Q2 2022 Ball Corp Earnings Call
Okay.
Yeah.
Greetings and welcome to the Ball Corporation, <unk> 2022 earnings call.
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Afterwards, we will conduct a question and answer session.
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As a reminder, this conference is being recorded Thursday August four 2022.
I would now like to turn the conference over to Dan Fisher CEO . Please.
Please go ahead.
Thank you Chris and good morning, everyone. This is ball Corporation's conference call regarding the Companys second quarter 2022 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 outcomes to differ are in the company's latest 10-K and in other company SEC filings as well as company news releases.
If you do not already have our earnings release. It is available on our website at 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 release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations.
Joining me on the call today is Scott Morrison, our executive Vice President and CFO .
I'll provide some introductory remarks and business performance commentary Scott will discuss key financial metrics and then we will finish up with closing comments and Q&A.
All delivered stable second quarter comparable operating results amid ongoing inflation earnings translation headwinds.
And regional demand volatility largely driven by north American customers retail price over volume actions global beverage can volumes increased three 3% in the quarter aluminum aerosol volumes increased 11, 3%.
And we along with NASA and industry partners celebrated the successful initial images from the James Webb space telescope.
We are actively managing the company to meet the world, where it does that by re phasing capital and rebates and cost while also enabling packaging innovation aluminum supply chains and sustainability initiatives to support long term growth and significant returns to shareholders.
The Russian invasion of Ukraine has had a significant impact on the global business environment and.
In March ball announced that it had suspended future investments in Russia and is also pursuing the sale of its Russian operations. As we noted in today's earnings release during the quarter, a noncash long lived asset impairment for the Russian operations was recorded and business consolidation and other activities no.
One in today's earnings release contains additional information about the Russia business.
The company continues to support humanitarian aid and we thank our colleagues near the war zone for housing refugees as well as supporting each other and volunteer efforts and their local communities.
Recent highlights and activities include our global beverage business continuing construction on two new facilities in EMEA announcing a new facility in Peru, and re phasing previously announced North American capital projects to balance the near term effects of higher retail prices for canned beverages versus long.
Term growth for sustainable aluminum packaging.
Our North America business pivoting, its cost and capital focus to align with the near term volume deceleration and localized supply demand imbalances in certain north American markets, including today's announcement to cease production at our Phoenix, Arizona and St. Paul Minnesota facilities, while also enabling.
Multiple aluminum supply chain projects to domesticate and broaden sustainable.
Sustainable aluminum coil supply and recycling capability across the U S.
Our EMEA volume growing seven 7% with operating earnings up 4% year over year, Despite 9 million of foreign currency translation headwinds, while navigating an ongoing volatile geopolitical environment across its operating footprint.
Our South America business, managing through two 9% volume declines due to unfavorable regional customer product mix diluting the volume strength that remains across the other south American countries, where we are deploying capital to enable growth.
Our global aluminum aerosol team, introducing nextgen real aluminum bottles for new categories, and increasing aerosol personal care shipments.
Our aluminum cups team growing our cups presence at stadiums and venues.
Our aerospace team completing a critical design review for the NOAA space, whether follow on Lagrange, one spacecraft and on the sustainability front, Paul joined the World Economic Forum first movers coalition encouraging value chain collaboration to drive de carbonization in the aluminum sector.
Our partnership to introduce electric trucks with fleet Master Volvo in Fort Worth Texas.
As we indicated on prior calls and looking forward our global businesses are absorbed absorbing non aluminum inflationary headwinds and experiencing additional price cost squeeze in advance of contractual cost recovery.
We also have a responsibility to do the hard things first by controlling what we can control and all corporate functions are actively addressing their SG&A costs and the operations are taking the opportunity to become more efficient.
In EMEA, our team is working hard to mitigate ongoing inflationary headwinds through commercial cost recovery hedging and energy efficiency and renewable energy initiatives.
In North America additional contractual price escalators based on PPI will phase and starting on July one and our work to address localized supply demand imbalances will deliver fixed cost savings over the near term.
It is also important to understand in this environment that cans continue to win in the fastest growing beverage categories and underlying demand for aluminum packaging continues to be resilient, despite retail shelf price increases by our customers.
<unk> as high as 20%.
Early indications are that North American customers will continue to emphasize price over volume during the second half of 2022 and in South America demand trends should strengthen due to the timing of World Cup and a seasonally strong fourth quarter.
Incorporating year to date shipments, we anticipate global volume growth in the range of 5% for the full year 2022.
In summary, our global beverage team is preparing for additional demand volatility inflation and regional customer anomalies, given global economic conditions.
Our customers are continuing to lean on the can as their package of choice.
And over the long term, our sustainability driven growth thesis and long term, 4% to 6% global growth CAGR for aluminum beverage cans remains intact.
Carbonated soft drinks North American import beer energy drinks and new categories like ready to drink cocktails.
So continue to grow in cans.
We are controlling the things we can control. In addition, we are focused on executing at a high level re basing the cost structure delivering high quality cans, and enabling global supply chains through alliances and investments in long term contracts.
We appreciate the work being done across the organization.
And ask for your support as we navigate necessary actions.
Other metal beverage and aerospace and a lower share count offset by comparable offset by comparable operating earnings declines in North America, and South America higher interest expense higher comparable effective tax rate and unfavorable earnings translation and.
<unk> balance sheet remains very healthy with ample liquidity and flexibility as.
