Q2 2023 Ball Corp Earnings Call
And an answer session at that time, if you have a question. Please press the one policy the four on your telephone.
Anytime during the conference you need to reach an operator, Please press star Zero as a reminder, this conference is being recorded Thursday August three 2023, I would now like to turn the conference over to Dan Fisher, Chairman and CEO . Please go ahead.
Thank you Malika and good morning, everyone.
This is ball Corporation's conference call regarding the company's second quarter 2023 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 in the company's latest 10-K.
And in other company SEC filings as well as company news releases.
If you do not already have our earnings release. It is available on our website at ball Dot com information regarding the use of non-GAAP financial measures May also be found in the notes section of today's earnings release.
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 comparable operating earnings.
In addition, the release also includes a summary of non comparable items as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations.
Late in the quarter. The company also announced that is considering options for its aerospace business. There are limitations regarding the depth of commentary, we will provide on that topic today, if and or win additional comments are necessary. They.
Will be made via a separate public press release.
Joining me on the call today is Scott Morrison, our executive Vice President and CFO .
I'll provide some brief introductory remarks, Scott will discuss key financial metrics and then we will finish up with closing comments our outlook for the remainder of 2023 and Q&A.
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Let me begin by thanking our employees for working safely and with the utmost level of agility, while fulfilling our customers' needs.
On our first quarter call, we said that our second quarter would be choppy.
And that was the case.
Our team delivered solid second quarter results amid tough year over year comparisons, including 47 million of higher interest expense the $40 million of operating earnings headwind from the Russian sale and global beverage volumes down 11% driven by the Russian sales impact and a notable domestic beer brand.
<unk> demand disruption in North America.
I'm proud to say that our team did an excellent job of managing both costs and working capital levels to deliver the quarter and position the business for a stronger second half.
Looking forward, we will continue to benefit from notable inflation recovery.
Cost out actions and improved operational efficiencies.
Our inventory levels are in good shape with plans to improve further our North America team is managing in real time, the balance of the U S mass beer brand boycotts and our improved demand forecast of other customers, which should unlock additional opportunities during the second half.
Cash flow is kicking in and we are studying opportunities to accelerate deleveraging and the multi year return of value to shareholders. While also developing additional innovative packaging solutions to grow the business going forward.
Around the globe beverage cans continue to win relative to other substrates and we continue to leverage the contributions of our two new facilities in EMEA.
Our customer mix scale plant footprint innovation and capable teams across the organization to ensure the best outcomes for all our stakeholders.
In our aerospace and aluminum aerosol businesses operational performance and demand for our products continue to grow in aerospace our won not booked backlog increased $1 billion and the unique technologies that we provide to support environmental and national security needs remains in high demand.
And in our global aluminum aerosol business, we continue to serve new categories and offer reuse refilled bottle innovations to a broader set of customers and occasions as.
As we look ahead.
All of our businesses will continue to unlock additional value for ball stakeholders in 2023 and beyond.
Consistent with our prior commentary in 2023, we remain positioned to deliver approximately $750 million of free cash flow to deleverage and returned value to shareholders and in 2023, we anticipate the potential of achieving the low end of our long term goal of 10% to 15% comparable diluted earnings.
Per share growth.
Including the Russian business sale headwind and exceeding that long term comparable diluted EPS growth goal, excluding the Russian sale headwind.
During the Q&A, Scott and I will strive to provide additional clarity on the external environment and cadence for the remainder of 2023 based on what we know today.
Our global beverage teams continue to position our businesses to deliver the year and have an eye on the future.
For the full year and incorporating year to date trends, our customer mix and excluding Russia. We now estimate flat global volume growth for ball with North America being down low single digits, South America volume up mid single digits, and EMEA volume up mid single digits.
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 second quarter 2023 comparable diluted earnings per share were <unk> 61 versus <unk> <unk> in the second quarter of 2022.
Second quarter sales decreased compared to the same period in 2022, primarily due to the sale of our Russia business in the third quarter of 2022, lower volumes currency translation and the pass through of lower aluminum prices, partially offset by the pass through of inflationary costs.
In the second quarter that comparable earnings decreased compared to the same period in 2022, primarily due to higher interest expense the headwind from the sale of our Russian business in the third quarter of 2022, and lower volumes as well as higher corporate costs, partially offset by the contractual pass through of inflationary cost fixed cost savings.
