Greetings and welcome to the Ball Corporation second quarter 2022 Earnings Call. This conference is being recorded on Thursday, August 4, 2022. I would now like to turn the conference over to Dan Fisher, CEO. Please proceed.

Thank you, Chris, and good morning, everyone. This is Ball Corporation's conference call regarding the company's second 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 stable second quarter comparable operating results amid ongoing inflation, earnings translation headwinds and regional demand volatility, largely driven by North American customers' retail price-over-volume actions. Global beverage can volumes increased 3.3% in the quarter. Aluminum aerosol volumes increased 11.3%. And we, along with NASA and industry partners, celebrated the successful initial images from the James Webb Space Telescope. We are actively managing the company to meet the world where it is at by rephasing capital and rebasing costs while also enabling packaging innovation, aluminum supply chains and sustainability initiatives to support long-term growth and significant returns to shareholders. The Russian invasion in Ukraine has had a significant impact on the global business environment. In March, Ball announced that it has suspended future investments in Russia and is also pursuing the sale of its Russian operations. As we noted in today's earnings release, during the quarter, a noncash, long-lived asset impairment for the Russian operations was recorded in business consolidation and other activities. Note 1 in today's earnings release contains additional information about the Russia business. The company continues to support humanitarian aid, and we thank our colleagues near the war zone for housing refugees as well as supporting each other in volunteer efforts in their local communities. Recent highlights and activities include: our global beverage business continuing construction on 2 new facilities in EMEA, announcing a new facility in Peru and rephasing previously announced North American capital projects to balance the near-term effects of higher retail prices for canned beverages versus long-term growth for sustainable aluminum packaging. Our North America business, pivoting its cost and capital focus to align with the near-term volume deceleration and localized supply-demand imbalances in certain North American markets, including today's announcement to cease production in our Phoenix, Arizona and St. Paul, Minnesota facilities, while also enabling multiple aluminum supply chain projects to domesticate and broaden sustainable aluminum coil supply and recycling capability across the U.S. Our EMEA volume, growing 7.7%, with operating earnings up 4% year-over-year despite $9 million of foreign currency translation headwinds, while navigating an ongoing volatile geopolitical environment across its operating footprint. Our South America business, managing through 2.9% volume declines due to unfavorable regional customer, product mix, diluting the volume strength that remains across the other South American countries, where we are deploying capital to enable growth. Our global aluminum aerosol team, introducing next-gen real aluminum bottles for new categories and increasing aerosol personal care shipments. Our aluminum cups team, growing our cups presence at stadiums and venues. Our aerospace team, completing a critical design review for the NOAA Space Weather Follow-on Lagrange 1 spacecraft. And on the sustainability front, Ball joined the World Economic Forum's First Movers Coalition, encouraging value chain collaboration to drive decarbonization in the aluminum sector; our partnership to introduce electric trucks with Fleetmaster, Volvo in Fort Worth, Texas. 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. We also have a responsibility to do the hard things first by controlling what we can control. And all corporate functions are actively addressing their SG&A costs, and the operations are taking the opportunity to become more efficient. In EMEA, our team is working hard to mitigate ongoing inflationary headwinds through commercial cost recovery, hedging and energy efficiency and renewable energy initiatives. In North America, additional contractual price escalators based on PPI will phase in starting on July 1, and our work to address localized supply-demand imbalances will deliver fixed cost savings over the near term. It is also important to understand in this environment that cans continue to win in the fastest-growing beverage categories, and underlying demand for aluminum packaging continues to be resilient despite retail shelf price increases by our customers ranging as high as 20%. Early indications are that North American customers will continue to emphasize price over volume during the second half of 2022. And in South America, demand trends should strengthen due to the timing of the World Cup and a seasonally strong fourth quarter. Incorporating year-to-date shipments, we anticipate global volume growth in the range of 5% for the full year 2022. In summary, our global beverage team is preparing for additional demand volatility, inflation and regional customer anomalies given global economic conditions. Our customers are continuing to lean on the can as their package of choice. And over the long term, our sustainability-driven growth thesis and long-term 4% to 6% global growth CAGR for aluminum beverage cans remains intact. Carbonated soft drinks, North American import beer, energy drinks and new categories like ready-to-drink cocktails also continue to grow in cans. We are controlling the things we can control. In addition, we are focused on executing at a high level, rebasing the cost structure, delivering high-quality cans and enabling global supply chains through alliances and investments in long-term contracts. We appreciate the work being done across the organization and ask for your support as we navigate necessary actions. And with that, I'll turn it over to Scott.

