Q2 2020 Ball Corp Earnings Call
Please standby the conference call will begin momentarily. We thank you very much for your patience I. We ask that you. Please remain on the line.
[music].
Greetings and welcome to the Ball Corporation to Q2 thousand 20 earnings call. During the presentation, all participants will be to listen only mode. Afterwards, we will conduct a question and answer session.
If you have a question, but the one followed by the four on your telephone if at any time during the conference you need to reach an operator. Please best ourselves as a reminder, this conference is being recorded Thursday August six 2020.
Now I'd like to turn the conference over to John Haines CEO. Please go ahead.
Kelly and good morning, everyone. This is Paul Corporation's conference call regarding the company's second quarter 2020 result, the information provided during this call will contain forward looking statements. Actual results were outcomes may differ materially from those that may be expressed or implied some.
Some factors that could cause results were outcomes to differ or in the company's latest 10-K, and then other company FCC filings as well as company news releases. If you don't have already have or second quarter earnings release, it's available on our website at <unk> Dot com information regarding the use of non-GAAP financial measures May also be found as I noted section.
Today's earnings release.
<unk> 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 EMEA and other non reportable segments.
Joining me on the call today, or Scott Morrison, Senior Vice President CFO, and Dan Fischer Senior Vice President and COO up 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 ever sold on aerospace businesses as well as your 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 at the world experience, the worst economic and social crises and 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 that are manufacturing performance increased volumes in the absence of metals.
GAAP headwinds all contributed to a very strong quarter.
And Fisher will elaborate more on our other beverage segment said a moment, but over the course of this quarter, so sequential monthly improvement and each of our packaging segments improved from the lowest we experienced in late May in 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 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 remained 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 in EMEA. However, we did experience much stronger year over year growth in the month of June about which Dan will elaborate more later.
Our aerospace business, we continue to see strong growth with quarterly year over year revenues up 16% and our whatnot book backlog up 10% since first quarter 2020.
We did experience however, a 13 million dollar reserve for the failure of a key subcontractor component and a large classified program that more than offset and otherwise strong quarter. We expect this could be a one time of that 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 to.
Turning to close in the third quarter.
Construction in hiring for first dedicated aluminum cups manufacturing facility remains on track. Despite the current fan attendance restrictions that 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 new.
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 clubs 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 a costa and Blue Ocean, thereby positioning the ball aluminum Cup for retail success.
Across our businesses year to date, we've hired over a thousand 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 Danna, Scott I do want to give a big shout out to all of our colleagues here Paul for caring for one another and for living our culture your dedication and hard work to support our customers our communities in the global economies, where we operate is second to none and true ball fashion throughout this crisis, our company and employees have provided millions of dollar.
Financial support to over 300 organizations in the local communities in which we live in 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, Paul has adapted well to this new environment. Despite contractions in some of our markets early in the quarter, we exited 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 are first responders, our governments and indeed all of our stakeholders for persevering through all this and we wish all of you listening for your continued safety in good health and with that I'll turn it over to death.
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 in 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 lifecycle assessments and biennial sustainability report visit ball dotcom backslash sustainability to learn more about what ball is doing to advance the circular economy and its operations and across our industry.
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 in store, both packages of our products and.
In late March this led to a surge and beverage can demand as those occasions.
That occurred in 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%.
Messick beer up 4% that includes up 13% and the second quarter craft growth of 20% and Fnbs up in the range of 80% to 90%.
As we look forward.
We're thankful that our new line in Fort worth started up a couple of 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 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 importance.
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 strengthen the UK in Russia were unable to offset softer demand in southern Europe, Egypt in Turkey across balls EMEA business demand trends improved late in the quarter with April volumes down, 11% may volumes down, 16% and then June volumes up 4%.
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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.
Hitting the second quarter package mix for beer on the shelf with 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.
Balls, 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 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 us 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.
And 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 a 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 teams close to our customers approach will bolster second half results.
And our other Nonreportable results, the company's Myanmar Indian in Saudi beverage can manufacturing results continue to be dampened by production downtime. In addition, other includes an annual 20 million PNM 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 have 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. Thanks, Dan comparable second quarter 2020 diluted earnings per share were 65 cents versus 64 cents in 2019.
Second quarter comparable diluted earnings per share reflects strong North America beverage segment results, a lower share count and lower corporate costs offset by lower EMEA, South America, and aerospace results due to the short term demand and supply chain impacts.
Due to the pass through of lower aluminum costs, and the 2019 sale of the Argentine steel aerosol business and Chinese beverage can assets and lower second quarter packaging demand outside of North America revenues for the second quarter without walls balance sheet is healthy and we have focused near term on maintaining ample liquidity and flexibility in the current environment.
