Q3 2022 Ball Corp Earnings Call
Please continue to standby the conference will begin shortly we do appreciate your patience and I thought you. Please remain on the line today's conference will begin shortly.
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Yeah.
Yes.
Greetings and welcome to the Ball Corporation, three Q2022 earnings conference call. During the presentation. All participants will be in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the <unk>.
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At any time during the conference you need to reach the operator, Please press star zero.
As a reminder, this conference is being recorded Thursday November 3rd 2022. It is now my pleasure to turn the conference over to Dan Fisher Chief Executive Officer. Please go ahead.
Thank you good morning, everyone.
This is ball Corporation's conference call regarding the company's third 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 another 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.
Historical financial results for the divested Russian operations will continue to be reflected in the beverage packaging EMEA segment.
See note one business segment information for additional information about the sale agreement and a quarterly breakout of Russia's historical sales and operating earnings.
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 brief business performance commentary Scott will discuss key financial metrics.
And then we will finish.
With closing comments and Q&A.
Let me begin by thanking those of you who attended our biannual investor field trip in late September It was great spending time with many of you in person. We sincerely appreciate your taking time to meet our team to listen the balls unwavering strategy for agile aluminum packaging portfolio and our aerospace technology security side.
And sustainability solutions to learn from our continued transparency on macroeconomic dynamics impacting our industry and to engage with us on the actions we have taken to deliver improved results cash generation and EBITDA in 2023 and beyond.
For those of you that could not attend a transcript of the management briefing and slides as well as contact information for our Investor Relations team are available on ball dotcom backslash investors under the presentations tab.
In Q3, we have successfully divested the Russian beverage can business.
Executed on our previously disclosed companywide cost out plan.
Further oriented our business plan to serve our customers' needs from an optimized lower cost footprint and reported our third quarter results.
Scott and I will strive to provide additional clarity clarity on the 2022 baseline and bridge to 2023 based on what we know today in the fourth quarter and beyond.
Our year to date and third quarter comparable net earnings reflect resilient global demand for our products offset by the historic rise in inflation and interest rates and headwinds associated with the sale of our Russian operations and earnings translation.
Relative to resilient trends.
Excuse me relative to resilient demand trends and to be efficient with our business commentary here is a summary of our year to date and third quarter global and regional shipments.
Global beverage can shipments, excluding Russia increased three 1% year to date and five 7% in the third quarter.
North America beverage can segment segment shipments increased one 9% year to date and two 5% in the third quarter.
EMEA beverage cans segment shipments, excluding Russia increased seven 8% year to date and eight 3% in the third quarter.
South America beverage can segment shipments decreased seven 2% year to date and increased five 2% in the third quarter.
And with the continuing support of EMEA demand our other non reportable beverage can shipments increased 48, 1% year to date and 46, 7% in the third quarter.
Our global extruded aluminum bottle and aerosol business continues to benefit from new refillable reusable bottle offerings, including our recent alliance with Boomerang and other water brands and higher recycled content aluminum bottles for personal care products shipments in this segment increased 11, 2% year to date.
And 12, 2% in the third quarter.
Other recent activities include our global beverage business continuing construction on two facilities in EMEA, our North American team successfully completing effects bargaining associated with our August announcement to permanently cease production in our Phoenix, Arizona and St. Paul Minnesota facilities in fourth quarter 'twenty two.
And first quarter 2023, respectively.
Our aluminum cups team, introducing nine ounce and 12 ounce Cup sizes at retail and in stadium venues.
Our aerospace team delivering solid program execution, a robust backlog of $3 billion and won not booked backlog of $4 6 billion.
And the scheduled mid November launch of the ball built ozone mapping profiler sweep instrument aboard the joint NASA and Noah J PSS to Earth observation satellite.
And on the sustainability and community front favorable substrate mix shift is continuing across balls aluminum product businesses, our aluminum aerosol facilities achieved ASI certification.
And our volume Czech Republic plant received an award from the Red Cross recognizing their response to the Ukraine refugee crisis.
Thank you again to our employees across the globe for supporting their communities and each other.
In summary, our customers continue to lean on aluminum as their package of choice.
We also reiterate our Investor day global volume growth opportunity.
Near term volumes may be pressured in certain regions as everyday consumers are feeling the pinch of inflation.
Our global beverage teams have position their businesses for slower growth in the fourth quarter inclusive of preparing for temporary actions to achieve year end inventory goals, keeping supply demand tight and preparing for optimal financial improvement in 2023.
Our global beverage businesses work will be complemented by our aerospace and aerosol businesses continued success.
We appreciate the work being done across the organization and extend our well wishes to our employees customers suppliers stakeholders and everyone listening today.
With that I'll turn it over to Scott.
Thanks, Dan year to date 2022 comparable diluted earnings per share were $2 34 versus $2 52 in 2021 and third quarter comparable diluted earnings per share were <unk> 75 versus 94 sites in 2021.
Year to date and third quarter sales were up due to the pass through of higher aluminum prices higher volumes with improved price mix and higher aerospace performance, partially offset by currency translation and inflation in Europe .
Comparable year to date and third quarter diluted earnings per share reflects strong results in North America, and aerospace and a lower share count offset by higher interest expense higher comparable effective tax rate comparable operating earnings declines in EMEA attributable to the sale of our Russian business cost inflation and unfavorable earnings translation.
