Q2 2021 Ball Corp Earnings Call
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Please standby the conference will begin momentarily we thank you for your patience and ask the please remain online.
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Greetings and welcome to the Ball Corporation second quarter 2021 earnings 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 have a question. Please press the 1 followed by the 4 on your telephone.
Any time during the conference you need to reach an operator. Please press star Zero as a reminder of this conference is being recorded Thursday August 5th 2021.
I would now like to turn the call over to John Hayes CEO of Ball Corporation. Please go ahead.
Thank you Kathy and good morning, everyone. This is ball Corporation's conference call regarding the Companys second 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 results or outcome.
The differ or 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 of ball Dot com information regarding the use of non-GAAP financial measures May also be found in the notes section of today's earnings release the.
The release also includes a table summarizing business consolidation and other activities as well as the 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 CFO I'll provide some introductory remarks, Dan will discuss the package.
And aerospace performance and trends Scott will discuss key financial metrics, and then I'll finish up with comments on the outlook for the company.
To all of our global employees. Thank you for your hard work and for staying safe. We know the past 16 months of been trying on everyone and it's not lost on US that we are not out of the woods, yet COVID-19 is still with us from the science of the vaccine speaks for itself. Please get vaccinated. If you can if not for yourself then for your loved 1 and co workers.
In addition, I also want to thank our packaging and aerospace customers suppliers and their employees collectively we continue to navigate our supply chains COVID-19 related restrictions in certain regions due to the ongoing delta of area.
Reopening in other regions and we are experienced all of this while deploying new EBITDA accretive investments innovation and technologies that will increase the global availability of sustainable of aluminum packaging as well as delivery of national security environmental and climate intelligence.
Our long term prospects are right on track relative to our expectations. Our business had been very resilient and we have an exciting future ahead of us in the second quarter comparable diluted earnings per share were up 32% comparable operating earnings were up 22% global beverage volumes were up 13%.
The global aluminum aerosol volumes were up 20% and aerospace finished the quarter with record backlog looking to the second half growth continues across our global beverage businesses aluminum aerosol volumes continue to rise as regions reopen our cup team continues to rollout our ball of aluminum cup of more than 20000 points.
The retail distribution and is working with even more stadiums and arenas to ramp up the foodservice side of the business.
Aerospace has multiple launches and of hiring continues at an elevated pace of the staff aerospace contracts in the aluminum packaging manufacturing projects in the U S South America and Europe.
While we are still working through several supply chain disruptions in our aerospace in north and Central American beverage packaging business that Dan will speak to we are and will leverage existing contractual terms and conditions to recoup higher input costs in future periods in both our packaging and aerospace businesses.
We have an even greater conviction in our ability to significantly grow diluted earnings per share EBITDA dollars cash from operations and return of value to shareholders in 2021 of them beyond to that end in the Scott will elaborate we are accelerating our return of value capital allocation strategy strategy given the conviction.
We have for our future performance.
Second quarter 2021 highlights include our global beverage businesses, completing the start up of 6 lines, including 3 in North America, 1 in EMEA and 2 in South America, our global aluminum aerosol volumes, increasing 20% of as I mentioned before our Cubs team executing national retail distribution of the ball of aluminum Cup.
All 50 states and providing 16 ounce 20 ounce from 24 ounce aluminum Cup to numerous sports and entertainment venues as Covid restrictions moderate.
Our aerospace team, winning new contracts the lift contracted backlog to a record $3 billion. Following a significant win late in the quarter.
Our 2030 sustainability goals announcement, including ambitions to achieve net zero carbon emissions, 90% global recycling rates and 85% recycled content as well as establishing regional DNI goals in our vision of circularity for the aluminum beverage can.
Our business is hiring nearly 600 people net year to date to support our long term growth of normal attrition due to retirements.
Our board increased our quarterly dividend, 33% and reiterated our $35 million share repurchase authorization.
And we plan to purchase an excess of $500 million of stock this year, while deploying $1.5 billion and EBITDA accretive growth capital investments in summary ball continues to operate from a position of strength. Our team is executing at a high level standing up new greenfield plants speeding up lines in existing facilities.
Bringing new aerospace infrastructure expansions online to support our increasing backlog and hiring of amazing talent to join our team.
To everyone listening best wishes to you and your families for good health and continued safety and with that I'll turn it over of our President Dan Fisher Dan.
Thanks, John I Echo your thanks to our employees customers and suppliers are global HR, environmental health and safety professionals in our own personal actions continue to keep our teams safe and vigilant.
The teams are doing a great job managing of accelerated growth.
Large scale capacity additions in the intermittent supply chain challenges.
We are entering the second half with a lot of momentum of few manageable challenges in a visible path of strong performance throughout 2021 and beyond.
Second quarter global beverage volumes up 13% versus 2020 and ongoing strength in EMEA and South America offset startup costs in North America retail marketing investments for our retail Cup launch.
The later than anticipated award timing for a new aerospace contract and higher year over year costs.
Demand for aluminum beverage cans continues to outstrip supply around the globe.
Our global Engineering and operations teams are executing at a high level. We are on track to exit 2021, with an additional 12 billion units of new installed capacity and we recently announced global projects all of which underscore our investor day commentary cans are in high demand contracts are in place and ball as well.
Physician.
Our focus on speed the market talent training systems and operational readiness is paying off as we continue to ramp up new capacity on time and on budget.
So all of the teams listening our time is now and you are making this happen keep up the great work.