Lower depreciation expense and SG&A cost out initiatives to reiterate our prior earnings call commentary, we have been and will continue to proactively manage regional supply demand balance across our system of plants in the near term.
Starting in the third quarter segment earnings in North America will accelerate through the majority of the anticipated contractual inflation recovery, having kicked in July one.
In EMEA the business will lap its last Russian earnings headwind in the third quarter, and then accelerate to an improved level of earnings in the fourth quarter as they move beyond this multi quarter headwind and will start up costs for the two new plants.
In South America customer and product mix, which has unfavorably influenced the seasonally slower second quarter will reverse and consistent with our prior commentary, we anticipate a more robust second half in Brazil as customer hedges roll off in the fourth quarter summer selling season kicks in.
As we sit here today, some very consistent commentary in key metrics. We ended the second quarter in a very solid liquidity position with approximately $2 65 billion in cash and committed credit facilities 2023, Capex will be in the range of $1 2 billion driven by cash outflows related to prior year's projects 2020 for Capex in <unk>.
<unk> to be in the range of GAAP DNA levels, we're targeting free cash flow of approximately $750 million in 2023 and focusing on deleveraging.
Our 2023 full year effective tax rate on comparable earnings.
As expected to be in the range of 19%.
Full year 2023 interest expense is expected to be in the range of $450 million, we anticipate full year corporate undistributed costs recorded in other non reportable to be in the range of $80 million <unk>.
Including the $86 million Russian business sale operating earnings headwind comparable operating earnings should increase nearly $200 million and full year 2023 comparable DNA likely be in the range of $550 million as we look forward to incorporating near term demand trends.
And 2023 net debt to comparable EBITDA is expected to trend in the range of three seven times and in future years, we will drive that lower.
Last week, both declared its quarterly cash dividend and as Dan mentioned, reducing leverages, our key focus prior to resuming share repurchases as fellow owners, we continue to manage the business through the lens of BVA and cash stewardship, and we will effectively manage our supply chain and customers in this current environment secure the best cash earnings and EBITDA.
Outcome for our shareholders with that I'll turn it back to you Dan. Thanks, Scott we continue to believe that given the economic.
Economic environment and global dynamics impacting our world. It is a great time for investors to get up to speed on ball. Our improved results. Following the challenging 'twenty two is progressing our products and technologies are resilient and provide solutions for our customers. Our focus remains on delivering earnings free cash flow and high quality.
Through our customers and consumers and as leverage continues to come down and free cash flow expands our return of value to shareholders holders will grow in 2024 and beyond.
Thank you to everyone listening today and with that Malika, we're ready for questions.
Thank you, ladies and gentlemen on the phone lines. If you wish to register for a question. Please press the one followed by the floor on your telephone.
We'll hear a steady tone pumps, Doug knowledge request.
Question has been answered and I would like to withdraw your registration. Please press the one followed by the tier.
Once again that is one four to ask a question on the phone lines.
One moment please.
Our first phone question is from the line of George Staphos with Bank of America. Please go ahead. Your line is open now.
Hi, Thank you hi, everyone. Good morning, Thanks for the details and congratulations on the performance I guess the first question I had can you talk I haven't tried to reverse engineer the full year volume guidance relative to the year to date, but what kind of volume trends are you seeing early in the third quarter across the regions and our.
Are there any regions left with any.
Notable filled product that needs to be stopped how would you have us think about that guys.
Yes. Thank you.
In the in the mass beer space.
I think you'd have to look at that on a net basis. Clearly there is one customer that's got more filled goods right now than the others and I think they've commented on that.
There is a little bit within our portfolio in terms of the energy space, where we're working through some.
[noise] inventory.
Our largest energy customer in our space in North America is growing at a slower rate than the balance of that space.
So.
The scanner data is reflecting more growth in our our shipment sales.
That normalizes, we believe in Q4 based on the projections that we have.
Nothing notable we're in a really good inventory spot George you can see that reflected in our <unk>.
Our cash generation in Q2.
You always have.
This is a softer period for South America.
Theres nothing really of news there, we expect to start building inventory here in the quarter to execute against the back half of the quarter and then peak season for that part of the world. So absent the obvious mass beer player.