Year to date year to date, we experienced our seasonal working capital build which was more sizable the typical due largely to the timing of metal payments as a result, this timing and ongoing growth initiatives and raw material supply to support them. We anticipate the full year 2020, working capital investment to be a use in the range of $300 million.
Which is slightly higher than previously anticipated due to accelerating growth conditions as we sit here today, some additional key metrics to keep in mind.
Our full year effective tax rate on comparable earnings will be in the range of 18%.
For your interest tax interest expense will be in the range of $270 million and full year corporate undistributed cost recorded in recorded in other non reportable are now expected to be in the range of $55 million are 2020 cash from operations will continue to be strong we will be investing in working capital and even more growth capex to expand.
Aerospace facilities beverage can production capacity, while also completing construction on our first aluminum cups manufacturing facility.
Contrary to pass sizable M&A deals ball is embarking on a multiyear phase of internal investments to serve organic growth for beverage cans and support new contracted volumes at this point 2020, capex will likely exceed $900 million and 2020 free cash flow is expected to be in the range of $400 million.
Paul has always been focused on being good stewards of our cash and prove prudently balancing real time growth opportunities with consistent return value to our shareholders given our strong cash flow. We are managing the business appropriately for the long term investing capital with an eye on ebay returns managing our balance sheet effectively and consistently returning value to.
Our long term shareholders with that I'll turn it back to you John Great. Thanks, Scott our aluminum aerosol business saw global volumes in the quarter declined 6% driven primarily by flat volumes in North America single digit declines in Europe, and strong double digit declines in India. As a result, multi week country Lockdowns in regional pillars down.
Looking ahead, we're excited to expand our aluminum aerosol businesses geographic reach into South America and expect the acquisition of the two bucks facility to close in the third quarter.
Our aerospace business reported approximately 16% revenue growth and lower than expected segment earnings due to the supply chain issue on the key fixed price project adjustments to testing schedules have been made and the items necessary from the supplier are forthcoming the team has done a good job managing the process with our customers despite difficult.
Circumstances looking ahead the growth trajectory of this business is even stronger with one not book backlog, reaching 5.3 billion.
In addition, our year to date aerospace headcount has increased by nearly 450 employees and we anticipate hiring an additional 550 employees by year end. Our HR team has done a great job on boarding these new employees and running or some are internship program remotely and this business, we continue to enhance our infrastructure buildout testing.
And manufacturing facilities in 2020, and ensure all projects are on track and on budget current indications reflect that the business will be able to grow profitably in excess of 15% per year over the next several years, given the scale and type of recent contract wins.
In summary ball continues to be uniquely positioned to lead and invest in sustainable growth and global aluminum packaging and aerospace while delivering significant value to our shareholders.
As we sit here today, our ability to grow comparable diluted earnings per share in 2020 is higher than previously thought our teams will do everything possible to outperform while being keenly focused on working safely and executing capital investments beyond 2020, we look forward to driving our business to deliver long term diluted earnings per share gain.
Both of at least 10% to 15% and achieve our JV dollar growth goals of 4% to 8% per year on our growing invested capital base, especially during these times, we're thankful for one another and the opportunities in front of ball for an even brighter future.
Lastly, as a reminder, bubble hosted by Aneel Investor Day on October six we look forward to your attendance at Thats virtual event and with that Kelly, we're ready for questions.
Thank you if you like to register for your question. Please press Star one followed by the floor on your telephone you are here with me Tom Kroll Technology request. If your question has been answered you would like to which you registration. Please post a one followed by the state.
Our first question comes from Anthony Pettinari with City you May proceed with your question.
Good morning.
Good morning indicate I think indicated you're sold out in all your major regions exiting the quarter and I'm wondering if it's possible to quantify maybe how much volume you may have left on the table either in twoq or potentially for the year and then just a related question, it's impossible to say what quantity of cans you might export import cross region.
In 2020.
Yes, I think it's.
Difficult to answer the what'd, we leave on the table I think clearly in Europe.
Negative almost 8% growth that should have been in the 3% to 5% growth range. So.
I would steer you in that direction and then.
For South America again, we should probably grown in the mid to high single digits for the quarter.
And we were obviously.
A little shy due to the.
Due to the April decline.
We are probably importing.
In terms of.
It's all North America support I would expect for the year somewhere in the neighborhood of a couple billion cans.
1 billion of that is coming from places that typically who wouldn't be shipping from.
Europe in the.
Brazil for instance.
And then where we can get.
Some relief than we benefited from that in the second quarter, specifically in Mexico as kind of the brewery industry was deemed non essential we're ready to use some of our excess capacity in Mexico to ship up so that's sort of how it would frame where those imports are coming from you have Anthony and how many were would we have been able to sell if we had.