<unk> and lower comparable operating earnings in South America continued to be driven by regional customer mix.
I'd like to take the opportunity to proactively address working capital and why cash flow will be better next year.
During 2021, we ramped up our metal purchases to meet what we expected would be strong 2022 growth in North America. We did this at a time of rising metal prices and while we are protected for metal price changes in our P&L due to our effective inventory hedging program. It does impact the cash flow and the amount of metal.
Payables.
Earlier this year when we saw the volumes would not materialize as expected in 2022, we began to reduce metal purchases. This also coincided with declining metal prices, which reduced the motto payables. Even further again, no P&L impact due to ball's effective inventory hedging.
The net result is less build in the accounts payable than originally planned. The end result will be a use of around $800 million in working capital for full year 2022.
This will normalize next year as both metal prices at our takes should stabilize we are focusing our attention on generated cash as we move forward.
Other reasons why cash flow will be better next year include $500 million less in Capex.
The expectation of meaningfully less pension contributions needed $90 million less in cash outflow for incentive compensation due to lower incentive comp payments from 2022, and we will have much less working capital pressure and also increasing our focus on selling terms I will give you more direction during our fourth quarter earnings call once.
All of our planning is complete.
As we sit here today and following the completion of our Russian business sale, some key metrics to keep in mind for 2022.
We ended ended the quarter in a solid solid liquidity position with $500 million in cash and $1 5 billion in committed credit availability, our full year effective tax rate on comparable earnings will be in the range of 20% full year interest expense will be in the range of $315 million and full year corporate undistributed.
<unk> costs and other non reportable are still expected to be slightly above $100 million.
Capex will finish the year in the range of $1 7 billion.
Given year to date results and the key metrics cited Q4 shipment trends estimated inflation in euro translation headwinds and including the sale of our Russian business, we will likely end the year with operating earnings operating earnings in the range of 8% less than last year's full year 2021 comparable earnings of $1.
$5 5 billion and full year 2022, comparable DNA likely it would be in the range of $540 million.
As a result yearend net debt to comparable EBITDA is expected to remain at current levels, which is higher than where we would like to like it to be and we are have prioritized debt reduction in the near term as we move into 2023.
Last week Bald declared its quarterly cash dividend and in alignment with our Investor day commentary after we navigate fourth quarter and early 2023 will address the path to resuming share repurchases rest assured as fellow owners, we will manage the business through the lens of EBITDA and cash stewardship, and we will effectively manage our supply chain and customers in this current economic climate.
To secure the best cash earnings and EBITDA outcome for our shareholders I'm looking forward to exiting 2022 and I'm excited for 2023 with that I'll turn it back to you Dan.
Thanks Scott.
I appreciate your help as always in my Best Scott Morris and impersonation minus the expletives. The world is in a really challenged state, but we're not.
Geopolitical unrest rapidly changing business conditions and unprecedented macroeconomic trends are unsettling.
So here's what here's what I know.
During 2022 and since assuming the role of CEO , we have endeavored to be transparent and decisive.
In doing so it has led to an uncomfortable yet necessary set of actions, which have impacted colleagues and communities. Yes, 2022 has been an unprecedented time and at ball, we're going forward with what we know.
Our drive for 10 strategy and Eva discipline. In addition, our well capitalized footprint is serving resilient demand for our products and technologies, we will benefit from contractual pass through of inflationary costs the cost out actions already implemented or nearing completion, our more conservative short term view of volume.
Growth.
The focus on cash.
And we have the best team to navigate change unlock value.
And beyond 2020 to achieve our long term diluted earnings per share growth goal of 10% to 15% inclusive of the divested Russian operating earnings headwind.
To everyone listening today and with that we.
We're ready for questions.
Thank you could you would like to register a question or comment. Please press. The one followed by the four on your telephone.
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The first question comes from George Staphos with Bank of America. Please go ahead.
Thank you very much hi, everyone. Good morning, Thanks for all the details and for taking my questions.
I guess.
You've given us some of the outlook for fourth quarter, Scott and we appreciate that.
Trying to adjust for Russia and.
In Europe should we expect more or less the same type of year on year trajectory across the other segments.
How should we consider whatever sort of inventory reduction you may need to see and how that will hit the segments. We would guess it would be North America. In particular, if you had a couple of quick thoughts there and then I have got.
Got a couple of follow ons after that.
I think most of the inventory kind of the absorption hit will take on and will be in North America, as we adjust inventories down.
Through nine months, we saw North American can shipments increased just under 2% kind of full year, we think it's going to be flattish.
In Europe , Russia will be the big drag.
<unk> got roughly $30 million of earnings.
<unk> is a bit higher in Europe than.
We will see a comparable inflation impact in fourth quarter as we did in third quarter, which was about $10 million and we've got some startup costs too as we wrap up Kettering.
Czech Republic, so that will be a bit of a drag when we look at aerospace had an incredible fourth quarter last year that won't repeat there will be more normalized this year.
And then in the.
South America.
We're not quite seeing the.
Bumped from World Cup that we had expected.
And so I think they will finish the year.
We thought we could get back to even and that probably won't be the case, when we look at South American volumes.
Yes.
Thanks for that Scott second question I had for you is is there any update on the net commercial on price cost.
