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spk12: Greetings and welcome to the Ebal Corporation first quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question and answer session. At that time, if you would like to register for a question at any time during the presentation, you may press 1 followed by the 4. If you require operator assistance at any time, you may press star 0. As a reminder, this conference is being recorded today, Thursday, May 6, 2021. It is now my pleasure to turn the conference over to John Hayes, Chief Executive Officer. Please go ahead, Mr. Hayes.
spk03: Great. Thank you, France, and good morning, everyone. This is Ball Corporation's conference call regarding the company's first 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. Now, 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. First, let me begin by thanking our employees. Together, we are working safely and executing at a high level in preparation for even more growth. Thank you for taking care of one another and living the ball culture day in and day out. I also want to thank our customers, suppliers, and their employees. Collectively, we are successfully navigating pandemic-related restrictions in certain regions, post-vaccine reopenings in other regions, supply shortages and disruptions across the entirety of our supply chains, and investing in growth brands, sustainable aluminum packaging, and scientific discovery. The past 15 months have further showcased the resiliency of our industries as well as our ability to communicate and manage appropriately to serve growing consumer and customer demand. 2021 is off to a strong start with comparable diluted earnings per share up 18%, comparable operating earnings up 12%, and global beverage volumes up 8%, despite a couple of disruptions in North and Central America beverage and aerospace that were outside of our control. Momentum continues across our global beverage businesses. Project execution is high, aerospace backlog is solid, and hiring continues at a robust pace, all of which will fuel long-term shareholder value creation. Even though we left a little on the table in the first quarter, nothing has changed about our prospects. In fact, we have an even greater conviction in our ability to significantly grow diluted earnings per share, EVA dollars, cash from operations, and return of value to shareholders in 2021 and beyond. Scott will discuss this more later on. First quarter 2021 highlights include our global beverage market, business completing the startup of four new lines and the speed-up of numerous others around the world. Our aluminum aerosol business successfully integrating the Brazil aluminum aerosol plant acquisition. Our CUPS team executing national distribution of the Ball Aluminum Cup at seven out of the ten largest U.S. food and beverage retailers late in the quarter. Our aerospace team continued to successfully test key instruments and win NASA contracts and study programs. and our businesses hired nearly 1,000 people net in the quarter to support our long-term growth. We continue to put our shoulders into the areas of sustainability and real circularity to ensure that aluminum beverage packaging continues to be the most sustainable package in the world. As many know, and you will hear us speak endlessly about, aluminum beverage cans already contain, on average, more than 70% recycled content, which is multiples above any other beverage package. During the quarter, we launched the first ASI-certified can in EMEA, and Ball commissioned UNOMIA to produce the first U.S. state-by-state comparable assessment of recycling rates for common containers and packaging materials. Please visit our website at ball.com backslash realcircularity to view our recently published 50 States of Recycling Report. As state and federal lawmakers consider recycling legislation, and infrastructure investment. It's important for everyone to understand what is working and what is not when it comes to recycling in the U.S. And as an industry leader, we believe with good data, smart policies, and infrastructure investment, the U.S. can be a leader in the global circular economy. Aluminum packaging is economically advantaged, properly designed, and as mentioned, offers the highest recycled content beverage solutions available to our customers today. Increasing U.S. and global recycling rates will only accelerate growth for aluminum packaging versus other substrates and promote a truly circular economy. So in summary, Ball is operating from a position of strength. Our future is very bright, and our time is now. To everyone listening, best wishes to you and your family for good health and continued safety. And with that, I'll turn it over to our new president, Dan Fisher.
spk02: Dan? Thanks, John.
spk17: I echo your thanks to our employees, customers, and suppliers. Our global HR, environmental health, and safety professionals, and our own personal actions continue to keep our team safe and vigilant. As John mentioned, it was a very rewarding start to the year. The teams are doing a great job managing accelerated growth, large-scale capacity additions, and a few curveballs along the way. We're exiting the first quarter with a lot of momentum and will continue to see strong performance throughout 2021. In addition to global beverage volumes being up 8%, specialty mix increased above 49%, up from 46% at year-end 2020. An ongoing strength in EMEA and South America beverage more than offset the winter storm impact in North America beverage. Accelerated marketing investments for our retail cup launch and COVID-induced subcontractor costs in aerospace. Demand for aluminum beverage cans continues to outstrip supply around the globe, despite Ball exiting 2020 with 7 billion units of additional installed capacity. We continue to be sold out and look forward to bringing more projects online. Our global engineering and operations teams are executing at a high level, and we anticipate exiting 2021 with an additional 12 billion units of new installed capacity, all of which underscores our Investor Day commentary Cans are in high demand, contracts are in place, and Ball is well on its way to installing at least 25 billion units of global capacity by year end 2023. That's off of a base of 100 billion in 2019. Our focus on speed to market, talent, training, systems, supply chain, and operational readiness is paying off as we continue to ramp up new capacity on time and on budget. To all the teams listening, our time is now, and you are making this happen. Keep up the great work. We continue to secure new customer and supply chain contracts, as well as properly aligned talent resources for the future. As John mentioned, we have hired an additional 1,000 colleagues year to date, with the majority of them located in the United States. Training and development and immersion into the ball culture is a vital part of our day-to-day work. Can demand across all beverage categories is strong. Our focus on improving customer experience is bearing fruit. Online tools like the Source, transparent customer communication, and even more can availability will continue to aid that trend. We also continue to make significant progress in operationalizing sustainability. I'm proud to say that in addition to our EMEA segment achieving ASI certification in 2020, Our operations in South America and North America are on track to