As John mentioned, we have hired an additional <unk> hundred colleagues year to date with the majority of them located in the United States.
Our investment in talent training and development and immersion into the ball culture and EBITDA mindset is of vital part of near and long term success.
We are blessed as an organization to attract this talent and the current environment and are committed to their success.
Can demand across all beverage categories remained strong our focus on improving customer experience by expanding can availability via new production coming online and providing our network latitude to build adequate inventory will continue to aid that trend.
We also continue to make significant progress and operationalize and commercializing sustainability.
Following of me as lead in 2020, our operations in South America, and North America are on track to achieve ASI certification by year end 2021, and each of our global businesses set specific regional DNI goals as part of our 2030 sustainability goals announcement.
Proof points of our progress include women, representing over 40% of the new team in 1 of our Brazilian plant investments and in aerospace over 40% of our summer interns and new hires representing ethnic and gender diversity.
We commend our global colleagues commitment to our sustainability journey.
And also wish to recognize our supply chain recent investments in sustainability focused initiatives.
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 continue to be very positive about our ability to achieve our goals and deliver low double digit ball.
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.
Ball is well positioned to capture 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 are in place for aluminum and other items.
And as we said on last quarter's earnings call now we execute.
Now for a few brief comments on each region.
In North America beverage second quarter volumes were up 5% versus 2020 and up 6.4% versus 2019 during the quarter.
Earnings were up slightly and as expected higher volume offset the combined effect of project startup costs and operational efficiencies.
And plants brought about by unsustainably low inventory entering peak season.
Glendale, and Pitzen are both operational and as of today 3 lines are running in Glendale and pits in the first line is coming up its learning curve.
Both plants will exit 2021 with 4 can manufacturing lines installed at our bowling Green in the manufacturing plant will start up early in the fourth quarter of 2021.
The remaining half of the anticipated $50 million of startup cost will flow through in the second half of 2021.
Across our broad customer base beverage can demand is strong in all brand categories alcohol soft drinks energy and water.
Despite recent chatter on heart sales, there's nothing has changed about our plans, we expect favorable growth trends across all categories to continue which will drive more EBITDA enhancing opportunities supported by long duration contracts with strategic customers and large regional accounts.
In the near term the work to build adequate inventory levels will offset some of the benefit of having new capacity online during the third quarter and position the business for success.
Looking out longer term ball, we'll build another beverage can manufacturing plant in the southeast our new North Carolina facility is supported by long duration contracts with strategic global customers. We are excited to invest alongside our customers and anticipate the facility to come online in late 2023 or 2000.
24.
In EMEA segment volume for the second quarter was up 18% versus 2020 on easier comps given prior year's volume declines due to COVID-19 onset timing and were also up due to customers, adding new can filling investments first.
First the second quarter 2019 volumes were up 9%.
Across balls EMEA business demand trends and positive momentum continues.
We foresee European beverage can volumes up high single digits throughout second half of 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 and the biggest can markets across EMEA.
Our new Greenfield plants in the UK, Russia, and Czech Republic are supported by long duration contracts for committed volumes with global and regional key accounts.
Our EMEA team is executing very well and fully prepared for these exciting investments.
In South America second quarter volumes were up 15% versus 2020, and up 16% versus 2019, given easier comps due to the prior year's COVID-19 impact and despite cooler than normal seasonal temperatures and delivery channels and large cities limiting alcohol purchases.
We continue to see more earnings upside in South America.
As John mentioned, 2 new lines ramped up in existing facilities in South America during the quarter and the fruits of all Brazil plant is preparing for a late third quarter start up additional.
Investments both in Brazil, and throughout the region are also anticipated.
Similar to our prior commentary, we anticipate can growth in the mid teens for the full year and additional growth will be possible. Once we have more capacity on line.
In summary, our global beverage team did a terrific job navigating some uncontrollable during the quarter, while also executing as well as we can on the things we can control of.
Our aluminum aerosol team did an excellent job supplying growth across EMEA, resulting in 20% higher volumes in the second quarter globally versus 2020 and <unk>.
12% higher volume versus 2019 for the same period.
The team continues to manage bearing degrees of reopening status in Brazil and India.
In addition, the business continues to amplify the sustainability credentials of our extruded aluminum bottles to deliver innovation across multiple brands and product categories, including the second quarter rollout of refillable Reclosable personal care packaging at a leading U S mass retailer.
Our cups team continues to raise awareness established distribution execute initial sell through and invest for continued growth in 2021 and beyond.
In addition to the 50 states retail launch John mentioned the team continued to invest in the party starts here marketing campaign to engage and educate consumers about infinitely recyclable aluminum cups, we continue to expect our cups business to turn a profit starting in 2022.
Turning to aerospace the team continued to win contracts and year to date contracted backlog is up 25%.
The aerospace business dealt with lingering effects of inefficient supply chain.
Though exiting the quarter, we saw a notable improvement with key subcontractors and we're exciting excited to book of key contract win at the end of the quarter.
This win and the trajectory of recent performance sets up the business for notable sales and earnings growth in the second half of 2021 and beyond in addition to margin improvement beyond 2021.
At ball Aerospace, we are managing challenges nurturing our culture, while capturing the future.
We appreciate all of the amazing work being done by not only the aerospace team, but everyone across the organization and with that I'll turn it over to Scott.
Dan comparable second quarter 2021 diluted earnings per share were <unk> 86 vs 65 in 2020, an increase of 32%.
