Q4 2022 Ball Corp Earnings Call
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Greetings and welcome to the Ball Corporation fourth quarter suffered in 'twenty two earnings call I started the presentation all lines will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone if at any time.
During the conference you need to reach an operator, please press star zero.
To remind you today's call is being recorded Thursday February 2nd thoughts on 'twenty three I would now like turn the conference over to Dan Fisher Chief Executive Officer. Please go ahead Sir.
Thank you Carlos and good morning, everyone. This is ball Corporation's conference call regarding the Companys fourth quarter and full year 2022 results. The information provided during this call will contain forward looking statements.
Actual results or outcomes may differ materially from those that maybe expressed or implied.
Some factors that could cause results or outcomes to differ are in the companys 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.
Historical financial results for the divested Russian operations, we 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 comparable 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 reflect on 2022 briefly and Scott and I will discuss key drivers and financial metrics for 2023, and then we'll finish up with closing comments the outlook and Q&A.
Let me begin by thanking our employees and stakeholders for their hard work and support as I reflect on 2022 I'm struck by the magnitude and pace of change we have navigated the commitments, we are prepared to achieve and the prompt and decisive actions that were made by our team and our fluid and ever changing macroeconomic and geopolitical backdrop.
Our full year and fourth quarter comparable net earnings reflect our EMEA aerospace and aerosol operations coming in as expected.
Offset by the impact of our Russian business sale softer volume in North and South America.
Planned inventory management impacting fixed costs absorption and the effect of high cost inventory and the timing effect of customer sell through.
Global beverage can shipments, including Russia increased <unk>, 8% in 2022 and decreased six 1% in the fourth quarter.
Excluding Russia global beverage shipments increased two 1% in 2022 and decreased <unk>, 9% in the fourth quarter.
North America beverage can segment shipments decreased 3% in 2022 and decreased seven 1% in the fourth quarter.
EMEA beverage can segment shipments, excluding Russia increased eight 6% in 2022 and increased 11% in the fourth quarter.
South America beverage can segment shipments decreased six 3% in 2022 and decreased four 2% in the fourth quarter.
Other non reportable beverage can shipments increased 48, 2% year to date and 48, 5% in the fourth quarter as a result of continuing to provide support to domestic European customers.
Our global extruded aluminum bottle and aerosol business continues to benefit from new refillable reusable bottle offerings and higher recycled content aluminum bottles for personal care products shipments.
In this segment increased 12% year to date and 14, 5% in the fourth quarter.
And our aerospace team increased their backlog, 20% year over year.
In response to the previously discussed unfavorable swing in beverage can volumes relative to our early 2022 expectations and as a result of our sale of our Russian businesses.
We optimize our global cost structure deferred certain projects and took actions to right size, our north and South American manufacturing plant systems by consolidating high cost less bit facilities into scalable facilities capable of delivering our customers the portfolio of can sizes, enabling category and pack sizes.
<unk> to our customers in a more agile way moving forward.
In EMEA newly constructed facilities will ramp up during the first half of 2023 and provide much needed cans to our customers across the region.
It is also important to celebrate the accomplishments achieved by our team during 2022, including shipping nearly 115 billion innovative aluminum cans bottles and cups to our customers delivering numerous environmental space Science and defense technologies to study the impact of humans.
And the environment on our Earth weather satellites to protect life and property from extreme weather events on orbit defense technologies to ensure the safety of our homeland, the warfighter and our alloys and deep space Marvel's like the James Webb space Telescope to view previously invisible images via the ball built Mirror Assembly.
And optics.
Joining the World Economic Forum first movers coalition to lead collaboration across the aluminum industry to prioritize circularity and decarbonize the industry.
Achieving aluminum stewardship initiative ASI certification across our global footprint.
Remaining on the 2020 to Dow Jones Sustainability Index, North America for the ninth year.
Receiving an a minus and the Cdp's climate change questionnaire, and 2022, which recognizes the company's commitment to maintaining best practices in corporate climate citizenship through its net zero carbon emissions commitment renewable electricity coverage and ongoing assessment of climate related risks and opportunities.
Receiving a perfect rating on the human rights campaign's annual corporate equity and equality Index Cei.
Receiving a 2022 ranking of 90 on 100 point scale on the 2022 disability equality index dei, reflecting the meaningful progress. The company has made in creating a workplace that enables employees with differing abilities to support its global mission.
And being recognized as the 2023 industry leader for the industrial goods sector for the just capital and CNBC is just 100 top performing companies on ESG factors, including ethical leadership cultivating an inclusive workplace use of sustainable materials and carbon reduction and.
Our global teams supported 2800 nonprofit organizations across 30 countries and contributed 30000 volunteer hours across our communities.
Drive for 10 continues to be our vision.
We know who we are we know what is important and we know where we're going.
Together volatile one execute our strategy of preserving our planet and delivering value by creating circular aluminum packaging solutions for single use limited use in refill and providing exquisite environmental space science in defense technologies.
Second we will provide our employees and communities the resources and opportunities to succeed.
Third we will be our customers and suppliers partner of choice to enable organic growth achieve sustainability goals drive innovation and technology development and four we will be a disciplined capital allocator by unlocking value and efficiencies from existing operations with limited future capital investment and in doing so.
So generate free cash flow grow earnings and EBITDA dollars and be good stewards of our cash flow to deleverage and return value to our fellow shareholders.