achieve ASI certification by year-end 2021. In addition, last week we recognized the 2020 Hoover Sustainability Award global winners. We commend all of our global colleagues and our global supply chain for their commitment to our sustainability journey. As we discussed throughout 2020, growth in our global beverage business is accelerating, and our product portfolio continues to support our customers' new brands, as well as broaden the addressable market for aluminum cans, bottles, and cups. Given market characteristics and our project execution, I'm very positive about our ability to achieve our goals and deliver low double-digit global volume growth and global specialty mix in excess of 50% in 2021. We continue to see the global industry growing at an annual rate in excess of 6% for the foreseeable future. As a reminder for those of you newer to the industry, that is 2x the historical CAGR and puts the industry on track to grow at least 100 billion units by 2025. Ball is well positioned to capture at least 45 billion units of that growth, given our scale and innovation in the world's largest can markets. Looking out, contractual terms and conditions are favorable and longstanding pass-through mechanisms for aluminum and other items are in place. These include our lift customer terms and conditions that will enable us to ensure full pass-through as inflation begins to ramp up. And as we said on last quarter's earnings, now we execute, execute, execute. Now a few comments on each region. In North America, beverage first quarter volumes were up 6% and specialty mix improved to 37%. During the quarter, earnings were down slightly due to the combined effect of project startup costs and lost production from winter storms, more than offsetting the benefit of improved volume and mix. We anticipate both our Glendale and Pitson facilities to exit 2021 with four can manufacturing lines installed and our Bowling Green Inns manufacturing plant will pull forward its startup to the fourth quarter of 2021. Across the customer base, beverage can demand is strong across all brand categories. Alcohol, soft drinks, energy, and water. We expect this favorable trend to continue and will support additional EVA enhancing opportunities to align with long duration contracts. As we have discussed on prior calls, Given three plants coming online in North America, full-year startup costs are expected to be in the range of $50 million. The impacts of these costs will be weighted more in the first half. In EMEA, segment volume for the first quarter was up 5% and specialty mix was 54%. Across Ball's EMEA business, demand trends and positive momentum continues. We foresee European beverage can volumes up mid-single digits throughout 2021 and beyond. Future growth will be driven by new and existing categories utilizing cans and additional regional plant opportunities emerging to fulfill market demand in the biggest can markets across EMEA. In South America, first quarter volumes were up 14% and specialty mix increased to nearly 68%. despite only 80% to 85% of delivery channels being open during the recent resurgence of the virus. We continue to see more upside in South America, and the Fruitall Brazil plant, as well as other projects, are progressing very well. We are also anticipating further investments both in Brazil and throughout the region. Similar to our prior commentary, we anticipate can growth in the mid-to-high teens and can mix on the shelf returning to even higher levels beyond 2020 once we have more capacity online. In summary, our global beverage team did an amazing job navigating some uncontrollables during the quarter while also executing at a high level on the things we can control. Sticking with aluminum packaging, our aluminum aerosol team did a stellar job managing costs and preparing for reopenings, lifting, deodorant, and personal care demand. Both earnings and volume increased slightly in the quarter, and the team continues to amplify the sustainability credentials of our extruded aluminum bottles to deliver innovation across multiple brand categories. Our CUPS team continue to execute and prepare for an exciting 2021. In addition to the retail launch John mentioned, the team recently kicked off The Party Starts Here marketing campaign to engage and educate consumers preparing for a summer filled with infinitely recyclable aluminum cups. We will continue to invest marketing dollars behind the cups retail launch in 2021 and expect our cups business to return a profit starting in 2022. Turning to aerospace, the team continued to win contracts during the quarter, including building the spacecraft for NASA's Heliophysics Glide mission, which will study Earth's exosphere, which is where Earth's atmosphere touches space. The GLIDE spacecraft and NOAA's Space Weather Follow-On spacecraft, also being built by Ball, and will study solar winds and forecast solar weather, will launch together in the future. The aerospace business also dealt with transitory costs due to a first-quarter subcontractor rate adjustment associated with the National Defense Contract and inefficiencies brought about by the current COVID environment. This rate adjustment does not impede the near or long-term growth prospects for the business. I'm happy to address any of those questions during Q&A. Our team also executed on new infrastructure, completed critical testing on multiple instruments, won new study programs, and backlog remains solid. We continue to be very excited about the business and appreciate all of the amazing work being done by the aerospace team. With that, I'll turn it over to Scott.
spk16: Thanks, Dan. Comparable first quarter 2021 diluted earnings per share were 72 cents versus 61 cents in 2020, an increase of 18%. First quarter comparable diluted earnings per share reflects strong global beverage results, favorable FX, lower interest expense, and a lower effective tax rate, offset by previously discussed higher year-over-year corporate, labor, and startup costs to support business growth and marketing costs to drive the Aluminum Cup launch. Ball's balance sheet is very healthy with ample liquidity and flexibility. As we sit here today, some additional key metrics to keep in mind for 2021. Our full-year effective tax rate on comparable earnings will now be in the range of 18%. Full-year interest expense will be in the range of $275 million. And full-year corporate undistributed costs recorded in other non-reportable are now expected to be in the range of $90 million. We continue to see a path to doubling our cash from operations by 2025. Our 2021 cash from operations will grow in line with the earnings trajectory and be aided by a source in working capital. We expect 2021 total CapEx to exceed $1.5 billion and returns on capital beyond our 9% after-tax hurdle rate will follow through as new growth capital products become operational later in the year and in the years to come. Ball continues to be good stewards of our cash and as fellow owners, and in alignment with our EVA discipline, will prudently balance real-time growth opportunities with consistent return of value to our shareholders via dividends and share repurchases. Given the first quarter's strength and approaching our net leverage target range as we progress through 2021, I see returning that value in a more meaningful way sooner rather than later. With that, I'll turn it back to you, John.