Not as much.
Okay and nationally.
So getting out to some degree was what you were seeing in South America. So in South America, you from your vantage point, not a big amount of Destocking, if anything that needs to get done at the customer level that'd be fair.
No.
We've been running rather than your large.
I'm sorry go ahead here, but.
Yes, that's correct, there's nothing there's nothing meaningful in South America, you always run to get you are always doing maintenance.
And there's always a level of curtailment in Q2.
And so there's just not a lot of room to run Additionally to build inventory because you're already planning that youre going to be running full out in Q3 the inventory builds.
If you have that effect typically it shows up at the end of our fiscal year.
Down in South America, if things arent selling through in Q4, you usually on a bit more inventory heading into Q1. So.
We're in a really good position inventory wise that was something that we commented heading into the quarter.
And the plants managed that tremendously even with the.
Mass beer inflection that Oh.
Showed up in the quarter and persisted throughout the quarter.
Okay, Dan Thanks, I wanted to sort of come back to part of the question as I asked it and ask as a follow on then I'll then I'll step down just to be fair to everybody else. So what trends are you seeing early in the quarter volume wise across the regions. If you can talk about put a number on that if that's possible and then.
From our research and contacts.
We've seen an uptick in promotional activity.
We haven't necessarily seen a pickup in consumption yet.
Or would you have us think about the efficiency and the yield on promotion and the level of promotion that youre seeing and to <unk>.
And are we beginning to see some finally, some uptick in beer just based on what we're seeing out of the scanners and why if thats. The case would you be confident about that continuing the rest of the year. Thank you.
Yeah. That's a good question, let me, let me see if I can parse out the elements of that.
Let's look at North America. There is there is nothing really to report in terms of inflection one way or another in South America, because it's still winter there we wouldn't see that behavior until the second half of Q3, so nothing.
Nothing to report other than the.
The conversations that we're having with our customers again I'll be down there next week are they are planning to deliver against what we've modeled in right now which is a pretty nice inflection in volume heading into Q for Brazil.
We've commented on this previously bullish on the Brazil, Brazil was the first to go into a recession and experience inflation and higher interest rates. They are starting to relieve some of that.
So the combination of that plus.
Previously disclosed comments centered around hedge positions all of that is is playing out as we would hope.
The only thing in South America, obviously is the question Mark and at around Argentina, but.
But Brazil is stronger and we still believe that what we've contemplated.
Contemplated for the back half of the year is going to manifest.
In North America.
Both Scott and I have been very public with our comments on what we were seeing throughout the second quarter relative to the mass beer dynamic.
And they have been confirmed by our customers one is.
Our beer customers are always running full out in the second quarter and even most of the third quarter. So if theres a mixed shift that's taking place it's going to come from.
Working capital or filled goods. So the scanner data wont be necessarily a one to one reflection of what we're experiencing we believe that there will be resets at retailers.
Some of the customers that have opportunities to step into.
Into.
Elevated positions or more velocity on shelves or a bigger shelf space on shelves, they're gearing up for that.
Don't really see that until the fourth quarter is how we are contemplating in our numbers.
And in terms of promotion I think the way you characterized it is correct.
There has been promotion, but keep in mind the promotions coming off in many instances staggering price increases over the last few years. So it's not about promotion as much as that as the intentionality of.
Volume momentum.
What we've seen in the CSD category.
As we have seen private label gained share.
And that is something new relative to what we've seen in the last couple of years that is generally a catalyst to drive for more volume and volume momentum and we've always thought that given Q4 comps for certain of our customers they will be.
More inclined to push volume.
And in the fourth quarter.
Conversations with those customers with signal that they are thinking about it similarly.
But until it happens and until they find the right price elasticity and volume momentum trigger.
I think they're doing a lot of activity I see the same data, it's not having the intended results of driving volume.
I think it will it means that they will need to be more aggressive and I know that they don't like to be losing share to private label. So.
That's a lot there, but that's that's how we're viewing it and that's how we've modeled it.
Check to see if a great deal of uplift in Q3 versus previous.
From a sequential standpoint in Q2.
With the exception of we believe mass beer within our portfolio.
It will be we will continue to be negative.