Outlook that you initially relate to us at the analyst day as you looked at 'twenty three.
Has anything moved of significance that you'd want to relay as we're again trying to build and bridge to 'twenty, three offset 22 base that you've given us.
Sure I think we're having the most progress in Europe for 'twenty three.
The team has done a remarkable job they've been doing that since the outset of the year. Obviously inflation has continued to go up George but we continue to go back and.
And continue to work those so I think we're in a really good spot.
Not only benefit from our contractual pass through that's already built in.
Two our contracts that.
Have the most meaningful impact obviously in Europe , Western Europe , and North America and on an ongoing basis.
I think you're hearing this from other participants in the industry.
If there are things that are extraordinary and the contract, especially from a supply chain standpoint, those are going to have to be paas pass through immediately and so thats. The stance, we will be taking moving forward, we're not going to continue to chase inflation.
Of an extraordinary nature, specifically Europe energy prices.
Okay. So.
Maybe Dan I recognize it's tough to say on a live mic, but should we assume those pluses and minuses are kind of balancing and therefore the outlook you gave us remains the outlook into 'twenty three on that front.
Yes, I think that's exactly right George I think what we are.
As we sit here today and Scott will give more context to this we're steering based on the baseline. We just gave you on 22 to the high end of our 10% to 15% for next year as we sit here today.
Okay.
Thanks for that and then my last one you talk about a near term more conservative view on growth and looking back over the last four or five quarters and as Youre hearing from your customers going forward what are they saying about their volume expectations into 'twenty, three and maybe a little bit past that.
What are they saying in terms of cans.
Relative to some of the new growth initiatives that are out there whether it's non alcoholic ready to drink and then in turn how are you.
For lack of a better term haircut ing.
That commentary in terms of your growth outlook, not just near term not just fourth quarter, but.
Playing with real capital dollars over the next two to three years. Thank you guys and good luck in the quarter.
Yes, Thanks, George I think it's a good news bad news story for North America I mean, the reality is what we're seeing and I'll give you. The most recent data that we have kind of.
The prior 12 weeks.
Total consumption is down total leader, it's consumption is down.
The U S.
The good news is that when we look at that relative to the can the can is significantly stronger than tetra glass and plastic combined so our declines are.
Muted compared to what everyone else is experiencing and in terms of substrate mix.
The areas that continue to grow it's probably easier to talk about what's still growing.
And we have a.
A nice exposure to those areas are energy is continuing to grow in the prior 12 weeks.
Import beer continues to grow cider F&B has continued to grow and craft beers flat everything else is a modicum of decline and if I were to bracket. The two big buckets right now.
This is just can volume.
Non alcoholic down about 1%.
And total alcohol down a couple percent you can double and triple those declines for the other packages and.
Substrate mix so.
Feeling really bullish about the circularity story for the long term, but inflation is clearly.
Hitting the end consumer right now.
And that is absolutely.
And our thinking.
And Scott maybe you want to talk just at a high level in terms of 2023 and some of the higher higher level assumptions you have but.
The one thing I will say.
That gives me room for optimism is.
We are a recession proof business are resistant business, what we've been experiencing is inflation.
As we transition into the recession piece.
There is a very good likelihood that they can start to get promoted.
And I think with higher credit card.
Interest rate increases on folks that have interest only mortgages.
That will and Thats, what we've heard from our customers. They said at some point that can will get promoted.
But as long as the elasticity curve remained somewhat strong with the price increases.
That's what we've experienced to date and I think we're kind of on the precipice here George we're not counting on upside but were right on the precipice of seeing a decline.
And that declined manifesting potentially in a better outlook for cans.
Yes, I would just add George I I have a real sense of optimism as we move forward from where we're at right now last quarter, you probably could hear the challenges and the tough actions we needed to taken by voice.
We've done all those things we've taken the actions on plant closures, we've reduced SG&A meaningfully we're scrutinizing all of our investments to a greater degree as we move forward.
And all of these actions will help us.
To ensure that we have improved results in 2023.
More off a more modest base of growth that we're expecting so we see nice improvement across all of our all of our business units moving into next year.
Contractual pass throughs on inflation will help.
And on the cost out actions will definitely help so as we sit here today I feel really good about the.
Moving into 'twenty three.
Thank you very much guys. Good luck. Thank you.
Thank you. The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone.
So.
So I wanted to continue on the discussion on North America.
And demand and you just gave some comments on promotions and that's obviously being important into 2023, I guess given the capacity actions that you've taken but also maybe the capacity utilization that you didn't fully take advantage of it earlier in the year in your own system.
Just to clarify do you can ball North America can shipments be up in 2023 from where you sit today.
Oh, yes, yes, we have we have ample dry powder keep in mind, the big investments that we've made we're still on the journey of increasing the efficiency curve and the startup.
Range and so.
Yes, we can grow.
Mid single digits here for the next couple of years in North America without any additional investments. We're just building a plan that's more conservative and we will have the ability to toggle up if our customers need that demand.
So just really are you actually planning to be your shipments to be up mid single digits next year or that's what you have the capability for I just want to clarify that that's where we have the capability for our we're planning for for flattish to slight growth.
Got it okay. That's.
That's really helpful. And then I guess I'll ask a follow up in Europe , obviously, theres a lot of noise in the accounting with Russia, but we strip that out.