spk03: Great. Thanks, Scott, and thanks, Dan. In summary, our Drive for 10 vision serves us very well, whether it be broadening our geographic expansion, developing new customers, markets, and products, and doing so with a commitment to being close to our customers and with uncompromising integrity. Following our strong first quarter results and outlook for the remainder of the year, we are even better positioned to exceed our comparable diluted earnings per share long-term goal of 10% to 15% and exceed our EVA dollar growth goals of 4% to 8% per year in 2021 and beyond. We will work together to do everything possible to work safely, execute on capital investments, drive the circular economy, and generate significant earnings, cash, EVA, and value for our shareholders. And with that, France, we're ready for questions.
spk12: Thank you. If you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw, you may press the 1 and 3. Once again, you may press 1-4 to register. Our first question from the line of Adam Samuelson with Goldman Sachs. Please go ahead.
spk06: Yes, thank you. Good morning, everyone. Morning. Morning. Morning. I was hoping maybe a little bit more color on some of the capacity additions. I believe in the pair of the marks you alluded to, $12 billion unit incremental capacity ending 21 versus 20. I'm just trying to make sure we think and think about the phasing properly of that in terms of how much actually benefits 21 volume growth versus how much is carryover and incremental growth in 22. And if you could just help us think about incremental capacity that you're looking at for how should we think about exiting 22 into 23 just from the phasing of the incremental projects that you're looking at?
spk17: Sure. Maybe just to restate where we ended, 2020 obviously sold out, sold 105 billion cans. Exited 2020 with installing an additional 7 billion referenced in the script today that we plan on exiting 2021 with an additional 12 on top of that. So you're getting to obviously that 19 billion range on top of the 105. And then we clearly are thinking about additional plan projects in 2022. It's a little early for me to speculate on the speed and the rate with which we're adding in 2022. There's still an awful lot of challenges, as you can imagine, in South America with COVID and in Central Europe with COVID. We've got line of sight, as I've indicated, to add $25 billion off of a base in 2019 by 2023. We can still execute against that. It's just timing as it relates to what we've already put in place and what we're executing on that I will continue to inform you as we get further along in the year and as we are able to get our engineers transported from location to location.
spk06: Got it. That's really helpful. And I'm going to have a quick follow-up just on the quarter. Some of the discrete items in terms of startup cost or winter storm impact or some of the supply chain items in aerospace, any way to specifically quantify those as we think about those not necessarily repeating in 22?
spk16: Yeah, this is Scott. In the North and Central America businesses where we felt most of that, I think the storm costs were $10 million plus and startup costs of about $12 million in the quarter. And then we spent an additional incremental probably $4 million over what we were planning to spend in CUPS as we ramp up that national retail launch. And then the aerospace impact was probably in the range of $7 million in total.
spk06: Perfect. That's really helpful. Thank you. I'll pass it on.
spk12: Our next question is from Kyle White with Deutsche Bank. Please go ahead with your question.
spk15: Hey, good morning. Thanks for the question. Or thanks for taking my question. After the Glendale and Piston plants are up and running, do you envision still needing to kind of import cans into the U.S. to meet this kind of elevated demand that we're seeing?
spk17: I do for 2022. It looks like, you know, latest forecast, what we're seeing, there'll be a modicum of import cans still for our customers. If they continue to if demand profiles continue in line with our expectations. Nowhere near the size and the scale that we dealt with here over the last couple years, but there will still be an oversold element heading into 2022, even with all the capacity that I indicated.
spk15: Got it. And then just going to Brazil and South America, you know, you touched on it a little bit. Demand seems healthy there despite only 80% to 85% of the retail channels being open. Are you seeing any impact at all from the kind of rise in COVID cases down there? Any impact on operations or volumes? And then maybe just touch on kind of your capacity situation there, understanding that you have the new plan coming on later this year. But just given the growth profile there, I imagine you'll still be constrained even after that comes up.
spk17: Yeah, we're running at – I'll answer the back half of those questions first. We're running at extraordinarily low inventory levels today. Can penetration in the market for Q1 was actually lower than on average what it was all of last year and even the year before, and that's because there's just not enough cans. And so even with the capacity ads that I'm talking about in South America, we're going to be incredibly tight in that region for the foreseeable future. A lot of it is underpinned by returnable glass shifting into cans. So if you reference back to my comments in the script, we're definitely looking into a series of further investments across that region as long as the demand profiles and the contracts look right. We have not had a lot of disruption, and I give our teams a tremendous amount of credit. This time a year ago was challenging in kind of the Amazon region, but since then, We haven't lost much in terms of production, and we've had some – the stories are incredible, as you can imagine, in terms of what's happening with extended families and loved ones. And that has been – the mental aspect of our employee base has been probably more challenging than getting people physically to work in a healthy environment. Obviously, these things can change. with new variants showing up, but it's been a pretty resilient bunch down there. We really haven't seen much of an impact, and, you know, knock on wood, we'll continue to manage this incredibly effective moving forward.
spk15: Got it. Thank you. Good luck in the quarter. Thank you.
spk12: Our next question is from the line of Anthony Petaneri with Citi. Please go ahead.
spk05: Good morning. Good morning. In North America, understanding that you're running full and sold out, we saw this massive consumer stockpiling in the U.S. in March, April last year as we went into lockdown. As you anniversaried those comps, did you see any impact or any change in terms of customer behavior or mix or offsets from recovery and on-premise? I'm just trying to understand how a summer reopening in the U.S. this year impacts your North American business.