Capacity that that's a tough question to answer we don't know Weve, Dan pointed out when you leave here some of those IR ice statistics and just in the second quarter alone you had carbonated soft drink cans up 14% get big beer cans up 14%.
Total fnbs up nearly 150% those are very big categories and very strong. We were obviously are not able to keep up with that because we had not anticipated that.
And so our as Dan mentioned to our inventories are at all time lows, we've been importing as many cans as possible I.
I know that doesn't answer your question how many were left on the table because it's just it's too difficult to know what I do believe though it underpins many of these longer term investments because the growth. We're seeing yes. Some of it has to do with the stay at home rules, but a lot of is still has to do a sustainability that that we've talked about over the past couple of years.
Okay. Okay, that's very helpful.
Then you talked about some benefits from new contractual terms and I'm wondering if it's possible to put any finer point on the contribution from that does that roll through over a number of years. If these are multiyear contracts and I understand you're probably limited in what you can say can you give any color in terms of how these terms are different than maybe conventional or.
Legacy contracts.
No.
Weve. This has been well described in the past and I'm not going to say other than what we've talked about we didn't we normally don't talk about these things, but we did have a number of contracts renew at the end of 2019, and we had told people that.
The phase and and some of these new commercial terms should probably be multiyear it's not just one year and so that's about all we can say right now.
Okay I'll turn it over.
Our next question comes from Neel Kumar with Morgan Stanley You May proceed with your question.
Great. Thanks for taking my question, you mentioned points tailing off in North American capacity additions.
Our land northeastern US can you give a sense of how much incremental capacity is expected to be adding in North America resting at 6000 unique clinical initially planned.
How should we think about a ramping is capacity on the start up in the facilities in mid point.
Yes, it's all going to be dependent on.
Executing contractual.
Negotiations and we will continue to update that that number for you as those things become more from and.
It's clearly room lands on execution hiring employees and ramping up ones, but.
Got to have contracts on the back of it and some of those contract negotiations are still ongoing.
Yes, but grow the two new facilities were building remember, we're scaling them that they have the capability of being the biggest in our system.
Okay Thats helpful. And then we recently signed announced had been a new Tim coming into us market.
What impact if any do you see to market dynamics from the announcement.
And well level demand growth do you think is necessary over the next several years in North American market.
Right the remain patient balance given all the new industry capacity has been product.
Yes, we've talked about this in the past in the long story short is let's put this in context. The market's approximately 100 billion cans, we've been realistically this year, it's been growing well above.
The 4% to 6% we talked about whether it's been eight or 10, it's unclear because we have left cans on the table as we were talking a few minutes ago. So you're talking about upwards of eight to 10 billion incremental cans in one year low now this is a unique year I get that but we think as we go forward that four to six at the basin.
What we see it's trending to the upper part of that range. So thats in the range of approximately 6 billion cans a year. That's why we're accelerating our growth investments and as we've discussed previously this is a growing business. This is a scale business and this is a business. If you run it right you can generate.
Recent economic returns and so I'm not surprised people have been looking at it but I think the overall market is more than the growth of the overall market is more than sufficient to absorb this capacity in as a result, given our 20 plus plant network. We have many levers that we can pull relative to any other smaller competitors.
Is that just have one or two levers to pull.
Thanks Thats helpful.
Okay.
Our next question comes from George Staphos with Bank of America. You May proceed with your question.
Hi, everyone. Good morning, Thanks for taking my question.
Thanks.
Well it would appear that way.
I wanted.
Piggy back on some of the.
Question is from Neil and from Anthony to extent possible.
Then recognizing you're not going below really quantify or maybe even a numerate can you talk to weather.
The your customers.
In North America anywhere else.
Given what you're seeing in terms of demand.
And your need to supply more capacity.
Our being willing to accept.
More creative terms different terms and maybe what was even put into contracts in 19.
Any.
Desire willingness to maybe share in and some of the risks and cost.
To make sure that capacity is on the ground when the demand is there anything that you can talk to you on that on that question.
Yes, I believe.
That is an accurate depiction of where we are right now there are a number of categories and a few customers.
George that are viewing this as a real opportunity to grow for the first time in years and.
Those customers in those categories are are being aggressive they want to move quickly.
And.
Yes, we are having any number of more much more creative discussions with.
With those folks it's not it's not everyone but.
Certainly you can imagine in a selzer categories and.
When you see big beer and non alcoholic categories growing at this rate.
That's a real opportunity for.
For some of our customers to step into some growth profiles of they havent seen in awhile and they are using the can innovative backs to it to do that and.
Yes different dialogues are certainly happening right now as a result edge or just give you. An example, we've talked about this in the past, but historically at least in North America. Many of these larger contract for based on requirements is that you'd have to fulfill a 100% of the requirements of any given filling location and over the last couple couple of years Weve rejiggered that because.