As we sit here today and inclusive of operating Russia for the rest of 2020 to some key additional key metrics to keep in mind our.
Our full year effective tax rate on comparable earnings is expected to be in the range of 19% full year interest expense will be in the range of $290 million.
Year end net debt to comparable EBITDA is expected to be below current levels and full year corporate undistributed costs recorded in other non reportable is expected to be in the range of $110 million.
At this time and given our earlier announcements about exiting Russia and other plant capital decisions. We expect total capex to be in the range of $1 7 billion in 2022, and 2023 capex to be down meaningfully from 2022 levels. The earnings impact of volume deceleration at a higher use of working capital have led to low.
Sure than anticipated operating cash flow, we now anticipate returning approximately $1 billion to shareholders in the form of share buybacks and dividends in 2022 and accelerated returns to higher levels in 2023.
Rest assured Paul will be good stewards of our cash as fellow owners and through the lens of BVA discipline, we will manage the business effectively partner with our supply chain and customers effectively and.
When necessary pull levers available to secure the best outcome for our shareholders. We look forward to addressing our plans to grow the business enabled the supply chain expand innovation and increase returns and answer questions why ball now and beyond at our September Investor field trip with that I'll turn it back to you Dan Thanks Scott.
Our drive for 10 vision, we will continue to serve as our guide we know who we are we know where we're going and we know what is important great companies showcase the resiliency and discipline and uncertain economic times.
And the company has an actionable plan to address costs capital and improve returns.
By providing actionable intelligence through our aerospace business sustainable solutions through our aluminum packaging businesses and honoring our disciplined capital allocation approach.
Our shareholders will be rewarded and.
And what we'll be doing our part to preserve our planet.
While our ability to achieve our long term diluted earnings per share growth goal of 10% to 15% in 2022 has been impeded by the recent deceleration in volume growth earnings translation headwinds ongoing inflation and the pending sale of our Russian business, our earnings cash flow and EBITDA trajectories.
Are in very good shape for 2023 and beyond.
We're re basing our cost structure in preparation for the Russia business sale and to meet the world where is that today.
We continue to focus on increasing returns on capital deployed and to further enable growth across our global aluminum packaging and aerospace and technologies portfolio.
We are uniquely positioned to serve the Takeda will shift that will favor our packages in aerospace technologies.
We look forward to continuing our journey and returning value to our shareholders.
We extend our well wishes to our employees customers suppliers stakeholders and everyone listening today, we look forward to discussing more about ball now and beyond by highlighting our long term growth plans and global management bench at our September 2022 Investor Day.
And with that Chris we're ready for questions.
Thank you.
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One moment please for the first question.
Yes.
And the first question is from the line of Ghansham Panjabi with Baird.
Please go ahead.
Hey, guys. Good morning, Hey, good morning.
Good morning, maybe just starting off with North America, and maybe just give us a bit more color in terms of which categories.
In particular showed deceleration.
And then how are you approaching the.
Sensation that you called out in terms of production in Arizona and in Minnesota as these as this.
Temporary idling of capacity, if so how long.
Where are we on that.
Sure.
So I'll start with the first question relative to cat.
Category.
Impacts in the second quarter.
Alcohol total alcohol was down 3%, mostly driven by domestic beer Im sure Thats not a surprise to you given our customers.
Pension for taking price versus volume.
Non alcohol was a bit more resilient CSD in particular and energy drinks grew total non alcohol was up 1%.
CSD flat to up a percent energy drinks up 8% sparkling water down.
5%.
The import beer was up.
Craft beer was down.
Import beer was up double digits, 13% craft down.
Low single digits.
Parts sales were down nearly 20% F&B was up 20% and ready to drink cocktails was was up 60%, obviously off a lower base. So net net net basically flat for four cannon penetration and it's very consistent with our customers' earnings releases as well.
Relative to the two facilities.
That were shuttered please keep in mind ghansham that we.
Announced those closures late last night and so it's very raw very sensitive right now for a number of our employees.
These are permanent shuttering.
These facilities one was built in 1969, one was built in the mid seventies. These are landlocked facilities.
They are both three line facilities.
Net capacity is approaching 4 billion units, so think about removing that.
Relative to our ability then.
To step into.
The 4% to 6% growth that we believe and again despite all the economic challenges. This year, we will deliver 5% growth.
We have plans in place.
And facilities that continue to.
Increase efficiencies in terms of their startup.
So we will be able to step into our growth.
<unk> and goals both from the medium and long term.
And this is just a step that we've consistently done throughout our history relative to optimizing our footprint and that's how you should be interpreting this.
Maybe I'll just turn it over to Scott to give some context in and around fixed cost savings, which is typically something that we would refer back to in times like this sure.
Just to clarify would dance at 5% growth that was a global number he was referring to there wasn't any particular region.
I'm not going to talk about the fixed cost of these particular facilities, but historically when we've closed facilities of this size you know two or three lines.
Think about roughly $30 million of fixed cost for each facility that will come out as we close those one probably later this year and early next year.
Okay. That's very helpful and then as it relates to.
The.
Comments on volume outlook for the full year of 5%.
How does that break down by region.
The way you see it at this point.
You can appreciate.
Very volatile times right now trying to anticipate customer pricing in North America, we're seeing we're seeing.
The second half play out.
To growth trajectory in.
South America in line with our commentary a quarter ago.
North America is going to be dependent on pricing behaviors and ongoing pricing behaviors from our customers.
And Europe has been incredibly resilient.
