BLL
#Thank you, Jennifer, and good morning, everyone
This is Ball Corporation's conference call regarding the company's third quarter 2017 results
The information provided during this call will contain forward-looking statements
Actual results or outcomes may differ materially for those that may be expressed or implied
Some factors that could cause the results or outcomes to differ are in the company's latest 10-K and in other company SEC filings, as well as the company's news release
If you don't already have our third quarter earnings release, it's available on our website at ball
com
Information regarding the use of non-GAAP financial measures may also be found in the Notes section of today's earnings release
The release also includes a table summarizing business consolidation and other activities, as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations
Now, joining me on the call today are <UNK> <UNK>, Senior Vice President and CFO; and Dan <UNK>, Senior Vice President and Chief Operating Officer of Global Beverage
I'll provide some brief introductory remarks, Dan will discuss the beverage packaging performance, <UNK> will discuss the key financial metrics, and then I'll finish up with comments on our Food and Aerospace businesses and the outlook
We achieved improved third quarter comparable operating earnings, particularly in South America and despite lower performance in our North American Metal Beverage business in the latter part of the quarter
First, given the devastation caused by the hurricanes, earthquakes, and recent fires that raged in our Fairfield, California facility, we're thankful that all our fellow coworkers, their families, and our physical assets in Florida, Texas, California, and Mexico are safe
Thank you everyone at Ball and beyond who lent a helping hand to their colleagues, families, and communities who are personally impacted by these natural disasters
Candidly, the hurricanes were a perfect storm that ripped through Ball's supply chain late in the quarter and then two of Ball's largest North American regions
To put the hurricanes into perspective, while our Conroe, Texas and Tampa, Florida plants suffered some downtime, they recovered in relatively good shape
However, the downtime at our key customers' filling locations continued well beyond the aftermath of the storms and resulted in a combined seven days of lost production due to lack of orders for us in the regions and meaningfully lower can sales
For example, industry sales in the alcoholic category were down 12% in September with much of that happening in Texas in the southeast filler locations
In addition, significant spikes in freight rates and out-of-pattern freight across our southern and lower Atlantic plant network accelerated after the hurricane events and negatively impacted our results
We understand that FEMA, for example, consumed nearly 10% of the available freight hauling capacity after the water subsided and freight surcharges increased materially during this time
Freight and fuel rates continue to be higher than before the hurricanes and we're attempting to offset this high cost freight expenses with existing passthroughs and additional surcharges where contracts allow
To state the obvious, this has been challenging and frustrating and it has overshadowed an otherwise good performance across the rest of our company, but we'll push through, Ball folks always do
Dan <UNK> will provide additional color on the overall Global Beverage Can business in a moment
Moving on and highlighting some of the great work being done during the third quarter
We began to see results from some of the actions taken in our European Beverage business with margins and profitability improving year-over-year
Our South American Beverage business experienced meaningful volume improvement with growth equally spread throughout all of South America
We further improved our G&A cost structure with the launch of our shared service centers in Queretaro, Mexico and Belgrade, Serbia
We transitioned beverage can production from Reidsville, North Carolina to Tampa, Florida and Rome, Georgia; however, this was impacted a bit during the hurricanes in Florida
We significantly improved manufacturing efficiencies at our Canton, Ohio metal service center
We hired additional staff in our Aerospace business to service existing and future contracts, while staying on time and on budget with important facility expansions
And year-to-date, we acquired a net $85 million of our stock and paid out $93 million of dividends
Our multi-year, value-capture plans are on course
And while we're disappointed in the third quarter performance of our beverage North America and Central America segment in light of the hurricanes, we have a clear line of sight to all of the synergies identified when we announced the transaction
Our plans are on track to capture cost savings and to grow comparable EBITDA, cash flow, and EVA
And with that, I'll turn it over to Dan
Thanks, <UNK>
Our Aerospace business reported improved third quarter results driven by solid contracts performance and the continuing ramp-up on new contracts
The team at Ball Aerospace is winning
All of it hasn't translated over to meaningful operating earnings improvement or contracted backlog yet
However, staff is being added weekly to be positioned for the ramp up of these key wins
The aerospace team has done a wonderful job managing through the ever changing winds of Washington D
C
We have an exciting launch of JPSS-1 scheduled for next week and we remain more constructive today regarding the United States budgetary process and how it can help translate programs wins into profitable earnings growth
Now, as we look forward, we are on track to achieve the financial benefits of the acquisition
Our Aerospace business is poised for another bump up
Our food and aerosol team has attacked costs and improved manufacturing efficiencies to Ball standards and our Metal Beverage Packaging businesses are preparing for further growth and cost-out initiatives
When we closed on the acquisition in June of 2016, we expected 2017 EBITDA to be in excess of $1.75 billion and free cash flow to be in excess of $750 million
As mentioned in the press release, we will likely be short of our original 2017 EBITDA goal due to our beverage North and Central America performance this quarter and the manufacturing inefficiencies we experienced early in the year in our Food and Aerosol segment, which is now behind us
However, our cash flow continues to show up at or above our goals at that time despite higher capital expenditures
We still expect that by 2019 we can generate $2 billion of comparable EBITDA and in excess of $1 billion of comparable free cash flow
So when we announced our intentions to acquire Rexam, we said that we would rapidly de-lever, capture synergies, spend any necessary growth capital on high-returning projects, and then returning our remaining free cash flow to our fellow shareholders through share repurchases and dividends, and that's exactly what we're doing
And with that, Jennifer, we're ready for questions
Question-and-Answer Session
I'll just add, <UNK>, on that very last point that some of our contracts, commercial contracts, are clear of what we can and cannot do with respect to passing through these higher freight charges and we are, as Dan said, focused like a hawk on where we're able to go after that
Rest assured we are going after that
Why don't I attack the first – last part of the question and Dan can could talk about timing of them
With regard to the overall capacity, we're going to be net flat to slightly down, but there should be a big shift because majority of the capacity we're closing is standard capacity and we're adding in a lot of specialty
Specialty continues to grow for us
The Southwest is an important market for us
And so you should expect net 12 ounce to be declining, while specialty is increasing in that region
Dan, do you want to talk about timing?