All the risk present on us to the upside and the downside quite honestly, but so what weve rejiggered that is think of it more of a a fixed amount plus or minus a window call. It a 5% window, 10% when new whatever has agreed to and if and they've got to take those cans and if they need more cans then it's a separate discussion and so what.
The most important thing we're trying to do those make sure we can fulfill as much of the can demand our customers are seeing and I think all because of co bid.
I would call everyone off.
Off guard a little bit people knew the growth we've been talking about this growth for several years and there were some customers that were more understanding of it than others, but I think this overall shift to off premise has been great help for us, but it's also pointed out the fact that.
Making sure that you have your supply chains and good order are important so we're trying to keep up with our customers as best we can.
Okay.
Thanks for that guys.
Two questions and then I'll turn it over to the extent that the capital spending has continued to move higher I mean, we we understand logic why because of the demand that you see that you're trying to meet.
Is there a way too.
I don't know quantify or qualitatively talk about return you expect to get on the with these incremental spending numbers look like relative to what had been perhaps the base capital spending a few years ago, whatever five $600 million and then on.
Aerospace.
And correct my number there if it's wrong on what the base number had been and then on aerospace.
If you could talk a bit further our realized it was a project in the black but can you talk a bit about what the issue was in terms of the subcontractor why you believe gets resolved and should we expect the earnings for aerospace to continue at what had been the trajectory you were expecting third quarter. Thank you guys. Good luck in the core.
Yeah.
Yes, George let me take the first part on the returns and then I'll turn over to John on the aerospace one.
Hi.
We are still at first and foremost in EMEA company. So any capital will put to work we have to get 9% over in within the first three years of putting that capital to work these projects.
Our better than average because they have tend to be a higher percentage of of specialty cans that standard containers. So we're going to like the returns on these projects over the over the course of the next several years and so I'd say our return profile has gotten better.
And compounded with the growth that we're saying so I think we're at a pretty good place and frankly.
Spending $900 million the faster we can get some of these assets up and running the faster we can enjoy the returns.
Yes.
And George with respect Aerospace we had we had a test failure of a key component from one of our sub suppliers that was late in the programs life. As you know that you when you're building a program like this you assemble everything at the tail end you test everything what we had a failure of one of the key components there, which.
Pushed out the delivery date, and therefore cost us money related to reworking the problem and getting a new PARP from this.
From the supplier as well as our marching army costs, if you want to call it that keeping the program team intact and moving it out in this case approximately six months or so.
As I said in the prepared remarks this was a onetime event.
This very few times do things like this happened, but they do have been time from time to time.
But I think are both our supplier as well as our program team have the issue isolated in under control. So even despite that you would see.
Even with that they had a pretty good quarter, but without that data very good quarter, and we expect as I said.
As we March four two have 15% or more earnings growth in that business.
Alright. Thank you guys. Good luck in the quarter. Thank you.
Our next question comes from our Lunacy Lima time with RBC you May proceed with your question.
Great. Thanks, good morning.
I guess I just wanted to ask.
First off about Europe.
Maybe you can just provide your thoughts on the business there.
Obviously is slightly different situation as far as the opportunity for pantry loading so.
How are you thinking about kind of Europe global back or Europe can volume.
The second half as well as next year.
Yes, what we think that.
In the prepared comments, we exited Jim.
As border started to open up than as folks were able to get out of their house.
Can consumption picked up and we were on a growth trajectory exiting June year over year.
When we expect that to continue to build at this rate.
Mostly.
I have to preface that with we don't know what's going to happen second wave a co that et cetera, but right now we're anticipating to end the year, despite being down 8% in the second quarter with.
You know.
Slight growth for the year and that means that the second half as to be up fairly appreciably.
In the mid to high single digits.
It's interesting this might be helpful for that these are for the second quarter.
In beer in Europe. This is across your beer cans grew 10%, but soft drink was down 17% soft drink is bigger and it makes a lot of sense. When you think about it because all hubs, we're close but people still drink beer. So they are drinking more beer at home, but much of the soft drink in Kansas actually sold in the.
The.
The on the go convenience channels, whether it's a kiosk at the beach or somewhere else like that with all of those close we saw retrenchment there and those are the types of things that are now opening up.
That Dan was referring to.
That's helpful. Thanks, John and I guess.
Maybe we can just asked related question here.
Do you have you.
Got it about any anything about changing consumption habits. It seems that as people are returning to.
On premise consumption looks like bars, maybe more apt to hold bottles and cans rather than CAGR since just in because theyre not sure what theyre, let their take rates are going to be so.
I guess does that affect your business and then similarly.
You had talked a little bit about the new beverages going into cans moving from 35% several years ago, maybe to 70% a year ago.
Have you seen continued growth in that trajectory and.