Europe continues to grow.
Slight growth in Q2, we had a very good second quarter last year I'm, commenting excluding Russia.
We will continue to grow as our plant system ramps up the new capacity was needed for us to really step into growth in the mid single digits, but everything is still in line and alignment with us delivering against that over the back half of the year.
Thank you Dan.
Thank you.
Thank you. Our next question is from the line of Anthony Pettinari with Citi. Please go ahead. Your line is now open.
Hi, This is actually Brian Bird Meyer on for Anthony and Thanks for taking my question.
Yes, Dan Scott you've been asked about the possibility of selling or spinning aerospace for many many years. So why now for the strategic review does something change for ball for the aerospace business.
Is it about capital allocation or returns just any detail you can add there and maybe maybe why this is happening now.
Yes, why now is if you look back five years ago versus today the business is.
Much bigger much healthier much more profitable.
And it could fundamentally stand on its own those are those are the key.
<unk> for why you could potentially do something else with this business.
It's really a manifestation of that businesses performed tremendously and gotten to a point, where it's an incredibly value valuable asset. We believe that was the case.
So we ran a process to validate that early indications are it is a valuable business.
If and when <unk> got more to talk about I'll, let you know.
It's really nothing about capital allocation in.
Return thresholds. It is just that it's a <unk>.
<unk> asset.
Increasingly so and we always need to look at our at our shareholder value equation and make sure that that that asset is sitting in the right spot for the long term generation.
Understood. Thank you.
One quick follow up here is that during the quarter I think you talked about kind of retail points and.
Supply chain being displaced by the customer mixed developments in U S beer.
Do you have a sense of where we are kind of in that process.
Maybe when ball could start to see the benefits of being exposed to some of the other brewers that are doing very well right now.
Yeah.
Yeah.
There has been.
Minimal movements in terms of retail displacement I know.
Those questions are being posed theres, a significant reset that happens kind of tail end of Q3 heading into Q4 across most of the major retailers. So you will see this net impact fully manifest.
Probably not until the first half of 'twenty four will all of the shakeout happen.
So I'm not looking at anything appreciably changing in Q3.
But the customers that have the opportunity to take a broader position in the retail they will be gearing up their supply chain they will be entering into these new retail.
<unk> over the course of the third quarter and then you'll start to see Q4 first half of 'twenty, four where things start to settle out.
Understood. Thanks, a lot I'll turn it over.
Thank you.
Thank you. Our next question is from the line of Adam Samuelson with Goldman Sachs. Please go ahead. Your line is open.
Yes, Thank you and good morning, everyone.
Good morning, maybe just the starting point is.
Think about the guidance and I think there is a new kind of qualifier this quarter around kind of the potential to be at the low end of the 10%, 15% long term kind of range.
It's helped me is it just a volume question more in the back half of the uncertainty with some easier comps in the magnitude of balance that drives kind of the introduction of that qualifier or is it further disruption in USB or just help me think about <unk>.
The range of outcomes.
Drive potential versus actually achieving.
It's I wouldn't characterize that as further deterioration of mass beer.
It's going to be persistent through the third quarter.
And so yes.
From a volume standpoint, the third quarter from a mass beer standpoint.
What we anticipate at the beginning of year versus what we're experiencing.
It's softer.
<unk>.
Nothing's going to change here, probably in the next 90 days meaningfully to inflect. The good news is <unk>.
Everything that we set out to accomplish in terms of our operational performance.
The PPI pass through.
The <unk> of some inflationary benefits.
The SG&A actions the fixed cost savings all of that.
Is allowing us.
To have a line of sight to that low end.
We wouldn't be there without the we wouldn't be able to characterize our belief in that low end without the performance of the operations right now so it is mass beer.
And in every one of the regions. We believe there is an inflection.
In the fourth quarter in volume, we've talked about the CSD market, we've talked about I think whats going to happen in mass beer and then also a peak season in South America with an improved economic environment in Brazil, all of those things have to come through but they were already baked in what wasn't baked in as mass beer in North America.
Got it.
Very helpful and as you look at <unk>.
<unk>.
Start to think about 'twenty four in that context and start working with customers. Obviously some of the market share shifts present could presenting incremental opportunities and I guess do you think about the mass beer channel in 'twenty four volumetric Lee.