Second quarter comparable diluted earnings per share reflects strong global beverage results slightly lower interest expense and a lower effective.
<unk> of tax rate.
Offset by previously discussed higher year over year corporate costs, as well as labor and startup cost 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 from 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 17%.
Full year interest expense will be in the range of $270 million and full year corporate undistributed costs recorded in other non reportable are now expected to be in the range of $95 million.
We continue to see a path of doubling our cash from operations by 2025.
Our 2021 cash from operations will grow in line with earnings trajectory and be aided by a source of working capital. We expect 2021 total capex to exceed $1.5 billion.
And returns on capital beyond our 9% after tax hurdle rate will flow through as new growth projects become operational later in the year and in the years to come.
Ball continues to be good stewards of our cash as fellow owners and in alignment with our EBITDA discipline, we will prudently balanced real time growth opportunities with consistent return of value to our shareholders via dividends and share repurchases given the second quarter strength and net leverage in our target range, we will return significant value to shareholder.
As of yet dividends as John mentioned earlier, and our ongoing 2021 share repurchase program of at least $500 million.
In 2021 will return approximately $1 billion to shareholders, including dividends and buybacks and we intend to double that total return to shareholders in 2022 with that I'll turn it back to you John.
Thanks, Scott 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 of the commitment to being close to our customers and with uncompromising integrity. Following our strong year to date results and outlook for the remainder of the year, we are even better.
<unk> positioned to exceed our comparable diluted earnings per share long term goal of 10% to 15% and exceed our EBITDA dollar growth goals of 4% to 8% per year in 2021 and beyond.
We'll work safely together together to execute on projects support our customers' growth drive the circular economy and generate significant earnings cash EBITDA and return even more value to our shareholders and with that Kathy we're ready for questions.
Thank you if the we'd like to register a question. Please press the 1.
Alrighty of telephone Youll hear from Tom prompt his knowledge of our classic.
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And our first question comes from the line of Ghansham Panjabi with Baird. Please proceed.
Thank you and good morning, everybody.
And then maybe if we can pick up on the hard Seltzer comment obviously the narrative of the market has changed quite a bit.
Maybe you can give us a sense as to how many units you think hard sales centers will total for beverage cans in North America.
The 2021.
What does that number look like for 2022, and then what gives you confidence that the momentum will continue in context of companies like Molson Coors or the rationalizing some of their brands.
Thanks, John I think for how we look at that category is and I think I've made this kind of before we look at sort of the ready to drink alcohol space and maybe just to give you some context.
For Ball Corporation.
Hartzell officers of our unit volume make up less than 5%.
We've seen obviously, we participated in the growth of that space.
But it is not.
The underpinnings for the things that we've been talking about in terms of long long term securitization of contracts EBITDA accretion, it's not on the back of that that category, specifically and so I think it will continue to grow its clearly not going to grow at the rate it has been.
I think what's what's been clear in that space is the folks that continue to innovate and innovate effectively are the ones that are taking share.
And.
So from that perspective.
We are we believe that we have a right to play in the innovation space and I think we benefit from those customers in particular.
So that's where our focus is I'm leery to comment on unit volumes across the entire space for the back half of the year, but maybe that gives you a sense of how we at ball of kind of view of that category.
We're continuing to bet on the long term trajectory of the can.
Mccann wins in every channel.
This is 1 that the.
<unk> has done really well over the handful of years, but we like we like a lot of other categories and a lot of other space is equally.
Okay that makes sense and then if we switch to Europe and.
And the big improvement versus 2019, I mean, obviously, you had an easy comp last year, but really.
What is driving the margin improvement versus 2019, even with the aluminum cost that are much higher and obviously dilutive.
What's driving that improvement there.
This may be too simple and the answer but.
Our team is executing really really well in some instances of little ahead of our expectations the even.
We've got a really stable footprint over there.
We're on the forefront of major.
Greenfield expansions, but that's a stable.
We've had the benefits of incremental speed ups and incremental line extensions and and Thats a much easier operating environment, coupled with the fact that the team over there is doing a terrific job. So I think solid contracts that we've leaned into and talked about globally. The <unk>.
<unk> performing extremely well.
And the fact that they benefited from the incremental growth expansion as opposed to some of the large greenfield footprint. So I think the combination of those 3.
And that team just continuing to perform exceedingly well.
Perfect. Thank you.
Okay.
And our next question comes from the line of Jeff <unk>.
<unk> with J P. Morgan. Please proceed.
Thanks very much.
Hope you're at $12 billion cash capacity expansion by the end of the year.
How much of that volume is already committed.
Overwhelmingly it's committed.
Haven't.
I think we've been pretty consistent on the capacity, we're putting in the ground, whether you've heard from Scott or John at other investor days in outlets.
We haven't deviated from that position they are long term contracts they're committed.
The effectively in many instances of.
Take or pay clause.
Clauses in them.
Good terms and conditions.
An equilibrium of risk.
That's improved over the course of the last 4 to 5 years in terms of the contract integrity.
But yes there.
They are overwhelmingly.
Contracted I'd say, 85% to 90% of each 1 of the facilities as contracted.
Okay great.
From my follow up I think your long term protection.
The growth in the.
North American can market as support of 6% so call it 5.
Of the 5% growth you expect on the normal basis.
How much of the growth comes from alcoholic beverages, and how much from non alcoholic beverages to get to the 5.
Yeah. Good question I think going back to 2019, when we had an investor day, and we've laid out the growth trajectory of we've been pretty consistent that I believe it's going to be somewhere in the neighborhood of 2 thirds alcohol 1 third.