Consistent with our commitment at our Investor day, and on our third quarter earnings call commentary in 2023, we can deliver our goal of 10% to 15% diluted earnings per share growth, including the Russian business sale headwind.
The next quarter will remain choppy as we work through higher cost inventory complete the optimization of our north and South American manufacturing footprint.
Ramp up our new Kettering U K and pills in Czech Republic plants in EMEA and lap the previously disclosed 2022 customer contract breach in South America.
We will benefit from the previously identified and executed SG&A actions, while continuing to receive the PPI cost recovery throughout 2023, which overall will lead to a back half weighted year.
During the Q&A, Scott and I will strive to provide additional clarity on the external environment and cadence for 2023 based on what we know today.
We also continue to reiterate our investor field trip long term goals for global volume growth fueled by sustainability, driven substrate mix shift product category in pack size innovation.
Our global beverage teams have positioned our businesses to deliver the year and with an eye on the future and 2023 and excluding Russia, we estimate in the range of 4% global volume growth for ball with North America flat to slightly down South America volume up.
Mid to high single digits, EMEA volume up high single digits and our other non reportable business volumes up mid to high single digits as new EMEA capacity ramps up and exiting 2023 exports from Saudi Arabia into EMEA wind down.
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 and with that I'll turn it over to Scott.
Thanks, Dan full year 2022 comparable diluted earnings per share were $2 78.
Versus $3 49 in 2021 and fourth quarter comparable diluted earnings per share were <unk> 44 versus <unk> 97, and 2021 full.
Full year sales were up due to the pass through of higher aluminum prices and aerospace performance offset by currency translation and inflation in Europe in fourth quarter sales were lower largely due to the sale of our Russian businesses.
As Dan mentioned fourth quarter and to a large extent full year diluted earnings per share reflect higher aluminum aerosol results lower corporate expense and a lower share count more than offset by higher interest expense higher comparable effective tax rate.
Comparable operating earnings declines in North and South America, and EMEA attributable to the sale of our Russian business cost inflation and unfavorable earnings translation.
I would like to take the opportunity to proactively address the year over year results in our North and Central America segment 50.
50% of the North and Central America operating earnings decline in the fourth quarter was driven by unfavorable swing in fourth quarter volumes versus 2000 22021.
We're up 5% in the fourth quarter of 2021 and down 7% in the fourth quarter of 'twenty, two and the other 50% reflects the confluence of unfavorable fixed cost absorption that was planned entering the fourth quarter customer mix and the timing effect of high cost inventory out of customer sell through this larger than expected headwind is.
The byproduct of volume declines aluminum price volatility and our proactive decision to greatly reduce production to meet current market conditions during the quarter.
The segment's earnings are anticipated to rebound late in the first half of 2023 as high cost inventory sells through in volume production stabilizes across the consolidated plant system and after July segment earnings will accelerate further as we entered the busy summer selling season.
And all of the contractual inflation recovery will be effective as.
As we explained on our third quarter earnings call. 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 largely protected from metal price changes in our P&L. It does impact the cash flow and the amount of metal payables earlier this year or earlier last year. When we saw that volumes would not materialize as expected in 2022, we began to reduce metal purchases. This also coincide.
With declining metal prices, which reduced the metal payables, even further and again typically not a material P&L impact due to our inventory hedging.
The net result is less build in the accounts payable that originally plan. The result was a use of over $900 million in working capital for full year 2022. This will normalize in 2023 as both metal prices at our metal takes should stabilize as.
As we sit here today, some key metrics to keep in mind. We ended 2000 to 2022, and a solid liquidity position with over $500 million in cash and $1 5 billion in committed credit availability 2023, capex will be in the range of $1 $2 billion driven by cash outflows related to prior year's projects, we will generate free.
Cash flow in the range of $750 million in 2023 and in this initially focus on deleveraging.
Our 2023 full year effective tax rate on comparable earnings will be in the range of 20% and full year 2023 interest expense will be in the range of $415 million full year 2023, corporate undistributed costs recorded in other non reportable are expected to be around $90 million, including the 86 million.
Russian operating earnings headwind comparable operating earnings should increase over $200 million in full year 2023, comparable DNA will likely be in the range of $560 million.
Recall that in 2022, we returned over $830 million to shareholders and as we look forward year end 2023, net debt to comparable EBITDA EBITDA is expected to trend towards three five times.
And we may want to drive it lower.
Last week ball declared its quarterly cash dividend and in alignment with our Investor day commentary. After we navigate the first half of 2023 will address the path to resuming share repurchases.
Assured his 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.
Secure the best cash earnings and EBITDA outcome for our shareholders.
To have 2022 behind us and I am excited and optimistic for 2023 and with that I'll turn it back to you Dan Thanks Scott.
We will continue to be agile and decisive in the current environment. We must do what is right to ensure supply demand balance foster innovation and stimulate equitable sustainable sustainability policy, which will further broaden the use of circular aluminum packaging solutions.
And provide continued fuel for our organic growth. In addition, our aerospace team will continue to partner with their customers to deliver world class solutions for some of the world's greatest challenges and opportunities.
Yes, 2022 was an unprecedented year in bulk history, and I'm encouraged about our ability to deliver the year with an eye on our future.
Last week, Scott and I reviewed our 2023 operating plan with the board in our businesses ability to deliver on that plan is on track, we look forward to generating free cash flow, achieving our long term diluted EPS growth goal of 10% to 15%.
Deleveraging and returning value to shareholders.
To everyone listening today and with that Carlos we are ready for questions.