We were just there I was just there last week and over the weekend I've been over there multiple times same with South America do you just keep a pulse on what's going on in those markets feel confident that we'll be within the 4% to 6% range globally difficult to parse out specifics quarter to quarter right now to be candidly candid with you ghansham.
Just as a follow up to that Dan is North America tracking negative thus far in <unk>.
No.
Flat to slight increase through July .
Got it thank you.
Our next question is from the line of Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone. Good morning, good morning, So I guess I'm just trying to.
The comments in the press release about <unk>.
On a path to return to 10% to 15% earnings growth in 2023.
I wanted to just be clear that's going to be off of some sort.
Sort of lower 2022 base, that's not kind of a long term CAGR off of a prior period.
And where you'd previously calibrated 2022 earnings would be below the 10%, 15% target kind of any.
Where we are halfway through the year any way to help us narrow in on.
Where earnings growth actually is looking this year end.
Theres any kind of a key buckets by region.
To think about bigger.
<unk>.
Against that that'd be very helpful sure Scott.
Given like in total given the softer outlook that we see in North America versus what we had initially thought given what our customers' pricing strategies and mix of Ben.
The loss of the customer in South America, what inflation is doing kind of around the world.
Timing and sale of our Russia business as well as the Euro earnings translation I think it's going to be tough to match last year's comparable operating earnings in 2022.
So the comment about next year is off that kind of base.
Okay. That's.
That's that's very helpful and I guess, then you still talk about kind of optimism long term on 4% to six 4% to 6%.
Volume growth, but I guess it would it be fair to say the actions in North America that you're taking kind of what youre seeing from a customer kind of end market perspective this year.
Especially maybe relative to the prior plans is that to get to that 4% to 6% kind of longer term volume growth it might be skewed considerably more heavily towards international markets than you might have thought 12 or 24 months ago.
And any just how you think about the regional composition of that growth.
Over the over the medium term if that's changed at all.
Yes, I think I think that's fair I think.
To be clear, we entered the year thinking that we would have grown in North America double digits, and we've clearly come off of that given the first in the second quarter and the pricing decisions from our customers much of the growth trajectory relative to what we said the underlying tenants relative to the medium and long term, 4% to 6% growth that still holds for every market.
And we need our customers to return to a semblance of pricing strategy, which they've implied and implored over decades right now they are pushing for price in excess of inflationary costs and their margining on that so if theres a modicum of return to.
A different pricing strategy, we will benefit from that in terms of an uptick in volume in North America, we've had resilient.
Europe business that continues to grow we're investing in that business South America entered into a recession or well in advance of the other markets they seem to be turning the tide in that region of the world.
So stepping into 'twenty three we will see some benefits of growth hopefully tailwind coming out of the fourth quarter and into the first quarter and we're certainly seeing early signs of that.
And in North America, as a pricing discussion.
Europe as I said, we've been over there several times.
We're concerned about what's going on as every businesses relative to energy and what's going to happen with natural gas pipeline flows.
But the underpinnings of what we're hearing both from our customers substrate penetration.
And aluminum investment.
Coupled with the fact that a lot of our customers continue to push cans in that part of the world.
Gives us belief that.
It's not a matter of.
If it's when.
Okay, Great. That's very helpful. I'll pass it on thank you.
Sure.
Our next question is from the line of Christopher Parkinson with Mizuho. Please go ahead.
Great. Thank you you did this amended to go but can you just break out just kind of your intermediate term views for the substrates you mentioned.
I'll call it non alcoholic <unk>.
Energy drinks.
RTD off of perhaps a lower basis, how should we be thinking about bridging whats happening right here right now versus let's say the first half of 'twenty three.
Specifically in North America. Thank you.
Very difficult to comment on a bridge to the beginning of 'twenty three because these numbers have a direct impact on our customer pricing strategy, our customers have taken year over year north of 20% price.
And their volumes are flat so if.
If that were to moderate back to less price stake and more interest in volume all of these numbers will be improved that as a backdrop I will go over.
The categories again.
For total alcohol category.
It was down 3%.
Domestic beer down five ish.
Import beer up double digits craft down slightly 3% hard sell through is down nearly 20%.
<unk> up 20, and ready to drink cocktails up nearly 60% off of a very small base.
The non alcoholic categories, where they grew slightly.
1% CSD, 1% energy drinks.
And sparkling water was down 5% so in total that nets out to zero growth for the industry.
During the quarter.
How that translates into the second half of the year just refer back to my pricing comments on the customers that is that will drive.
And consumer behavior, and it will drive volume, which is what we're most interested in relative to our customer commentary.
Understood and just a quick follow up on Latin America, and specifically, Brazil, obviously, there is some choppiness in the fourth quarter first quarter.
It seems like it's abating, a little bit there is some optimism for the World Cup in the fourth quarter this year how.
How should we think about that kind of that bridge and your confidence in that boost towards year end based on what Youre hearing right here right now in the alcohol category. Thank you.
Thank you Q4, and Q1 were down significantly and as I as I mentioned the end consumers and you can revert back to earlier commentary from us publicly.
And consumer purchasing power was up 30% to 40% in Q4 and Q1 from a prior period in Q1.
Volume are hectoliter was down nearly 20% in that market. We saw a return to a modicum of flat in Q2 that was in line with our expectations.
What we saw early parts of the third quarter.
We returned to double digit growth year over year for us in South America as you mentioned incredibly volatile world.
