BALL Corp Q1 FY2022 Earnings Call

Greetings, and welcome to the Ball Corporation First Quarter 2022 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Thursday, May 5, 2022. And now, I'd like to turn the conference over to Dan Fisher, CEO. Please go ahead.

Good morning, everyone. This is Ball Corporation's conference call regarding the Company's first quarter 2022 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the Company's latest 10-K and in other company SEC filings as well as company news releases. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of today's earnings release. The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Joining me on the call today is Scott Morrison, our Executive Vice President and CFO. I'll provide some introductory remarks and business performance commentary. Scott will discuss key financial metrics, and then we will finish up with closing comments and Q&A. Ball delivered strong first quarter results amid significant geopolitical and economic conditions. Our company remains deeply troubled by the war in Ukraine, and our focus is on the safety and well-being of our colleagues. In addition, our global employee giving program, and the Ball Foundation to date have provided in excess of $1 million of financial support for humanitarian aid. And our colleagues near the war zone are housing refugees as well as supporting each other in volunteer efforts in their local communities. We thank our employees and the broader global community for their acts of compassion and giving. The Russian invasion of Ukraine has had a significant impact upon the global business environment. Late in the first quarter, Ball announced that it has suspended future investments in Russia and is pursuing the sale of its aluminum beverage packaging business located in Russia. As we noted in today's earnings release, our ability to achieve our long-term diluted earnings per share growth goal is dependent upon the outcome of our announced intention to sell our Russian business. Note one in today's earnings release contains additional information about the Russia business. To our team in EMEA, we are proud of your professionalism and your quality work during an unimaginably stressful and constantly evolving situation. We are thankful for your support of one another. Looking beyond the challenges that 2022 has presented so far and focusing on the opportunities before us, let's remember the basics. We are the largest producer of sustainable aluminum packaging for beverages and personal care products in the world, and we deliver exquisite aerospace technologies that keep us safe, informed and inquisitive about what's happening on earth and in deep space. Ball has a proven track record of achieving success through leveraging customer focus, sustainability, our people and culture, operational excellence and innovation to drive profitable growth, EVA and cash flow. No matter the economic climate or the ways of the world, we will adapt, remain agile and grow. Ball has 142 years of experience doing just that. Ball is a recession-resistant company that can effectively manage rising cost over time and will deploy capital to garner the highest possible EVA returns and value to shareholders. With our EVA discipline and drive for 10-vision as our guide, we are keeping calm, carrying on and enabling a brighter future for our planet and our people. Turning to first quarter performance. Global beverage can volumes were up 1.4%. Global aluminum aerosol volumes were up 10%. Aerospace backlog increased 28%. Comparable operating earnings increased 6%, and comparable diluted earnings per share increased 7%. And our teams were successful offsetting significant cost inflation through pass-throughs, cost recovery programs and procurement actions. Our year-to-date business highlights include: our global beverage business ramping up new lines and breaking ground on two new facilities in North America and EMEA. Our North America business growing comparable operating earnings 24% and growing volume over 3% by successfully ramping up new domestic can-making capacity while weaning ourselves off imports into North America and the team effectively built inventory back to reasonable levels ahead of the busy summer selling season. In addition, the North America team achieved dual ASI certifications during the quarter. Our EMEA volume growing 10% with operating earnings being flat year-over-year despite $7.5 million of foreign currency translation and late quarter cost inflation, not to mention the team navigating a volatile geopolitical environment across its operating footprint. Our South America business managing through 21% volume declines due to unfavorable customer mix, economic volatility and poor weather in Brazil, diluting the volume strength that remains across other South American countries where we are deploying capital to enable can growth. Our global aluminum aerosol team introducing re-closable aluminum bottles for new categories and increasing aerosol shipments by 10%. Our aluminum cups team, installing a new line in Rome, Georgia, to manufacture new 9- and 12-ounce cups with production starting in the second quarter. Our cup achieving 90% recycled content, winning an Edison Award and signing a contract with Sodexo Live to expand our cup's presence at stadiums and venues. Our aerospace team expanding its backlog by 28%, completing its critical design review on SPHEREx and marveling at the on-orbit success of the James Webb Space Telescope with images for public consumption expected in the early summer. And Ball joining the UN Global Compact to demonstrate our commitment to aligning our business strategies and operations with universal sustainability principles. As we indicated on prior calls and looking forward, our global businesses are absorbing non-aluminum inflationary headwinds and experiencing additional price/cost squeeze in advance of contractual cost recovery. In EMEA, inflationary headwinds accelerated late in the quarter. And going forward, our team is working hard to mitigate their impact through ongoing commercial cost recovery, hedging and energy efficiency and renewable energy initiatives. In North America, contractual price escalators based on PPI and other indices have been effective and will continue to phase in throughout the year. We continue to rely on our supply chain for raw material inputs and look forward to additional alliances and investments being announced in 2022 to support domestic U.S. production of aluminum can sheet to further enable long-term growth and substrate shifts to sustainable aluminum packaging for new and existing categories. Underlying demand for aluminum beverage cans remains strong. We exited 2021 with 12 billion units of new installed capacity, and we also have plans in place to exit 2022 with a similar level of new installed capacity available to sell-through in 2023 and beyond. In summary, our global beverage team is preparing ourselves and our supply chains for long-term durable growth while managing notable volatility. Our customers are continuing to lean on the can as their package of choice. Year-to-date, carbonated soft drinks and energy drinks have accelerated their move into cans. And in beer, cans have maintained package mix share despite declines in total liquid consumption. By region, trends are in North America, following the broader reopening of on-premise, cans continue to outperform all other packaging substrates in aggregate. Strength in energy, CSD and import beer has bolstered demand for cans. In South America, rising can demand and liquid consumption growth in countries outside of Brazil were unable to offset a 15% decline in total liquid beer consumption in Brazil, though cans maintain their share versus other substrates during the quarter. In EMEA, cans continue to outperform other packaging substrates, particularly in CSD and energy. And we continue to see the need for imports from our Saudi and Indian beverage can plants for the remainder of the year. We are operating safely, controlling the things we can control, focused on executing at a high level and recovering costs, delivering high-quality cans to our customers supported by equitable contracts and closely monitoring and enabling global supply chains through alliances and investments in long-term contracts. We look forward to highlighting our long-term growth plans and management bench at our September 2022 Investor Day. We appreciate the amazing work being done across the organization and extend our thanks to all of our employees and external stakeholders. With that, I'll turn it over to Scott.