Thank you Sir if he would like to register your question. Please press the one followed by the four on your telephone you.
We'll hear from took voluntary request and answer your question has been answered or you would like to withdraw your registration. Please press one to three.
Our first question comes from the line of George Staphos with Bank of America. Please go ahead.
Thank you hi, everyone. Good morning, thanks for the detail.
How has it gone so.
I want to thank you first of all for all the details in terms of what Youre expecting in terms of performance cadence, particularly within north and Central America.
Can you give us a bit more view in terms of what your underlying assumptions are in terms of.
Your volumes as it will progress through the first half the promotional activity and programs from your customers.
What youre seeing in terms of innovation from customers right now and if you were an IC to analysts and investors in your stock and we saw something not materializing or something develop that would undermine your expectations what would it be.
Yes, Thanks George.
So as we sit here today.
The volumes in EMEA.
Our in line heading right out of the gate in North and Central America. They are in line.
I think were a little soft right now in South America versus my commentary on where we think the year is going to end up.
The biggest element that I think misunderstood George relative to our expectations on volume and why we're a little bit more bullish.
Is.
Aluminum prices have come off.
But that doesn't mean that necessarily the cost position for our customers. So as they lap their head positions heading into the second quarter and the second half of the year.
With the price increases that have gone into aluminum beverage packaging plus the actual costs coming off there are significant profit pools that our customers are going to be able to step into as I said right out of the gate, where a heck of a lot closer to what we anticipated in terms of volume.
In North America in particular.
Given the December falloff on all in consumer products.
That has changed the behavior patterns.
Initially this year with a lot more price promotion and end cap.
Will that continue for the balance of the year I would suggest it will given the other backdrop that I gave you relative to costs.
But.
B Europe continues to be incredibly strong.
North America is off to a good start.
I think theres, a little bit of a wait and see in terms of the volatility in South America, but having said that the <unk>.
Real cost positions at some of our major customers down there we will lap in terms of hedge positions will stimulate.
Optimism in the second half of the year.
The PPI pass through we're in good shape.
All of the cost actions and the footprint reductions.
That we've talked about are in good shape, maybe I'll turn it over to Scott just for some of the positives.
<unk> relative to inflation and currency and some of the other things that are starting to move in our direction from a from a more stable environment, but.
2023, as we sit here today.
Feeling really confident about.
I'll touch that and then why don't you touch innovation was part of his question, Yes, George I think I think why we feel optimistic is we are definitely seeing that.
Input costs moderate.
And whether it's European energy is not going to be as bad as what people predicted we're largely hedged in Europe lower than where the spot prices today.
That really squeeze this last year, we're getting all the PPI pass through we started to see freight rates warehousing lots of input costs moderating.
So as we sit here today, we feel pretty good about kind of the cost input side being at a much more stable place kind of had long term rates kind of peak short term rates are still ticking up a little bit and so we will feel that in our interest expense for 'twenty, three but we feel much better.
<unk> talked about the EBITDA, reflecting on your kind of your comment and question around innovation certainly in the alcohol space. We continue to see a lot of innovation, which is a good thing because the combination of the innovation something is going to win as we always say George we don't know what's going to win something is going to win but it also increases the pressure.
On the beer category to compete.
Those two things will equate to improve volume outlook. So we're.
We are helping to fuel the innovation number one but we also have a heck of a lot of customers that we sell beer cans.
We will benefit one way or another depending on who wins.
Yes, we will be hoping for more consumption during the Super Bowl and other things My other question I'll turn it over thanks for all that color is so you talked about reduced capex.
Not a surprise, but that also includes.
Your talent spending for existing.
Plants as they are coming up.
I know, it's not 24, but is your view you can give us on what capex might look like or what the delta might look like.
As we look out to 'twenty four 'twenty five thank you very much guys.
Sure most of the spend this year George that at one point to are things that are already in flight and as we've talked about we've got.
We will have enough capital in the ground. After completing these couple of things in Europe that will be in a pretty good spot. So I would expect although February 2nd of 'twenty three I would expect in 'twenty four we will see that drop further.
Internal conversation George quite candidly is we've spent the capital we need to grow into over the next two to three years, we could most likely spend at DNA levels in 'twenty four 'twenty five if we have a reason to invest that will be with a strategic customer one or two.
So I think youll start to see a much more.
Disciplined level loaded capital approach relative to DNA spend moving forward.
Thank you very much.
Our next question comes from the line of Christopher Parkinson with <unk>. Please go ahead.
Great. Thank you. So much can you just talk a little bit more.
More about North American volumes, specifically, how much you believe was more just industry sell through.
Specific customer Destocking and anything idiosyncratic to ball given the shutdown in Phoenix, just anything to break down those three variables will be very helpful. Thank you.
Yes, I think it was.
It was the back half of the quarter and it's no different than probably every other end consumer product.
Retail shelves people.
Customers pushing price pushed it too far and there was price elasticity that kicked in.
Beer was down the most.
And I think what we're seeing is a return to more promotional activity here right out of the gate in Q1. So I think there's recognition of what happened there in the last four to six weeks of the year, which is well publicized.
Since we sell to everyone. In every category in every channel we were impacted by all of that but.
But I can tell you theres a different behavioral patterns setting in relative to our customers and their promotional activity. So I think this will normalize and you'll start to move into a more sustainable underpinning for growth moving forward.
Got it and just a very quick follow up on some of your Latin American commentary.