Maybe can you stop or your thoughts longer term.
Just on new new categories in beverage cans as well as maybe changing consumption habits amongst customers. Thanks sure. Yes. The for the first part this is when I really wish to add associate degrees, so that could really capture the.
Changing behaviors and consumption patterns, but.
It is clear in conversation with the number of our customers that they.
They believe that cans, we'll we'll certainly be lease in the medium term.
Beneficiary of everything that's happening in the as it relates to.
Folks working from home more.
In those areas and how you in your dining the foodservice experience all of that tends to tends to lead itself to more packaged products in more cans.
So that.
And from there you know, we think that theres, even potentially some upside.
On the growth rates that we shared six months ago.
That's that's early indications I think a lot of our customers are still working through what all of that means specifically, but.
At a 30000 foot level, it's certainly lends itself to more cans and more package goods.
We are continuing to see and your second question, we're continuing to see cans winning.
I referenced what was happening in South America that was a substantial increase in pack mix in the beer category.
But continue to see growth and movement into indications in North America.
On the north of that 70% rate and I don't see that slowing down anytime soon the innovations that we're hearing the brands that are getting pushed in the cans.
Yes.
That rate.
Seems too.
Seems to have some some teeth to at some staying power and I could see a continuing a tick up modestly here over the next three to five years.
Thanks.
Our next question comes from Ghansham Panjabi with Baird. You May proceed with your question.
Hey, guys good morning.
Good morning.
Hey, so John back to your favorite topic on North American capacity additions, if we sort of total up the.
Last month by you and your peer group over the next couple of years or so.
It looks like capacity will be added in the mid teens in terms of units up 100 billion bays and obviously the industry's seeing very strong growth at current but can you just give us a sense for how long the contracts typically immigration standpoint specific to the new capacity you as the industry leader kind of bringing on at this point.
Well it's.
Every every customer every conversation is different but what I would say is there's a tendency for us to think more long term about these things and because that's what we've always done.
You've followed us a very long time and I reflect back in the things within South America. When we're building new plants that mindset is what kind of what we're doing here and so it's a long long ways out also remember that number you cited thats not going to be all in place at one time. These are all ramp ups and they start overtime.
So I wouldn't disagree with your number but thats probably over the next three years type of number and when you see the growth one on one of the things I think about is is that even enough.
I could make it very compelling argument right now given the growth rates were seeing that that will be.
Create a shortage in the and the can market in 2022 or 2023 as well so.
It's a very dynamic environment right now, but we're.
And we're very focused on making sure we're doing the right thing for the long term for our company and our shareholders and our customers.
Thanks for that perspective, and then second question on the beverage packaging segment from North America.
North and Central America, and take it can you help us with the operating profit bridge between Twoq you have this year versus last year.
Are there any temporary savings that perhaps inflated that margin that could reverse as.
Business kind of normalizes or is that not the case.
Well.
Absence of the.
The scrap.
That we had last year, but the businesses operating better.
The manufacturing performance is better we're making every Ken that we can possibly is also absorption is good.
But beyond that there's there's nothing that's that unusual kind of year over year over to the scrap is probably the biggest absorption yet gone from remember at the beginning of this year, we talked about that the bridge year over year, and we talked about we needed to where we're going to have the commercial terms the benefit the new commercial terms, we talked about.
We needed to execute better.
We talked about the absence of scrap but then we also talked about headwinds related to startup costs of all this new things all of those in general are happening as we anticipated the only surprise to the positive in my mind is up the operating performance is actually better we're ahead of our.
Our plans for 2020, I think our manufacturing folks are doing a very good job they've got a ton on their play too because given the tightness the market and then with all this new capital coming on they are being spreads stretch pretty thin, but despite that they are performing candidly better than we expected what more startup in the back half of the euro versus other plants get closer to fluid.
In two so I wouldn't take the second quarter is being kind of normalized number there was exceptionally good.
Thanks, so much.
Our next question comes from Mike lipid with Barclays. You May proceed with your question.
Great. Thanks, guys good morning.
Morning.
Q on the imported cans in North America, you mentioned in the release about needing to ship cans in from Europe, which I can imagine isn't cheap so I guess first.
No contract pricing its annual so does that incremental costs fall on ball or customers and second how do you think this evolves as we head into 21 burst through here because I assume you're starting up plants here in the US you can get can the customers for cheaper while transferring some of that value hopefully to your own TNL.
Yes, the the first part of your question is I mean, essentially what we're doing is.
We're allowing the customer to take take the product at the facility in there they're basically on the outlook for the for the free so we're not exposed on that.
And as John referenced we're stepping away with an awful lot of our contracts away from requirement contracts.
Two more fixed volume and then as a result of that.
You're not on the hook for getting those can ship and absorbing the cost it's a much more equitable.