The other.
It may be shifting a little bit more to 60% alcohol and 40% and the reason for that is energy the energy market continues to absolutely be on fire.
And so that's the only fundamental change I see in like the underlying architecture of the good news is that means volumes more [laughter] than what we anticipated a couple of years ago, but that segment in particular and.
And Theres more fitness energy drinks coming online Europe, and consumer you see all of this and we're obviously going to benefit from it.
I'll, just add that let's not forget that that 4% to 6% did not include any water any stillwater and weird, even just driving in and the car today I actually heard of radio commercial about still of new Stillwater brand coming in and so.
<unk> provides it was delayed about a year because of COVID-19, but we are starting to see it.
Little bit less so here in North America, certainly in Europe, and we expect that to be upside to that 4% to 6% volume growth.
Great. Thank you very much.
Yeah.
And our next question comes from the line of Anthony Pettinari with Citi. Please proceed.
Good morning.
Morning, John John Dan after bringing up and ramping the additional lines in the North America.
<unk> would you expect to still be importing cans at year end can you just kind of give a snapshot of where your global footprint stands from our import export standpoint, and when do you get to a point, where you no longer need to import into North America.
I think we'll be importing far less in the back half of the year and having said that.
The the cadence of growth we're still in the early innings of growth so as the.
All of our channels and all of our markets continue to open up and we lean more into.
New innovations et cetera, those could spur some imports, but we're not planning on near as much to the extent that we saw in the first half of the year, but having said that even going into 'twenty..2 we still expect some imports as we kind of catch up the all of this if you go back probably.
I'll call. It 18 months ago and asked US we would have probably said the amount of imports in 'twenty 2 would be negligible, if any but we're seeing more just because the overall demand growth and we want to be prudent in our investments and as Dan mentioned earlier, we make the investors based upon secured contracts and so as those come through that <unk>.
<unk> is an underpinning, but I would expect that we're still.
Doing some level of importing in 2022 absolutely.
Okay. That's very helpful and then.
And with the Delta variant, we're seeing some renewed lockdowns I guess, maybe in some Asian markets, where you don't participate as much I'm just wondering if youre seeing or does your guidance anticipate any impact on premise demand.
In any of your global markets from from renewed Lockdowns.
Now I know it doesn't because as you know I think it's actually only upside the can is.
Seldomly.
Certainly here in North America lessor in Europe, but is very does not skewed towards the on premise.
So I think as the price comes on.
I think they are upside because of the.
The anecdotal evidence that we have seen and heard is that as the on premise does begin to open up the the kegs of the ones at risk because they had the flush so much bad product because of the Lockdowns and so bar owners and restaurant owners are looking at much more flexible and adaptable our supply chains.
Within their own.
Within their own walls, and I, certainly think that favors. The can so in fact, I think as things open or close there is little downside, but more upside.
Maybe just adding a comment to John.
Good take on on premise I think.
We're also seeing the continued investment into the direct channel and there have been behavioral changes.
<unk>.
This is the operator of the main line has disconnected day will be dialing back in so please stay on the line. The main line has disconnected, but there'll be joining shortly so please remain on the lines will be on silent until the rejoin I will let you know once they have John.
<unk>.
Hum.
Thank you for standing by I do have the main line connected the please go ahead.
Yes, apologies for that I do we see them somehow dropped off but we're back so Kathy.
Kathy.
Perhaps like pick the next question.
Certainly thank you.
And the next question comes the line of Neel Kumar with Morgan Stanley. Please proceed.
Hi, great. Thanks for taking my question.
You mentioned several supply chain disruptions in the aerospace and northern Central America segments.
You just quantify for us the impact from the quarter and what impact do you expect from these issues in the second half of the year.
Yeah on the aerospace side I think we are we saw continued struggles earlier in the quarter got much better in the back half of the quarter, we think going we feel much better going forward that we're kind of beyond the challenges that we had the supply chain and north of Central America.
You know it.
Seeing.
The increased costs as it relates to the warehousing coatings all kinds of things I think everybody is seeing that across their their supply chain. So we've been able to our teams have done a great job of making sure that we have metal to run our operations. So we haven't had any issues from that standpoint, but it is it's a challenging environment, but 1 that the we're navigating through pretty well.
In total I think in aerospace, we think of costs in the range of probably $5 million in the quarter and I think in North America beverage and all of our startup costs. We were in the 11 of 12 or excuse me $12 million to $13 million range and then all of the other inefficiency costs of Scott alluded to and don't forget we entered the quarter with the lowest inventory, we had and so the U S.
You're going into a seasonally high period of time in North America, that's what created the disruption, but that cost is probably in the range of $20 million to $25 million and.
Dan talked in his prepared remarks of who you know a big focus in the second half of this year is as new capacities coming on line is getting our inventories back to a more normalized level. So that we are not making to order, but we're making a making to stock which is very important from a whole supply chain efficiency perspective.
It's important to.
To add to that debt.
When we when we talk about we're doing an effective job controlling what we're controlling especially within the 4 walls of our plants. It's exactly the John's comment when you. When you have historically low inventory levels that just promotes more label changes of more turnover. So our folks are operating incredibly well, they're just doing it in.
Challenging inventory level of circumstances.
Great that's helpful and you mentioned.
The pumps being profitable in 2022.
I was curious what the drag is in 2021 and how much capex and investing so far and can we just generally expect the major near 10% of return on that investment on an ongoing basis.