Could you just very quickly just to discuss the market dynamics, obviously, it's pretty difficult during the first half with carnival and everything else and then kind of easing to that.
That's helpful World Cup rebound, which didn't necessarily materialize, but just given the easy comps on 2022 and your comments on preliminary basis for the BNET January how do you think believes the market will ultimately materialize throughout the balance of the year given the low comps just given the industry and then also any perhaps just very quick comments on.
Market share trends. Thank you so much.
Yes, I will point I will point you to the fact that.
The real costs.
That our customers have relative to aluminum cans has as much to do with their hedge positions and in the second half of the year.
Cans will be the lowest cost substrate with the greatest profit pool and that will give ample reason for our customers to push aluminum packaging at that point.
Youre right.
Cup relative to the fourth quarter, we did see an uptick but we didn't see the uptick that we anticipated.
<unk> knew that early in the quarter.
And we were reacting to that throughout the quarter.
And we've got to your point you've got Carnival.
Got another a couple of things you don't have a COVID-19 environment like you did last year. So there's optimism.
It started off.
Less favorable than we anticipated in south and South America, but it's only one month and then I would I would and we're still bullish on things getting better in the back half of the year I would just add on South America in the first quarter last year.
We will lap the customer breach that we had so that will we won't have that volume as we look forward.
Okay. Thank you so much.
Thank you. Thank you.
Next question from the line.
Our own <unk> with RBC capital markets. Please go ahead.
Great. Thanks for taking my questions. Good morning, good morning.
Yeah, obviously, we've seen the destocking in some of the impact on the consumer from the inflation and you mentioned that maybe thats, turning a little bit now.
The deflation raws.
<unk>.
Customers of yours.
Essentially in a position to promote the products. So could you describe a little bit more what youre seeing on that front and if you are seeing that.
Do you expect what's kind of your growth in volume outlook for north.
North America this year, taking into account some of the closures you had last year as well thanks.
Yes, as we sit here today.
I'm encouraged by what we're seeing and I'm not willing to come off of.
And certainly in the year that we're planning for flat, we're planning our earnings lift in our 10% to 15% EPS growth up or flat in North America.
Until we were more convinced that the behaviors of the customers will continue to lean into promotion throughout the year.
That's that's where we're that's where we're landing right now.
Okay, well, maybe I can ask the question a little differently do you think about the $400 million or so that you delivered in Q4 EBITDA.
Maybe there's a little bit of seasonality improvement in Q1.
23, Q4 dollars 23, I imagine could look like Q1, and then Q2 and Q3 would be up seasonally better, but still that would fall short of $2 billion of EBITDA.
Is that right I mean, what are some of the levers you guys can can can pull to maybe get back to that level.
Or is that maybe more like a 24% and 25.
What kind of range that we should be thinking about.
I think in the first quarter remember a year ago in the first quarter things were pretty good our volumes were up.
It looks strong we're not going to have that kind of.
In Russia, we had Russia, but in North America. The volumes were good. So we won't have we're going to have a pretty tough comps in the first quarter I think as we look for that in the remaining quarters, we should see nice improvement.
Year over year at each of the quarters in North America as we look forward.
Okay, Great and then just lastly, just on Europe .
It sounded like.
Somewhat a little bit more constructive on.
Could you just describe that.
Square that away with some of the inflation that they saw last year you had some energy price inflation that was pretty stiff. So is that what's also giving you some relief and potentially pushing some volume upside in Europe .
Well, we had we had a really strong.
Volume year in Europe .
And it wasn't impacted despite the end consumer being impacted with.
Less discretionary spend the aluminum package did really well and I think it's more of the aluminum package story and the resiliency of the can in Europe .
Then it is discretionary spending levels that helped us your point is valid so where contracts are work, we will be able to pass through a lot of the inflationary headwinds that we experienced in 'twenty two we'll pass that back in 2003 so.
If we if we're if inflation moderates, which it has even if it dissipates a bit then you've got the underpinnings of volume that continues to grow at the high single digit rate. We've got capacity online are coming online in two major facilities that will take advantage of that growth.
And we should be able to make more money given the stability of the inflation and the fact that we're catching up in arrears on a lot of inflationary pass through.
Excited about Europe for 2023, and just to your comment on EBITDA I would expect I'd be disappointed if we didn't exceed $2 billion of EBITDA in 2023.
Okay. Thanks.
Yes.
Next question from the line of the cabin Shannon.
Jabby with please go ahead.
Yes, good morning, everybody.
Good morning.
So Dan just kind of building off your recent comments you've been quite vocal about how higher beverage prices pressured volumes, along the supply chain, including at year end.
How much do you think volumes were impacted in 2022, just based on the dynamic and beverage North America and as it relates to your comment on Europe resilience.
Was that also boosted in 2022 by just the comparison from.
The reopening across Europe relative to the prior year and do you still see sort of that momentum continuing into 'twenty three.
Yes, I'm not entirely sure. Your first question I could parse out that Delta I will tell you.
Where it had an impact and where we'll be able to point to it is and the fact that it's really the promotional activity during the peak season that we didn't see any of.
Last year, we still grew a little bit.
I would probably go back to sort of that 18 19 range of growth that we saw.
And I would put that up against what we actually saw in 'twenty, two and I would say that Delta just speaking out loud is probably.
What we lost out on because of a lack of promotional activity in the peak season, So maybe 1% to 2% during that period.
Which as you know those that last billion cans as you kind of where you make your money.