Yeah, what we've said in the past was we're going to be focused on in the range of about $500 million of CapEx as we go forward over the 2017, 2018, 2019 time period
And as you recall, our maintenance CapEx we believe to be about half of that
So embedded in that $500 million assumption is things such as Arizona
So, I don't think there's any appreciable more capital other than what we've said
There's always a timing issue, and I think that the slight raise in terms of what we expect for CapEx this year has to do with accelerating some of those – some of that CapEx, particularly for Goodyear because, as Dan mentioned, we need to get the capacity up and going before we can get – start getting those savings out
Not at all
It was separate and apart from anything to do with the synergies
And when you think about it, it had to do with the – in the Food and Aerosol, and I'm happy to report that that is behind us
And you see that one of the things I didn't mention in my prepared remarks, but overall food can volumes were down about 10% in the quarter
Aerosol was roughly flat and so you see very good cost performance in that business
That obviously had nothing to do with the synergies and then as <UNK> just pointed out in terms of the lost sales absorption because of the lower inventories we had and then the higher freight, both in terms of out-of-pattern and overall freight rates, that's what really affected it
So there's been no change at all to our synergies
Thanks
Why don't I take that first part
There was a meaningful impact
Let me give you some statistics here
Year-to-date through August, overall beverage cans in the United States were flat
In the month of September, they were down 6.5%
When you break that down between alcoholic and non-alcoholic, alcoholic they were down 2.5% year-to-date through August and they were down 12% in September
And in the non-alcoholic side, they actually were up 1.5% year-to-date through August and were down 2.5-plus percent in the month of September
So you can clearly see what happened
I do think that there was a lot of good heads up around these hurricanes in the days, if not week or two prior to it
There was able, perhaps, to be some stock up, although we don't see weekly data like that, so it's not – I don't think it's appreciative
But when you have total communities underwater for, I won't say weeks, but certainly a week plus at a time and you don't have the ability for your customers to be filling and you don't have the ability to be shipping either our product to our customers or our customers to their distributors or retailers, it does have an impact, and I think those statistics show
Yeah, I did answer your last question
I think, in October, what we've seen is they have bounced back as the supply chain starts to normalize
And so we've seen back to normal improvement yet – but as we've said all along, I think longer term we expect flattish demand in North America and we can happy to go through some of the trends
They've actually reversed because you recall over the last five to seven years, actually, cans – beer cans have been up and soft drink has been down
It has reversed
We've benefited candidly from some customers down in Mexico that have helped us in that whole segment, but I think it's no surprise
Big Beer here in the United States has been struggling
The cans have been doing well
Actually, it's been taking share from glass
It's just overall Big Beer in America has declined and it's encouraging to see the soft drink has started to get some growth back in the can as well
Yeah
And let's not forget we're experiencing duplicative costs now
I mean, we talked earlier in the year about the G&A and we were able to get in the short-term G&A out through the closure of Millbank and the closure of Charlotte, but then we are reinvesting and we just stood up in this quarter two shared services centers, one in Serbia, one in Mexico
So we are having duplicative costs
I think to <UNK>'s point, what we've told people is we expect the next chunk of SG&A to come out as we transition many of these back office services from the various plants in regional locations to the shared service locations, but it's hard work
There's a lot of process, there's a lot of process redesign, there's a lot of manual efforts going on right now that we are going to – we'll be looking to automate, and that's probably a second half 2018 event as well
So, we are experiencing duplicative cost now
Yeah, I think it comes in three or four different areas
Number one, volume was up low-single digits, as Dan had mentioned on this conference call on his prepared remarks, I think a little over 2% or so
So obviously that helps
Cost side, we're doing a much better job on that
We did inherit some contracts that had some pricing challenges for us as we went into 2017. So that's kind of a headwind relative to it, but to be up in that segment, as you said, about $10 million or so given that we really haven't gotten much
If any of the benefits from some of these larger strategic actions around the plant in Germany, et cetera, we have a long way to go
We recognize that, but we are on the path that we expected
Well, it's – when you – I assume you're largely talking about beer
because it's really what we actually do
But when you think about it, you're right, in terms of Big Beer in the United States, that's been challenging
I don't have the exact numbers in front of me, but as I mentioned before, I know the can is taking share from other substrate, such as when the beer market is down 2.5% or so it's challenging particularly when the base is so big
We have been a beneficiary in Mexico of a couple of customers and we've been very strong in that region
But let's also not forget the craft beer side that we've talked about for a while where, I think, in the third quarter again we were up close to 30% in that segment
So you combine those three together and that's why we're able to offset many of these things
I may just add on to that that we've been, candidly, pleasantly surprised by the can growth down in Brazil
I think we see all the trends that Dan just mentioned
The economy, it's flattened out, but it certainly hasn't improved