Thanks, Dan. First quarter 2022 comparable diluted earnings per share were $0.77 versus $0.72 in 2021, an increase of 7%. First quarter sales were up due to the pass-through of higher aluminum prices, higher volumes with improved price/mix and higher aerospace performance, partially offset by currency translation. Comparable first quarter diluted earnings per share reflects strong results in North America metal beverage and aerospace offset by comparable operating earnings declines in South America, higher corporate costs and unfavorable earnings translation. Ball's balance sheet remains very healthy with ample liquidity and flexibility. As we sit here today, some additional key metrics to keep in mind for 2022. Our full year effective tax rate on comparable earnings is expected to be in the range of 19%. Full year interest expense will be in the range of $280 million. Year-end net debt to comparable EBITDA is expected to be in the range of 3.5x, and full year corporate undistributed costs recorded in other non-reportable is expected to be in the range of $120 million. At this time, and given our earlier public announcement about Russia, we expect 2022 total CapEx to be in the range of $1.8 billion and to return in the range of $1.75 billion to shareholders in the form of share buybacks and dividends in 2022. We continue to see a path to doubling our cash from operations by 2025 from year-end 2020 levels and look forward to more opportunities to invest in our businesses and to accelerate the return of value to shareholders. Rest assured, Ball continues to be good stewards of our cash. As fellow owners and through the lens of EVA discipline, we will manage the business as owners, partner with our supply chain and customers effectively to secure the best outcome for our shareholders. Ball reached a few important milestones this year. 2022 marks the 30th anniversary of EVA. That discipline has served us well in the past, and it will serve us well in the current economic environment. 2022 marks the 50th anniversary of Ball's initial public offering. Last week, we announced that effective May 10, our stock ticker will change from BLL to BALL. Back in the 1970s, four-letter ticker symbols were unavailable. And to ensure that the BALL ticker stays right at home with Ball Corporation, we're making this seamless change. With that, I'll turn it back to you, Dan.

Thanks, Scott. As I embark on my tenure as Ball's CEO, our drive for vision will continue to serve as our guide. We know who we are, we know where we're going and we know what is important. Great companies perform in uncertain economic times, and Ball is a great company. By providing actionable intelligence through our aerospace business, sustainable solutions through our aluminum packaging businesses and honoring our disciplined capital allocation approach, our shareholders will be rewarded, and we will be doing our part to preserve our planet. While our ability to achieve our long-term diluted earnings per share growth goal of 10% to 15% in 2022 is dependent on the outcome of our announced intention to sell our Russian business, our earnings, cash flow and EVA trajectories are in very good shape now and in 2023 and beyond as we increase returns on newly deployed capital and further enable and serve growth in our aluminum packaging and aerospace and technologies portfolio. We are a world-class manufacturing company with a fabulous team, the most capable and agile global footprint, the confidence and the heart to continue to do well and do good. We are uniquely positioned to serve the decadal shift that will favor our packages. We look forward to continuing our journey and returning value to our shareholders. We extend our well wishes to our employees, customers, suppliers, stakeholders and everyone listening today. And with that, Scott, we are ready for questions.

