Ball Corporation

Greetings and welcome to the Ball Corporation 2Q 2020 earnings 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 conference is being recorded Thursday, August 6, 2020. I would now like to turn the conference over to John Hayes. See you. Please go ahead.

Thank you, Kelly, and good morning, everyone. This is Ball Corporation's conference call regarding the company's second quarter 2020 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. In addition, the press release financials include descriptions of new segment reporting for our EMEA and other non-reportable segments. Now joining me on the call today are Scott Morrison, Senior Vice President and CFO, and Dan Fisher, Senior Vice President and COO of our global beverage business. I'll provide some introductory remarks. Dan will discuss the global beverage packaging performance and trends. Scott will discuss key financial metrics, and then we'll finish up with comments on our aerosol and aerospace businesses, as well as our outlook for the company. Second quarter results were strong, and candidly, came in stronger than we expected, which is just another proof point of the long-term resiliency of our various businesses. At a time that the world experienced the worst economic and social crises in our lifetimes, our second quarter and year-to-date comparable diluted earnings per share increased 2% and 12%, respectively, and were driven by our North and Central American beverage business, where improved commercial terms, better manufacturing performance, increased volumes, and the absence of metal scrap headwinds all contributed to a very strong quarter. Dan Fisher will elaborate more on our other beverage segments in a moment, but over the course of this quarter, sequential monthly improvement in each of our packaging segments improved from the lows we experienced in late May and early April. North American beverage can demand continues to outstrip supply, and despite the initial pandemic-related demand impact in Europe and South America, Demand in these regions has accelerated meaningfully since these regions began to reopen in mid-May, and our beverage can business in each region has sold out in advance of new capacity coming online. We are encouraged by the startups of our new lines in Fort Worth, Texas, and Rome, Georgia, and the rest of our growth projects around the world remain in good shape. During the quarter, global beverage volumes were down 3%, with low single-digit growth in North America, unable to offset weak volumes in April, and to a lesser extent May in both South America and EMEA. However, we did experience much stronger year-over-year growth in the month of June, about which Dan will elaborate more later. In our aerospace business, we continue to see strong growth with quarterly year-over-year revenues up 16% and our one-not-book backlog up 10% since first quarter 2020. We did experience, however, a $13 million reserve for the failure of a key subcontractor component and a large classified program that more than offset an otherwise strong quarter. We expect this to be a one-time event and believe our supplier and our program team have the issue isolated and under control. Other highlights in the quarter include our aluminum aerosol business was down slightly for the quarter after customers took anticipated downtime and increased demand for sanitizing sprays were unable to offset lower demand for deodorants. We continue to make progress on our aluminum aerosol manufacturing plant acquisition in Brazil. We expect this transaction to close in the third quarter. Construction and hiring for our first dedicated aluminum CUPS manufacturing facility remains on track. Despite the current fan attendance restrictions at major sporting, music, and other events, our outlook for 2021 is perhaps even a bit stronger than when we began the year as we have accelerated our retail go-to-market strategy with the signing of a number of various letters of intent executed with both retail partners as well as venue operators. Starting this fall, consumers will be able to purchase our cups on major online platforms, which will then feed into more presence in the physical stores as our production capabilities ramp up towards the end of this year. During the quarter, we announced our national partnerships with Acosta and Blue Ocean, thereby positioning the Ball Aluminum Cup for retail success. Across our businesses, year to date, we've hired over 1,000 new employees and invested approximately $450 million in growth projects that we and our investors will enjoy in the years ahead. Now, before I turn it over to Dan and Scott, I do want to give a big shout-out to all of our colleagues here at Ball for caring for one another and for living our culture. Your dedication and hard work to support our customers, our communities, and the global economies where we operate is second to none. In true Ball fashion, throughout this crisis, our company and employees have provided millions of dollars of financial support to over 300 organizations in the local communities in which we live and operate. At the same time, these same people were able to continue to execute successfully our strategy, grow our business, control the things we can control, and invest in our future. So a big thank you. In summary, Ball has adapted well to this new environment. Despite contractions in some of our markets early in the quarter, we exit the quarter with good momentum and are excited to bring additional capacity online as quickly and safely as possible and continue to believe that the overall strength of our businesses will allow us to grow operating earnings in the second half of this year and beyond. We also want to extend our well wishes to everyone, our customers, our suppliers, our first responders, our governments, and indeed all of our stakeholders for persevering through all of this And we wish all of you listening for your continued safety and good health. And with that, I'll turn it over to Dan.