If that rebounds do you think you've gained disproportionately from that or is it some of that potentially accrue back to one of the captive Ken.
Makers that.
I wanted to pay customers.
No I don't believe the Catholic captive can makers will benefit.
Obviously theyre going to prioritize.
In the short term their assets.
One in particular.
Having the.
The marketing issue, we've come to an agreement.
We've got a stable go forward position, where we understand what the bottom is.
And so we should see inflection off of that.
If they're able to turnaround and then to your point.
<unk> are with everyone in the beer space. So we should see net benefits into 'twenty four.
Characterize Q2, and Q3 is a bit of a trough for us right now.
So relative to that and then what happens in the mass beer space.
Clearly the economy writ large.
There is there is reason for optimism for sure in 'twenty four and beyond.
Okay, Alright, so that color is very helpful. I'll pass it on thank you.
Thank you. Our next question is from the line of Christopher Parkinson with Mizuho. Please go ahead. Your line is now open.
Great. Thank you so much just I want to circle back to the just the Brazilian market and everything going on and there has been kind of some macro volatility.
To date about glass recycling the relative cost of various packaging substrates.
Obviously the rebound it is highlighted in the potential for the rebounds highlighted in your press release could you just take a step back and just how should we be thinking about that that evolution. During the kind of the fourth quarter, which you already highlighted and into 2024 in terms of kind of like the normalized progression. There just because it seems like they're just a plethora of moving parts, which we have to consider thank you.
Yes.
So what we've stated in an inflationary environment recessionary environment, which is clearly what Brazil has been.
Saddled with here the last couple of years.
Two or three times when we've had similar macro events in that country. We have seen share shift of returnable glass in the fives to high single digit range. We experienced the same thing from second half of 'twenty, one all the way through today.
As a lot of it has to do with the economics a lot of it has to do with the pur.
Per unit price point.
Of aluminum and aluminum packaging the hedge positions that were.
Constructed by our customers.
The cost of aluminum has come off the hedge positions have come off.
The economy is rebounding inflation as declining interest rates are coming off so all of those things point to we should normalize back to.
Mid 50% low 50%.
Can penetration in Brazil. So we're we're betting on can penetration improving in Q3 Q4 and stabilizing in Q1 for 24, we haven't done a ton of work on 24, right now but I.
I would think about it is principally an improved economy and our returnable glass shift.
That took place during inflationary period, which has always come back to cans, because thats the preferred choice and the preferred choice of our customers. We expect the same thing to happen.
It's too early in the process given this.
It gives me in the year given its winter there to see much movement if anything.
We anticipate that tail end of Q3 and into Q4 more in Q4.
Hopefully that opened.
Of course understood and just a very very quick follow up on the North American market regarding your volume commentary there.
There's been a lot starting to go on various promotional expectations. This year in Q4.
For you then kind of waning euphoria, and then kind of coming back.
How should we think about that in the mass market I mean, there's been some competitor commentary and optimism for CST at least a little bit but what are you actually seeing from your customer base and how is that actually flowing in to your outlook for the second half. Thank you.
We began the year with the expectation that we wouldn't see we.
We would see promotional activity, but promotional activity does not generate volume momentum, we thought volume momentum would come in Q4, when there are more challenging comps.
We still anticipate that we didn't.
We didn't build in much in terms of volume momentum happening in the first three quarters of the year.
And even though you are right. There is increased activity on promotion it hasn't been enough to move volume.
There has been share shifts from the.
The major CSD players into private label over the last four weeks.
That is usually a light bulb that goes off.
And folks behave differently as a result of that.
But.
I'm encouraged that.
What we built into our plan heading into the year will manifest in the fourth quarter.
I don't see any appreciable movement in the third quarter, because the promotion to your point is happening, but it's not manifesting in volume momentum yet.
Helpful color. Thank you. Thank you.
Thank you.
Next question is from the line of Ghansham Panjabi with Baird. Please go ahead. Your line is open.
Hey, guys. Good morning, Hey, good morning Ghansham.
Good morning, obviously, a lot going on.
[laughter].
If we were to just kind of step back in the first quarter beverage packaging, North and Central America volumes were down roughly 5% and then into Q down eight and a half.