Thanks, Dan. Second quarter 2022 comparable diluted earnings per share were $0.82 versus $0.86 in 2021. Second quarter 2022 included $0.02 impact of unfavorable earnings translation. Second 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 second quarter diluted earnings per share reflect strong results in EMEA, other metal beverage and aerospace and a lower share count, offset by comparable operating earnings declines in North America and South America, higher interest expense, higher comparable effective tax rate and unfavorable earnings translation. In June, the company completed new credit facilities maturing in 2027. Ball's balance sheet remains very healthy with ample liquidity and flexibility. As we sit here today and inclusive of operating Russia for the rest of 2022, some key additional metrics to keep in mind. 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 $290 million. Year-end net debt to comparable EBITDA is expected to be below current levels, and full year corporate undistributed costs recorded in other nonreportable operations are expected to be in the range of $110 million. At this time, and given our earlier announcements about exiting Russia and other plant capital decisions, we expect total CapEx to be in the range of $1.7 billion in 2022 and 2023 CapEx to be down meaningfully from 2022 levels. The earnings impact of volume deceleration and a higher use of working capital have led to lower-than-anticipated operating cash flow. We now anticipate returning approximately $1 billion to shareholders in the form of share buybacks and dividends in 2022 and accelerated returns to higher levels in 2023. Rest assured, Ball will be good stewards of our cash as fellow owners. And through the lens of EVA discipline, we will manage the business effectively, partner with our supply chain and customers effectively and, when necessary, pull levers available to secure the best outcome for our shareholders. We look forward to addressing our plans to grow the business, enable the supply chain, expand innovation and increase returns and answer questions why Ball now and beyond at our September investor field trip. With that, I'll turn it back to you, Dan.

Thanks, Scott. Our Drive for 10 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 showcase the resiliency and discipline in uncertain economic times. And the company has an actionable plan to address costs, capital and improve returns. 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 has been impeded by the recent deceleration in volume growth, earnings translation headwinds, ongoing inflation and the pending sale of our Russian business, our earnings, cash flow and EVA trajectories are in very good shape for 2023 and beyond. We are rebasing our cost structure in preparation for the Russia business sale and to meet the world where it's at today. We continue to focus on increasing returns on capital deployed and to further enable growth across our global aluminum packaging and the aerospace and technologies portfolio. We are uniquely positioned to serve the decadal shift that will favor our packages in aerospace technologies. 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. We look forward to discussing more about Ball now and beyond by highlighting our long-term growth plans and global management bench at our September 2022 Investor Day. And with that, Chris, we're ready for questions.

And the first question is from Ghansham Panjabi with Baird.

Maybe just starting off with North America. Dan, maybe just give us a bit more color in terms of which categories in particular showed deceleration? And then how are you approaching the cessation that you called out in terms of production in Arizona and Minnesota? Is this a temporary idling of capacity? If so, how long? Where are we on that?