Where do you think you are today on on price ask on price discussions with customers and recouping some of the energy and other inflation that you've been absorbing and kind of visibility that that can maybe potentially flip to a tailwind in at some point in 2023.
Yes, well on energy specifically, we're in a pretty good spot.
Got.
95% of the energy that we can hedge has been hedged.
So what well energy will go up next year.
We feel like we're in a pretty good position to control how much it goes up and we're having active dialogue with our customers on that front of them absorbing those costs, because we're not going to absorb.
Okay, Great. That's all I really helpful I'll pass it on thanks.
Thank you.
The next question comes from Ghansham Panjabi of Baird. Please go ahead.
Hey, guys. Good morning, Good morning, I guess first off good morning.
I guess first off on your comments on metal sourcing in 2021 for 2022, obviously prices have changed between then and now did you secure that additional metal specifically for customers based on contracts because I'm trying to understand why customers would pay you yesterday's prices in context.
Lower prices today for Mt.
So we hedge so we hedge our inventory got jobs. So we don't take P&L hit so we bring in inventory with an expectation of when it gets sold and we hedged that price grid.
So.
It's not that's why it's not showing up in our P&L, It's just really a cash flow hit.
Got it and you said just to clarify 800 million hit in terms of working capital year over year for 'twenty, two and if so sort of your base case expectation for free cash flow this year and what kind of a reversal could we see next year on working capital.
Well I mean, if you take $800 million use of working capital and the Capex, we're spending will have.
Well negative free cash flow over $1 billion next year, we expect a working capital element to be greatly reduced.
We expect that whether thats, where I was talking we're going to we're going to reduce.
Our capex, we have reduced incentive comp payments that go out next year.
We don't need to fund our pension plans, our pensions are in really good shape.
There's a bunch of other elements of cash flow that we'll be able to generate next year versus what we experienced this year.
Okay.
Okay.
Yes, good point thank you.
Thank you.
The next question comes from Mike <unk> of Barclays. Please go ahead.
Okay.
Great. Thanks I appreciate it first question I just wanted to ask about Europe .
Obviously, you guys are still posting pretty strong growth there.
Relatedly I would think the inflation pain there for the consumer as much worse, just given where the economy. So can you maybe just talk through kind of what youre seeing there and maybe some of the resilience relative to the inflation pamer.
One of the things that we've seen.
I commented earlier in the call, but we have seen.
Okay.
A shift from on Prem.
To off Prem, which has benefited the can.
At the end consumer is.
Absolutely their energy bills and their homes right are impacting their discretionary spend and they are already making choices.
The areas of strength continue to be beer and continued the energy drinks, which we have.
A really nice portfolio. There so we may be benefiting a little bit from mix.
But at the end consumer has been quite resilient to this point, we are seeing the beginnings of shifts but those shifts are manifesting in.
More resiliency in more of a shift towards the can.
Obviously.
I think the.
The anecdotes I can bring you from Europe are folks arent as concerned about this winter as they are about next winter.
With the with the natural gas reserves, we'll see how that manifest in terms of additional inflationary pressure moving forward.
Great. Thank you and then just briefly Scott I just wanted to clarify on your cash flow answer Ghansham, just now I know it is.
Who knows where metal prices will be next year, but just as we sit here today.
Actually if you go back to 2021, and we had a big source.
So it started in 2021, and we got the benefit of bringing in more bottle and the metal payables being higher in 2021. So we saw that benefit in 'twenty, one we're giving that back essentially in 'twenty. Two so that's why I think next year we're.
We're not going to build a plan based upon that much volume growth. So we want our metal shipments will be more.
More measurable if you will more controllable.
So we don't expect this kind of.
Swinging from.
From a working capital standpoint.
We see a much more neutral.
Got it thank you.
Yes.
Thank you. The next question comes from Christopher Parkinson of Mizuho. Please go ahead.
Yes.
Hello. Thank you for taking my question just to circle back on your the planet in the initial planning for 2023.
On Europe eight answer comments in North America, what about I'll, just Latin America, just given obviously some of the headwinds that were incurred during the first half of the year.
The World Cup in the fourth quarter, our normalized Carnival and yes. Some of that is more customer specific issues. If you could just hit on that the region Holistically. It would be very helpful. Thank you.
Sure I think as Scott already indicated if youre thinking about.
Sort of high level volume assumptions as we sit here today, we're thinking flattish in north and Central America, We think we'll be in that kind of 4% to 6% range in both South America and in Europe .
South America keep in mind that we walked from a major customer in the beginning of 2021 and so our comps begin to be much easier. If you will relative to that dislocation in excuse me in 2022.
They become we lapped that in Q1 of 'twenty three so.
Our like for like business, we should be growing in that 4% to 6%.
And we don't anticipate any more customer dislocations heading into that the year.
Brazil.
Beer consumption has continued to get better throughout the year. The can is continuing to win and I think what youll see is a much more stable.
South America region in general with the exception of Argentina is always a wildcard. So we expect a modicum of growth everywhere.
Inclusive of Brazil heading into next year.
Got it and just given all the noise and the kind of the puts and takes on some of the various substrates and demand categories can you just comment on your overall wins in terms of aluminum cans for new launches I mean is that still relatively in line with what <unk> been discussing over the last few analyst days.