Contracting relationship.
And right now as you can imagine for the folks that.
Don't have a revenue stream on premise.
We're trying to buttress their revenue stream with product.
Off premise and they.
Are happy to pay for that.
Additional.
Cost.
Moving forward. This is the real real challenge for US is when we look at our IR data, we believe that the growth that we saw in the second quarter and year to date.
Thats still has some tiv, regardless of whether we're in a coded environment or not.
Sustainability continues to drive.
New product launches in cans continue to drive that growth profile.
And I think as the previous.
Question was centered around a lot of capacity is going to be coming online, but as we've all as we all know it's all related to how effectively you get it put up and how you execute against those startup curves and so for the next two to three years long story short I think there will be a continued reliance on some.
Level of imports probably not to the extent we've seen this year, but 2021 is shaping up to be incredibly tight again.
I think you'll hear more reference to import cans at least for the next 12 to 18 months beyond that.
We'll have to we'll have to see.
Great that was helpful. And then just one on the aluminum cops, particularly as you are shifting it more into a retail focus right. Now can you talk about the potential price point for your Cups relative say standards solo Cup and I'm, assuming both you and your retail partners have done a bunch of consumer market analysis as you're preparing for this.
So can you just talked about what your observation so far have been and their excitement around the product, yes, I wanted to take a first and then let Dan Dan Chime in just let me take a step back to because it's important to remember our strategy. All along was kind of getting the venues first create awareness and then follow up through the retail which is that for the size of the prices.
Really on the retail side.
The bad news is because the cove at many of those venues were shut down. The good news is we did a tremendous amount of research and testing and we realized that the awareness is already there in fact, many people when they have already seen them are very well first of its attributes and as positive attributes.
So as we go to the retail channels and sell it.
Theres two observations I'd point out observation number one is we don't have to quote sell it because we can feel the demand being there and number two I don't think it's as much of a relative to a plastic hub as we thought. It was this is a whole new product with a whole different proposition and as a result, a whole different price points.
So I'm not going to get into right now about what the various price points are you will see them in the near future. When you see them on the shelf, but they are going to be a premium to what's out there today because consumers have told us they're willing to pay a premium for this product.
Some some of the more specific conversations we've had in and around the cup that May help you at least on the retail side is.
Almost universally the folks were talking to view this as innovation and that and in of itself creates a very different discussion in dialogue in terms of the process to get it in the store to get it on the shelf and the price point.
And they are leaning in many instances these retailers are leaning on a lot of the research we've done too.
To look to us to what the appropriate prices.
So thats been that's been very favorable and the other thing thats been.
Really exciting is.
Some of the larger retailers had a real focus on reducing their plastic in store and this is a wonderful opportunity for them to do that.
And so those are the.
Those are the learnings the biggest learnings on the biggest takeaways that might allow you to have a little perspective on maybe the success. We may be having there are gearing up for as it relates to that product. The other thing, we're doing more and more and you'll see it as we go through 2020, but particularly in 2021 is more on the marketing side as well creating awareness for this.
Hi, give our cups team Dan the rest of his team a tremendous amount of credit.
Being very creative things that candidly, we haven't done in the past the creating awareness for thats going to actually help.
Help maintain the price positioning rain aiming for.
Our next question comes from Ryan Macquarie with Goldman Sachs. You May proceed with your question.
Hey, good morning.
Thanks for the taking the question just wondering to better understand the the rates Capex outlook I don't think you were announcing any new lines or.
Locations or capacity with it. So if you just simply pulling forward. Some of the investments you would have otherwise may next year and then as they think about looking into 2021 should we expect capex to decline meaningfully and related to that the working capital.
Bill This year you have any.
Initial thoughts on were working capital might go next year more investments to support the growth or.
Do we see it flattening out a little bit.
Yes, I think the pace of Capex is really pulling forward as much as we can because we see the demand is there now Dan talked about being short can't so.
After we could get these assets up and running the better so some of that pull forward I think as you look into next year I think.
These growth.
Percentages, if they're going to continue at this kind of pace, we'll probably spend more capital than what we had originally anticipated 2021, we're also be making a lot more money.
On the working capital from.
The growth from where I said previously for this year is due to that acceleration of the growth I think next year will stabilize somewhat but I could still see a small use of working capital next year, but it's too early to tell.
And Brian the only thing I'd add to that is well on one hand, we didnt announce any new capital in fact, we did because with what Dan said was we are going to accelerate this.
The build out the ultimate buildout of our plants in Arizona and northeast Us.
Okay.
Sure I interpret that initially there were certain number of lines and then correct potential room to build more lines and we're going have aetna's second phase kind of planes.
That's correct.
Makes sense just that.
One.