Thanks, John. I also want to thank our employees, customers, and supply chain for their collaboration to maintain our industry's ability to serve consumer demand. In addition, our HR leadership and our environmental health and safety professionals continue to keep our Ball family safe and vigilant about our well-being as communities. offices and schools begin to open up. Looking forward and given the increasing demand for sustainable aluminum packaging, it is going to be an exciting beverage can market for the next several years. To bolster the growing demand for aluminum packaging and true circularity, we recently published our peer-reviewed life cycle assessments and biennial sustainability report. Visit ball.com backslash sustainability to to learn more about what Ball is doing to advance the circular economy in its operations and across our industries, while also supporting diversity and inclusion initiatives. As we discussed on the first quarter call, consumer behavior varies by region. In North America, consumers are able to access multiple shopping channels, stock up and store bulk packages of our products. In late March, this led to a surge in beverage can demand, as those occasions that occurred and the on-premise and convenience channels shifted to the at-home or off-premise channels. Following March volumes being up 12%, April slowed a bit, then returned to single-digit growth in May and June. Demand has continued to outpace supply, and inventory levels are low. In particular, year-to-date through July, we have seen IRA can demand in the non-alcoholic category growing 11%, Domestic beer up 4%. That includes up 13% in the second quarter. Craft growth of 20%. And FMBs up in the range of 80% to 90%. As we look forward, we are thankful that our new line in Fort Worth started up a couple weeks ago and that our new Rome, Georgia beverage can line is on track to start up next week. In advance of those lines and our two new plants coming online in early 2021 for Glendale, Arizona, and in mid-2021 for our Northeastern plant. Our global plant network outside of the US will supply additional cans when possible. For the full year, we anticipate North America beverage can growth of at least 4%, with half of that growth coming from inventory drawdown and imports. In EMEA, segment volume was down nearly 8% for the quarter as borders remained closed, tourism was restricted, and shopping hours were limited across many countries through much of the quarter. During the quarter, strength in the U.K. and Russia were unable to offset softer demand in southern Europe, Egypt, and Turkey. Across Ball's EMEA business, demand trends improved late in the quarter, with April volumes down 11%, May volumes down 16%, and then June volumes up 4%. This positive momentum continued into July with volumes up mid-single digits. Additional capital projects across Europe continue, and we foresee European beverage can volumes up low single digits in 2020. In South America, after seeing a nearly 60% decrease in Brazilian can shipments in April due to the temporary closing of smaller grocery stores, gas stations, and convenience stores, our demand rebounded sharply, up 7% in May, and the progress continued in June with volumes up nearly 40%. Beverage cans have been very resilient, with store owners leveraging recyclable aluminum cans over other substrates. Exiting the second quarter, package mix for beer on the shelf was 70% cans versus a rate of 50% at the end of the first quarter, 2020. Following discussions with customers, we anticipate can mix on the shelf remaining high beyond 2020, and we intend to move forward with previously discussed line additions in Brazil. From a segment operating performance perspective, Ball's North American segment earnings were up 34%. More equitable customer contracts, operational improvements, and volume growth benefited the quarter. Partially offsetting this were hiring costs associated with the new manufacturing lines ramping up in the second half of 2020 and unfavorable mix associated with certain can sizes sold through the convenience store channel. Our initial plans to add 6 billion units of capacity in our North American business by the end of 2021 have been adjusted upward following recent contract discussions. We perceive fully scaling out our new facilities in Arizona and the northeastern U.S. sooner rather than later. As of today, our capital growth projects are on track and earnings growth is expected to continue across North America in 2020 and beyond. In our EMEA segment, negative demand trends resulting from the pandemic, lower absorption, and FX headwinds pressured segment results for the quarter. our EMEA teams close to the customer approach and support from our North American business positions, the business for strong second half performance. Turning to South American segment, second quarter earnings were down primarily driven by the abrupt contraction in Brazilian demand early in the first half of the quarter, which led to lower absorption over multiple weeks. Similar to our EMEA segments, our team's close-to-our-customers approach will bolster second half results. In our other non-reportable results, the company's Myanmar, Indian, and Saudi beverage can manufacturing results continue to be dampened by production downtime. In addition, other includes an annual 20 million P&L investment to stand up our aluminum cup business. As John referenced earlier, we are on track with our aluminum cup plant construction and our push into retail is picking up steam. In summary, global beverage can demand was very resilient during the second quarter, and momentum is building for the third quarter and beyond. Thank you again to all of our teams around the globe. 2020 has provided us all with unprecedented challenges, and you've risen to the occasion time and time again. Your leadership has been nothing short of remarkable. Keep it up and stay safe. With that, I'll turn it over to Scott.