Is that delta purely mass beer or is there anything else that perhaps was a little bit worse on a year over year basis.
I think you characterized it correctly.
It's the net impact in the second quarter.
Okay.
So there were pretty stable pretty stable trends across <unk>.
Everything in a kind of a lens into my my previous comments on the CSP sector.
Energy continues to almost all the categories are performing year over year in line with the exception of mass beer and that fell off I think net.
There was negative two five points of growth in the first quarter net minus four five points and obviously our mix would've waited is further down.
Okay. Thanks for clarifying that and then in terms of the curtailment that you are.
Youre doing in terms of managing supply et cetera across multiple regions.
What was that number for <unk> and how are you thinking about that for the back half of the year as well.
B the curtailment in South America is exactly what we planned.
I mean candidly, it's negligible in terms of the curtailment.
That we planned in Q2 versus what actually happened.
Could say.
The Delta that you just confirmed and volume that was additional curtailment that we took in the second quarter.
Apart from that.
We've got a little bit more curtailment that will manifest throughout the third quarter versus what we entered the year with because of the mass beer phenomenon apart from that.
Everyone's in alignment with what we entered the year with.
And what we expected.
Got you and then just one final one you seem generally constructive on Europe on the beverage packaging side based on what you've seen so far this year.
Just judging by the commentary and just some of the macro news it seems like the European consumers just much weaker in terms of spending and trade downs and so on and so forth.
Has your view changed at all in terms of the outlook for Europe , specifically as it relates to the beverage can or.
Or is it pretty much the same.
The outlook for the long term and the medium term.
Continue to.
It is just a wealth of opportunity for us in terms of substrate shift given our current position.
And consumer is absolutely weaker than than where we entered the year because of everything you sided.
Can generally benefits from the on Prem off Prem shift.
Even some of the trade downs are beneficial.
We've got a more diversified portfolio that has helped us heavier energy heavier CSD.
Beer has been the.
From a pan European standpoint beer has been the.
The softer.
Category, there, but I think our portfolio has helped us and so we see.
We see a little bit more opportunity given that then.
Maybe some of the other commentary that's been that's been put out there.
But yes, thanks, so much consumer in the second half of the year softer.
Still we're still going to see nice growth and we're still going on that business continues to perform extremely extremely well.
Thanks, so much.
Yeah.
Thank you. Our next question is from the line of Mike Rocklin with Twist Security. Please go ahead. Your line is open.
Thank you, Dan Scott and for taking my questions.
Mike and Mark and I will jump on them.
Spirit, we're going over here and.
Ask the question just.
How are you thinking about the portfolio of your portfolio.
Your end market exposure going forward I would think so you made the comment that you could see some taking some share ship later this year until 2024.
So you could see mass beer improve and then your volumes would probably possibly that out but if there isn't that recovering this year what happens to your volumes then.
So I guess the question millions one let's assume that's because of a couple of Hep C volumes and two are you actually considering trying to shift production to other product categories.
I know you made comment in the press release that you said youre trying to align yourself with customers that are experiencing higher growth. So that means you're trying to really shift and minimize your exposure to <unk> relative to other categories that maybe have more potential on a go forward basis.
Yes, Mike let me.
This is all North America related I'm, assuming so I'll start there.
Let's just let's just talk about the categories, because we're spending an awful lot of time on.
On the domestic beer category, which is which is down and I believe we're at a trough. So it will recover from this point.
And it's consistent with all of the customer commentary within that space.
But domestic peers down.
Four 5% last 12 weeks, which is a further versus 52 weeks down nearly 3%. So there is an acceleration of the decline obviously because of the marketing issue, but import beer is up 11% non alcoholic beer is up 27%.
<unk> is up 8% F&B is a 50, 15% ready to drink cocktails are up 41%.
As as we've seen the evolution of our customers transition to beverage companies, they're going to be forced to put stuff on the shelf that sells.
We've only experienced this phenomenon here for the past.
12 weeks.
And there's a lot that is going to be repositioned and given we participate with everyone in the market.
We should win with whatever's going to win in the market.
At what percentage, it's a great question.
We don't know.
But the trough that we're experiencing now in the second quarter in the third quarter will improve.
Should benefit from that.
In the first half of 'twenty four I would expect continued benefit throughout that first half of the year.