spk17: Yeah, there's a lot to unwrap there. A lot of open-ended questions, too, that we're trying to pay attention to if I just take the on-premise, off-premise. One thing that we've seen over the last 15 months is there's been a number of customers that have really leaned into the direct channel, the e-commerce channel. That certainly benefited us. I don't think that's going to suddenly turn off. Folks are going to continue to – everyone's dealing with comprehending flex schedules so a couple days more a week at home versus in the office that all benefits cans so there's room for optimism at least with our substrate that you know there's been a shift a secular shift for the long term and I think that's here, and I think that is here for the long term.
spk03: I do think, though, in the month of April, you know, it was kind of interesting because that was the month of year-over-year comparables. And what we saw was overall liquid volume on the alcohol side was down a little bit. Cans were actually up a smidge in that, meaning cans were taking share. And on the soft drink side, or the non-alcoholic side, non-alcoholic liquid volume was up And the cans were up as well. So, you know, not by huge amounts, but, you know, people I think were expecting a big decline. And obviously, when you look week to week, there's big swings. But if you look over the past month, so to speak, those are the kind of trends we've been seeing.
spk05: Okay, that's very helpful, caller. And then, you know, you talked about COVID protocols hindering, you know, aerospace, I think in 4Q as well. has aerospace been impacted more by, you know, COVID and COVID protocols more than Bev and aerosol, you know, relative to your expectations? Is that fair to say? And then, you know, does that sort of temper growth expectations for aerospace over the next couple of quarters or maybe things are easing just any, any additional detail you can give there?
spk17: Sure. I can give you a little color here. I think moving forward, I think we're in a far better place than candidly we've experienced the last six to nine months. Keep in mind that, historically, and the type of work we do, much of it being classified, folks need to be on site in order to do the work. And so our aerospace business of roughly 5,000 employees today, you would see 80% of those folks would be on site. And if you go back to the end of Q3, beginning of Q4, it was more in the 35% to 40% range. We've begun to transition now. In the last couple weeks, we've seen north of 60% on-site, and that's continuing to build as folks get vaccinated, and CDC guidelines are allowing us to bring more folks in-house. So we should see productivity benefits, not just for us, but the entire supply chain, which has been disrupted because of this. So we're feeling bullish about, you know, this quarter and the back half of the year and returning to some sense of normalcy for that business and increasing productivity and efficiency. So hopefully that gives you some additional color on kind of what we've been up against.
spk05: No, that's very helpful. I'll turn it over.
spk12: Our next question is from Gunsham Punjabi with Bayard. Please go ahead.
spk10: Thank you. Good morning, everybody. Maybe, Dan, just following up on the earlier questions, with the Texas weather disruption from February and you're running quite lean on inventories to begin with, just given the nature of the growth in the U.S. over the past few quarters, how have you managed to flex your production as you gear up for the summer season from an inventory standpoint in the U.S.?
spk17: Yeah, you're hitting on a great point and something that we're going to candidly have to figure out and grind through. We're in peak season. We've been oversold for two years. We're at historically low inventory levels. We have an incredibly tight supply chain. Our teams are doing things and trying things and trying to be as transparent as we possibly can with customers. The one thing we can do is try to lock in, candidly, a production plan for the balance of the year and try to stick with it as best we can. That gives our plants the best chance of success. Any alterations, any changes to that are going to put us in very close to a make-to-order environment, which will be challenging. I think our teams are up for it. We do have capacity coming online, which I've commented on. Those are coming online right in line with our expectations. That will give us some modicum of relief. But, yeah, our customers are gearing up for a big peak season. They're taking every can we can possibly get. There's a lot of importation happening right now, and it's just going to be tight for the summer. You know, the first quarter did not set us up for – the most optimal scenario heading into the second quarter in North America.
spk10: For sure. And then, you know, almost every inflation cycle over the years, you know, the beverage can industry has, you know, found some level of weakness in their contracts, whether it's freight pass through or aluminum premiums or whatever else there was, just given the nature of this particular inflation cycle, just how ferocious things have been in terms of cost increases and, you know, maybe even wages at this point. How are your contracts holding up? And is there any risk in terms of incremental margins that we should be thinking about as we progress the next few quarters specific to the ferocity of the inflation curve right now?
spk17: The contracts are, you know, if you look three years ago to today, we've commented on it several times. You've been following us for a while. They're much better. We're in a much better space. The downside is the downside that's always been in our business, and it's the self-induced inefficiencies in our distribution channel. So the more touch points we have in the supply chain, that's not embedded in the cost to serve and the cost to deliver to our customers. Those aren't pass-through elements. It's a minimal amount, but as you said, the amount of inflation that we're experiencing, especially on freight, there could be some dollars tied up in there that aren't tied to pass-through.
spk10: Got it. Thanks so much.
spk12: Our next question is from the line of Mike Leathead with Barclays. Please go ahead.
spk09: Great. Thanks. Good morning, guys. First question, just on growth investment. I think you moved forward the expected timing of the ENDS plant in North America this quarter, and it seems like broadly... your growth projects are coming at a larger accelerated clip versus maybe what you laid out for us six months ago at your investor day. So I'm just curious what you'd attribute that to, whether it's greater customer demand, better project win rate, better execution, maybe it's all of the above, but just trying to get a sense of what's driving the real acceleration and growth investment there.
spk16: I think all of the above, really. I mean, the customer demand is not waning in any way. In fact, it continues to firm up. I think our execution is getting better. I think, you know, you look at North America, the ramp up of these two new facilities has been better than expected. So I think we're getting better at all of that. And the opportunities, frankly, if we can pull them forward and get these things running faster, we'll like it better.
spk03: Yeah, and just a case in point on that is talk about the new hires we've had. Over the last 18 months or so, probably in the beverage camp business, I'll put aerospace aside, we probably hired over 3,000 people. That is unprecedented in our business relative to what we have done in the past. We've talked a lot about these quote-unquote startup costs. It's really training costs at the end of the day. If you recall three, four, five years ago, the lessons learned were some of the footfalls we had in terms of our startups is we didn't bring people on early enough and we didn't give them a chance to succeed from day one. We've been accelerating the hiring process and training and development of those people six months prior to what we would have done a couple years ago. And I think, to Scott's point, we've been executing quite well as we're starting up these plants, and I think we're giving them a better shot at success.