One month does not make a quarter, but it's in line with our anticipation heading into both on election further stimulus in Brazil.
And the World Cup falling in a winter quarter.
Thank you very much.
Our next question is from the line of George Staphos with Bank of America. Please go ahead.
Hi, everyone. Good morning, Thanks for the details.
Dan.
If you could help us understand to the extent possible.
What was going on in North Las Vegas, and what your plans are in there are there and kind of the.
Background, there or will you need to supply to the customers that should have been supplied by that facility from other facilities or or not.
The answer is no at this point, we will we have put a pause we've had conversations with the anchor tenants there those customers.
Think about this as.
A six to nine months re phasing.
We can engineer.
We can put the lines in.
The phasing impediment right now would just be the speed with which you could hire the labor.
So this is absolutely going to happen, it's just a rebase and re phasing of timing.
Okay.
And then this question has come up a couple of times with.
My peer analysts I wanted to take another try at it so.
Still.
Guiding to a long term 4% to 6%.
Growth rates.
Our rate for the can you.
You mentioned, it's very difficult to determine at this juncture and we understand what the growth might look like this year because part of it is driven by what the promotional strategy will be from the customers and you obviously can't speak for know exactly what the customers are going to do so with that as a backdrop how can you have.
Confidence what gives you confidence there is a way to quantify it at all in the 4% to 6% and how it might vary across the regions.
Yeah.
Difficult to parse out the regions I will tell you on a global basis.
I'll reaffirm we believe that we will be growing at mid single digits for the year.
And George.
I'll probably much.
Yourself I've never seen a geopolitical and inflationary environment, our macroeconomic environment as unstable as the one we have right now and we're growing in the range.
A couple of other things to point to we are in constant contact with our customers.
We are in constant contact with our suppliers are filling equipment.
And we are.
And there have been three multibillion rolling mill investments announced in the last 90 days so.
<unk> 2023 relative to the regional dynamics a bit difficult to discuss right now we'll have a clearer picture of that at our Investor day.
It will be entering our budget conversations.
All of us will be out on the road talking to customers in different parts of the world on an ongoing basis to stay close to this.
But I have.
Our firm.
Underpinning and belief in the variables that will drive the circularity story and the sustainability story that allow us to get to that.
Thesis that we outlined a couple of years ago, its still holds Georgia.
Everybody given how volatile the world as I think everybody has a bit of a recency bias to kind of say, okay. What are we seen in the last 90 days and what's going to happen going forward. Nothing has changed if you think about nothing has changed about the sustainability benefits of the can and the long term attractiveness of the package.
And the conversations we're having with our customers we are in Europe for a couple of weeks ago.
There is a plan for 118 filling lines at our various customers across Europe over the next several years. So the customers are looking at this as a long term proposition they're doing some things in the short term that are disruptive.
And are not helpful from a volume standpoint in North America, but long term. The can is going to continue to win and so we think we are.
We're kind of we got excited when we saw in 2018 at the Investor Day, We said that 4% to 6% growth then growth accelerated and now it's moderating a bit but let's go back to that 4% to 6%. So I think if everybody takes a step back and looks forward all the benefits of the can none of that's changed.
And we've got to do things in the near term because we have localized supply demand imbalances that we're going to we're going to have to we.
We have to fix that and we've got a decent frankly at our SG&A costs that have probably gotten ahead of where they need to be and so we're going through department by department.
What things do we really need to be spending money out and what things don't we need to be and that's going to put us in a position that when there is inflation moderates and when we get the escalators in our contracts that contractually happen.
We're going to like the result of that combination a lot sure Scott I appreciate that and my last one is a great segue, so with that as a backdrop.
Given your input to take a longer term view relative to a last whatever 30 90 day view.
You also reduced your value return target from $1 75 to a $1 billion can you help US bridge, how you get there.
What was the consideration in terms of dropping that thanks, and good luck in the quarter.
Yeah sure well we're.
We're going to make less money than what we thought originally when we came into the year, we're going to use work, where theyre going to be a use of working capital of about $350 million. If you look in the second quarter. Our inventories we were building inventories for what we thought would be a more robust season here in North America that didn't show up so we're going to have to take focus on that in the back half of the year, but we're still going to have.
Use of working capital in the range of $350 million.
We're still too early in the process to know what the sale of our Russia business will yield us so we're being cautious around that front.
We've got a customer issue in South America that the customer defaulted on their contract isn't paying us. So all of those things kind of lead us to.
Real in the share.
Value return for right now, but trust me in the long term our focus on that has not changed at all and so that's when we look at capital for next year, we see a meaningful reduction of growth capital because we can we can put it in more slowly over a longer period of time.
Dialed back.
And be in a position to be able to ramp up the return value to shareholders.
Very much.
Our next question is from the line of Anthony Pettinari with Citi.
Please go ahead.
Good morning.
Good morning.
We're coming off a number of years, where North America was sold out and we were importing cans from all over the world.
To understand how you think the North America, the North American market sits or maybe where your system. Once these closures are completed.
Could there still be some slack in the North American market will you be back to essentially running full out I'm just wondering.
Actually if you could talk about where north American operating rates.
Exiting the year.
Yes. Thank you.
A confluence of events that are happening and this is a short term or near term answer which is there could be slack capacity for the near term simply because we're ramping up large asset basis pits.
<unk> in Glendale.
And we've made further wind investments over the last couple of years. So the efficiencies of all of those lines are improving really nicely.
They were anticipating a higher volume number so.