But theres a lot of there's a lot of questions, but I am confident that.
Our customers understand their world real well and they know that they need to be putting stuff on the shelf is going to sell and folks will find a home nothing's going to change candidly from that import beer number. The Hispanic population continues to grow they will they already have all got plans to lean into that to add more capacity.
<unk>. So there is an ability for those folks to accelerate.
And.
Obviously, we're very close to them so I'm encouraged.
From today moving forward I'm encouraged with what's going to show up in in the first half of 'twenty four and beyond.
Got it and thank you for the color and then just one quick question I think.
Recently, we started production.
Tom.
In Minas Gerais.
Wondering.
I think the plan was taken down due to the weak macro and also because you lost a customer contracts. So I'm wondering did you bring the mill up and restarting the plant because.
The anticipation of better Brazil demand did you win new business, just wondering why you've pointed but historically I think it was done within the last month or so.
Yes.
We're bringing it up for <unk>.
The other customers in that market that are winning and we anticipate that they will win.
Further and take further share as a result of.
The one brewer who filed for bankruptcy at the tail end of Q1, that's one issue, but we're not bringing that answer for the customer that.
We originally built it for.
Got it very clear good luck in the second half.
Thanks very much.
Thank you. Our next question is from the line of Ireland with one Optum with RBC capital markets. Please go ahead. Your line is.
Yes, thanks for taking my question.
Sure. So I guess I was.
Just wanted to ask a little bit more on.
Two things so first off when you look into the back half of the year and into next year.
You do have relatively easier comps for next year.
Already down mid single digits on the volume side.
And.
High single digits for North America. So.
What would that allow you to get back into the stay that low single digit range for next year's volume growth and.
Are there any other capacity considerations that we should consider when thinking about higher volumes.
I'll, then maybe settle into that low single digit range.
Okay.
Thanks for the question.
As we sit here today, we haven't spent a whole lot of time on 24, I think for both Europe and South America.
Given their growing we continue to believe that that growth will persist so.
The question Mark will obviously be North America, but as I stated several times in this call I think Q2 <unk>.
Q3, or we're at a trough so we should see improved volumes over these periods.
I believe that will be enough to.
To push us into growth territory.
So the aggregate position in.
The answer to your question is yes, I believe we will be in that low single single digit growth for 2024. We've also stated several times that the capacity we put in place over the last two to three years is enough to grow into it that at that range and so we should see.
Nice lift in terms of profitability and performance.
Without having to spend additional growth capital we spent the growth capital we need.
And I don't anticipate much in the beverage business over the next two years from a growth Capex standpoint.
And so what.
With that I guess, when you think about free cash flow.
I imagine it could be nicely up over the next couple of years from that 750.
Base.
Could you just touch on that opportunity as well.
The capital.
But you plan to spend.
Yes, I'll have Scott good better no you're exactly right I mean, we're going to spend less capital there sort of a $1 2 billion. This year next year, we expect it to go down closer to GAAP depreciation. So all of that freed up cash flow can go back to shareholders. So I think it gets better.
Okay. Thanks.
Thank you.
Thank you.
Question is from the line of <unk>, Inc. With Jefferies. Please go ahead. Your line is open.
Good morning, Thank you guys for taking the time and providing all the details. This is John on for sale.
Yes.
Hey, Dan has begun.
I wanted to start just I.
It's kind of been beaten to death, a little bit.
But with the North American volume down.
5% in the quarter have you seen much worse than the overall market I mean, you called out.
Obviously that Daphne.
<unk> driven by by the mass beer.
Declines.
Yes.
The additional capacity.
Now in the market over where demand has kind of fallen to end supply chain is obviously east globally have you been experiencing any any customer shifts to or.
Pressure on your contracts.
This point in time in the North America business.
No pressure on the contracts at this point.
I think a good reflection of that commentary would be the.
The fact that we're passing through the inflationary mechanisms. So if you werent seeing that come through I think you could probably could see that there has been some negotiation that's taken place and that's that's not the case.
The way I would look at.
Volume.
I think we're in a short term.
Dislocation for the second quarter, and the third quarter because of the mass beer.
That correction relative to curtailments or declined shipments will revert.
In the second half of the year, but more meaningfully in the first half of 2024.