spk17: Maybe one additional comment. I did indicate that the end plant in Bowling Green, we were thinking, you know, earmarking a Q1 startup. What we're talking about is three, four weeks earlier that it falls into the Q4. Scott hasn't come off and we haven't come off our startup costs. There's negligible change or our capital spend for the year. So this is really, we've already had those costs and the capital outlays embedded. This is just recognition that the teams are executing. They're executing a little better than we anticipated, moves inside the fiscal year. And hopefully that means candidly fewer imports on ends heading into next year.
spk09: Great. That's really helpful, Cutler. And then your second question, when you talk about Glendale and the Fitston facilities, I think you've highlighted that they're both going to have four operational lines by the end of next year, which is already quite large. But you also noted that they are able to add incremental capacity from there. So I guess, could you maybe just touch on how much further you're able to scale these facilities? Is it another one line, two lines? And just given the way you've structured these facilities, would the incremental line costs be relatively similar or better versus, I don't know, say a ball plant five years ago where you might have added a second or third line? Thanks.
spk17: Yeah, I would look at it in terms of incremental output on kind of a mega line concept. So you would get additional capacity. on the existing infrastructure, but we can scale the lines within the footprint. And so we can do it much faster and much cheaper than had we taken a historical approach to it.
spk12: Our next question is from Arun Viswanathan from RBC Capital Markets. Please go ahead.
spk01: Great. Thanks for taking my question. I was hoping we could maybe put a finer point on the EBITDA progression or EBIT, you know, however you want to look at it. But, you know, a couple of years ago, you had called out, you know, 2 billion of EBITDA on an annual basis. You're now at 475 in Q1. Admittedly, that had some startup costs in there and some storm impacts. So as you progress forward, could you potentially lay out some mile markers of, you know, you have a lot of capacity growth coming. So would you be exiting kind of 21 at a much higher rate than that, 475? And if so, I guess, would most of the growth be coming in North America and South America? Or how should we think about, you know, kind of the EBITDA progression from here?
spk16: Yeah, I think we'll, you know, in the first half of the year, we'll have, we have more startup costs than what we had last year, obviously. And then we'll start to get the benefit of that in the third quarter. We'll exit in the fourth quarter with much more strength. So I think it's more backend weighted. I think the performance in South America and Europe in particular continue to be very strong throughout the rest of the year. I mean, they're really surprised to the upside. And I think North America will be in the first half of the year, again, more heavily with startup costs and then start to accelerate in the back half of the year.
spk03: Yeah. And let's not forget also the first quarters are seasonally slowest quarter too.
spk01: Right. And as a follow-up then for aerospace also given you know, some COVID impact I imagine that would also be better you know, as you move through the learning curve with some of those new employees as well and your projects actually start to come online and So are you still thinking about kind of 15% EBIT growth in aerospace on an annualized basis?
spk16: Yeah, I think that what we experienced in the first quarter hopefully doesn't repeat as we go forward. To Dan's comment about having more people on site, the supply chain getting better, you know, COVID issues reducing, that should accelerate their improvement as we move through the rest of the year.
spk17: And when we initiated the $2 billion EBITDA number, we also weren't contemplating a CUPS business, which clearly we're forward investing in right now. So that should give us a whole other revenue stream moving forward.
spk14: Okay, thanks.
spk12: Our next question is from the line of George Staffos with the Bank of America. Please go ahead.
spk07: Hi, everyone. Good morning. I hope you're doing well. Thanks for the details. I wanted to dig a little bit into Europe. The vine growth of the quarter was certainly in line with what you had guided to in the fourth quarter, but it was sequentially down from the fourth quarter, which you had said was going to be a – was a stronger-than-expected quarter. Was there anything, as you looked under the hood in terms of the European trends in 1Q – that were surprising, perhaps a little bit less positive than expected. It doesn't seem like it, given the margin trend, but just wanted a little bit more color on Europe and what we saw in 1Q and what it means for the rest of the year relative to 4Q.
spk17: George, it was in line with our expectations, maybe a little better. That is an area where you know we're adding capacity, and we were allocating every single customer So I wouldn't read too much in the growth rates right now and the year-on-year comparables. I mean, we're converting our France steel to aluminum facility. We're continuing to add capacity in multiple locations in Europe. And the demand trends, if we had cans and could serve them, we would have exceeded, I think, fairly significantly these growth rates.
spk07: All right, thanks for that, Ken. I appreciate that commentary. The second question I had is around innovation. So we've talked a lot about this, all of us, on these calls going back a number of years, and it's been great to see alcohol, the alcoholic category, pick up with spiked seltzers over the last couple of years. Can you give us an update on kind of the bleeding edge and the next categories, again, to the extent that you can comment, you know, mixed cocktails, things like that, and how sizable, how significant they might or might not be, you know, relative to Spike Seltzer and some of the other products we've seen really drive your growth the last couple of years?
spk17: That is the million-dollar question. That's a great question, George. I can tell you there are more innovations that are being pent up right now that we unfortunately can't help our customers launch. And it would be difficult to prognosticate. I think our customers over the last three to four years, in North America in particular, have really learned to develop products that the end consumer wants. They're pricing it. They're putting it in cans. What's going to win? I can tell you it's probably got some alcohol in it. If it doesn't have alcohol in it, it's low calorie. It's different stimulants on alcohol. on waters, and I still think there's still an underpinning for still water. That's just an area where I still am bullish on. It gives the retailers an opportunity to improve their CO2 footprint within their retail shelves without having cans or allowing folks to step into those cans. that feels like a market that could be sizable in the future.