So I think in the next six to nine months I think there's a wait to see exactly the dynamics relative to supply and demand but.
But rest assured we have an industry leadership position we understand.
We've taken a view to optimize the network, we've consistently done that over the last decade.
Strong belief in the medium to long term, but we need to meet the world where it's at right now and those are the decisions that we took yesterday.
Okay. That's very helpful. And then just as a follow up to that I mean is the situation in North America is solely that your customers are seeing lower volumes with promotional strategies and tougher inflation environment.
Are you walking away maybe from some business that doesn't meet our return thresholds or is it some combination of those two things I'm just wondering.
What you can share there.
Well, we're not we're not walking away I mean, we've historically always walk away. If we don't have in EMEA return, so that's but that's not a recency bias.
This is 100% our customers are putting up price in advance of inflation and their volume is zero and we are impacted by the zero volume growth.
I would just add in terms of the customers we've entered into some new contracts recently, but we like the economics on those contracts a lot and we will start to see those benefits as we get into 'twenty three.
Great that's very helpful I'll turn it over.
Thank you.
Our next question is from the line of Mike <unk> with Barclays. Please go ahead.
Great. Thanks, Good morning, guys and appreciate all the detail, especially by category in North America.
First is there any update or.
That you can provide on the Russian divestment and Scott just to be clear. When you gave an earlier answer or commentary about this year's Etfs are you, assuming some sort of sale of Russia within fiscal 'twenty two.
Well, what I gave direction on comparable earnings about EPS, but.
And Russia was it was inclusive of those numbers for the full year.
The process, we have a pretty robust process going on currently.
And it continues to progress and we'll see where we get to in the yen. So.
Kind of what I can tell you right now hopefully we will have more information when we get to our Investor day.
In later September .
Where we are at the process and what's happening in the timeframe at all.
Great I appreciate that.
And just kind of wanted to go back to North America I appreciate customer behaviors are a little bit different in the past a lot different than the past three months.
The two plan announcement last night.
<unk> New plan I mean, it feels like a pretty big deviation from where we were all thinking for 'twenty, three and even about two or 3% in North America market, but just.
As you mentioned, you're taking decisions quite honestly. So I mean is it fair to say your growth conversations are changing quite a bit with the customers I guess I'm just trying to square your medium term confidence wells kind of shrinking your plant there a bit.
Yeah.
So just one clarification.
Pricing behavior Hasnt happened over the last three months, we've had an aggregate each quarter over the last four quarters.
Our customers have taken up on average 7% price increases so youre getting to a point now where year over year Youre looking at 20, almost 30% price increases in some of these products that absolutely has an impact on discretionary and consumer buying.
And.
We're looking at that and we're making adjustments we're optimizing our footprint. This is a near term.
Balance for us we've optimized the efficiencies across our system were constantly looking at this I'll remind you that these two plants. One was built in 1969. One was built in 1975, so that should give you. Some some thought in terms of what we need to do relative to what we've seen over the.
Last year in terms of the pricing behavior from our customers.
Great. Thank you.
Okay.
Our next question is from the line of Arun Viswanathan with RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
Good morning, So yeah. Good morning, just wanted to I guess.
Drill down further into the demand outlook here. So obviously, we've gone through a period of very robust growth. It looks like we're normalizing into.
Our more historical range.
Whats it going to take to kind of Reaccelerate too.
Maybe a slightly higher rate of growth.
You noted seltzer is we're down 20%.
We've all been seeing the data there, but have you seen any pickup in either the amount of new beverages that are going into cans or any.
Any trends as far as still water or anything else that would potentially drive growth back or accelerate growth as we look out into the next year or so.
Yes. Thank you so just one major point of clarification.
Our historical growth rates for 1% to 2%.
For 20 years heading into 19, we just communicated I think multiple times in this call that we believe will grow 5% this year.
There were two to three X what the historical growth rate is in line with our long term investment thesis for growth.
As it relates to categories and innovation.
Absolutely, we're seeing ready to drink cocktails growing at 60% off of a small base. We are seeing energy drinks continuing to grow at high mid high single digit growth rates.
If you refer back to <unk>.
Several calls over the last quarters I have said multiple times our business doesn't move.
Quarter to quarter it moves over six to nine months digestion period. So.
Retail shelf space filling locations.
Promotional activity to push around things like RTD cocktails, those things as they start to happen. They will they will fill out the retail shelves and rebase areas that are seeing <unk> decline and so yeah, I'm very bullish on ready to drink cocktails.
I am bullish on energy drinks continuing.
Steve.
That is a plastic to aluminum substrate shift and despite the 20 plus percent price increases we've seen in those areas, it's still very resilient to flat to slight growth.
All of those things give me comfort that what we're seeing in terms of an appreciable differentiated higher growth rates versus historical norms will maintain and continue for an extended period of time.
Okay. Thanks, and then.
So I understand that the facilities that you're <unk>.
Centering are potentially on the higher end of the cost curve and a little bit older or relative to your.
Rest of your production base so.
I guess.
How should we think about capital from here on so.
Yeah.
I know your growth projects are still on track but.
Maybe if you could lay out how you're thinking about capex over the next several years I know that obviously, you've moderated the capital return, but are there other levers you can pull on on capex to potentially get that capital returned back up.
Yep.
I'd mentioned that we expect this year the things that we're paying for in the back half of the year are essentially things that are in the ground. We have we have pretty good favorable payable terms on most of the capital.