The other thing that we've done.
As we've managed the inventory so we built too much inventory last year, we've worked that off.
So theres been an elevated level of curtailments relative to versus 2022, we will be running much closer to scanner data.
In 2024.
And in Q4 likely to be a lot closer to scanner data. So those are the things that.
Our well understood within the industry and with our customers.
Think the theoretical excess capacity versus the reality versus the intentionality of running two cash all of those things stabilize heading into 'twenty four in a what I believe is a much tighter marketplace.
With growth underpinning.
Every industry participants moving into 'twenty four.
Understood. Thank you for the details and thank you.
Just.
Touching on the I think if I heard you correctly.
In the early part of the call.
And you're still exploring opportunities to accelerate deleveraging efforts.
Could you maybe just talk a little bit more about what you were referring to if that maybe made some smaller divestitures or other actions that you're taking to that deal.
Leveraging efforts.
No we have what we referred to as we generate a lot of cash here in the back half of the year, we're sitting on a lot of cash and so we have the flexibility to.
Pay down whatever piece of the debt, we want to pay down.
So that's really what that's about.
Okay I understand thank you very much.
Thank you. Our next question is from the line of Gabe <unk> with Wells Fargo Securities. Please go ahead. Your line is open.
Dan Scott Good morning.
I appreciate that there's been a lot of ground covered here, but maybe just because we don't have access to the industry data anymore.
Perfect.
Lend into what the market is can you parse out maybe eight 5% decline in the second quarter and sort of whats embedded in the second half.
I mean between.
Shift between the market being soft and then maybe the kind of what's going on with the beer disruption.
And then another volume related question in Europe .
I think volumes decelerated in the second quarter.
Curious if thats a function of not having the capacity that you need you talked about obviously, the UK and the Czech facility ramping up.
So I'm just curious if that's what's driving your optimism for the second half to recover.
Talked about your largest energy customer, maybe being a little bit weak.
Based on sell through in North America.
They are pretty big customer over in Europe is that part of what's driving your optimism or just help me understand because im assuming.
The business in Europe is sort of contracted.
Yeah, maybe let me start with the start with Europe .
Everything is coming in.
In line with what we anticipated heading into the year.
Inclusive of the large energy player.
The one area that softer as beer I think thats related to the macro environment there.
So the higher single digits that we anticipated having the year going to be closer to mid single digits.
But still nice growth.
And it's not a function of bringing on.
The capacity the capacity that's being brought on is in the growth areas.
B the capacity that's.
A little less utilized in the beer space.
That's what's happening in the in Europe .
Relative to North America.
We.
Had a decline as you mentioned of roughly 5% in the first quarter. We are in that eight five range for decline in the second we will see declines in the third with a return to some volume momentum in the fourth.
What happens in the mass beer space will be the indicator of growth is it flat.
But that's fundamentally it is the mass beer impact and it is the fact that we're overweight in the beer space and overweight to one customer within that space. So.
That's the that's the Delta.
Okay, maybe I didn't ask the question.
I explicitly can you do you have any sense for what the market was down in North America.
And then last one if I can slip it in.
I think there was.
$20 million of year over year improvement embedded in for the Cups business.
I think there was some basketball championship that was a good thing for that product can.
Can you talk about sort of how that business is evolving and maybe expectations going into 'twenty four.
Yes, I think the overall marketplace in North America.
Down slightly 1%.
So the delta between that and.
Our customer mix is really the delta there.
And then on the Cup side.
We're seeing incremental improvements.
I think a.
And La Boston series versus the Denver.
Miami areas would help to cut a little better believe it or not but.
Making good ground and good traction in the foodservice space.
Things are breaking our way in terms of the regulatory environment as well on that product with Hawaii and now the mid Atlantic.
Either banning are contemplating banning single use plastic cups.
So we're looking for trajectory over the second half of the year I would not say that we will make a $20 million of improvement in that business year over year.
But we will continue to improve against it more in the $10 million range.
Thank you Dan.
Thank you.
Thank you and at this moment I'm showing no further question on the phone lines.
Alright. Thank you very much we will look forward to talking to you again in the third quarter everybody enjoy the rest of your summer.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation and ask that you. Please disconnect your lines have a good day.