spk03: Yeah, George, just as John, I may just add two things and amplify what Dan said. Number one, don't forget over the last 12 months, innovation has really been on the sidelines, particularly because the retail side of it. They were just trying to fill up their stores with the basic needs, and so there is a lot of innovation that's pent up right now, and to Dan's point, we're seeing it. The other thing is it gets to this real circularity that we talked about in our prepared remarks. It's real. It's here. There's a number of various anti-plastic at the state level laws that are either being enacted or being debated right now at a level that historically we haven't seen. And so I think that momentum continues. And I think there is increasingly by the consumer and to a degree our customers a recognition that When you have the aluminum beverage can, which is the most sustainable package in the world, that there is an alternative to this. And as people are trying to reach their 2030 CO2 reduction goals and sometimes even 2025, let alone net neutrality by 2040 or 2050, this is going to play an important role. And so this isn't measured quarter over quarter, but it is a long-term secular thing that we continue to see playing out that benefits the aluminum beverage can. Yeah, that's a great point.
spk17: Just to George on that, it's like our biggest growth category is plastic. That's our biggest category.
spk07: Okay. Appreciating that, and I don't want to take up too much time, is there a way for us to maybe think about the capacity that you're adding this year or through 23 and how much of that you think is going to new categories? And then, Scott, you know, it sounds like – Value return is perhaps more likely to happen sooner than later versus your prior expectations, given what I heard you say on the call. Could you give us – I mean, I know you're not going to time price a month or whatever, but can you tell us what is actually behind those comments and what opportunity and flexibility you have to do more value return as the year progresses? Thanks, guys. Good luck in the quarter.
spk17: Thanks. I'll answer the – The first question, uh, I would say 80 to 90% of what we're putting in place is, is simply, um, existing categories. You know, we're, we're, we're earmarking some additional capacity. So our customers can step into some of these innovations and trial them. But the fact of the matter is we're just, we're so darn oversold. I think it's just stepping into the existing categories and the space and the shift to cans. Um, So unfortunately not a lot, not a lot of room to disrupt ourselves. So that's, that's why we're so bullish on the medium to longterm in this, in this area.
spk16: And on the return of value to shareholders, George, you know, we perform better in the first quarter than our expectations. And we think that momentum continues to look through the remainder of the year. So as we sit here today, uh, we think we can, you know, accelerate, bring forward the return of value to shareholders while still investing a billion and a half dollars of capital. So I would target kind of buybacks in the half-billion-dollar range for the remainder of the year for this year, and then I think it accelerates into next year.
spk07: Thank you very much. Thank you.
spk12: The next question is from the line of Silke Cook with J.P. Morgan. Please go ahead. Hi. Good morning. How are you?
spk17: Good, thanks. How are you?
spk11: I have a question regarding your North American cannabis business. So you said that the business in the quarter grew about like, you know, 6% in terms of volume. And some of your competitors said they thought their volumes in North America grew 12%. And, you know, another competitor said maybe 8%. And so I was wondering whether you had a view what North American beverage can grows really was for the industry in the first quarter. And if you had a view as to, you know, how the beer category grew versus soft drinks.
spk17: Yeah, I mean, we're 45% of the U.S. market, so you probably take our growth rate and take the others and divide by two. I'd say it's north of 6%. It's probably in the 8% to 9% range. And keep in mind, for us, it would have been more. We had one significant customer who had a disruption in the quarter, pretty significant from a volume perspective. And so beer was approaching 1% growth. Our beer volume was down 8%. So if we were more in line with flat to slight growth on our major beer customer, you would have seen double-digit growth in the first quarter. I think there was an anomaly built in there, and I'm excluding the winter storm altogether.
spk03: Yeah, and even with that, let's not forget, we were short cans for the markets. we could be selling more than we have. And so right now it's capacity constraint and that's why we're so focused on getting this new capacity up and running.
spk16: But I'd be careful of quarter to quarter volume growth because it depends on who's bringing on capacity at what particular time. So you can kind of get distorted in a quarter.
spk11: That's helpful. And my follow up, Again, on the North American business, if I look at your capacity, which there are like 50 billion cans or so, plus or minus, what's the normal rate of the bottlenecking or efficiency that you can achieve? Is it like 2%? Can you get like a billion cans out of the existing production every year?
spk17: Yeah, that's a good question. Combination of how many additional conversions, how many additional label changes, et cetera. Yeah, we're We're trying to earmark something in that, you know, kind of one to three productivity improvements. But when you look at the level of complexity as an end consumer that's showing up, the number of new products, the number of new labels, the number of new can sizes, all of that eats against the productivity. So if you can fundamentally stay flat, you're doing pretty darn good. You just need to be able to make sure you can charge for that.
spk11: I see. Okay.
spk12: Thanks very much. Our next question is from Salvatore Tiano with Seaport Global. Please go ahead.
spk14: Yeah, hi. Thanks for taking my questions. So firstly, you just mentioned a major customer that it seems it was a pretty significant impact on your volumes in Q1. And I think what they've said is they expect to pretty much make up the entire production loss in the balance of the year. So how do you think about any tailwinds from recovering this loss in Q2 or later?
spk17: Yeah, I don't know that there are tailwinds because we're oversold. And every single can, even in the first quarter, every single can we could make, we can sell. I was just talking about the categories and the shift relative to that. So Um, the winter storm had an impact. I don't know how you, I don't know how you can recover. Um, the only way we could step up volume versus what we've characterized here is have our new facilities and new investments come online faster at more efficient rates than, you know, we've seen historically. I wouldn't, uh, we've got a, uh, we've got a pretty impressive startup curve that's built already built in place that's in here, but, uh, I wouldn't, uh, I wouldn't underestimate our people to do better, but at this point in the year, it's premature to characterize that there's a lot more on the table that we could see recovery in the back half of the year versus what we gave up in the first.