And we do have a question from Anthony Pettinari with Citi. Please go ahead. Your line is open.

Dan, can you talk a little bit more about the time frame for recovering the costs in Europe? It seems like there's been a difference in the pass-throughs in North America versus EMEA. I don't know if you could talk a little bit more about opportunities to kind of close that gap? Or were you just more impacted by sort of hardship clauses given the sharp rise in energy in Europe? Any more color you can give there?

Yes. I'll give you a little high-level color and then maybe ask Scott to make some specific comments. One of the things is we did not experience a lot of inflation in Q1. It accelerated towards the tail end of the quarter. So it's a little bit more of what's yet to come versus what we've experienced. I will say how that plays into the cost recovery discussions that we initiated kind of November-December timeframe with our customers is, those conversations have been going well, but we haven't secured 100% short-term pricing pass-through. As you can imagine, these conversations are ongoing. We're trying to make those as equitable as we can moving forward in the event that we're moving into a more high inflation environment. So there's more work to do. And I think it would be safe to say that I don't think we anticipated the level of inflation that we're now seeing in Europe. There's more work to do, but our contracts are sound. We will get this back. Europe may look a little bit more like North America did last year and then transitioning into this year relative to the pass-through. But Scott, I don't know if there's anything additionally you would add to that.

Yes, Anthony, I would just say that going into this year, we saw the potential for significant growth and profitability improvement in Europe. However, due to the outbreak of the war in Ukraine, inflation, and the devaluation of the euro, it will be challenging to achieve last year's performance in Europe. Specifically, we anticipate inflation costs to be about $50 million higher than initially expected. Similar to last year in the U.S., we expect to recover this in the following year. It's definitely a headwind for this year. In North America, we are starting to see recovery, which contributes to the substantial results in the first quarter, driven by some volume growth, albeit with slightly lower volume growth.

Okay. That's very helpful. And then just shifting gears to Brazil. When you look at your volumes maybe versus what you were expecting at the beginning of the year, it seems like there's a few things going on with maybe consumer weakness and weather and maybe timing of Carnival. I think you indicated cans are holding share. Can you just kind of help bridge what's really driving the volume performance in Brazil and just kind of thoughts as we move into 2Q and back half of the year?

Yes, thank you for that. To clarify, liquid volume declined by 15%. This decline is mainly linked to discretionary spending power in Brazil, especially as other South American countries have performed significantly better. Our colleagues have indicated that spending power has decreased by about one-third over the past three to four months. Additionally, since these products are priced in U.S. dollars, customers are passing on price increases, resulting in a 30% to 40% reduction in consumer buying power for products in Brazil. Looking ahead to the second half of the year, we are somewhat optimistic due to a few factors. First, it's an election year in Brazil, which typically means a stimulus package will be introduced. You mentioned the timing around Carnival, and we believe there will be a traditional street carnival, likely in July. Moreover, the World Cup is scheduled for November this year, which differs from its usual timing, and we expect it to have a positive effect. Our customers are anticipating these events, so we believe performance in the second half will improve compared to our initial expectations. While the recovery may not fully compensate for the first quarter decline, there are several positive indicators suggesting strong results not only in Brazil but across the surrounding South American countries as well.

Thank you. Our next question is from Ghansham Panjabi with Baird. Please go ahead. Your line is open.

Just in terms of your comments on consumer mobility, just kind of increasing and of course, here in the U.S., especially, how do you see that impacting demand for packaged beverage more broadly? I know you said that the can is gaining share, but is that a headwind from a just a shift standpoint that you're just going to have to cycle through as an industry in 2022?

Ghansham, you're talking specifically about the on-premise versus trade.

Exactly.

Yes. I wasn't really surprised by the returns to on-premise. I view it a bit differently than the tone of your question. I see it as a positive that we were able to continue increasing our share in cans across all platforms. It's also important to consider that in the Northern Hemisphere, when our customers raised prices in the first quarter, they usually compete very hard for volume and market share during the peak season. I believe we will gain more insights into that issue and our volume trends as we approach the peak season in the Northern Hemisphere. However, I am feeling optimistic about the underlying performance related to our can share penetration coming out of Q1, even with some lower unit volume levels.

Understood. And then in terms of aluminum, I mean, there's plenty of concern about aluminum availability, and many of the producers reported earnings over the last couple of weeks, and they have all these nice charts that show inventory levels very low, et cetera. Is that starting to affect your customers in terms of new product development as they sort of look at the supply chain and sort of want to de-risk away from aluminum supply issues, maybe not this year but certainly over the next couple of years? Or do you think the suppliers on the can sheet side are able to produce aluminum fast enough, just based on their own investments? How do you see that unfolding?