One additional question if I could yes. It was there any impact on the last margins from mix in the quarter. I know you talked about some shifting maybe to more of the club stores in the Multipacks.
That I had a material impact on mix and then any any thoughts on restarting the share repurchase program now that.
I think that the macro independence lifted a little bit of the Faade, Sir your billion forecast the business.
I'll take the first part of those questions.
It wasn't a material impact the yes, we did have some dampening of margins because the convenience store channels with.
A higher specialty mix and higher price points.
For our customers that was that was down a bit especially in April in the first part of May.
Not entirely sure that thats, all going to come back.
Just depending on returned to work.
At least for the next six months.
And what folks are going to do in the us the less frequently or you are driving the less frequently are stepping in and a convenience channel and that that was certainly a difference in terms of behavior pattern that dampened our mix a bit second quarter around the share buyback front, we're going to continue to return significant value to shareholders with over $200 million.
Dividends this year with what we bought sub stock earlier in the year and we'll see how the year progresses and are not rolling out blacks matures in the back half of the year.
Great. Thanks very much.
Thank you.
Our next question comes from Phil Ng with Jefferies. You May proceed with your question.
Hi, This is actually John Benda going on for Phil How you guys doing.
Good.
Hey.
Congrats on the strong performance I just I just had one question.
I guess related to Dan's comments on Pacsun mix shifts, particularly.
You had noted the shift in grocery I'd say that 50% beer was in canton once you in that it move.
70% this quarter.
I would just hoping you can talk about.
Kind of what caused that was that mostly driven by people not wanting to go to the stores and candidly usable glass bottle.
And what you think is in the actual sticking it in the longer term for picking up that share of the shelf and then you.
In the release of they've also talked about an acceleration of substrate mix towards can in EMEA.
Maybe you can also discuss what's driving that and how that.
In can now be held onto in the longer term as well.
Sure.
First part of your question as it relates to South America Theres, a couple of things.
That you certainly have to pay attention to one one we've seen for the last I would say three to five years has been the reluctance by the smaller retailers.
And it's all throughout South America to carry.
Returnable glass the perishable nature of it they don't have a lot of square footage buying behavior in the in those areas is smaller stores. Its gas stations. It's it's much more in convenience channel.
And.
Those retailers are demanding cans.
And so that has been certainly I would continue to see that moving forward.
The other part is.
And a lot of South American markets Theres, a dominant returnable glass player and when they make a conscious decision or when they're losing share to cans.
At some point in all the markets that we're participating in they will make a conscious decision to move into cans and I think the combination of those two things have happened in Brazil.
And I would suspect that that would continue for the foreseeable future.
And as it related thing that it was also accelerated because of the pandemic answers I want to hold absolutely sure returnable glass roof and now being shipped.
Thank you outside of obviously the trends that we've been seeing for awhile.
When the on when the on premise is closed.
The the incumbent that is relying on returnable glass, they either fight with cans.
They're losing share and I would I would suspect that they've made such a conscious effort on that front end.
The retail movement is a lot bigger of an issue I think than what a lot of people have discussed previously so I think thats sort of here to stay whether it's 70%. This quarter 65 next it's appreciably going to be higher moving forward.
I understand it.
Yes in Europe, I think we're seeing as John referenced person.
We'll continue to see is.
As pubs and on premise is less and less.
Open there will be more Dolby more cans pushed and typically I think.
Because of the sustainable nature of the package and as folks move into filling those cans and if they had success with that I think it will be up it will be open.
To to what level and what extent in the medium and long term, that's yet to be determined but I would certainly assume that it will be a lift for us.
Moving forward.
To put a finer point on that a beer side in Europe, that's not the hasn't been the issue at all it's really been on the soft drink the non alcoholic.
And without going into any particular items, whether its energy whether it's soft drink because those are typically sold in the immediate consumption channel.
Thats whats been soft it's gotten better.
But it will continue to be soft just because the tourist trade in Europe is down year over year. This summer for the reasons, we all know.
Understood. Thank you and good luck in quarter.
Thanks. Thanks.
Our next question comes from Mark will be with Bank of America material. You May proceed with your question.
Thanks, just couple of them real quickly.
Can you can you talk about any bottlenecks that you may be in foundry.
Either from Goldman there from just equipment suppliers being stretched is you as you ramp up because there are a lot of can projects around the world. The other one on non we've seen some different numbers out there for kind of recycling and recovering rates on on aluminum beverage cans and I wondered if you could just share your perspective on those rates into different.
He is around the world.
Yes, first let me try and quickly take both and then maybe Dan can chime in I'll, Let me talk about not only is beverage and when we talk aerospace as well all of our projects.
Our folks have done a herculean job to make sure that they're all on track there was a couple in Europe that we slowed down there is one in particular down in Brazil that we consciously slowed down.