spk14: Okay, great. And a little bit on, I guess, the operating leverage in Europe and South America. Your earnings growth was pretty good, especially in Europe relative to the Volume expansion, you saw 5%. So did you see any other specific tailwinds that helped boost your incremental margins? And how should we think about your incremental margins absent startup goals going forward?
spk17: Yeah, we've historically said, you know, whatever we grow on the top line, we should double that in terms of a percentage growth on the operating earnings line. exclude startup costs and some of the inefficiencies with the storm. I think we're more or less there across the board globally. The things that can impact and influence it are hopefully what we're continuing to see is strengthening of the contracts. Supply-demand tightness allows you to improve your terms and conditions. That gives us a better chance for success in our plants. And there's just a more predictable nature to that flow through moving forward, I believe, as we get capacity put online. Yeah, and also mix plays an important part of that as well.
spk14: Okay, perfect. So I guess there is an opportunity for some quarters or even a couple of years to be above that normalized two times earnings growth over top line growth.
spk17: There's an opportunity. Okay. Nothing's linear, as you indicated. This is a preface there.
spk14: Yeah. Okay, perfect. Thank you very much.
spk12: Our next question is from the line of Mark Wild with Bank of Montreal. Please go ahead.
spk02: Morning, Dan, John, Scott.
spk17: Morning. Morning.
spk02: I wonder, Dan, can you just give us some sense about the impact of these kind of global freight and logistics issues on both the flow of canned sheep, but also just how it's affecting your ability to ship cans around market to market this year.
spk17: Yeah, good question. The challenge is we're extraordinarily tight. So we haven't seen much of what you're describing, but there is always the potential. As we continue to grow, as we have tightness in these domestic markets, as these supply chains in every area industry are getting extended. The challenge will be if we had to dip into non-domestic aluminum, if we had to dip into China, where the overwhelming majority of excess metal is in the world, we know those freight costs are much higher than they were a year ago, 18 months ago, two years ago. And the real risk, though, is probably more our ability to potentially pass through that cost of just getting it hung up in the ports right now. So I would see the risk being more on being able to fill demand profiles if we had to go that route than not being able to potentially pass through the inflationary pressures on the delivered metal. But that's the area that we're paying attention to.
spk02: Okay. And just in terms of your own shipping around of cans this year and bringing them into North America in particular?
spk17: Yeah, it's got more to do with the consistency of the delivery and the predictability of when we can get those LTL carriers. Our team's done a really nice job of managing it, but anything that we have to do that's spot price related, that doesn't fall within the bounds of contracts that we previously negotiated, Those are accelerated, and those at times can be a challenge for us to pass those through.
spk02: Dan, just for my following, you mentioned contracts and terms in your commentary, and I wonder, particularly with regard to Europe, if you can just perhaps put a little more color around that.
spk17: I think we indicated this briefly in our Q1 comments. If you look back over the last three years, North America and South America have felt the supply constraints and the tightness faster and with much more conviction, if you will. And so that has enabled a very different seat at the table, if you will, of negotiations. The first quarter and the tail end of Q4 in Europe have shown up in a very similar way. And so I would say moving forward, Europe, if you look at our gross profit and our contribution margin, it's as good as anywhere in the world. So I wouldn't indicate there's a whole lot to be gained there, but in terms of terms and conditions, maybe longer-term contractual opportunities, those things, I could see those moving in a different way than what we've experienced historically in stepping into this moving forward if the market continues to be as tight as it is.
spk02: Okay, that's helpful. I'll turn it over. Thanks very much.
spk12: Our next question is from the line of Gabe Haidt with Wells Fargo. Please go ahead.
spk08: Good morning, guys. Thanks for taking the question. Two maybe quick ones. Dan, you mentioned importing ends into the U.S. until this end module is up in Kentucky. And I'm kind of piggybacking off the sales question in terms of contribution down in South America. I mean, by my calculations, the 14% volume growth gets you 12 to 15 million, um, of incremental contribution. So I'm curious if it was the ends that you're producing down there and maybe bringing them into the U S that, that helped aid that. Um, I guess that's question number one. And then when that goes away, perhaps the, the profitability stayed down there, um, as you ramp up this capacity there and you sell the ends locally as opposed to into the U S. Yeah, that's that, uh,
spk17: Good question. There's a bit of that happening. Yeah, we're, we're shipping some ends. It's not going to be material to those results. Um, it was just that it was just a damn good quarter in South America. Good mix, a good volume. Um, uh, there was a modicum of, of shipments up from South America into North America on ends, and we're doing a little bit out of Europe. Uh, and, and to your point as that will require less capital investment in the aggregate package moving forward. as we free up that capacity back into those regions. So it should be, as you indicated, a win-win-win for multiple regions as it relates to standing up Bowling Green.
spk08: Okay, and I think in the press release you guys mentioned favorable price mix down in South America. I thought the specialty mix as a proportion of cans was pretty high already. So I'm kind of interpreting that as maybe a little price comment, and I expect that would persist through the balance of the year. I guess, can you confirm that? And then kind of a secondary question. I read an interesting article talking about Canadian craft brewers importing cans from places like South Korea and even China. It strikes me, number one, kind of interesting from a logistics standpoint, and number two, you know, how do you guys strike a balance from a commercial standpoint with you know, not enticing unwanted capacity or investment versus obviously, you know, getting paid and for what you guys have talked about in terms of complexity and stuff like that.