I think just the opposite. I think there's so much pressure on anti-plastic sentiment. So innovation conversations right now, Ghansham, they would be what's going to show up on the shelf in '24, '25 in terms of sort of new categories, new channels, new products. And those conversations are far more robust than they were a year ago. And as you already indicated, aluminum is back up a lot more expensive than it was a year ago. So let's see. Let's see how we get on. But I think the anti-plastic pressure and sentiment is beginning to be palpable for a couple of large CPG customers, and they see aluminum as a solution to some of these recycling content percent increases they're going to have to achieve.

And we're starting to see investment in the aluminum supply chain in North America. So I think that's encouraging.

Our next question is from Chris Parkinson with Mizuho. Please go ahead. Your line is open.

Just when you take a step back and just look at the overall theme affecting aluminum bev can demand, there's been a lot of money being thrown still at ready-to-drink cocktails. I mean the sales and marketing budgets would suggest that those consumer companies are fully dedicated to that. There have been a lot of conversions and energy drinks and so on and so forth. When we look at the back half of the year and we look into 2023, what are the two or three things that you're most excited about? Has that changed given the current macro environment? And just how should The Street ultimately be thinking about that?

Your question really emphasizes the areas we are optimistic about. One of those is not necessarily innovation but rather existing categories and channels that involve plastic products. Plastic represents our greatest opportunity by far. Ready-to-drink cocktails and energy drinks consistently surprise us with their growth potential, and we have strong partnerships in those areas. Additionally, while we may not see immediate changes in the latter half of this year, I believe there are significant categories involving substantial plastic usage that will evolve over time. For example, most nutritional sports drinks are in plastic, and that is going to need to change, which presents opportunities for us.

So just as a corollary of that, essentially the exact question. I mean you have, in fact, seen efforts California, Colorado, New York, Miami Beach, regarding switching over from plastic to aluminum. Availability has actually been an issue for some of those initiatives. I mean a few airlines have discussed it. I mean, it doesn't seem like it's been a primary focus of the investment community quite yet. But do you have any updated thought process in terms of kind of the initial knee-jerk action in some of those announcements? Obviously, they're small, but how easily would it be for any one of those to morph into something that could actually be material for your platform?

Thank you for your question. If we focus on airlines, they certainly face sustainability challenges with fuel consumption. To meet their goals, a straightforward step would be to eliminate plastic during the boarding process, throughout the flight, and upon exiting. We currently offer both single-use and multi-use aluminum containers, as well as cups, and we are actively discussing these options with airlines. One airline in the Northwest has already announced plans to switch entirely to aluminum, which could trigger a broader trend. This presents significant opportunities, especially as policies shift; for example, New Jersey is making efforts to eliminate styrofoam. These developments will benefit our entire aluminum packaging portfolio, not just the beverage segment. Thank you again for your inquiry.

Our next question is from George Staphos with Bank of America. Please go ahead. Your line is open.

Thanks for the details. So I wanted to come back to the guidance question just to make sure that we all were appropriately level set. So your ability to hit the 10% to 15% and your ability to execute on your plans in Russia, basically, what you're saying is you can get into that range if you generate the capital that you can deploy from ultimately exiting Russia. Is that a fair summary? Or is that incorrect and anything that I stated?

George, you experienced a bit of a connection issue, but let me try to address your question. Our growth in the 10% to 15% range this year is contingent on our ongoing operations. If we maintain our current operating levels, we anticipate staying in that range for the rest of the year. However, this business generates approximately $10 million to $11 million per month in operating earnings, so our performance is somewhat tied to that. We're still early in the process regarding a potential sale, and as you know, these matters can take time to finalize. Nonetheless, it is an appealing and profitable business, and there are several interested entities. Ultimately, our success in this area will depend on the timing of any developments.

Understood, Scott. And apologies for the breaking up on the phone. If you can hear me now, I thought perhaps it was you would ultimately close on some sort of move, which would give you proceeds that you could redeploy, which in turn would enable you to get to the 10 to 15, but it's really more about how long you can hold on to it in the course of the year. Is that right?

No, it's really both those things, George. So you're exactly right. It's really proceeds and what we do with those proceeds and conversely, how long we operate. So right, either of those ways would give us paths to that 10% to 15% potential.

And George, maybe Scott, you just want to comment on the $1.75 billion return to shareholder and how that's impacted by Russia or not.