And specifically if you could hit on plastic and containerboard that'd be quite helpful. Thank you.
Yes, so a real quick trip around the world.
Can't the can is.
We have we're underpenetrated in Europe , the lowest substrate penetration of the three big regions with the most.
Regulation mounting and central.
In Western Europe here heading into 2025 with some producer.
Our responsibility bills.
The most pent up demand in terms of new can filling lines in Europe , because of those regulations and because of the steer toward aluminum and South America, we're still winning.
Ex Brazil, there's still a huge shift from returnable glass into aluminum and aluminum continues to win and in North America.
The new product introductions are still coming out in cans. The thing Thats muting that as I said earlier in the call is overall consumption is down and so that's really the biggest issue relative to there's nothing that's changed in our circularity story are the fundamentals underlying our belief in the medium to long term, but the inflation is caught up to the end consumer.
And we're seeing less consumption across the board in North America.
Thank you very much thank.
Thank you.
Thank you.
The next question comes from Mike Rochman of choice. Please go ahead.
Thanks, Dan Scott and I appreciate taking the questions.
Just first off just you mentioned.
Shipments grew two 5% in north and Central America is there any way to parse that between the two regions.
You really need.
Yes, so between between like what did North America growing three Q versus Central America, and the reason I'm asking is because as you just noted your commentary.
Mentioned slower beer demand I think some of your peers have called that out as well and some of the bigger companies themselves in their earnings call devoted volume weakness given consumer inflation. So given that there is a pretty important end markets in North America, just trying to figure out what the market did stand alone versus a combined north central and North and Central America.
Okay.
Yeah.
Yes, I think overall.
Similar level of resiliency in both.
The things that we are advantage for us are I'd, probably our energy mix in our portfolio, which is stronger our import beer.
Mix in our portfolio, which is probably stronger. So those are the two things that have given us some underpinnings and our strategic partners in both the non alcohol space and the alcohol space are winning.
So those three things have given us.
Probably a modicum of growth that's in line or a little ahead of what the industry is.
Got it.
That agreement not a great deal of difference between North America and.
Mexico Central America.
Got it okay perfect. Thank you and then just wanted to get your perspective, what do you think it is going to ultimately for the industry to have better volumes.
It's just a matter of the pillars and beverage companies realizing they need to drive increased throughput is as you mentioned earlier it isn't a matter of just what you've been seeing tamer inflation that should drive better hopefully provide better consumer spending what do you think ultimately gets you over the hump with respect to seeing those better volumes.
Yes, it's a great question.
Again, when I look at.
When I look at the substrate mix the cans, winning the problem is overall leader edge is declining. So there is clearly pressure on the end consumer relative to inflation in credit card debt raising interest rates there has to be some level of stability in the economy.
And then I think we transitioned back to what we saw prior to the the heightened inflation pressures.
It is true.
<unk>.
When we've entered recession historically.
The can has been promoted because there has been a shift from on prem into more off trim and we haven't seen that yet.
So I think theres been a lot of pent up enthusiasm.
Yes, because we haven't been able to go out over the last couple of years that people are spending their money and their take.
They are in the on premise channel.
That feels as if it is beginning to shift.
And the most recent data here on the one in the four week data.
That will help the can but fundamentally.
I think a return to a normalized inflation and interest rate environment.
Provides consumer confidence and then they can wins on the circularity notes I think also the thing that will help us aluminum is off almost $2000 from its high.
So while all the while most input cost for our customers are going up the reality is the actual aluminum has gone down and so that gives them. The ability. They took a lot of price. This past year and that gives them the ability to do a little more price promotion and not give up margin because aluminum has come down so much so I think.
That's a positive.
Got it. Thank you that's very helpful. Good luck for the balance of the year.
Thank you.
Okay.
Thank you. The next question comes from Phil <unk> of Jefferies. Please go ahead.
Hey, guys.
At your Investor Day, I think you called out about $200 million.
Net pricing benefit which accounts for inflation from some of the PPI escalators is that still a good way to think about it just because inflation is obviously pretty dynamic here and I think.
Dan you mentioned, how youre, making pretty good progress on renegotiating pricing trying to recoup some of the inflation you're seeing in Europe any color on how much of a uplift that could be next year.
Well I think on the PPI faster I think it's going to be greater than 200 billion.
Across all of the different segments.
Cause inflation has run pretty hot this year, we're starting to see input.
Input inflation moderate which would be helpful.
We should get a lift a lift on the pass through to kind of catch up some of the pain. We've had to feel this year its been mostly in Europe with energy and inflation last year. It was North America. So I think we feel pretty good about those contracts work, we did get the price pass through in North America and in Europe that we expected this year.
As we offset in Europe by currency and by more inflation will get a lot of that inflation back next year.
The 200 million Scott.
The 200 and it is really not mutually exclusive to the ongoing conversations we're having with our customers those ongoing conversations I'd look at it this way.
If we continue to see.
Surprises in terms of increased inflation, especially in energy with surcharges coming from our supply base.
Those will be passed through directly.
And we werent behaving in that manner here over the last 18 to 24 months.
So.
What I envision is the number that Scott gave you were able to hold to that number next year as opposed to seeing it potentially being eroded like it was this year.
Okay.