So all the.
The answer a couple or add a couple of comments and then maybe turn it over to Scott.
Number 1 we're having to seed the market in terms of promoting and building the brand and so you could you could see commercials in traditional media you can see an awful lot of activity in that arena. So.
We're spending that money as we launched you only have 1 time to launch in the 20000.
Stores, so we've leaned in.
In the second quarter, even than probably what you see in the back half of the of the year in terms of investment to build the brand.
And then it's a function of volume against the fixed cost right. So as were seeing volume continued to pick up.
And the seeing some nice velocity turns in this retail we have pretty good line of sight into where we're going to be exiting the year in that.
Real good line of sight in terms of this is going to be able to transition into a profitable business in 2022, and we've invested of rub $250 million. So far is just the start at just in the wrong cups plants, so far and we expect to have returns, yes, well in excess of the 9% as it matures to Dan's point I think the team has done a of.
Amazing job given kind of COVID-19 restrictions of getting into 20000 retail locations in a really short period of time that doesn't come without some additional investment, but we expect that investment to be well worth it as we get into 'twenty to 'twenty, 2 and beyond and start to see those returns and the 1 thing I'll just add on that is let's also not forget the foodservice side, the the sports and entertainment.
The venues Theyre just in earnest over the last month or so just starting to to open up even on the on the concert side, they're just starting as we speak and so as we go into the second half of the year, that's going to be a big focus and then.
Assuming normal no restrictions or very limited restrictions in 2022, that's where we see the the road the profitability.
Okay.
And as a reminder, Q Register for a question. Please press the 1 followed by the 4 and our next question comes from line of George Staphos with Bank of America. Please proceed.
Thanks, Hi, everyone. Good morning.
Thanks for taking the question.
So I wanted to hit again on innovation and you know I think sometimes it's good to remember 6.7 years ago. I think you all were talking about how especially on the alcohol side, there wasn't innovation relative CSD and <unk>.
That's obviously changed a lot in churn is is good when you look at your customers' new product pipeline, especially in alcohol.
Are you more or less confident looking out a year of 2 years than you were a year ago in terms of the innovation and what it will mean for your growth and return and why or why not.
I'll give a very high level view I'm I'm, probably a little bit more excited why it's not only just because of innovation. It seems like every new a new brand that's coming out is coming out in cans and so the amount of the number of sheer number of new product inquiries, we get from big.
Big customers regional customers small customers has been the greatest I've seen in my 20 plus years of Ball Corporation.
Building on that George.
The first is 3 or 4 years ago every large CPG company now is getting into the alcohol space. So just by virtue of that we're seeing a lot more innovation on that side and as John said.
Almost everything is going into cans, so I'm more bullish I don't know, which one's going to win.
But we know that the can is going to win and we continue to place our bets on debt.
Are you seeing in the innovation pipeline any sort of mixed.
The mixture between previously separate of categories. So.
Energy drinks and alcohol energy drinks and coffee and what that might mean for.
Youre Cam business going forward.
Uh huh.
I think yes, youre, probably just scratching the surface on the hybrid anything she can get alcohol into is being contemplated.
Yeah, Yeah, just think of anything on that sorry, the same thing on the fitness side anything they can have fewer calories to give you energy or some benefits. There's no shortage of innovation. There. Yeah. You know George just give you a context of people people have been talking a lot about spiked seltzer will what we're also not talking about of the ready to drink debt is just totally booming.
As we sit here right now you know as Dan mentioned, the energy is going very strong and we're seeing more and more coffee going in with.
With all sorts of functional benefits, whether it's the various oils being put into it or other things like that and so again across the spectrum. That's what we're seeing.
Okay. Thanks for that hopefully no no alcohol and milk drinks, but we'll see.
I guess my last question there is that there is such a thing.
Russian George.
I forgot I forgot.
Look for that and then they can at some point.
But not already out there.
So.
You mentioned that youre going to look to double of.
The value of return.
Next year versus this year.
And I was wondering you know what.
What is ultimately driving that recognizing it's going to be a combination of things is that the confidence in the return that you're generating from your investments, giving you the wherewithal to do that.
Is that the implicit.
Higher cost of equity now being put on ball stock because of the way the stock has been performing and so maybe it's time to pull back and and reward shareholders.
Is it doesn't sound like it lack of confidence in the growth outlook. So maybe it's time to start redeploying that capital and I recognize it's it's going to be probably something totally different but 1 of your thoughts there and I'll turn it over from there. Thanks, guys and good luck in the quarter. Thanks sure sure George I think it's I think it's more conviction and confidence in our business.
And the prospects of our business longer term.
That's where we're in a comfortable leverage you know we said we wanted to be of 3 to 3.5 times of year end debt to EBITDA.
We see our earnings growth over the next several years out of growing at a pretty good clip.
So we have the ability to basically borrow more money.
And keeping the leverage flat and returning a ton of that value to shareholders kind of like what we've done in the past historically, so I think its conviction about all of those things that gives us the confidence to.
The raise the dividend, 33% a week ago and to ramp up the share buyback and I think I think this year will be a good start and I think we get a lot more of it as we as we go forward.
And people who have been around ball of long enough over the last 20 years 25 years know that this lather rinse repeat strategy of you know, making good investments are getting your debt down to the optimal capital levels and then giving it back to shareholders that is a tried and true model and we are the key.