Yes. Really, our plans are the same. We tend to not buy that much in the first quarter. We've got our working capital build. We tend to front-end-load our pension funding. So most of that happened in the first quarter, but obviously, given kind of the weakness in the share price, we expect to accelerate the return of value to shareholders here as we move through the rest of this year and out of the first quarter.

George, you've been following us. You know we're laser-focused on that number. The world is a little bit fluid right now, but we're going to be laser-focused on returning value to our shareholders.

I have two questions, and then I'll pass it along. They're mostly about volume growth. In the last quarter's conference call, you mentioned a target of roughly double-digit growth in North America. If I'm correct, we started with a reasonable rate above 3%. How does this beginning of the year affect your overall outlook, and why was it somewhat slower than you anticipated for the year? Additionally, regarding the initiatives we've discussed over the past couple of years that haven't yet gained significant traction—like water and nutrition—have you secured any contracts exceeding one billion units in these larger categories? Why do you think these might emerge in a potentially challenging macro environment when CPG companies may prefer to conserve their marketing budgets?

Thank you, George. I'll address the last part of your question first. Regarding water, there haven't been any significant contracts in either category. We won't discuss specifics about customers, but we haven't secured any multibillion-unit contracts in those areas. There seems to be more potential in the sports drinks and nutrition category due to their higher price points and the considerable amount of plastic involved in those products. This is beneficial for our customers who need to transition away from plastic-heavy products. Water will require disruption with new packaging and a different approach. Growing anti-plastic sentiment, particularly in coastal states, will alter consumer behavior. This shift doesn't have to come only from our beverage sector; it can also stem from our impact extruded and cups businesses. We have opportunities across our aluminum packaging sector, which may not result in billions of units in the next 12 to 18 months. However, we can perform well in that timeframe due to the variety of our product mix. Would you like to discuss the 3.4% growth in the first quarter?

Yes, in North America, we still see a path to double-digit growth. The first quarter fell short of our internal expectations for a couple of reasons that make sense. First, our customers raised their prices a bit more than we had anticipated, and as you've likely seen in their earnings reports, they performed exceptionally well in the first quarter. Additionally, as we transitioned in North America with the new contract allowing us to pass through inflation in arrears, some customers seemed to pull forward orders in the fourth quarter to avoid that price increase. While I'm not sure what the final impact would have been for the quarter, we expected a bit more than what we delivered. However, we're optimistic about the potential promotional activities in the second and third quarter, as that's when businesses typically compete for volume. Considering our customers started strong profit-wise, they likely have the resources to engage in more aggressive strategies in those quarters.

Our next question is from Mike Leithead with Barclays. Please go ahead. Your line is open.

First, I want to circle back to George's first question, and I apologize for pressing here, but it's just an area we've heard a lot from investors in the past month. But I think your March press release talked about reducing operations immediately in Russia. So can you kind of square that with continuing to sell cans? And obviously, Ball prides itself on being an ESG leader. So I guess, again, how do you square that with continuing to sell in Russia?

Well, let me start. We scaled back, but we're still operating at about 90%. We're dealing with customers that are paying us basically upfront where the business can sustain itself from a cash standpoint. From an ESG standpoint, we have 950 employees that work for us in Russia. And we provide well-being for those people and those families. And so finding an orderly transition for that business, I think is exactly the right thing to do as an owner. And so that's what we're doing.

Great. And maybe just quickly for Scott on the cash flow. Obviously, 1Q is a seasonal working capital build, but it's a bit steeper this year. So just where would you expect working capital to shake out for the full year in your guidance?

Yes. I think full year, there'll be a bit of a use of working capital, probably in the $150 million to $200 million range in total. First quarter, we intentionally built more inventory. We've been talking about the last couple of years kind of running hand-to-mouth in the summertime, and we wanted to avoid that. And so, we intentionally built more inventory in the first quarter. So that's the big chunk of it. And then we did about 80% to 90% of our pension funding for the full year in the first quarter. So those would be the big changes or the differences from last year.

And we have a question from Arun Viswanathan with RBC Capital Markets. Please go ahead. Your line is open.

Great. I guess First off, in Europe, could you just describe some of the energy inflation headwinds that you're experiencing, maybe if there's a dollar impact and how the contracts need to be restructured potentially to account for some of that headwind, if that's part of any initiatives as well?

Sure. In several European markets, energy is regulated, allowing us to hedge about 65% of the markets where we operate. We do this, but when faced with extraordinary price spikes—where increases are not just in the range of 3%, 4%, or 5% but can soar as much as 100% or even 7 to 8 times the normal rates—our hedging is insufficient. While these spikes are usually temporary, they do have a significant short-term impact. Over the years, we've observed extreme volatility in various commodities; events like storms can lead to rapid fluctuations, but prices generally revert to a mean quickly. The $50 million inflation figure I mentioned includes energy, and we are actively working on contracts to better manage these challenges, especially as we anticipate entering a more volatile environment in the future. We will need to structure our contracts appropriately to ensure we have effective mechanisms in place for timely recovery.