That's why we can't change it a heck of a lot. This year, it's going to be I think we've taken it down about $100 billion from what we thought three months ago. So it's like $1 7 billion.
I would expect as we as we look at 2023, and we will update you as Dan mentioned, we'll be doing our planning.
Here over the next couple of months and what we will be able to give you a better number at the Investor day, but I would expect our capital to come down meaningfully in 2023.
Just because.
The growth has moderated but it's still in that mid single digits, but it's not the double digits.
Some people thought we would hit this year, so we're able to dial back that capital and that gives us more opportunity to return value to shareholders.
Thanks.
Okay.
Our next question is from the line of Angel Castile with Morgan Stanley . Please go ahead.
Hi, Thanks for taking my question. So Dan I, just wanted to I guess digging a little bit more into that 2020.
I appreciate it we're going to get more details at the Investor day, but any sense for that capex reduction roughly where that might be coming from I assume maybe it's in North America. Just as you think about the future plants that you've kind of laid out.
I guess reduction might be a source of pumps.
Sure. Thank you.
It's been an awful lot of focus on volume on this call I think.
If you reflect on Scott's comments relative to sort of a downturn and earnings that we anticipated 60 to 90 days ago.
Keep in mind, there has been a hell of a lot of headwinds on inflation.
That inflation is going to come back to US next year that number is higher than what we anticipated to get coming into this year. So.
Earnings should be reflective of an improved PPI mechanism keeping keep in mind, we pass through inflation in both Europe , and North America, a year in arrears, so that will be as we sit here today a good guy.
And we will further.
Document that and bring more specificity to that number of months from now as we as we do our homework there and.
Relative to capital and some of the other comments ill.
Turn that over to Scott, but.
We're good stewards of capital.
That has been going into the ground, we're paying for that now.
And then we should be reflecting in re phasing capital over the next year. If we continue to see our customer pricing strategy, but more specifics Scot if there's anything I missed there.
We're our aerosol business continues to grow our aerospace business continues to grow I think we're going to we're really scrutinizing all of our capital. We were just on a call yesterday with some of our colleagues.
We need to be we're progressing on the on both the European projects that we have rebuilt the Paraguay play out a couple of years ago. We're liking the results of that and we're going to do another plant in Peru. So it's not like the growth has stopped its definitely slowed down and frankly at a more moderate pace, which will be better.
So we're looking at capital and our costs every part of the business.
That's very helpful. Thank you and then as we think about maybe the medium to longer term I wanted to maybe revisit a couple of things you mentioned one was maybe on the inventories front and then I think there was a mention of kind of a customer default that we would kind of dealing with so as you think about maybe 2022 and what some of these items that might be kind of one time in.
We should recover from and should get back to kind of growth next year and give you the comfort of returning back to us anything else outside of those two or others that you can kind of point to that are maybe more specific to.
Paul or just kind of to this year that we can then look at as we think next year industry growth returning back anything with market share or again with the inventory levels et cetera.
Those are the big ones.
Inventory.
I have been around for 22 years, and you'd never want to scale back your production until you get to the summer season, because if youre not ready to service your customers of the summer. Those are sales that are lost so we built inventory for the first half of the year expecting more robust growth than what we've seen so now we've got a.
Be a little more focused on inventory for the back half of the year and bring that down to more reasonable levels.
And the customer default I've been here 22 years.
That's the first time I've ever seen.
Customer that we have a legal contract with <unk> chosen not to to complete that contract. So I think that's a bit of a one off. So those are those are the big things that are changing and we're going to make less money than we thought in total so that's why we're having to be cautious about.
The return of value to shareholders in the near term, but we think we're setting ourselves up really nicely for 2023 to approve all of those things.
Thank you.
Our next question is from the line of Mike Roslyn with <unk> Securities. Please.
Please go ahead.
Hi, Dan and Scott.
Thank you for taking my thanks for taking my questions.
Welcome.
Wanted to dig a little further into North America.
It would be probably running the library coming by the way. We appreciate it just one of your peers mentioned volume growth in North America of 1%.
<unk> gone into 2023 to be up double digits. Another key you mentioned growth in North America.
<unk> mid single digits.
Would it be a fair comment to say that maybe older estimated growth somewhat in the southwest region relative to demand you guys do have a fair amount of capacity in the region with yes, I think Dan you mentioned in terms of the Goodyear Ya <unk>.
Core lines Glendale, it could be three or four lines, maybe relative to demand.
Occurred in that region.
You were you'd be a little bit too aggressive with your with the capacity expansion.
No I appreciate the question and thoughtfulness of the question.
It's inaccurate.
And the fact that southwest has is performing in line with our expectations keep in mind.
And this has been disclosed in previous calls we have an anchor tenant.
In Glendale.
That we do business globally with an.
Continue to grow significantly and in line with our expectations.
And that facility in particular I would also point out that every every one in the industry probably has a bit of a different customer mix.
And so that could account for some differences in what people talk about.
Got it okay.
Quick follow up.
Dan you mentioned retail prices being up 20%, 30% customer volumes are flat so it could be the consumer.
Consumers are trading down to some extent given given these price increases could you remind us of your private label exposure and any push possibly to increase your private label exposure given the current environment.
We.
Yes.
In General I think we have like for like comparable is probably with the rest of the industry participants in that area. A lot of it just has to do with what filling partners do you have a relationships with those private labels, it's very hard to parse that out you'd have to look at IRI scanner data because what will happen is you'll be shipping cans with labels into.