So whether you look at GDP is flat, now that's better than down 3%, but unemployment is still too high, it's still in the teens, the 11% to 12% range and we really need the middle class to be growing to get that leverage (34:35) growing, because think of the logarithmic opportunity we have if we can get the leverage (34:39) going and the pack share changing
No, we said from day one that we're not going to go into that level of detail because you end up parsing things out and you hire a bunch of accountants to do what? It doesn't make us any money by doing that
Yeah, the only caveat I would put on that, <UNK> is we said freight rates remain elevated
We're going after them where we can, but obviously we're not saying we've covered them off yet right now
So the longer they persist, the little bit more headwind we have in that, but that's the only thing
Volumes have bounced back, the plants have bounced back, the supply chain has bounced back, it's just the freight is a bit higher
Yeah, and <UNK> specifically just to give you some data points, around the world, Dan mentioned we have 2% volume growth around the world
We had almost 9% specialty volume growth around the world
And so it was a bit impacted here in North America for the exact reasons Dan just mentioned, but we continue to push this and it's part of our strategy
All right
Well, <UNK>, a couple of things, and you've been a long-time student of Ball in our Aerospace business, so this may not be surprise you
But number one, you first got to follow the revenue growth and then just look at year-to-date what we've seen in the revenue growth and I think that's terrific
Number two, as you well know, as we start up new contracts that the margin profile of those always starting is lower than when you're finishing if you perform well because what you do is, as you accrue, you buy down the risk
The technological risk subsides and you start to – you're able to accrue more as those programs go on
We have a lot of new programs going and that's why the margin, if you look at just pure margin it's come down
There's nothing in that other than we started a bunch of new projects as we go forward
Lastly with your question, we look at several different metrics
We look at funded backlog, we look at won not booked, which is programs that we have won, but have not been booked, because they haven't been funded
And then we also look at bids and proposals that are outstanding and all of those are at record high for Ball
I mentioned in my prepared remarks about the – we're much more constructive on the budget process right now
I know Congress or the House is putting out a tax plan now, but let's not forget both the House and the Senate approved a budget, and I think that's very important because that gets the funding on some of these won not booked
And so I would expect, I don't want – don't pin me down to the exact timing, but I would expect over the six to nine to 12 months that you're going to see an improvement in our backlog, and then you could see continued performance improvement as we translate these new and existing contracts, buy down that risk and perform on them like we typically do
Thank you
Yeah
Well, let me first by start to say Hubbard and Baltimore we actually sold those facilities
We did not close them and so actually we sold – and they were both profitable
So, actually our results on a apples-to-apples basis, perhaps, might have been even a little bit better than what we suggested
I think really what you're seeing, to answer your question, it's difficult to partial out, because many of our manufacturing facilities are comingled, but what I would tell you is that the projects that we had in place over the last 12 months to close our Weirton, West Virginia facility and bring up the new Canton – or expansion of our existing Canton facility, we had some short-term pains in the first quarter and second quarter
We worked those out and the team has done a very good job and we are getting the benefits that we expected currently
We weren't in the first half of the year, but we are certainly currently
We also – as the Aerosol business continues to grow and it is continuing to grow, I said it's relatively flat around the world
In North America, it was down a little bit
Again, we can't specifically determine why, but I think some of it had to do with these hurricanes, but in Europe was up for us and in India, which is a relatively new plant for us, that is growing very strong
So from a big picture perspective in that segment, as you continue to see our Aerosol business growing and our Food business, which is a small business and getting smaller in that, you should see margin improvement in that business
Right now, I think we're in around the 9% year-to-date
We would expect that to improve
It all has to do with the amount of pass-through of steel and we do expect increases in steel going into next year, which means the margin may look lower, but the overall profitability of that segment ought to improve as we move forward
Yeah
We're looking into that
The issue is you've got – these are two storms and so we have insurance that covers both downtime in our facilities and then contingent downtime at customers' facilities, but you have to satisfy deductibles in both those
So we're looking it up, but it's probably negligible
And just to give a little color and context
It's not a big bang event that you go from zero to one and just put all those things in
We have new processes, we have new systems, we have new people in place
And so each of those various work streams, as <UNK> mentioned, in addition to many others, we have a specific game plan of when to roll those out
For example, at the beginning of October, we turned on a payroll system on a global basis for the first time
Are we getting the benefits right now? No, because we're going through the typical debugging issues when you go from a bunch of different systems to one much more standardized system
But now we have people in place in these two shared services to be implementing that and we're able to relieve ourselves of some of the higher costs G&A elsewhere
You're going to see over the next year or so a lot of this, I call it two yards and a cloud of dust, to use the football analogy, because that's what it is
It's hard work, but you're going to see it and it's – we really expect to start to meaningfully see the benefits as we get in the mid to late 2018.