Just because the volatility in those markets, we have restarted them off but.
Kudos to our folks here in North America, whether it's that cups build out whether its fort worth whether its Rome, whether it's all the building we're doing enough where we are here in aerospace.
All of them have been going extremely well and that requires very close.
Collaboration and communication with the various supply chain, whether its equipment suppliers, whether its construction companies et cetera. So.
No impact on that for us other than the things that we consciously chose to slowdown and have now restarted.
Second with the recycling, we could spend hours on this what I might refer you to weaken happy to take it offline because we had addressed is very directly.
What it because it varies by country it varies by region and the solves for each of the countries and regions are different but if you go to our new sustainability report at I think Dan mentioned fall Dot com slash sustainability. It will all be laid out there in a very transparent way and we'd be happy to engage with anyone on this.
Because I think thats what.
Continued success of the beverage can means we have to continue improving the already good recycling rates because from an LLC a perspective, it positions that can even stronger relative to PT and relative to class.
Okay. Just one other one for me capital spending so I think Dan mentioned, the the practical size.
Two new plants, maybe bigger than anything else you've got your in the states I think.
Typically we think of kind of four lines is about the biggest.
Beverage can plants out there is there any kind of practical limit.
Size of a beverage can plant that you would want to put in.
Maybe I'll six or seven.
It could but remember that you got to factor in shipping.
And you could make it all in one place and ship it thousands of miles and lose all that money to the freight company. So theres a balance is nice, but theoretically you could build something as big as you want to just you got to look at where your supply.
So what is the practical limit you think John.
It depends by region in the northeast for example, northeast southwest, where we're talking about doing this population thats, where the biggest and or it's growing the fastest so it makes sense. If you were to save to do it in Iowa wouldn't make sense.
So it very much depends.
Okay, I'll turn it over the one segment.
And our follow.
Final question in some key bit Haiti with Wells Fargo Securities. You May proceed with your question.
Good morning, gentlemen, I hope everyone is doing well.
Yes. Thank you you too.
Thank you I will come at the U.S. question from a little bit of a different angle I.
I know you guys don't typically talk about utilization rate, but I've heard the term fallout from virtually everyone. So I'm, assuming that somewhere in the upper Ninetys and I think.
Maybe safety utilization you guys have talked about before where you feel comfortable is something more 95%.
So if I take a differential at 3% that implies that maybe you guys have already made 3 billion cans more than you otherwise would.
From higher utilization rates, and if you're bringing in as an industry two and a half billion units.
Your active actually short five and a half billion such that this.
15, 16 billion units of capacity coming to the market is is actually not that big of a deal is that what youre trying to get out John before and yes buildings case.
Yes, as an industry.
I tend to read don't forget theres been new capacity by some of our competitors over the last 18 months, so they've been benefiting from that but you're absolutely right. We are running full out and.
And as a result, the way you're thinking about strategically I think it's the right way to think about it.
The only other lever that you didn't indicate.
He is working with our customers on lowering safety stock levels.
Thats the other lever where you can.
Get more volume.
Okay, and then I guess transitioning over to Europe, you mentioned in the release that you're adding multiple line.
Support market recovery as well as capacity, so north American market I'm, assuming that wasn't the intent necessarily when these lines are planned.
So I guess does that imply sort of a protracted recovery in Europe, and I'm trying to marry that up I thought I heard you say Dan.
Mid to high single digit volume growth in the back half of the year.
And then as a quick follow up for that.
I guess energy drink production migrates across different parts of the globe does that free up some capacity pretty wide next year as that ramps up.
Yes, I think the yes, the 5% to 8% on the back half the year in Europe is correct you heard that right.
The.
It's it's yet to be determined on the bounced back of energy drink or through the convenience channel I think thats more or less but where you were headed with that question.
Some of those.
Some of those companies will be they'll go to where they can sell their product. So you might see more multipacks right you might see that showing up in.
In retail different than the convenience store channel there, yes, but on your capital say I just want to clarify it we're not putting capital in Europe to export into the U.S caresses for the long term growth in Europe, and whether it's the growth we've seen in the UK or in Russia or parts of Eastern Europe, Thats, where that's going.
And and we will I think what you are also referencing in terms of energy, it's not as if certain customers are moving filling from Europe to other places they are actually adding in other places and keeping what they have in Europe.
Because they see the growth opportunity in front of them.
Thank you guys. Good luck.
No.
Okay, Kelly, if we have any final questions.
We have no further questions at this time, Sir Okay, great well. Thank you Kelly and thank you everyone for your participation and once they save say would say well and we look forward to hopefully seeing many of you are virtually at least on our investor.
Investor Day on October six take care.
That does conclude the conference call for today, we thank you for your participation and we ask that you. Please disconnect your lines.
Yes.
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