Okay, but the <unk>.
Way to think about it Dan would be the 200, plus any incremental good work youre doing are negotiating stuff in Europe right.
And that accounts for inflation Youre seeing today correct.
Yes, I would I would say the ongoing work with customer contracts enables us to see the 200 flow through.
I'm not have yourself not have it be muted like it was this year.
Do you have still a good way to think about it that's great and then now throughout the supply chain. There has obviously been pretty meaningful destocking in some Europeans have called that out you saw a big drop off in September .
From what you can tell based on order trends.
To October November .
Your customer base do you have a sense that Dennis.
Largely flushed out at this point.
And then Scott I think you were calling about calling out potentially curtailing production in the fourth quarter to kind of flush out your inventory should we assume that it's going to be largely behind you orders can be some hangover effect starting next year from an earnings perspective, as you kind of work that down.
Our plan is to take.
To get our inventories in line by the end of this year. So that we go into next year.
And a cleaner more balanced position so about half the impact next year.
Okay.
On the customer level.
Yes, I think what we're seeing right now Phil is.
The end consumer.
Is consuming less.
So I think that as I understand the question around Destocking I do think thats.
A lot of those filled goods are now out in retail and Theyre being pro mode.
What we need is for the end consumer to start picking up the pace of consumption on Mccann and for those promos to continue and then it turns into a positive we haven't seen that yet.
Okay, and just one last one for me remind us how the promotion cycle usually works in North America I believe its heavier during the summer time. So if your customers do come back and want to step up promotional activity to kind of drive demand in North America.
When would be the earliest pocket b.
You see a small amount for the Super Bowl a real small amount and then you see memorial day.
Fourth of July Labor day in two weeks prior to each one of those events is when you typically see it.
And if you get Lucky you might get some around the holiday period, which.
We're not we're not planning on that slide.
Yep you got it.
Thank you.
The next question comes from Angel Castillo of Morgan Stanley . Please go ahead.
Hi, Thanks for taking my question.
I was hoping we could unpack fourth quarter, a little bit better I guess, just want to make sure I'm understanding correctly. So the bridge that was given for operating income it seems to suggest and correct me if I'm wrong, roughly kind of $307 million for the quarter could you just give us a sense for how youre thinking about that buy.
Kind of segments and regions and also included in that what are your volume expectations are embedded within that.
I'm sorry, what was the number you gave me.
$307 million I, just basically you took the 8% for the <unk>.
85, and then last one you've done year to date.
Okay.
Yes, I mean, the things that I mentioned.
Sure.
Absorption in North America, and lower volumes than last year, we had a tough comp from last year.
We grew 5% last year, we've grown 2% year to date through nine months, we expect that to be flattish for the year.
South America.
We had the loss of the customer from last year that will be a bit of a drag.
Europe , obviously, we sold our Russia business that generated would have generated.
It'll be in the Q and the press release about $30 million of profitability in the fourth quarter inflation is running kind of similar to where it was in the third quarter, which is about a $10 million drag and we'll have some startup costs related to our new facilities.
Beverage packaging other should still be strong.
As we continue to imported to Europe .
To meet demand.
Our aerospace business had a record fourth quarter last year, which likely won't repeat so I think you are where you're landing is directionally correct.
And then I just wanted to also revisit the final question on Destocking, a little bit more so I guess there was a couple of customers that maybe you mentioned some potential kind of pull forward ahead of pricing initiatives.
Tober. So can you just talk a little bit more about kind of what you've seen from September .
Standpoint in terms of shipments in North America, and whether there was any kind of pull forward that you kind of anticipate to be unwinding.
Unwinding in the fourth quarter.
No. We didn't we didn't see any of that in September what we're seeing.
Through the last four weeks in particular is.
Further in consumer decline in overall beverage consumption.
So we didn't feel the impacts of a September pull forward.
And we're monitoring very closely.
The promotional activity here in the fourth quarter, because as the end consumers.
Stopped buying beverages.
Across the board in any setting and if theres a shift from on Prem to offer them. They can typically will be promoted more and there will be reason for upset we have not seen that.
Through the first four weeks of the quarter.
Okay.
Very helpful. Thank you.
Thank you.
Thank you.
The next question comes from Anthony Pettinari of Citi. Please go ahead.
Hi, good morning.
I.
Just wondering.
Equity earnings I think were negative in the quarter after being up I think mid single digits in <unk> and <unk> can you just give some color on what drove that and maybe just remind us what's in that line.
After the metal pack sales.
We had we had unusually some kind of one time good guys in the second quarter and then those kind of reverse in the third quarter. So we will get we will have more normalized equity earnings as we look to the fourth quarter.
And the things that are in that are mainly our jv's with rocky mountain metal container.
Guatemala.
And Vietnam.
Okay.
It was kind of spread across those three basically.
Got it got it.
And then the $150 million in fixed and variable cost reductions that you outlined for 'twenty three I'm just wondering if theres any finer point you can you can put around maybe the cadence of that kind of savings flow through.
And just generally when we think about kind of quarterly comps next year, and obviously a lot of moving pieces.
Any reason why you would expect earnings growth might be more first half weighted or second half weighted.
Just overall thoughts there.
It should it should come relatively evenly, but we won't get all of the benefit in the first quarter as Dan mentioned, one of the plant closures doesn't happen until the first quarter.