At the end of the year at a fixed cost business. So.
Yes, let's see right now we're off to a good start relative to how the beer companies are promoting and how our customers are looking at what they need to do from.
There are less.
The city curves have changed here in the last four to six weeks, but I would say in Europe .
The sustainability push in Europe is not slowing down and I think that will help we know how many can filling lines are going in Europe in the next couple of years.
So that's why I think we're bullish on the outlook for Europe , I think the reopening if anything would have slowed our growth.
The on premise is overwhelmingly kegs.
And so despite the despite that returned to on Prem, where we're still growing at the high single digit rates. So.
I continue to be bullish about what's happening in Europe .
I've said this a number of times and I think I've said this to you.
I am most bullish on Europe in the medium and the long term.
The short term obviously they have to figure out of energy that will impact every industry every business, but for us the sustainability underpinnings are tremendous.
We're excited about these new assets that we're ramping up here in the first half of the year.
Okay. That's clear and then for the second question on the 200 plus million net price cuts recovery guidance for 23, how do you anticipate that will flow through the various beverage can segment and then separately did you did you give a working capital number for 'twenty three in terms of year over year movement.
For 2023, working capital, we expect to get to that $750 million of free cash flow, we expect working capital to be a source.
A little over $300 million.
Okay and on the on the net net cost pass through net recovery, it's overwhelmingly Europe , and North America and at 60%.
North America, Scott and.
As he is nodding and Youll see.
In Europe . It comes in in a more linear fashion over the quarters and in North America Youll see.
60% of that coming in in the second half of the year July one's a big date for.
For lapping one particular customer contract.
Yes.
Next question from the line of Anthony Pettinari with Citi. Please go ahead.
Good morning.
Just following up on <unk> last question.
You reaffirmed the 200 million inflation recovery target.
Scott you mentioned inflation in energy coming in.
Lower than expected maybe in some cases materially I'm just wondering if that's something that would cause you to raise that $200 million target or maybe it's too early in the year or do you think about sort of the benefits of those lower cost in a different way or is there a lag.
I'm wondering how we should think about that.
I'll answer it and then I'll, let Scott give you more detail answer we'd prefer to be heroes in December then.
Austin.
For the second.
Scott go ahead.
February 2nd I mean, I think I think the opt is optimism. We're feeling is that it appears a lot of the trends are more helpful to us.
So all of those things will be beneficial, but we got to see how volume show up.
Wildcard.
Getting out of the gate and a more positive and constructive way and we're building our plan on a more conservative basis, but we will see but definitely things seem to be turning into a little more tailwind than headwind that we had last year.
Okay. That's helpful. And then just a few quick follow ups on Latin America with the footprint actions in Brazil, I don't know if theres a kind of a finer point you can put on the cost savings there and then maybe just where your operating rates will be in Brazil.
Once that's completed and I guess, just one last one if it's how you would characterize the south American businesses ex Brazil.
Theyre doing.
Yes.
Ex Brazil, there are quite resilient.
With the inflation levels that youre seeing in Argentina.
Our volume was up double digits in that country year over year. So.
It's incredibly resilient.
Chili's performing well.
Paraguay very well some of the other areas that we export into continue to perform well. Despite all of the geopolitical turbulence in the inflationary pressures you're seeing there that's holding and that team is doing a wonderful job managing all of that all of those challenges.
In Brazil.
It's less about the cost savings relative to.
The expenditures, obviously labor is incredibly cheap there. So yeah, you shuttered a facility you're not going to see Nir near the near the savings that you would in Europe or in North America.
<unk> operating.
And a tighter supply demand environment gives you the ability in your other facilities to keep them full and to run them full out and that generally benefits efficiency levels reduces spoilage all of the things that.
We're asking our plants to do and manage on a day to day basis that gives them a.
Greater ability to do that manage their quality aspects stay in touch with customers manage our supply chain more effectively so that's what you would see the savings and the benefits and the earnings profile.
Being impacted in South America.
Okay. That's helpful I'll turn it over thank.
Thank you.
Next question from the line of Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone Hey, good morning, good morning.
I guess the first question is thinking.
About the demand side, maybe coming back into North America and.
Gains can I hear your comments on paid January has had.
Better start maybe seeing some pick up in promotional activity.
Your comments seem to EBIT more focused on beer as a category versus CSD.
Or elsewhere and I'd love to just get your perspective on are you seeing that change in customer behavior and promotional intensity across all categories. There is right now exclusive to beer.
And corollary to that is in discussions with customers across different beverage categories is there any where you're seeing kind of a step up in innovation and new product introduction that is giving you more optimism.
I think it's I think it's a really good question.
Beer is being more aggressive on the promotional activity because beer had the most precipitous drop off in volume so it all it correlates.
And the magnitude of the volume declines in terms of the promotional activity. So yes, youre seeing it across every single category. Because every single category was down in the last six weeks of the year.
But it's certainly more pronounced and that's probably a recency bias in my comments are relative to.
Really a really nice uplift in beer right out of the gate. Some of it is attributed clearly to the Super Bowl as were two weeks out now you always see some promotion some lift there, but it's more pronounced than that from a historical standpoint, because of the volume falloff.
And on innovation I made this comment earlier on a question, but maybe I can dive into it a little bit more there is innovation in every category, but the most innovation and this has been a consistent thematic here with the exception of that.
Cordiant effect relative to Covid, where there were less skus, just trying to get cans out the door, but.
As the large cpg's become beverage companies.