Yes, that's fine. Considering the market is quite competitive and some of your rivals are in the process of re-contracting, do you anticipate an environment, perhaps by next year, where that business could yield a higher return profile, even if you aren't experiencing that right now, particularly due to the competitive dynamics?

Yes, I'm not entirely sure it's higher return profile, but we'll certainly catch up the inflationary headwinds that we have this year. Our business over the last four to five years has improved Keep in mind that metals pass-through, so that can dilute if you're looking at this on a return on sales percentage. But when we look at contribution margin and we look at actual dollars being generated, it's a very profitable gross profit business, and you can have a bit of a drag in periods like this where you have a spike in inflation, that's what we're experiencing, that's what we're communicating to you. But I think you'll get that back. next year. And if you return to some level of normalcy on inflation, you'll continue to see that two-in-one flow-through operating earnings versus unit sales growth. And that business is performing well. I'm actually quite pleased with the fact that despite everything that's happening right now, our business produced like-for-like earnings year-over-year. That's a testament to the quality of that leadership team, that management team and how they're able to operate in a pretty challenging environment.

Today, it's kind of on the margin percentage, be careful, metal is up 60% year-over-year. So that's going to really impact your margin percentage on sales. But we're very happy with the performance in total.

And we have another question from Phil Ng with Jefferies. Please go ahead. Your line is open.

I have one more question about Europe. I understand that your earnings are expected to decline in Europe this year due to inflation delays. Do you anticipate making progress throughout the year as you continue your commercial initiatives? Additionally, excluding Russia, should we expect your earnings to return to 2011 levels for 2023?

As we progress through the year, we are still in the early stages, so we need to see how the summer season unfolds in Europe and how the volumes develop. We do anticipate a positive improvement as the year goes on. These comments do not take Russia into account, as it remains uncertain. Additionally, foreign exchange is somewhat of a challenge. However, on an adjusted basis, we saw a 7.5% increase in the first quarter, though it remained flat in dollar terms. Currency fluctuations could continue to be a challenge as we look ahead.

And Phil, on the cost recovery question, we are having conversations. They're ongoing. Our customers know that this needs to be equitable. These are unique times and circumstances. And so yes, depending on the outcome of those conversations, we could do a little better than what Scott indicated as we sit here today and what we know is in front of us in terms of contractual language.

Okay. That's super. And then from a Russia standpoint, they're obviously a big exporter of raw materials, including aluminum. Any supply chain risk and availability of material that we should be mindful of?

Not really. I mean Russia was really, for us, is kind of a self-contained business, and there wasn't a lot of aluminum going in other places. Russia is a global supplier of aluminum. But right now, we're not seeing any more supply chain challenges that we've been facing in the last year or so.

Our next question is from Mike Roxland with Truist Securities. Please go ahead. Your line is open.

Dan, Scott, I have a quick question regarding your Russian greenfield plant. Are there any liabilities you are still responsible for? For example, if you were to sell the business next week, would there be any pending equipment orders or contracts that we need to be aware of that you would still be liable for after the sale?

We have indeed ceased operations related to the Russian greenfield project, and no equipment had yet been delivered to the country. The reduction in capital expenditures is largely due to Russia, and I would say the majority of it is attributed to this situation. We are reallocating resources to other areas where we still require capacity, so there are no additional complications arising from this change.

Yes. I think the important comment there, I think you heard it, but we're growing everywhere. So there are opportunities to redeploy the capital, those lines in particular. And so, we're just evaluating the prioritization list right now, but kind of excited where we could potentially deploy those assets.

Got it. That makes sense. And just one quick follow-up on supply chain food raw materials. Dan, you mentioned in your comments about supporting U.S. production of aluminum can sheet. How is the availability of aluminum can sheet for your greenfield plants? And given your comments, is there any concern that you have that is continue to grow we might not have the can sheet you need, so you're looking to diversify suppliers and to expand who you operate with work there?

So I think we might be having some technical difficulties. I heard most of what you said. It's a little choppy on this in. But let me talk about some additional commentary on my scripted comments as it relates to the U.S. domestic supply. We've been really consistent that the market is tight. We're still importing from various parts around the world, mostly China, some from the Middle East but still coming in to support domestic growth. As we sit here today, looking out three to four years, it becomes increasingly tight, but there's a path to get aluminum to support the growth that we've announced. There are going to be additional investments, some pretty significant that we believe are going to start to show up. And you'll hear more about those in coming days and weeks. So we see really good line of sight, and we'll talk about it more at our Investor Day, heading out into 2030. And that's probably about as far as we can look right now with any kind of level of conviction with our customers. But we're in a much better place in terms of the opportunity set that's in front of us and the level of commitment from the supply base than we were a couple of years ago. It was starting to be a little bit concerning for us. And I think it's far less of an issue when you look at the Pareto of challenges to keep pace with the growth in the supply chain, We're in a far better position as we sit here today.