Filling locations that are all full.
So they may be trading out there we'd be sending can volume into a customer that's really a filling location for an end consumer and sometimes those aren't even graphics on cans. They are shrink sleeves, so difficult to parse that out.
I agree with you on trading down we've seen trading down typically where you see that as you see that in rural areas first versus urban areas, we saw that going back to the.
Later parts of the first quarter. So what Youll see is a 12 pack versus a 12 pack and a trade down and then you'll eventually see volumetric trade downs.
And so it's not as much.
<unk> of the category shifts as much as it is exactly to your point you would see.
Base labels.
Hi, and labels being traded down to medium to lesser labels being traded down to share of stomach and so we haven't hit the share of stomach trade down.
Across the landscape, but as price increases continue at this rate you that would be that would be the concern is that you may start to see the volumetric trade down.
Got it. Thank you good luck thank.
Thank you.
Yeah.
Our next question is from the line of Phil <unk> with Jefferies. Please go ahead.
Good morning, Dan and Scott. This is John Dunigan earned Brookdale, Hi, Jeff I wanted to.
Hi, I wanted to to stay on North America for a second.
And we've seen.
In the market.
Up until now.
This year led to a.
A lot of several contract negotiations, which I thought.
Volume requirement baked in is that not the case.
Some of that just getting pushed out.
Customers.
Yeah, I'll start and then turn it over to Scott I would say the new contracts are performing in line with what our expectations were keep in mind, that's not the majority of our business.
Got it.
So all the new all the new assets, we put in the ground and the contracts that support those are progressing.
If you take a step back.
Every contract is going to have some rain.
Range of what they can do but the bulk I mean, nobody gets their forecast of 100% right.
So in our case, where we're at it's kind of like 95% right.
So that 5% we're feeling that.
That's kind of.
That's kind of normal but the contract provisions that we've been talking about the favorable contract provisions that we've talked about for the last couple of years are definitely showing up.
But what we're seeing.
Okay and then.
In terms of like maybe a bulk case scenario.
You're spending about 8%.
North America policy football and pushing out another 4%.
This bull case, where you maybe return to that.
6% CAGR in quicker than expected here in North America do you have enough capacity to meet that demand with the ramp up of your other projects and maybe you can give some insight on kind of all.
Operating really at work.
Yes.
Yes, I'll broad terms.
Yes, absolutely absolutely we have dry powder to step into.
We were going to on an annualized basis add 12 billion units. This year, we're saying we're going to take four.
From that but keep in mind, the knock on effect from efficiency builds moving forward.
<unk> enable us to step into growth and excess at the high end of the 6% range if it shows up.
The other thing we are in constant conversation with our customers anchor tenants.
The previously disclosed Greenfields that were anticipating in North America, and we can very quickly move into engineering and executing against those so.
This doesn't have an impact really progressed there'll be able to step into a really nice growth.
In 'twenty three and beyond.
Great I appreciate it I'll turn it over thanks.
Thank you.
Our next question is from the line of Mark <unk> with Bank of Montreal. Please go ahead.
Hi, Dan Hi, Scott I wanted to just turn at the end of the call here from from volume over to the costs. We are in a higher inflation environment that we've seen for four decades.
Can you talk about what you might be doing.
And to do in some of the contract renegotiations too.
Both speed the pass through of non aluminum cost and then also to maybe match up the escalators that you use so that they better square with the actual cost as we're incurring.
Yes.
I mean, the PPI CPI various escalators that we've used over time have been pretty effective in most environments and what we're what we're feeling right now is a bit of a short term squeeze because inflation has been accelerated at a pace, we havent there'll be seen in 40 years.
So we don't want to be too reactionary to the to the changes.
What's worked in this business for a long time, however, I will say, we are looking at a variety of things and contracts to make them tighter. So that so that there is less leakage and theres quicker.
Response to big changes in costs.
But those things take time to implement so in some places that are experiencing high inflation.
Like a lot of emerging markets that we operate in.
They do have very effective and quick cost pass throughs, because they've experienced hyperinflation for a long period of time in North America, and Europe that hasnt been the case, so the past the annual pass through his work and we're seeing the benefits.
The pass through mechanisms are working.
It's just that we've had another round of inflation to the tune of $100 million this year.
We're haven't choked out so.
But maybe.
Let me also add though on the SG&A side.
That's something that is different.
And we are looking in fact, we've already started this we're going through every support function.
And looking at things that we need to stop doing and things, where we can take out costs to get our SG&A in la that we're already seeing that SG&A feel from most of us have incentive compensation and one of the reasons of the corporate line looks better as we're not going to get paid as much. This year. So we're kind of in line with.
The shareholders are saying.
So we're very focused on our corporate costs in our support costs.
We expect to reap a lot of a lot of cost savings out of those areas.
Something we haven't had to do in a while.
Mark one area that we haven't spent a great deal of time on previous calls we spend an awful lot of time on cost recovery relative to our customer contracts. We're spending a lot more time on our supply contracts and whats embedded in those supply contracts are extraordinary clauses.
Think about our Oems on the chemical side, we need to ensure that the supply contracts mirror, our customer contracts and that would be an area that where we would pass through cost.
More expeditiously, but we wouldnt be absorbing costs that are decoupled from our customer contract and that has a margin improvement ability.
The ability to it as well.
Okay. That's helpful. And then one other just real quick one and I think I know the answer but lower growth youre seeing in North American beverage can.