They're leaning heavily into alcohol and mixers and those types of cocktails and that's where innovation is really <unk>.
Stemming and Youll continue to see that.
For the foreseeable future and those are most of what we expect to see here in 2023. There are other things obviously been worked all the time that or.
But what I know is planned for retail shelves is going to <unk>.
Largely fall into.
Cocktails and innovation in around that for the can.
Got it.
Then.
I appreciate you gave different segment level detail.
Or is it a different camera is I'm not sure if I missed it our view on the aerospace performance for the year.
Do you think that that's tracking yes.
Yes. So for 2023, we will be will exceed 15% earnings growth.
Actually right now is it's shaken out we're north of 20.
So we will see.
We're beginning to step into the backlog that we've won.
Through the years and starting to see repeat builds.
Our defense platform is executing really really well.
And I think we navigated some choppiness in terms of supply chain in 'twenty two that is stabilized so as we sit here today, we should see a much improved operating earnings performance from our aerospace business.
Alright, great. That's that's helpful color I'll pass it on thank you.
Next question is from the line of.
<unk> with Jefferies. Please go ahead.
Hey, guys.
I appreciate it.
Hi, good.
Good morning, I appreciate the earnings will be a little tougher in the first quarter and likely down do you have enough levers where earnings will be up year over year in <unk> and I think youre targeting 10% to 15% earnings growth for 2023 is that predicated on the 4% volume growth you were mentioning or is it more of a flattish backdrop like you've previously guided to.
I think we will start to CMO, but in the second.
Quarter.
Definitely.
We got it got it.
On volumes, but as things kind of roll in we get some PPI pickup here in the first quarter, but as Dan mentioned, the bigger chunk of it.
Comes in.
In the second half of the year.
First quarter will definitely be softer year over year, given some of the challenges we are still working through some of this inventory both in North America and in South America. So that's where you'll see most of that impact, but that I would expect in North America, we'll see nice earnings improvement as we get into the second quarter and year over year as we look through the rest of the year.
You should see sequential improvement right <unk>.
Two Q3 Q4 throughout the year, both with the PPI the fixed cost savings.
Keep in mind <unk> from a volume standpoint was quite challenged in North America and so.
We get a little modicum of promotional activity there in the peak season, then I think our plans as Scott indicated there they are more on the conservative side.
Where are we where we would need volume in order to achieve our plans is Europe , because we are opening up too.
Two facilities, there, but Europe has been the most resilient and.
The anchor customers are the most resilient.
That are going to be the tenants of those those facilities.
But just to be clear guys to hit your 10% to 15% earnings growth do you need 4% volume growth or is it more flat because I thought at the analyst day. The messaging was more flat and we still can get to like 10% to 15%.
In North America, it's flat.
Global is for North America, it's flat mid to high single digits in Europe mid single digits in South America.
How we get to the fourth yep Okay.
And then on Latin America in General certainly, Brazil has been really choppy and there is certainly some social unrest.
What gives you confidence kind of deliver that mid to high single digit growth in 2023, So it's been a pretty tough environment for some time, especially Brazil.
Any contractor a perennial in 2023 24 and that Brazilian market.
No we have no open contracts heading into 'twenty three 'twenty four.
The resiliency relative to.
South America is going to be the stabilization first of all lapping the contract reached in Q1.
And then the actual cost position of our customers down there we will have the aluminum package being the most cost advantaged product.
In Brazil in particular with that customer base.
Okay I appreciate the color guys.
Yes.
Next question from the line of Andrew witty CEO of Morgan Stanley . Please go ahead.
Alright, Thanks for taking my question and just a quick one on near term one that you've talked about kind of full year.
Volume growth across the different regions could you give us a similar walk for what that <unk> number is.
Thinking about it across the region.
I think <unk> had total will be down again, we had pretty good growth in Q1 of.
'twenty two.
So I think it will be slightly down.
In Q1 in total.
Yes, I'd say in North America Youll be flat.
In South America, Youll be flat because the customer breach so we'll be lapping that.
Flat would actually be growth on an apples to apples basis.
So we could be a little plus a little minus there and we'd expect to be.
That high single digits growth mid to high single digits for Europe that will be a linear number throughout the year it'll you'll have more opportunity to grow in the back half because of.
Because of the two facilities that are coming online.
But you should see growth right out of the gate in Europe , and then flattish in the other two regions for the aforementioned customer reach and the market dynamics that exist right now in North America.
Got it that's very helpful. And then just curious as you think about the ranges that you gave for the full year I guess, maybe I'm reading too much into this but South America, Europe , and others seem to be a little bit of a wider range, whereas North America flat I think.
I've kind of heard it correctly flat to slightly down.
Seems to be a little bit narrower, but this also seems to be an area, where the region, where we've seen maybe some other more a bigger deterioration throughout the last few quarters. So you kind of mentioned liquor and cocktail if there's one area of potential growth and promotional activity, but how much of this I guess what gives you comfort to have a narrow range there.
As you think about the year progressing.
Some of that Posco liquor related volume.
Particularly of visibility.
There is things contact data I guess, yes, I just want to get your comfort in that kind of a narrow range.
Yes.
Flattish.
That's not the that's not the narrowest range with fabric, David but I. Appreciate the question I would say.
Optimism to tighten the range in North America is that we plan on a much more conservative environment.
And one thing that I think is important.
Underpinning this business in this industry in particular, we're generally the first to go into the recession and we're generally the first to come out and what we need.
