Ball Corporation

Greetings and welcome to the Ball Corporation Third 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 one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Thursday, October 31, 2019. I would now like to turn the conference over to John Hayes, CEO. Please go ahead.

Great. Thank you, Malika, and good morning, everyone. This is Ball Corporation's conference call regarding the company's third quarter of 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 results or outcomes to differ are in the company's latest 10-K and in other company SEC filings as well as the company news releases. If you don't already have our third 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. Joining me on the call today are Scott Morrison, Senior Vice President, CFO, and Dan Fisher, Senior Vice President and Chief Operating Officer of our global beverage businesses. 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 to exceed our expectations, and our demand outlook heading into 2020 and beyond remains quite strong. During the quarter, overall global beverage volumes were up 4%. Our aerospace revenues were up more than 30%. We successfully launched our lightweight aluminum cups business. We completed the sale of two underperforming businesses, and we consistently executed share buybacks, including dividends, and as of today, we've returned in excess of $900 million to shareholders. During the quarter and year to date, our volume growth in our beverage can business has actually been hampered by tight inventory levels, tight capacity conditions, and some manufacturing inefficiencies. Across the globe, we are actively investing in new aluminum packaging production to serve increasing demand for aluminum cans, bottles, and now cups. In our earnings press release, we announced additional beverage can expansion plans that Dan will get into shortly. New product introductions and sustainability are the key drivers for us as customers seek out aluminum packaging solutions. In an environment of strong demand, particularly in our portfolio of specially canned sizes, as well as tight inventories, we continue to experience short-term costs to serve this growth, particularly in our North and Central American packaging business, and we are focused on building out capacity to catch up with this growth. Our customers plan to convert more packaging to aluminum, and consumers' environmental consciousness are supporting our decision to deploy high returning capital at a responsible pace. Scott and Dan will discuss these opportunities across our various geographies and businesses. In aerospace, the team continues to deliver on its growth ambitions. Hiring is up, backlog is up, and additional capital investments are ongoing in this business to keep up with the strong growth. From an earnings perspective, our comparable results were up 25%, despite tough year-over-year comps given FX headwinds, the July 2018 steel food can business sale, and wind down of the end sales agreement in South America. Our North and Central American segment continued to feel the impact of previously discussed U.S. aluminum scrap headwinds and project startup costs. All other segments were at or above our expectations. We continue to expect year-over-year improvement in each of our main geographies going forward. Now, key highlights for the quarter include, as mentioned previously, overall global beverage can growth of approximately 4% was driven by 10% specialty can growth. Today, 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 3% year over year, South America up 5%, and Europe up 4% while EMEA returned to growth. We completed the sale of our China beverage camp business, and we expect to receive the cash proceeds in the fourth quarter. We announced the sale of our Argentine steel aerosol business and subsequently closed on the sale in late October. Our aerospace revenues, as I mentioned, were up over 30%, and operating earnings were up 35%. While we don't expect this level of growth to continue in the fourth quarter due to a difficult year-over-year comp, We do expect our airspace revenues and earnings to grow over the next several years at strong double-digit rates. And aluminum aerosol was up low single digits with investment for new product innovation work continuing. Our focus areas continue to be maximizing the value and performance of the investments we've made to date in order to capture as much growth as we can manage, continuing to proactively invest in our beverage can business to service the growing needs of our customers, hiring, training, and mentoring the most talented people to capture this growth in all of our business. And lastly, raising awareness and educating consumers, governments, and other stakeholders on the facts of sustainability, including but not limited to the infinitely recyclable nature of aluminum products, as well as carbon footprint benefits that recycled aluminum has over other substrates. So in summary, we continue to see strong growth at the company, And while we continue to have some previously articulated short-term cost challenges to serve this growth, we believe these headwinds will moderate over time as additional new assets ramp up going into 2020 and beyond. We will continue to execute our long-term strategy of deploying capital against growth opportunities, increasing EVA dollars and earnings over time through higher revenues above our cost growth, driving more mix shift to specialty containers, growing new innovative packaging products like the cup, and expanding aerospace, all with the return of value to our shareholders' mindset. And with that, I'll turn it over to Dan.