This is not going to have any impact on the plan can sheet expansions or the timing around those expansions, particularly at the manor project.
The answer as of today is no we don't anticipate that it's.
Again. These these assets will come on line three and four years from now so.
I think we were just we were actually just with a number of folks earlier this week, having those conversations and.
It was all.
Go go forward continue they believe strongly in the.
The circularity message as do we so yes. Thanks for that question no I think.
People are very bullish about continuing to invest in and around the circularity story of aluminum in beverage packaging.
Alright, very good thanks, good luck in the second half.
Thanks.
Our next question is from the line of Adam Josephson with Keybanc.
Please go ahead, yes, hi, Chris.
Chris will end with this one.
Perfect. Thank you.
And go ahead, thanks for taking my Thanks, Dan I. Appreciate you taking my question can you just talk about.
This visibility you have into north American demand. So I mean for two years the industry was caught short.
And now you are in effect caught long can you just talk about what your normal visibility as how many months of that you have compared to what it might be now.
No. That's a great question, it's actually much longer than it used to be historically because.
The fear of missing out relative to our customers being able to step into cans with innovation the big challenge here.
For US is what we don't have access to and you can.
It makes a ton of sense.
Don't have access or we don't have access to pricing strategies by our customers.
It's the best that's the big dislocated right now in terms of what we're seeing from a volume standpoint.
And that is something they hold very close to their vest and so that's.
That's a challenge.
We're having conversations relative to where they're at right now versus the the size of the price increases over the last nine months. So you get a you get a revisit point, probably every six months to nine months with your customers.
But if they have decided to go much stronger on price and a 120 or 180 day period.
You can have dislocation like we're experiencing right now on volumes.
I would say that's been kind of have more visibility to today than we had six or seven years ago.
Mid long term strategy and our customers are planning to do with their mix with their package with their package mix in sizes and all of that and the investments that we're making on the filling side, we have better visibility into that it's the near term stuff, that's a little bit more challenging.
Got it I appreciate that and then just along somewhat similar lines you mentioned in the release.
You saw the deceleration in demand late in the second quarter.
As you mentioned earlier your customers have been raising prices for call. It a year now so I guess why would it all have seemingly come to a head.
Quite recently as it why would it not have happened three months ago six months ago now why all of a sudden was did you just did the growth just hit a wall seemingly so at least.
Yes, there is certainly a recency bias don't know if I have a.
Specific answer to that however for us there's always been there's always been memorial day fourth of July promotional activity and consumers. We are anticipating that it didn't come through there is less going into everyone's back grocery basket right now so.
So I think there's a recency bias I know Scott you've got you've got.
A thought on I mean, we've been looking at a lot of economic data and what what's been happening. Most recently if you look at some of the most recent things youre starting to see the consumer get pinched more the second quarter, yet you had fuel prices rising now the good thing is the fuel prices are coming off a little bit.
But all the stimulus money that was pumped into the economy.
I think a lot of that has been spent through in the first part of the year and now youre starting to see delinquencies tick up as it relates to <unk> you had was to credit cards for people that are 20% to 35 <unk>.
Starting to see that consumer get pinched more.
More recently, because a lot of that stimulus money has now been spent through the economy. So I think we're we'll see.
You used to see is if they raised price 2% their volume declined one 2% and for a period of time that hasn't happened, but I think we're going to start to see that in their volumes.
And that's why we're more bullish as we look out long term and things normalize.
We think we'll get back to more kind of a more normal situation.
Okay.
Just lastly on that but you've always talked about beverage cans.
Pretty darn recession resistant.
Everyone has is there is it any less so now than has been the case historically just because of the magnitude of this inflation and these extraordinary price increases that you just did.
Demand elasticity just takes over at some point and there's nothing anyone can do about it.
No.
Don't think it's changed in terms of recession resistant.
Look at it again, you take a step back and everybody's kind of digesting. These numbers real time, right, we've had a little bit to look at it digested so.
The world is a mess.
Our earnings are holding up reasonably well.
Not anywhere near where we want them to be anywhere near we're disappointed in where we're at but if you look at the world.
It's not that bad.
So I think this is still a recession recession resistant business, but it is clearly not.
Immune to shocks when you have 40 year inflation, a landlord Europe euro deflation.
Youre going to feel short term box from those things energy prices skyrocketing in Europe , you're going to feel short term box, but the long term.
Beauty of this business as it will grow it will flow cash and it will get nice returns and so.
I think we feel pretty good about where we're at we're not happy with where we're at we're going to do a bunch of things that we need to do in the near term to address a lot of these things, but the long term is still intact, Adam one thing to pay attention to and we're clearly a lot closer.
So one thing to pay attention to if you look at our customers.
Or simply passing through inflationary costs and not margining up they are growing significantly.
And so it's it is hugely resilient, what's decoupled right now is customers, putting up significant price over and above inflationary cost pressures and margining up so that's going to have a volumetric impact that's not recession that is a pricing strategy. So I just.
Refer back to customers that have.
Taken a.
Middle of the road pricing approach and just pass through costs, they're growing we're growing with them.
Thank you Dan.
Hi, Chris.
I think thats all for now and we'll talk to everybody again in 90 days.
That's kind of.
Conference that's going to be on September 22nd look forward to seeing as many of you as can make it. Thank you.
That does conclude the conference call for today.
Thank you for your participation and ask that you. Please disconnect your lines.
Uh huh.
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Bruce.
Okay.
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