The point that I was making my prepared remarks, as we had planned on really doing that in 2022, but we have enough conviction in the growth of cash flow of the growth of earnings and where our balance sheet is as Scott said that we're going to be accelerating that and we don't have to sacrifice growth investments, we're still going to where we're able to invest heavily in the growth supported by those.
Long duration contracts, the Dan talked about and we're gonna flow of lot of cash and a lot of that extra cash is going to go back to the shareholders.
I appreciate the thoughts thank you very much.
Thanks George.
And our next question comes the line of Mike <unk> with Barclays. Please proceed.
Great. Thanks, Good morning, guys good morning.
I wanted to circle back to the inventory conversation. So can you maybe just touch on kind of how far inventory levels. Currently are below where you want them and Relatedly I assume just given the demand strength over the past couple of years your north American plants have been running and producing Oh, what I, what I would say.
There's probably almost unsustainably high rate. So is it fair to say in the more normalized environment. When you get all your new plants up and running you would ideally like the dial some of those operating rates back just to keep things smoothly running or just how should we think of the plant level, how you would like to operate.
The steady state versus kind of how you're operating today to kind of make do.
Yeah.
Out of high level.
We are.
Essentially running this business during peak season.
As it makes the order instead of a make the stock business.
And.
Because of that.
You see.
Very different behaviors from the and consumers in North America, So the volatility of what products of men and what products.
You know when at a lesser degree.
If you don't have safety stock available to lean into that that manifests in the more label changes and more conversions and that's what our plants are up against right now.
We we have known we've got some significant footprint investments coming online here.
As I think it's both John and I mentioned in our prepared remarks 3 lines came on in North America This quarter.
They'll start to gain efficiency and then we will have built out into facilities 8 lines by the end of this year that will give us some much needed breathing room.
And as those come on line and we can build the stock in.
The traditional December January time periods, we will see the benefits in peak season next year in North America.
And you know we're not done on an expanding obviously to continue to make sure that we've got the appropriate asset utilization and you'll see the efficiency levels pick up in our plants, because they'll actually have a fighting chance.
Could do what we're planning to do it just to give you of some numerical context around the you know historically, meaning over the last set of about 5.7 years, we would run on average inventory days in North America in the mid Twenty's call. It.
We're down this summer in the <unk>.
Mid single digits.
It's the Dan's point, you can't efficiently run our system of network like debt when your inventory levels are so low what we're planning on doing in the second half of this year is get them back to the mid teens call It 15, plus or minus a.
Because that's where we think more optimal levels can be I don't think we'll get back to the 25, because I think the world is a bit different in the velocity of Dan's point of label changes is different but certainly.
And this is the operator. Unfortunately did disconnect again, I will just wait for them to dial back in so please just remain on the line.
Please go ahead.
Yes, sorry about that I'm not sure what we got dropped off again, but I think I was in a finishing up the saying you know in the summer we've been in the mid single digits and we expect to get back by the end of the sheer hopefully to the 15 days.
Which we think is of much more optimal level because otherwise, we're just stressing our system too tightly.
Okay.
And our next question comes line of Adam Samuelson with Goldman Sachs. Please proceed.
Yeah, Thanks, and good morning, everyone.
Good morning, good morning.
Maybe first 1 of them.
You get some of his color on the aerospace business and you alluded to some of the kind of subcontractor and supply chain challenges labor issues, there, but a much more constructive revenue outlook.
For the back half of the year end.
<unk> talked about margins expanding in 2002 has there been any change in terms of the revenue.
Outlook for the business for this year of anything slipping into next.
And then I've got a follow up from 10%.
No to the revenue.
And a little on the profit but negligible.
2 things that influence that of Scott already indicated number 1.
And I think I've made a comment in a prior.
Call.
We were operating pre COVID-19 with about 80% of our employees co located on campus.
We exited Q1 at about 50%, we're exiting Q2 about.
About 65% so we're trending.
In a way, that's allowing us to be a heck of a lot more efficient and collaborative in terms of our efforts. The same phenomenon is happening with our sub contractors. So.
So the combination of that gives us great confidence in the back half of the year and why were.
Bullish on the revenue outlook.
Outlook.
Why it's in line and the in referenced the Johns comments of nothing has changed we did secure a significant project.
Kind of the last week of the quarter and that will give us the ability to continue to execute in line with our previous comments and expectations on the business and to that point then.
We had expected to.
To put that in the backlog in the beginning of the second quarter is really more towards the end of the second quarter and and so that was in some part.
Relative to our expectations, a little delay, but it was the right thing to do for a variety of reasons, but nothing has changed as we go forward, we're really excited about that business.
Hum.
That's really helpful and then to the.
The earlier question point on the acceleration in cash return next year and it's a big step up you announced the the 33% dividend increase.
Last week, it should we be thinking the dividend as the even bigger kind of.
Component of that or do we think that with where the dividend handed now that's comfortably north of $101.5 billion of buyback next year is the kind of.
Plan for a pair of the moment, yeah. We I mean, we kind of look we look at the dividend all the time, we don't adjust that on a regular basis. We look at it from time to time, and then make larger I guess adjustments.
Most of that returns are obviously going to come in the form of share buyback.
But we'll keep a balance between dividends and the share buyback.
But you're right.
Kind of at the front end of acceleration of <unk>.
Both of those as we see have more confidence as we look out into the future of our cash flow and EBITDA generation.
Yeah that kind of ours.
Really helpful I'll pass it on thanks.
Yeah.
And our next question comes the line of Adam Josephson with Keybanc. Please proceed.