And we have a question from Angel Castillo with Morgan Stanley. Please go ahead. Your line is open.

Dan, just a quick one, I guess, in terms of the North American market. You talked about maybe 2Q, 3Q being a little bit stronger. But as we think about maybe the pull forward of those in 4Q, 1Q, some of the trade trends in North America perhaps coming in a little bit below your expectations, are you back in terms of inventories back to where you want to be in terms of a normal environment? And how do you kind of see imports in North America shipment growth for the full year in terms of percentage and the absolute value for imports?

Yes, I can provide insights on the trends we're observing and the quality of our inventory. Currently, we are in a significantly better situation than we were a year ago. The overall inventory position appears favorable, but we still face challenges with some can sizes being extremely limited, which we need to navigate. However, we are entering Q2 and Q3 in a much stronger position compared to the previous year. Reflecting back, last year was particularly challenging in the Northern Hemisphere, especially during a six to eight-week period in Q2 and the first half of Q3.

I think imports in total, you're going to see down, but remember, those import numbers, they always include Mexico which will be a consistent flow of Mexican beer into the United States.

One other comment, it was in the script. As it relates to some of our other joint ventures and our assets that we are exporting cans into the U.S., we are now exporting cans into other parts of the world, particularly Europe. So the exports are still happening, but they may be showing up in other parts of the world because we have focused more on North America investments compared to the timeline of investments for Europe and South America. As those foundational assets are established in Europe and South America, those regions may need to import a bit. Nothing to the extent of what we experienced in North America, but that’s our current perspective on the import/export situation.

I understand. That's very insightful. Regarding capacity additions, during your last Investor Day, you presented potential totals for two phases of capacity increases, with many of these already announced. Considering what hasn’t been revealed or fully constructed yet, aside from the plant in Russia that you already mentioned, are there any changes influenced by the current environment? Specifically, how is the uncertainty affecting your decisions on capital deployment and construction timelines, as well as the regional distribution you hinted at? How is the approach to capital deployment evolving?

Yes, we will continue to prioritize EVA. As our understanding develops, some assets may be positioned differently than we initially expected back in late 2020. The positive aspect is that our medium- and long-term growth forecasts still stand, even four years after we first made those projections. Currently, we are slightly ahead regarding the capital we have invested and the unit volume we have installed. You are correct in noting that the current global situation is quite unpredictable. This could lead to new opportunities that differ from what we saw a couple of years ago. If we can agree on favorable terms and conditions with our customers, secure contracted volume, and ensure a good EVA return, we will invest in those opportunities.

We have a question from Mark Wilde with Bank of Montreal. Please go ahead. Your line is open.

Scott, I wondered if you could just give us any color on getting cash and getting capital out of Russia. I know it's hard in the middle of the situation to get too granular, but just any color would be helpful.

I mean our historical profit have already been dividend out of Russia. So we don't really have much sitting in Russia other than our assets that are there. And so there's no there's not like a bunch of trapped cash or anything like that. And so we'll have to see as we go through the process and the regulatory approval as to what that looks like, and that will play into our decision as to ultimately what we do.

And then just the sale proceeds, the expected sale proceeds?

Yes, we're early in the process, and we'll provide updates as we obtain more information.

Okay. But do you see any issues in a prospective sale in getting the capital out of the country?

There are a variety of ways in which you can structure sales. So I'll just leave it at that.

Okay, that's good. And then, Dan, can you share how the North American beverage can business is performing in terms of manufacturing efficiency? What improvements might we anticipate as you increase capacity throughout the year and into 2023? Yes. You broke up a little there. I think your question was in and around operational performance and the ability to improve. I can tell you in North America, in particular, what I was most excited about the results here in the first quarter was the performance in North America. Aerospace did wonderfully as well. So we're seeing some stability in those two businesses that, quite candidly, we haven't seen for the last 12 to 18 months. I think those will start to build on themselves. We will get to a better asset utilization framework where we're not oversold, hopefully. And with that in tow and the management team with new contracts, new terms and conditions, a clearer line of sight in terms of supply chain, more efficient ability to run our plants, you should see continued incremental benefits and the learning curve. The learning curve in areas like spoilage, like M&R, those things are costly line items when you're starting up a plant, and we're seeing nice progression in all of those new assets. And so I'm pretty bullish that the earnings profile regardless of whether we're 10% growth or 8% growth, I think you're going to like the results coming out of that business moving forward because we've been really honest. We haven't necessarily been what we expected here the last couple of years. And I think we've got our arms around a really good team in place there, and we're going to get after that here in the back half of the year.

