarter due to volume growth and improved year-over-year operational performance, despite a $5 million unfavorable operating earnings translation impact in the quarter. Volumes increased 7% in the second quarter, despite mixed weather during the quarter. Cans are winning, and customers' operations continue to add new can filling lines. For 2019, contributions from our new lines, the year-over-year impact of our 2018 G&A improvement, and plant cost initiatives will provide further year-over-year earnings growth and margin expansion as we progress through the balance of the year. Looking ahead, we will leverage our existing Continental Europe network with near-term line speed-ups, while in Russia, we're executing a capacity expansion strategy in the short and medium term to support in-country can growth. Turning to EMEA in Asia, the demand environment was softer than anticipated as Middle Eastern conflicts escalated in the quarter. Operationally, the plants have lowered their costs and focused on controlling what they can control. And as John mentioned, in China, Ball has secured antitrust approval and has begun the multi-stage closing process for the Chinese manufacturing plant sale to ORG. In summary, global beverage can demand momentum has continued in our three largest regions of North and Central America, Brazil, and Europe. Supply demand globally for cans is tight, and our commercial sustainability and recent talent moves will benefit Ball going forward. As John mentioned earlier, the amount of growth we are seeing today and are securing into the future is amazing. We will invest wisely with an eye on EVA returns and a proper pace relative to customers' long-term needs. Thank you again to all of our teams around the globe. With that, I'll turn it over to Scott.