Thanks, Good morning, everyone hope you're well.
I think Neil asked earlier about the cup launch and the costs associated with it and Scott I think you addressed the capital costs, but not necessarily the P&L cost. So can you just give us a sense of what perhaps the swing could be if.
If you turn a profit next year compared to whatever drag you're experiencing this year.
I think this year, we'll invest probably in total close to $30 million and the startup of the plant of getting it into retail and all of that I think the marketing cost that we're experiencing this year, mostly in the second quarter, but some also of the third quarter will reduce greatly next year and I think our vos.
<unk> will grow quite a bit next year as of as John mentioned kind of on premise foodservice stadiums venues those kinds of things come back.
We are having nice success on the retail side nice success on the on line.
So I don't think it'd be a nice contributor year over year I would expect it to be a nice swing.
The Guy I appreciate that Scott and Dan I think the Jeff was asking earlier about the composition of the long term expected long term growth in the North American beverage can market and you mentioned, perhaps now youre thinking of to about 60% alcohol and you've talked about hard seltzer in beer in ready to drink cocktails.
Can you just talk about what's informing your view of how each of those categories will contribute to that growth I mean, how.
What kind of fore sight your customers would have about the rate at which each of those products is likely to grow over that period.
Sure I mean.
In the most in the simplest of terms that's it.
Roughly the construction of our of our revenue now.
And we're seeing of grow consistently across all product lines and channels.
At this point.
And so we see that the continuing we're seeing equal number of innovations across all categories in all channels.
I think.
The fact that a couple of the larger beverage companies are leaning into alcohol gives you some.
Belief that it will alcohol will continue to represent a majority position of our volume concentration.
But as I think both John and I commented on this call.
The 40% the wildcard within the 40% is gonna be Stillwater, and the accumulation of that and the.
In the marketplace. So.
If the 40% grows at a higher clip, we're all going to like that [laughter] cause of theirs. We still believe everything is going to grow in line with our expectations. It's been consistent that just means that we are seeing a further entrenchment and growth of new Stillwater categories.
Great. Thanks, a lot Dan.
And our next question comes from the line of Arun Viswanathan with RBC capital markets. Please proceed.
Great. Thanks for taking my question.
I guess I wanted to go back to the market development, you know around South center, and just the whole ready to drink alcohol.
The market.
A lot of us are under the impression that the market is sold out until 2023 here in North America.
And so when the seltzer market I guess moderates.
How does that kind of affect the other categories do you think that theres a lot of new products that are of pent up on that maybe get some.
Some cans does that give you a little breathing room, you know just given the tightness that you've experienced over the last couple of years is that something that's potentially welcomed maybe.
Maybe you can just kind of square away how to interpret the slowdown and the impact on the other categories.
Yeah. Thanks for that I would say first off I think you're hitting on an element that is there's still lost [laughter] the broader followership, but every single category every single customer and every channel is on allocation in our 3 biggest markets. So there is an impact of growth.
I don't know if it's disproportionate to 1 category because I don't know what the ultimate sell through of those products are but we.
We we are contributing to some of the and customer growth targets and rates are just by virtue of the fact that if we had more capacity we'd be selling it through.
The second question, maybe I'll turn it over to John.
The ad commentary to that but.
Yes, what I was kind of say as you know don't forget we've always taken a portfolio approach to this and as Dan had mentioned earlier the hard seltzer itself represents 5% or less of our North American volume and so we've always played on the on the mainstream beer side. We played on the import beer side, we played on the Spike Seltzer.
We trade wine on ready to drink alcohol all of those you have to look at it from a portfolio theory and to Dan's point from a portfolio theory.
The perspective that were on allocation in all of these things are growing and so I do think the the focus on hard seltzer is probably a bit overstated here because people are still drinking more alcohol from canned products period.
Yeah.
Great. Thanks, and then if I could similar question just outside of the U S. What's the the penetration and I guess the momentum that you're observing and a similar new products. Maybe you can just touch on Europe and Brazil.
Have you seen any you know potential increase and some of these new categories and those regions at all.
Yes, the the new entrants.
That are coming in the South America are 100% can entrants in the call.
And that's been happening over the last handful of years and so their influence.
And maybe more importantly.
How the how the end consumer is consuming products.
Through the the smaller retail channels and the mini marts and that part of the world.
They like cans, a lot more than they like the historical return of returnable glass offerings, and so we've seen a manifestation of <unk>.
To your point, if the new products coming out it's disproportionately coming out in cans.
And in Europe.
That's the lowest can penetration.
Market in terms of substrate penetration in anywhere in the world for us outside of Mexico.
And.
Much of the same I think there is ample growth and away from from plastic from glass from our on premise kegs through direct channels. So we're seeing that we're seeing the can win I don't know that I could point to 1 particular category because we're seeing it across every category.
So theres a heavier lean in terms of of cans and the thing that Emboldens us and continues to.
Sort of Echo Johns comments at the outset that were right in line with our expectations.
Nothing has changed we continue to see the filling operators are overweight to manufacturing can filling lines and thats whats getting purchased and that's what's getting implemented and installed everywhere around the world Yeah to the to Dan's point on that let me just amplify because the not for years.
The 1 third of all new filling lines going in were for cans now it's closer to 2 thirds of all new filling lines going in for cans and to Dan's point its across all categories, whether it's beer soft drink energy water craft wine F. N B's you name it it's across the board.
Thanks.
Yeah.