spk17: Yeah. I think the, the first part of your question, I think about it more in terms of customer mix, favorable customer mix, as opposed to it, you, you draw such a fine line. We talk about price and customer mix almost simultaneously. It's, you know, it's, We can add a bunch of accountants to segment that stuff out, but the reality is you get, on average, higher price for the same product family, and it can be driven simply by customer mix.
spk03: Oh, the second question was about the small Canadian brewers. This is a very delicate balance because, as Dan has said repeatedly, we're oversold. number one. Number two, we have long-term contractual commitments to the larger customers. And so some of this innovation that typically comes from the smaller, I don't want to call them startups, but smaller regional customers, typically they are the more of the list price type of customer that Dan was referring to in the prepared remarks. And when you don't have capacity, they're looking somewhere to get them. And so you're right, the supply chain complexity of bringing cans in from across the world is intense, not only from a cost perspective, but just a complexity of the supply chain perspective. This is why, again, we're trying to get our capacity ramped up as quickly as we can because I think it's going to open the door in terms of incremental innovation by not only the large customers but the small customers as well. And, you know, there's a number of small customers that we're in contact with that they put new can lines in, but they didn't really order ahead in terms of cans. And so we're trying to help them out as best we can, given the constraints we have in our system right now.
spk08: Thank you guys for the details. Good luck.
spk12: Our next question is from the line of Jake Bleicher with Carson Wells. Please go ahead.
spk04: Hi, guys. Thanks for taking the time. I was wondering on the previous call, you talked about some of the innovation that we'd seen over the last couple of years in North America, starting to spread to Europe. And I was wondering if you could give us any update on that as far as the innovation you're seeing over there. And also is any of that spreading to South America or is that still a conversion from glass to aluminum phenomenon?
spk17: Yeah, good question. I think we were talking specifically about the seltzer movement or a Countless questions on that. Will we see that in other parts of the world? By everything we're seeing and hearing, it will show up in Europe, in Western Europe first. I know capacity is being added. I'll go back to my comments that everyone's on allocation over there. We're oversold. So I think innovations are important. It'll be a longer supply chain and a longer pipeline for those to show up in a meaningful way. But they're out. They're in the market, specifically in the U.K. In South America, we are seeing innovation. I don't think you can underestimate within beer, the beer category, there's been a huge shift into different ingredients, craft beer, hops from Europe, All of that has been transitory in the last three to four years, and it's now changed the landscape altogether. Those disruptors in the marketplace that started there all came out in cans, and that was really the tipping point for the incumbents that had returnable glass to kind of wake up to the fact that we probably need to match what's happening because we're losing share. And so your comment's right, it is returnable glass, but the returnable glass shift, I could I could probably characterize that it came as a result of innovation and innovation in the cans. And we see that there's still plenty of room for that to grow, as I think I indicated in my prepared remarks. Only 51% can penetration in the first quarter, and that's down from north of 60 in the third quarter last year, and that's just a function of tight supply from cans in the marketplace.
spk03: France, we're past the top of the hour. We'll take one more question if there is one.
spk12: Okay. Our last question then will be from the line of Phil Ng with Jefferies. Please go ahead.
spk13: Hey, guys. Thanks for squeezing me in. You know, the last two quarters you've seen really strong performance out of Europe, and that's during a period when you're seasonally slower. So what's driving the strong results, and can you build on this in the coming quarters when you kind of factor in seasonality?
spk17: Yeah, it's been overwhelming me. It's been beer. I think some of the customers have had success. There is an underpinning. That's a heavy on-premise market. There may be some underpinnings that there's been a shift in it and a little fervor and a moving to cans. But even as things start to open up over in Europe, we're still seeing that continued strength. We have got a heavy presence, as you know, in Russia. Russia continues to bear fruit. We have a heavy presence in the energy category, and that's doing well. And the UK has just been on fire. And it's a combination of the anti-plastic sentiment there and additional fillers coming into the UK. And so a number of those are factoring in. You know, we still believe in Europe it's got the lowest can penetration of any major region in the world. It's really underserved. I think the folks that have been so heavily weighted to on-premise are starting to wake up to the fact that we need to divest our supply chain. And I think cans are going to do really well there for the foreseeable future.
spk03: And I'll just finish up from a longer view. Since we acquired that business in 2016, our folks have done an amazing job on the cost side of the business. From a financial results perspective, I think in addition to all the mix and other growth opportunities Dan was just talking about, from a cost perspective, I think we're in such a better spot today than we were three, four, five years ago in that business.
spk13: Got it. That's really helpful. And I guess a competitor of yours called out higher inflation that could impact your margins, I think particularly in North America, and they called out codings. Is that something we should be mindful of and having more of an impact on your profitability in the coming quarters?
spk17: Yeah, I mean, inflation is absolutely something we're keeping our eye on. It's happening in every industry specific to that particular area. We have pass-through mechanisms in place. We've got long-standing contracts. Based on what we're seeing and what we're hearing from our supply base right now, it's not overly concerning. I think we can manage that. Scott?
spk16: Just one thing on the margins. Be careful on margin percentage because if you look at metal costs year over year, there's going to be huge variations. There was a 24% difference in the first quarter this year versus last year higher. It will be even more dramatic than that in the second quarter. So you're going to see weird things from a margin percentage standpoint. But to Dan's point, I think we have good pass-through mechanisms, but it shouldn't impact our earnings dollars.
spk13: Got it. So just outside of the aluminum impact, it sounds like you're managing inflation pretty well. That's great. Thanks a lot, guys. Thank you.
spk03: Okay. Well, thank you all. France, thanks for your guidance on the call and appreciate everyone's input, and we'll be speaking to you soon. Be well.
spk12: You're very welcome, sir. That does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day.
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