And some of the folks that are departing wont depart until the first quarter. So we'll start to see more of that benefit kind of Q2 going forward, but it should run relatively evenly and was your question specific to the $150 million or were you looking for phasing of earnings.
I guess, both I mean, the $150 million, but yeah. So.
So the inflation pass through mechanism. The net 200 that Scott talked about that will come through.
And contractual chunk. So January 1st Youll have some April 1st you'll have some July 1st you'll have some and then we will have an FX drag of $15 million to $20 million.
Mostly in the first four to five months of the year.
Okay. That's super helpful I'll turn it over.
Thank you.
The next question comes from Adam Josephson of Keybanc. Please go ahead.
Dan its Scott good morning, Thanks, very much for taking my questions I appreciate it.
Just one clarification just on the full year guidance. So I think Scott you said North America shipments flattish for the year forgive me if I missed this does that imply about down five to six in the fourth quarter and if so is that about consistent with what <unk> seen thus far in October .
No I don't think it will be down that much.
Okay at closer to four ish I guess okay.
I mean, we could play that game, but I don't think it would be down that much. Okay. Okay. Okay. I've, just because I know <unk> is typically a lighter quarter volume wise. So we had a really good quarter last year, we grew like 5% last year, it's not going to grow like that.
Got it okay, and if I, if I think about just flattish shipments. This year and then similar next year can you just compare that to one nine I think organically you were down a bit because I think you bought the four plants from ABN Beth if memory serves such that shipments were down a bit organically Dan could you just compare.
<unk>, what you're expecting this year and next to what you saw in <unk> I know you said the one difference is that there is a lot more inflation now than was the case then are there any other differences that you would point to now versus then.
We were actually up a couple percent.
And that's after being down like 5%, so usually I mean in my 22 years here.
If you get a short term hit on volumes. It comes back pretty quickly I mean, the can is pretty resilient to Dan's point on all the benefits that they can have none of that has changed and so you might see things.
In a particular quarter given pressures out of the consumer or pricing actions on the customer those things tend to balance out over time, and so I think we're we're in that period right now where it's it is more a.
A little more uncertain, a little more volatile, but we still believe and our customers still believe which is even more important and the benefits of the can and so we feel really good about as we get into this year has definitely been choppy here and we feel really good about moving into 'twenty three.
I think Adam your question is is a really good one in that.
What.
We've talked about and the question that you're posing really has to do with the recession.
It really hasnt, we havent really had or we haven't been in a reset we've had inflation.
And interest rates rising and we've got customers that haven't really lost.
Volume on the topline and so they've continued to leverage the price mechanism.
If we shift.
Into a recession.
That's when the cans resiliency shows up it doesn't necessarily show up in 50 year inflationary times, depending on depending on the promotional activity the pricing from our customers. So there's ICU you may be hearing a little bit more optimistic tone from Scott because I think we're heading there and <unk>.
And consumers behavioral patterns and what we're seeing in the data as they will prefer the can in that environment.
Yeah, No I understood and I appreciate that and then just one other one along similar lines with the benefit of hindsight.
Gross shot up in 2019 with sparkling water and then hard seltzer and that was the one.
It was the biggest growth youre in a very long time for the industry and then the pandemic hit and that kind of skewed everything and it was unclear how much was specific to beverage cans. How much was the pandemic inflating demand for everything and we've seen that deflate now so with the benefit of hindsight, how much of that the growth over the past call. It three years would you trip.
Two the pandemic versus growth in hard Seltzer is sparkling water et cetera, and how is that informing your view of what you think the long term rate of growth is <unk>.
I can remember at our 2018 Investor day item that we've talked about the growth that we were already starting to see it in 2018. So it was well before the pandemic. It wasn't just 2019. So we started to see the growth we started to see really the sustainability story to start playing out in North America and you had you had new product introduction.
Went from.
30% five years before to 70% at that time in 2018, now we're seeing it even higher.
So definitely there was some distortions because of Covid and Theres, some distortions like unwinding COVID-19, but now we've got inflation and some other things to deal with but that's where I think long term all the benefits of the can still exist and so that's why we feel very confident and very comfortable about how we're moving forward into 'twenty three.
Adam I think at a really high level.
We're paying attention to a basket of countries like the U S that pushed significant stimulus into their economies and if you go back.
A handful of years, we've talked about this in the Investor Day, I mean, there has been 20 to 25 billion.
Additional cans added to the U S market over about a three to four year period.
That can volume isn't going.
Backwards.
So it's there.
Now what's the growth rate on top of that is a very fair question. We believe because of the circularity story because this volume has stuck.
That we're poised for really nice lift.
Kind of in that medium and long term range, but we just need a modicum of stability in the economy.
And we've seen that in places like Chile was up 25% in 2021.
They haven't gone backwards.
They've maintained that can penetration on the shelves.
I think the underpinnings of the Circularity story or the biggest reason why those have stuck so.
Thats.
I'm much more in the half glass full.
Standpoint that I am that this thing is going to go a different direction.
Alright can has all Dan yes.
Yes.
Yeah, good call fair enough Leo.
Hey.
[laughter] take care. Thanks, so much okay. Thank you.
Thank you.
The next question comes from Kyle White Deutsche Bank. Please go ahead.