And the only thing I'd add, we're also mindful we have debt covenants
So as our leverage comes down, we have to make commitments
We're well within that, but we have to be mindful of that
So, we're trying to be good long-term stewards of our capital
Yeah, well let me kind of start and ask the others to jump in
Let's start and talk big picture about the various synergies and where we are with them like the footprint
We've announced upwards of $130 million of cost savings through the footprint and we haven't gotten really anything year-to-date
And so that's all on the comp we will start to get in the fourth quarter
Dan mentioned Recklinghausen, Reidsville here in North Carolina in the United States
But then really going into 2018, so that's a big chunk of it
We also announced – on the sourcing side, we announced I think in the first quarter that we expected to slowly start getting it in the second half of this year and as we enter the fourth quarter we'll start to accelerate, but we're really going to get the full-year benefit of that in 2018. And then on the SG&A side, I just mentioned that, through our shared services that we expect to get a kind of half of our original expectations, but it won't be coming till mid to late 2018. You add all that up and you quickly see how we've gotten some good synergies
Now it's been the SG&A, we've gotten some sourcing, and you can see in the progression, but really going into the fourth quarter and going into 2018 you're going to get a lion share of that
You layer that on top of Aerospace growth that I talked about before, you lay it on top of the growth capital that Dan talked about and whether it's the new plant we have in Spain, what we're doing here in North America, some other regions as well, and that's why we remain confident of getting to $2 billion by the end of 2019.
Well, yeah
What I said was the $500 million was the original placeholder when we announced the transaction and it included $250 million of growth capital
As time goes on, you get more specific plans around that and we'll adjust up or down
Dan had mentioned that in Mexico we've been investing to keep ahead of the demand
Down in South America, we have some opportunities
We'll let you all know when it's appropriate, but I think that as a placeholder it may be a little bit more like we're doing this year
Some of that's pulling ahead
But as opportunities come forward, and we think they're good projects, we're compensated to earn returns in excess of 9% on that
And if we think we can do it, we're going to do it
Please go ahead, Jennifer
Yeah, Debbie, I think I might have mentioned it earlier, but the quick summary is we've had volume growth of 2%, 2.5%
We've had good cost and efficiencies at the plant level
We really haven't benefited from any of the strategic moves we made, although we start to in the fourth quarter and we also inherited some contracts that had lower year-over-year pricing
So that's been a bit of a headwind
So despite all that, we've been up and been able to improve margins
I think in real short summary, it's the regional nuances that occur here
Brazil is such a large country
Its supply chain is very different and its transportation is very different than what you see in more developed markets, and so it really is a region by region
And where the new capacity is coming in, we have facilities there and there has been some growth, which has been helpful
But the question that Dan alluded to is, is it enough growth to offset some regional supply demand imbalances and it's premature to tell
The only thing Dan was signaling is that the competitors' plant we understand is up and running now
And so it does create a little bit of headwind
Thanks
Well, what we said is at – about a year ago, we said that we believe that there's 250 basis points of margin improvement in that business, but it will take some time
And we now – we closed at the end of July, early August the Recklinghausen, Germany facility
We really haven't seen that much of benefits of that and so you're going to start to see that with some other things in terms of G&A, the shared service concept that we talked about earlier
It's Europe and you have to work through Union
You have to work through Works Council and it just takes longer than what you would like to do, but we've got a three-year game plan to get back to the margins that we think ought to be achievable in Europe
Jennifer, assuming there's no other questions, we should probably finish up
Why don't we take one more?
Okay
Thank you, <UNK>
Jennifer, we could wind up, please?