Thanks, John. As John alluded to, new product launches and substrate conversions to aluminum packaging in the beverage industry are still in the early stages. In addition to multiple customers announcing trials of still water in cans and or publicizing an increase of aluminum packaging, and their overall beverage portfolio mix, we successfully launched our new infinitely recyclable, brandable aluminum cups with an addressable market of 93 billion units globally, a third of which are in the U.S. We are incredibly excited about this new product and our recently announced multi-year investment plans to construct a dedicated aluminum cup manufacturing plant in Rome, Georgia, with the first commercial cups expected off the line within 12 to 15 months. Across our global operations, our team continues to manage tremendous growth, complexity, and incredibly tight supply-demand conditions. As we prepare for an acceleration of products converting from PET to cans while supporting, to the best of our ability, new categories leveraging aluminum packaging, we are providing additional resources to our plant operations in the areas of talent, training, and mentoring. As John said, until we have more assets up and running, cost to serve the surge in growth may linger over the next quarter or two in North America's performance, given the U.S. aluminum scrap situation and leveraging the fourth quarter to rebuild inventory levels heading into 2020. Further investments will be required to overcome the greater-than-anticipated specialty growth of approximately 10 plus percent over the past 18 months. Our operations need a bit of breathing room to return to historical operational leverage on incremental sales. We believe the expansion announcements in our Q2 release, along with today's announcements, will get us there over the course of the next 12 to 24 months. Turning to growth, our third quarter global beverage can shipments were up 4% and comparable operating earnings increased only slightly year over year, given the U.S. aluminum scrap, continuous U.S. line of inefficiencies, final wind-down of the South America ends manufacturing agreement, as well as EuroFX earnings translation headwinds, and Argentine peso volatility. All in, these issues impact the comparable global beverage earnings, $40 to $45 million in the quarter. As we mentioned last quarter, the unfavorable impact of U.S. aluminum scrap logistics, and customer ordering complexities have largely been addressed in contracts renewing in 2020. Moving to the individual segments, Ball's North American segment volumes were up 3% in the quarter. Sold-out customer conditions and spiked seltzers, double-digit growth in wine, craft beer, new water brands, energy drinks, spirits, and premixed cocktails and cans led to 4% year-over-year growth in specialty despite tight conditions for cans. We are thankful we made the investments we did in 2018 and year-to-date 2019. We just wish we would have done more. Inventory levels continue to be low, and every plant in our network is running at maximum utilization. Conversions, line speed-ups, and additions at existing facilities in Georgia and Texas are largely on track. As John noted in our press release, we are excited to announce the construction of a new facility excuse me, a new specialty beverage can manufacturing facility in Glendale, Arizona, to support the new can filling facility for a major customer as well as other third parties. Initially a high-speed two-line facility, we expect this plant to come online in early 2021 and will have the capability to be further scaled as demand dictates. We are finalizing plans for new capacity in the Northeast, and actively exploring further capacity expansion across the region as our customers continue to invest in their can filling businesses. We look forward to the multi-year opportunity of offering new products and more specialty aluminum can, bottle, and cups capability to support our customers' growth. Following these investments, our plant and sales teams will gain some headroom across the system, allowing us to get costs in line, better serve our existing and new customers, and With previously negotiated contracts favorably resetting at the beginning of 2020, I fully expect strong earnings momentum across North America as we close out 2019 and accelerate profitability in 2020 and beyond. Turning to our South American segment, our volumes were up 5% in the third quarter. Year-over-year quarterly earnings were impacted by the final wind-down of the ENDS agreement, FX headwinds related to the Argentine peso, Startup costs related to our new plant in Paraguay, as well as incremental warehousing and logistics costs related to customer mix and preparedness in advance of the seasonally strong fourth quarter. Operating earnings are expected to improve year over year in the fourth quarter. Our new plants in Paraguay started up on schedule in late October. Chile is performing in line with expectations and despite economic volatility in Argentina, Can demand is holding up well in the region. And similar to North America, overall South America 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. European beverage earnings were up 7% in the third quarter due to volume growth and improved year-over-year operational performance. Despite a $4 million unfavorable operating earnings translation impact in the quarter, on a constant currency basis, comparable operating earnings were up more than 12%. Volumes increased 4% in the third quarter, despite mixed weather during the quarter. Our customers' operations continue to add new can filling lines, which will benefit industry growth in 2020 and beyond. Looking ahead, we will leverage our existing continental Europe network with near-term line speed-ups, and we are in the process of finalizing a near and long-term capacity expansion strategy in Russia and other areas of Europe to support customers' growth. Turning to EMEA, the demand environment met expectations in the quarter. Operationally, the plants continue to focus on their cost and post the sale of China. we will continue to assess opportunities to prudently invest if the economics justify. With all the growth across our largest regions, we will be laser focused on prioritizing capital for the best long-term economic outcome and on improving execution. In summary, global beverage can demand momentum has continued in our three largest regions of North and Central America, South America, and Europe. Supply demand globally for cans is tight. Our sustainability, commercial, engineering, and talent management teams have a full-court press on supporting our plant teams. Aligning with the right customers, leveraging our innovation product portfolio, EVA returns improvement, managing a proper pace of spend relative to customers' long-term needs, and building out a complete CUPS business make for interesting and exciting work. Thank you again to all our teams around the globe. And with that, I'll turn it over to Scott.