Ball Corporation

Greetings and welcome to the Ball Corporation third quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll 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, November 4th, 2021. I would now like to turn the conference over to John Hayes. Please go ahead.

Great. Thank you, Dina. Good morning, everyone. This is Ball Corporation's conference call regarding the company's third quarter 2021 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 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 Dan Fisher, our president, and Scott Morrison, our executive vice president and chief financial officer. I'll provide some introductory remarks. Dan will discuss packaging and aerospace performance and trends. Scott will discuss key financial metrics, and then I'll finish up with comments on our outlook for the company. Ball Corporation finished the quarter in a strong position despite challenging year-over-year comparable results from the economic recovery this time last year, continued supply chain disruptions, and inflationary pressures that are being experienced in the rest of the manufacturing world. For the quarter, we generated comparable operating earnings of $417 million, which was flat against prior year and up 13% from 2019, while generating comparable diluted earnings per share of $0.94, up 6% versus the prior year and 34% over 2019. Underlying demand for our products remained strong. Ship volumes in the quarter were up 1% in North and Central America, where we dealt with freight and supply disruptions while simultaneously deliberately building back our inventories. In EMEA, volumes were up 4% driven by continued package mix shifts. And in South America, volumes were down mid-teens percent largely due to a difficult year-over-year comparable as South America ramped up significantly in the third quarter of 2020 after being largely shut down during the second quarter of 2020. As we look forward, we expect year-over-year growth to accelerate further with strong expectations in the fourth quarter and going forward. Dan will elaborate more in his comments and will also focus on providing more detail by segment. During the third quarter, we began absorbing the impact of global supply chain hardship clauses being triggered by some of our suppliers for the first time in decades, while also weathering the impact of indirect supply chain disruptions with certain materials, dunnage, freight, and transportation at our customers' locations. Though we have existing mechanisms in our contracts to recoup certain costs, and are confident in our ability to recoup such costs over time. At the moment, these mechanisms are not sufficient in the current environment, and as a result, we are implementing a comprehensive commercial cost recovery plan to cover unprecedented excessive costs outside of our normal customer engagements. Our commercial teams have begun discussions with our customers on a case-by-case basis the need for such cost recovery efforts if we are to continue to invest alongside the growth of our customers and partners. In conjunction with our commercial cost recovery plan, we'll also leverage existing contractual terms and conditions to recoup higher input costs in future periods in both our packaging and aerospace businesses. Despite this, our five-year growth and profitability outlook that we discussed a year ago at our investor day remains intact, and we are very excited about our trajectory going into 2020. Demand for our products and technologies continues to outstrip supply, and our new facility startups are all on track or better relative to our plans, which will both lead to significant growth in long-term diluted earnings per share, EVA dollars, cash from operations, and return of value to our shareholders over the foreseeable future. Other third quarter 2021 highlights include our global beverage can business completing the startup of six lines, including four in North America, one in EMEA, and one in South America, and announcing two additional green fields in Nevada and North Carolina. Our global aerosol, aluminum aerosol volumes up 15%. Our CUPS team signing new contracts with the world's largest retailer and a major food service distribution and hospitality partner. Our aerospace team opening its state-of-the-art payload development facility in Broomfield, Colorado, expanding our aerospace manufacturing center in Westminster, Colorado, as well as successfully launching the ball-built OLI land imaging instrument on NASA's Landsat 9 satellite. Our North American and South American aluminum packaging business is continuing progress on the respective aluminum stewardship initiative certifications following EMEA's ASI certification last year. Our business has hired over 2,000 people net year-to-date to support our long-term growth. We successfully raised $850 million in a 10-year bond offering at 3.8%. Our board declaring a quarterly dividend of 20 cents and electing Dr. Dune Ives to our board, who will bring a wealth of experience and knowledge as we proactively position our products to be the most sustainable in their respective categories. And in 2021, continuing to be on track to return $1 billion to shareholders while deploying in excess of $1.5 billion in the EVA accretive growth capital investments while generating earnings per share growth over time of at least 10% to 15%. In summary, despite near-term headwinds, Ball continues to operate from a position of strength. Our team is executing at a high level and ready to take our performance to the next level. To all of our global employees, customers, and suppliers, thank you for your hard work, for staying safe, and for navigating unprecedented supply chain disruptions. Collectively, we are working to regain efficiencies, recover costs, and deliver long-term value to stakeholders. And with that, I'll turn it over to our president, Dan Fisher. Dan?