See what happened over the last four to six weeks was the elasticity curve on volume and price for our customers has been broken and now youre seeing volume come off that means you have to return to some level of promotional activity. That's good for the can so.
For North America in particular.
We've got a big business, where with all of the customers It gives us.
Some foothold in understanding the market dynamics. The contracts are secured we know what we had heading into the year.
Could it be up a little down a little yes, that's not going to have an impact on whether or not we can deliver our 10% to 15% EPS target I would I would also say I mean, while it has.
Been more volatile in the last few years no doubt historically.
North America has been more predictable.
America has always had a wider range just because volumes can move around a lot. Both of those economies are more volatile and so you could see you could see outpaced growth at times and you could see bigger declines at times. So South America has just always been a more volatile region.
Despite the dance cabinets I mean, you would think with a 100% inflation in Argentina that would be a big negative for cans, but cans grew double digits last year. So it's a little tougher to predict in a place like that.
That's very helpful and if I may just kind of quick little follow up on that I think one of the areas that historically recessions Thats helped is the customer pushed back maybe how much. They are spending on plan some of that some of that <unk>.
<unk> have we seen some of that already or is that still potential upside as we think about the near term and on the customer.
Yes, I haven't we haven't seen that particularly.
But youre exactly right.
Those are the early signs and signals that were.
That's when you know you're on the uplift coming out.
And we've seen the first stages of promotional activity, starting we haven't seen them steering on trim versus off Prem.
But that usually is the next.
As the next lever to pull Youre exactly right.
Thank you so much.
Yes.
Next question is from the line of Mike <unk> with Truest. Please go ahead.
Thanks, Dan Scott and it's taking my questions.
A reminder.
Just one quick follow up.
Dan mentioned the weakness in beer and obviously you experienced firsthand, we all saw that in the Nielsen data with beer volumes being very challenged.
Late last year, how are you thinking about your exposure to bear at this juncture.
Still a core end market given what's occurred in beer are there any opportunities future diversify your mix.
Yes, Theres always and we're constantly we're constantly looking at our portfolio and our customers and how do we look at it Michael It's a great question. So I look at <unk>.
Brand owners and brand builders.
The other thing we may be talking to are we may be having we may have a portfolio of historical beer customers, but those historical bureau customers are moving aggressively into other things from an innovation standpoint. So.
Within the portfolio of some of our customers. We like the fact that they are acquiring products that they are innovating products and that they are pushing new innovations and so.
Youre right. There is there is volume ascribed to beer and Theres big volume ascribed to beer and that's always going to be an underpinning of.
US within a volume business, but as that beer skus to other drinks.
And other alcohol profiles.
It'll be a it'll be a trade off within their portfolio, we're selling them. The cans the label they want to put on it it doesn't matter to us we just want to be with the winners on the brand side.
Got it that makes sense and then just quickly can.
Can you comment on any additional portfolio rationalizations or temporary closures, maybe contemplating I think last quarter. You indicated that you had taken all the actions needed to with respect to plant closures.
Then there was an industry publication came out with some details I guess in December about some temporary closures in Brazil, and I think you highlighted broadly in your press release as well. So the first question is are those closures in Brazil temporary or permanent.
And the second quickly just given the volatility in Brazil over time certainly.
The last few years can you walk us through.
The investment case as to why investing in Brazil makes sense, we're really doesn't at this point.
Yes.
So I would look at.
The regions.
Pending on what permanent and what's temporary a lot of times labor laws dictate that and I would tell you in North America, and South America, we've always.
Managed our supply chain, so we will curtail lines.
We will have temporary shutdowns.
That's more reflective of the conditions with which we.
We are managing.
Our South America plant.
Think it was mischaracterized as to what we were doing with that we.
It's a temporary closure for now.
And given the existing conditions and economic conditions in Brazil.
It's no different than the analysis right. It's Eva we do have a larger risk profile.
And hurdle rate in places that are more volatile like a Brazil, so thats already embedded.
So it's going to be the length of the contract the substantive nature and the.
The economic underpinnings of that contract and whether whether or not we believe can generate EBITDA I don't know Scot if there's anything I mean.
Brazil, Brazil over a long period of time, it's been a really good place to invest the can.
<unk> share.
Share has grown in all of the markets that we've operated it does tend to be a more volatile region and so you have to live with that volatility but.
Over the long run it's been a great place to invest and we expect it to be a really good place going forward.
It is not without its challenges, but that's part of why you can make some pretty good money there too.
Got it thanks for all the color and good luck in 2023.
Thank you Michael.
Next question from the line of Adam Josephson with Keybanc. Please go ahead.
Thanks, Scott good morning.
Morning.
Good morning.
Dan one on back to North America to your your long term target is two to four last year you were down a touch.
Youre seeing that VR companies promote more it sounds like you're encouraged about what youre seeing in January yet you're expecting flattish shipment so that would be two years in a row.
<unk> shipments compared to that long term target of two to four I guess, just given the low base and the promotional activity you're seeing.
Why are you not expecting more growth in North America, particularly given your long term target.
Just trying to understand if there's something I'm missing.
No I just think it's earlier in the year Adam.
We've seen we've seen a couple of weeks' worth of promotion, that's that's not enough for us to get overly excited that we'll return to some modicum of growth and.
Candidly, the inflationary and but all of the all of the things relative to a soft economy are still presence I think we can we will do well.
I think youll see trajectory in the second half of the year that will be helpful. With these promotions continue.