Our next question is from Curt Woodworth with Credit Suisse. Please go ahead. Your line is open.

First question just around the tightness in the can sheet substrate market, obviously, conversion fees for that product are going up. So I just wonder if you could speak to your alignment with respect to pricing those contracts against your new capacity ramp and whether you would have any interest in potentially partnering or funding some of the upstream capacity going forward.

Yes, it's definitely a tight market, and it has been for some time. Our suppliers have been making incremental investments over the past four or five years to alleviate some of these constraints. I think there is now a general consensus on the growth potential, though not everyone may have been convinced enough to invest a significant amount, like the approximately $2 billion needed to establish a new rolling mill. However, these developments will begin to take place, and as the industry leader, we will be involved in various ways. We will provide more details on this as announcements are made.

Okay. Understood. You mentioned that consumer packaged goods companies are experiencing increasing pressure regarding conversion to recyclability and moving away from plastic. It seems they have been progressing in this direction over the past few years. Are you noticing an acceleration in their thought processes? Additionally, considering you have substantial capacity backlog through the end of '24, do you still see a strong interest and bidding activity for new plants beyond that timeframe? Are the CPG companies currently pausing to digest some of the recent capacity announcements?

Yes, I believe it's more focused. What you've observed are gradual changes. Now, the discussions are starting to involve shifts in categories where cans currently aren’t being utilized. These discussions take several years, and it's essential to have the supply chain aligned on both sides. If there's going to be a significant move from plastic to cans, they will need to invest accordingly. The conversations are now more intentional and aligned with the timeframe you mentioned earlier. This gives me a lot of confidence that we are still in the early stages of this transition. So, yes, stay tuned.

We have a question from Kyle White with Deutsche Bank. Please go ahead. Your line is open.

In South America, if Brazil continues to be weak and doesn't recover as expected for the remainder of the year, is there a chance to export some of your production and cans to other parts of South America? Did you manage to do that this quarter? Or are countries like Argentina, Paraguay, and Chile already in balance from a supply and demand perspective? I'm trying to understand any potential alternatives you may have if Brazil continues to underperform.

Yes, thank you for that. Brazil is our largest market by a considerable margin. I don't believe there will be significant short-term offsets. Nonetheless, we are continuously fostering growth in other areas, which should start to pick up speed towards the end of Q3 and into Q4 with events like the World Cup. If we encounter a turning point or if there isn't the strong increase in volume that we and our customers are anticipating, we will collaborate with our customers who are present in other countries. This allows us to ship products and capitalize on growth opportunities in Brazil or neighboring countries. And where we are right now, I mean maybe we're feeling a little bit more confident than you are because we are already starting to see a little bit more growth here in April and the early parts of May, even with all of the things that I outlined previously. So, I think you're starting to return to a little bit more normal shipment patterns for various reasons. And so, I don't think we're going to be needing to pull the levers that you indicated, but let's see. And I think we are managing through that decline in volume admirably and our teams are doing a great job overcoming the challenges.

And we have a question from Adam Samuelson with Goldman Sachs. Please go ahead. Your line is open.

I appreciate you squeezing me in. Maybe just thinking about North America and coming off of the first quarter where the volume shipments maybe weren't as maybe were a little bit light of where you had previously thought. And can you talk about where your product inventories are today? I think if I'm going back to last year and last summer, that was an area of real stress in the supply chain because your finished product inventories were very tight. And is that something that gives you real confidence about the summer and the peak drink season here that you can serve the customers in a way that might have been tougher and operationally more complex a year ago?

We are certainly in a much better position compared to a year ago. This is especially true for our North America business, although it depends on our customers' preferences regarding product mix and promotions. While we might not have the perfect mix, it is significantly healthier now, allowing us better management and execution capabilities. We ended 2021 with extremely low levels, and the first three quarters of last year were challenging. However, our improved performance in the first quarter should give you confidence, as it does for us, that we are in a stronger position to proactively manage our business. We hope to maintain this positive momentum for the rest of the year, but we still need to monitor our product mix closely, particularly in North America. Well, I want to thank everybody for joining us, and we'll get on in the second quarter and look forward to talking to you again soon. Scott, was there anybody left in the queue?

No, not at this moment.

Thank you.

Thank you. That concludes the call for today. We thank you for your participation and ask that you please disconnect your line.