Thanks, John. I echo your thanks to our employees, customers, and suppliers. We strive to keep our teams safe, and to everyone listening, we strongly encourage vaccination and boosters. As John mentioned, the global operations, commercial, and procurement teams are are managing accelerated growth, large-scale capacity additions, while navigating unprecedented supply chain disruptions. These impacts are largely outside of Ball's control and include steep supplier cost pass-throughs beyond normal levels. Ultimately, the compounding effect of labor and trucking shortages outside of Ball has impacted our operational efficiencies, customers' production and filling operations, as well as retailers' efficiency stocking store shelves, the degree of which varies greatly by region. Given the scale of costs being passed on to us, and as John mentioned earlier, we are beginning conversations towards implementing the additional commercial cost recovery program. Our aerospace and aluminum packaging businesses delivered a tremendous amount of value amid current conditions. Third quarter single digit volume growth in North America in EMEA aluminum beverage packaging was offset by double digit volume declines in South America due to tough year over year comps of 30% growth in third quarter 2020, largely due to the timing effects of COVID in South America versus third quarter 2019 demand. Our retail marketing investments in cups continues and supports additional food service launches at stadiums and venues continues across the U.S. The Ball Aluminum Cup will begin an initial rollout at a major retailer during the fourth quarter and a new contract with a leading global food service and hospitality company that will further broaden the Cup's presence at stadiums and venues. Our aerospace team brought online new infrastructure investments on time and on budget and supported the successful launch of OLI aboard the Landsat 9 spacecraft. complementing our legacy of value-added earth imaging science. Demand for aluminum beverage cans continues to outstrip supply around the globe. We remain on track to exit 2021 with an additional 12 billion units of new installed capacity. We also recently announced additional domestic projects, all of which underscore our Investor Day commentary. To all the teams listening, I know it's been challenging to keep up with the growth, keep your heads held high, and focus on basic blocking and tackling. We have the contracts, we have the raw materials, we have the equipment, and we have each other. We also continue to make significant progress in operationalizing and commercializing sustainability and driving our D&I goals. Our operations in South America and North America are on track to achieve ASI certification by year-end 2021. We launched Brazil's first circular economy lab in October. and we continue to finalize our steps to achieve to become carbon neutral prior to 2050 after publicly stating our intent to achieve such goal. As we discussed throughout 2021, growth isn't always linear. Given our year-to-date global beverage shipment growth of 7% and recent supply chain dynamics, we are on course to achieve high single-digit global volume growth and global specialty mix in excess of 50% for full year 2021. We continue to see annual growth rates in excess of 6% for the foreseeable future. Ball is well positioned to capture growth given our timely execution on new capacity additions and our established scale and innovation in the world's largest can regions. Now a few brief comments on each region. In North America of average, third quarter ship volumes were up 1% versus 2020 and up 7.4% versus 2019. During the quarter, Earnings were down as volume growth was offset by the combined effect of inflationary cost increases from suppliers above current cost recovery provisions. Project startup costs and operational inefficiencies in legacy plants brought about by unsustainably low inventory and indirect supply chain disruptions. Glendale and Pitson successfully started up additional lines during the quarter. Both plants will exit 2021 with four can manufacturing lines installed and our Bowling Green ENDS manufacturing plant started up successfully in early October. In the near term, the work to build adequate inventory levels is ongoing. These actions and cost recovery will further position the business for success in 2022. Following the successful on-time startups of Glendale, Pitson, and Bowling Green, Ball has announced two new greenfield plants in Nevada and North Carolina. Both are supported by long-duration contracts with strategic global customers. We are excited to invest alongside our customers and anticipate these facilities coming online in late 2022 and 2024, respectively. Lastly, I would be remiss not to acknowledge and thank Colin Gillis, who is retiring from Ball, for his 48 years of dedication to the company and our industry. We wish him well. Kathleen Petrie, who many of you know, was our chief commercial and sustainability officer in our global beverage business, will do a great job in leading this business in the future. In EMEA, segment ship volume for the third quarter was up 4% versus 2020 on tougher comps given prior year's volume increases due to COVID reopening timing and were also up due to customers adding new can filling investments. Versus third quarter 2019, Volumes were up 10.7%. Across Ball's EMEA business, demand trends and positive momentum continues. Year-to-date, our can volumes in EMEA are up 9%. Ongoing high single-digit growth will be driven by new and existing categories utilizing cans and our new greenfield plants in the UK, Russia, and Czech Republic, which are supported by long duration contracts for committed volumes with global and regional key partners. Our EMEA team is executing very well and managing complex country by country supply chain issues. In South America, third quarter volumes were down, upper teens percent versus 2020 and up high single digits percent versus 2019. 2020 volumes were up 30% versus third quarter 2019 due to timing effects related to COVID. Cooler than normal seasonal temperatures in the first two months of the third quarter this year and weather damage sustained to our extrema facility contributed to lower year-over-year volumes. With unseasonably cold temperatures and the facility disruption largely behind us, October volumes recovered and were up 5%. We continue to see more earnings upside in South America in 2022 and beyond. The Frutal Brazil plant started up its first line earlier this month and anticipates starting up its second line in early 2022. Additional investments throughout the region are also on schedule. As we enter the busy summer selling season and given the nice volume bounce back in October, we anticipate double-digit can growth for the full year and additional growth will be possible once we have more capacity online. In summary, our global beverage team is preparing for long-term durable growth while managing volatility and costs across our supply chain. No doubt money was left on the table. We are laser-focused on operating safely, controlling the things we can control, recovering costs, and delivering high-quality cans to our customers from new and existing facilities supported by equitable contracts. Our aluminum aerosol team did a good job supplying growth across EMEA, Mexico, and Brazil, resulting in 15% higher volumes in the third quarter globally versus 2020 and 5% higher volume versus 2019 for the same period. The team continues to manage varying degrees of reopening status in Brazil and India. In addition, the business continues to expand the rollout of refillable, reclosable aluminum personal care and bottle packaging across multiple categories. To support the new CUPS contracts I mentioned earlier, we have increased marketing investments and are adding another cup manufacturing line in our Rome, Georgia CUPS plant. Following this investment, both lines will be capable of making multiple cup sizes. Turning to profitability, we anticipate 2021 Total investment cost in the Cup business will be in the range of $45 million, and we expect the business turning to profit in 2022. Turning to aerospace, the team continued to win contracts and maintain record backlog. The operating earnings were up in the quarter and included the impact of rate adjustments on fixed price contracts. This business continues to be positioned sales and earnings growth in 2021, and margin improvement beyond 2021, given contract mix. Across all of our operations, we are actively investing in the businesses to deliver on strong demand and grow and train our labor base while also effectively managing supply chain disruptions, recovering costs, achieving returns on capital employed, nurturing our culture, and delivering shareholder value. We appreciate all of the amazing work being done across the organization. And with that, I'll turn it over to Scott.