I'd love to come back to you in six months and say, we're right back on track with the two to four but as we sit here today.
Have enough data points to say that that's going to happen in 2023.
Over time.
Still kind of in the post Covid adjustment period I think.
'twenty three will kind of I think 23 will kind of be the end of that and I would expect those historical rates that we saw before COVID-19.
Sustainability tailwind at all of those things those aren't going away those are going to continue and so that's why we think longer term.
Those growth rates makes sense, but we're still kind of at a in a period, where we're getting through COVID-19 and now through rapid inflation and we're starting to see things settle down.
And that gives us more optimism about that.
Just one follow up to that which is I know you said two plants I think that was about 8% of your north American capacity middle of last year.
So you were down 3% you are expected to be flat next year do you think the market grew by.
By more than than what you were doing.
Did the market did you underperformed the market last year and do you expect to underperform. The market. This year can you just give me any sense of how you think you're performing in terms of north American volumes versus the broader market.
Probably a tick under performance relative to the market because of the size of our beer portfolio and that was the most distressed category last year. So.
That certainly had a knock on effect the good news is if that area.
Reverts back to.
More <unk>.
Positive.
Promotional activity than we should be the beneficiaries of that shift moving forward and remember market.
The impact in our market is going to be dependent on who is bringing up capacity who's turned on new capacity.
In Europe . This year, we will probably outperform the market because we have facilities coming online so those kind of things.
Can happen quarter to quarter year on year, we don't focus on market share, we focus really ought to Dan's point being with the right customers. The customers that are innovative customers that are growing that are using the cash we focus more on that.
Versus market share.
Right now I guess.
So if you end up flattish would be unreasonable to think that the market would be.
Wanted to just using that logic.
I think that's right I think thats right, Adam I think youre thinking about it the right way.
Okay. Thanks.
And Scott just on the working capital.
I think Tim asked about it that you are expecting a $300 million source is that can you just help me with where thats coming from.
Yes.
<unk> to what you dealt with last year.
Coming from any particular place in particular.
Off the board improvements that you're expecting.
Mostly inventory out and we still have too much inventory.
That's what we need to work off so we've got a lot of cash if you will sitting in our inventory.
So as we as we roll that off we will be able to generate a lot of cash from it the biggest chunk.
Got it thanks, and then just beyond that so that working capital normalizes in the Capex Center.
Equivalent to DNA are those the are there any other swing factors that you would point out as we think about free cash flow beyond 'twenty three lower capex.
But the earnings engine right Yep Yep.
Yes, yes.
Well that would be about <unk>.
Got it got it okay, Yes, we've got really good line of sight Adam into into it.
It's both raw material and finished goods. We've got really good line of sight. We're working that every single day right now so we're confident about that.
Source of cash this year.
Thanks, Dan.
Carlos.
We'll take one more.
Alright, Sir last question from the line of Kyle lined with Deutsche Bank. Please go ahead.
Hey, good morning, Thanks for squeezing me in here I, just wanted to better understand kind of the bridge to 2023 earnings and I believe that $200 million improvement in comparable operating earnings that you called out.
You had the $200 million and net inflation recovery you have the $150 million in cost savings.
Partially offset by call it $85 million from the Russia business.
But that's still about $2 $50 million to $265 million of improvement before we have any volume growth I guess, what are some of the major headwinds here that it might be missing in the bridge.
And the rise in interest rates interest expense.
Alright got it.
And then on the the $200 million replacement recovery that you guys talked about it seems like it's mostly going back to your past comment though are in.
Inflation is moderating.
The base cost energy cost in 'twenty, three are going to be higher.
They were at 22, we're just passing them along with.
But that there are things that have are built into our plan.
That are negatives from a cost perspective, and so that's why you gotta.
You can't just talk about all the positives.
The other way and so the balance of those until I get to my number.
Right.
I was assuming that the net.
Trying to net for maybe the incremental inflation that youre seeing but maybe thats not the right way to look at it.
It's really the net of what we expect.
Okay.
But again Thats just inflation.
Yes Nathan.
Sticking on that point, so it seems like a large portion of that recovery of the $200 million in place and recovery is in North America, but it doesn't happen just given the contractual time until July .
Correct.
Good day.
Yes, 60% of it is in North America, the other <unk> in Europe .
Okay. I appreciate that that's very helpful. I know, it's early days, but do you have a sense of how much of that benefit but actually continue to flow into 2024 in North America.
So it doesn't go back the other way it stays.
Right I'm just.
Okay perfect.
That's perfect scenario for US is you get a pretty sizeable.
PPI increase in your cost actually go down.
Effectively what would happen your questions Youre thinking about the right way. So you pass through inflation a year in arrears.
If inflation moderates, our dissipates you hold on to that margin expansion for the following year.
It was just the opposite of that past two years for us.
But if things come off in energy prices et cetera, et cetera come up after we put through.
The existing cost.
Then that would be carried into parts of 24, you are right.
Got it sounds good well everything.
Much better from a price cost standpoint going into this year versus the challenging last year. So good luck with the balance of the year.
Yes, very much so glad to be done with 22 and excited about 23.
Well said Carlos in with that.
We will close the call and look forward to talking to you at the end of the first quarter. We are excited for 2023.
<unk>.
We've got the teams in the plans in place to execute so we'll be following up and Iterating on those plans as we move forward. We look forward to the next time, we get together thanks.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.
Sure.
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Yes.
Sure.
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