And our next question comes from the line of Salvator Tiano with Seaport Research partners. Please proceed.
Yes, hi, thanks for taking my questions.
First of all be very quickly if I understood correctly from the burden of gaining that you mentioned 1 billion in the top line returns this year and I think the deemed the NIS 200 million. So does this imply the excess of 500 million buyback is actually 800 or did anything of any figures there.
The governor of the little Hot with the dividend bump with the we just did the dividend will be a little higher than that but the share buyback is kind of of that $7 million to $800 million range, Yes, that's correct.
Okay, perfect and in Europe can you provide us a little bit of with St. Paul of them on.
On each margin UK rail share Continental Europe, how we performed during the quarter.
Yeah, I mean, they're all consistently up.
And that the mid to high single digits.
I I think ever.
Ever since the third quarter of last year, when things started to reopen.
Not as much as in the U S. But the folks have figured out of way through the direct channel or are there avenues to get the beverage of choice and so we've seen consistent growth across across the continent.
Yeah.
Okay. Thank a lot of do you think about the growth in Russia.
We were on allocation of unfortunately, there because we don't have enough cans from the market think about the U K for all of the things we talked about the Dan mentioned 2 earlier this whole sustainability, we haven't talked much about this today, but you can clearly see in Europe, a strategic mind shift changing as we speak but let's not forget in <unk>.
2025 of the European packaging director of comes into full force in terms of recycled content and other things and I think we're seeing changes in behaviors by not only the consumers, but also our customers in anticipation of that.
Okay.
Yeah.
Yeah.
And our next question comes from line of Phil <unk> with Jefferies. Please proceed.
Hey, guys, John you mentioned that Russia, you're on allocation. So curious with the capacity you're adding on 1 do you have a anchor customer and then I noticed 1 of your bigger competitors of the region is adding more capacity does the market have enough demand to support that incremental supply.
Without question I'll turn it over to Dan and he can answer of more succinctly, yes, we have of long term contracts.
With all of the major players there, especially on the brewery side.
And those contracts were entered in.
In alignment with adding this capacity.
And so the the challenge is going to be the market is growing faster than when we were negotiating those terms a while ago. So we're constantly monitoring that marketplace.
Got it and then Dan you mentioned that you know really great execution and running full out in Europe, given some of the investments you're going to be making in ramping up is that kind of have an impact on your margin. When we look out to next year for Europe in in a meaningful fashion.
The.
The U K and the Russia facilities, they can't come on line fast enough of I got tremendous confidence in the team's ability to ramp those up.
In terms of the Czech Republic that market can sometimes be a little bit more volatile, but we've got again long term contracts.
A really good team executing there.
I don't anticipate the weight of startup cost to be in line with what we're experiencing in the U S simply because those facilities are a little smaller.
And the cost profile, obviously in the Czech Republic, and Russia are far different than the U S U S wage rate.
Got it that's helpful and then in North America, you know really solid growth, but certainly lagging.
Some of the other markets was that largely a function of of each didn't have enough capacity in the win some of the past year of investing ramped up in the back half do you expect to run a little of full or any color on how strong that volume could look like if you run full out in the back half this year.
It's almost 100% capacity in the not to belabor. This point, but we were the less efficient just simply because we didn't have any inventory of the buffer when things took off and of product was outpacing some of our anticipated projections. So we left a couple of I would imagine we've left a couple of points.
Of growth on the table in the second quarter because of the combination of that and.
In the back half of these lines.
<unk>, we've got really good contracts there.
We are in constant conversations with the customers and they're they can't wait to get those cans. So I would expect the accelerated growth in the back half of the year because of the capacity we put in place.
Okay. Thanks, a lot guys I appreciate it okay. Thanks, Cathy we have time from 1 more question. If there is 1.
Thank you our last question comes from the line of Alton Stump with Longbow Research. Please proceed.
Great.
It's a good question.
Got to ask about South America, there's a lot of talk about Europe as you tightness here and also the over it.
Of course.
In Europe, as well, but how it gives the crisis situation that you see currently over next 12 to 18 months, particularly as it pertains to South America.
It's it's tight yeah. During a you know obviously, there and non peak season, and getting ready to enter into peak season, and everything that we're seeing is going to put us in.
An incredibly tight.
Area. So that team is doing a marvelous job trend.
Build inventory right now in anticipation of that growth, but the.
Sure.
As I've commented in my prepared remarks, we're obviously starting up of new plant in Brazil, and the this quarter, probably the back half of this quarter.
Are there other line extensions and investments all throughout the region that we continue to invest in and.
It's going to continue to be tight in the.
We're adding we're adding volume and capacity for strategic players.
We've got a I guess, we're signaling high.
It's the middle teen growth.
In that region and.
A lot of that is coming from this returnable glass. The can shift the can continues to win across all categories and we will benefit from that here.
As this capacity comes online.
Okay, great. Thanks, John that's all I have.
Okay.
Okay well. Thank you. Thank you all for your participation as you can tell theres just lots of excitement here that we really do believe we're on the front edge of a meaningful capital allocation.
Strategy is to return it to shareholders, we see as we sit here today nothing has fundamentally changed from either our Investor day 9 months ago, and we're just excited I I do wish and hope that everyone stays very safe and health healthy. This delta variant is of concern, but I think strategically.
We'll be as as a as the globe be able to get beyond it. So thank you all for your participation and we look forward to continued engagement.
Okay.
Thank you that does conclude the call for today. Thank you for your participation have a great day.
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