Hey, good morning, Thanks for taking the question.
Go into North America, and can you just talk about the competitive dynamics there in that market given the change in near term demand profile.
Are you seeing any changes on the competitive environment or is this more of a kind of a wait and see as contracts come up for renewal.
There aren't there aren't a great deal of contracts that come up for renewal.
Each year.
I think we believe that we've got somewhere in the neighborhood of 80% to 85% of our contracts locked in for the next handful of years. So we're in a really good spot.
There are always contracts that come up that volume could move on the fringes.
But its such an efficient market and so much has to do with freight.
<unk>.
That I don't see a lot I don't see a lot of movement in the marketplace I think it's a very rational marketplace, we're continuing to lead.
We believe that supply demand will continue to be tight for the foreseeable future given the growth prospects of the business.
And so.
I'm feeling good that the pricing and the terms that we've locked in here over the last couple of years, we'll maintain.
So we're feeling we're feeling like it's a.
It's an increasingly disciplined market.
Things will remain tight.
Everyone should should benefit from that moving forward.
Got it that sounds good and then on the Russian sale can you just talked about the call option there.
That decision any kind of range of what the exercise prices relative to the sale price.
The call option was it was a great business that we didn't really want to sell and we would love to get back there if Russia ever normalizes there.
Behavior leadership and activities. So we have a call option that starts in year, three and goes through year 10.
And.
It depends on price depends on the performance of that business at the time, we exercised the option so.
We thought it was absolutely the best outcome, we could achieve by getting $530 million in cash off into our bank accounts.
And then have an option to return.
Things normalize and we're able to do that but obviously right now thats not terribly likely in the next few years.
Got it thank you I'll turn it over.
Thank you.
The next question comes from Arun Viswanathan from RBC capital markets. Please go ahead.
Great. Thanks for taking my question.
So I guess first one on beverage cans I just wanted to understand the contracting.
Process, a little bit more.
Yeah.
Or are your customers.
Essentially signing up for volume or is it a range of volumes or is it min Max.
Just curious because there was kind of a slip slowdown and our understanding was that most customers were.
Kind of.
Required to take certain levels of volume. So could you just flush that out for us a little bit. Thanks.
I mean, it's a range of things that there is no one contract structure. So it's everything from fixed volumes with probably some range, 5% range up or down.
There are some that are fixed for a period of time over a multi year period. So if you're short in one period youre going to need to make it up in a different period. So it really the old requirements kind of contracts are becoming fewer and fewer and that's where you were more exposed to volatility, but those are becoming fewer as time goes on.
We've gotten rid of a lot of those requirements based contracts, which caused more of the volatility.
But now we're going to have something that is 100%, we're usually talking around the last June .
2% of volume and that can matter.
Got it and then on aerospace our understanding is that 22 is kind of a transition year to the next say two or three year range of backlog.
Is that right and so maybe 23% to 25 do you expect kind of 10% to 15% EBIT growth for that business or how should we think about aerospace.
Over that period, yes, and.
North of 15% next year is what we're looking at.
Thanks.
Okay.
Thank you, we'll do one more question.
Thank you. The question comes from Mark <unk> of Bank of Montreal. Please go ahead.
Greg Hi, Dan Hi, Scott Thanks for slipping me in sure.
Wondered Dan any update thoughts on Capex and expansion plans as we move towards 2003.
Yeah, I mean, I think as we go into 'twenty, three we expect capex to drop by about half a billion dollars.
I would say given growth rates, we see in the near term I mean, we're going to finish.
Pills in the Czech Republic.
Those have really good contracts supporting those investments.
And we obviously have enough capital in North America for the next couple of years. So I don't think we need to do anything meaningful on that front. So I would expect it to come down again in.
24.
And Moreover, we're through okay. So a fairly big build on the aerospace side and Thats starting to come down too.
Okay, so that sounds pretty similar to what you were talking about.
Six weeks ago at Investor Day.
Yes, yes, exactly correct nothing's changed there.
One other one and I know, there's a little bit challenging on a public conference call, but it does sound.
Like you've taken a different path in terms of cost pass through over in Europe .
Best you are able to can you give us some sense of that because it sounds like.
There's going to be no eating of energy costs going forward.
We are.
Its a nuance.
I think we're getting out ahead of.
The risk profile that Europe will present for the next 12 to 18 months, that's how I would characterize it we understand fully that theyre going to have to get their act together.
And the European continent.
In terms of transitioning to a more secure and stable energy source.
And.
Our supply base feels it first.
Then we feel that the end consumer feels that our customers feel it and.
If the costs go up they're going to need to be passed through to the end consumer straight away.
There won't be a lag on these things and I think that's the momentum that understanding.
Understanding and the equilibrium that the industry needs to have.
And we're happy to take a leadership position on that.
Okay very good thanks, a lot guys. Good luck.
Thank you.
Yes.
Thanks, everybody for joining.
Any closing remarks.
Thanks, everybody for participating.
We're really encouraged and upbeat heading into 2023, we will navigate the choppy environment here in the next 60 to 90 days and look forward to hearing you on the next day and seeing you at the next.
Conference call.
Yeah.
Thank you. This does conclude the conference call for today, we thank you for your participation and ask you. Please disconnect. Your lines. Thank you and have a good day.
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