Sure. So I'll start with the first question relative to category impacts in the second quarter. Alcohol, total alcohol, was down 3%, mostly driven by domestic beer. I'm sure that's not a surprise to you given our customers' penchant for taking price versus volume. Non-alcohol was a bit more resilient. CSD, in particular, and energy drinks grew. Total non-alcohol was up 1%; CSD, flat to up 1%; energy drinks, up 8%; sparkling water, down 5%. The import beer was up, craft beer was down. Import beer was up double digits, 13%; craft, down low single digits; hard seltzer, down nearly 20%; F&B was up 20%; and ready-to-drink cocktails was up 60%, obviously, off of a lower base. So net-net-net, basically flat for can penetration, and it's very consistent with our customers' earnings releases as well. Relative to the 2 facilities that were shuttered, please keep in mind, Ghansham, that we announced those closures late last night. And so it's very raw, very sensitive right now for a number of our employees. These are permanent shutterings. These facilities, one was built in 1969, one was built in the mid-70s. These are landlocked facilities. They are both reline facilities. The net capacity is approaching 4 billion units, so think about removing that. Relative to our ability then to step into the 4% to 6% growth that we believe, and again, despite all the economic challenges this year, we'll deliver 5% growth. We have plans in place and facilities that continue to increase efficiencies in terms of their start-up. So we'll be able to step into our growth projections and goals, both from the medium and long term. And this is just a step that we've consistently done throughout our history relative to optimizing our footprint, and that's how you should be interpreting this. Maybe I'll just turn it over to Scott to give some context in and around fixed cost savings, which is typically something that we would refer back to in times like this.

Sure. Just to clarify, when Dan said 5% growth, that was a global number he was referring to. That wasn't any particular region. I'm not going to talk about the fixed cost of these particular facilities. But historically, when we've closed facilities of this size, 2 or 3 lines, think about roughly $30 million of fixed cost for each facility that will come out as we close those, one probably later this year and one in early next year.

Okay. That's very helpful. And then as it relates to the comments on volume outlook for the full year, the 5%, how does that break down by region, the way you see it at this point?

The current market conditions are highly volatile, particularly when it comes to predicting customer pricing in North America. In South America, we are observing a growth trend in the second half of the year, consistent with what we mentioned last quarter. The outlook for North America will rely heavily on the pricing actions and ongoing pricing strategies of our customers. Meanwhile, Europe has shown remarkable resilience. I visited Europe last week and over the weekend, and I have made multiple trips there, as well as to South America, to stay updated on market developments. I am confident that we will fall within the 4% to 6% range globally. It is challenging to identify specific figures from quarter to quarter at this moment, to be honest with you, Ghansham.

Okay. Just as a follow-up to that, Dan. Is North America tracking negative, thus far, in 3Q?

No, flat to slight increase through July.

Our next question is from the line of Adam Samuelson with Goldman Sachs.

I want to clarify the comments in the press release regarding our aim to achieve 10% to 15% earnings growth in 2023. This growth will be based on a lower earnings base from 2022 and should not be viewed as a long-term compound annual growth rate from a previous period. Considering that the 2022 earnings have been calibrated below the 10% to 15% target, could you help us better understand where earnings growth stands halfway through the year? Additionally, it would be helpful to identify key regions facing significant headwinds affecting this growth.

Sure. This is Scott. I mean, I think given like in total, given the softer outlook that we see in North America versus what we had initially thought, given what our customers' pricing strategies and mix have been, the loss of the customer in South America, what inflation is doing kind of around the world, the timing and sale of our Russia business as well as euro earnings translation, I think it's going to be tough to match last year's comparable operating earnings in 2022. So the comment about next year is off that kind of base.

Okay. That's very helpful. You maintain a long-term optimism for volume growth between 4% to 6%. However, given the actions you are taking in North America and the customer and market dynamics this year, it seems that achieving that 4% to 6% long-term volume growth may now rely significantly more on international markets than you anticipated 12 or 24 months ago. How do you view the regional distribution of that growth over the medium term, and has your perspective on this changed at all?

Yes, I believe that's accurate. To clarify, we began the year expecting double-digit growth in North America, but that has clearly not happened due to the performance in the first and second quarters and the pricing strategies from our customers. The expected growth trend of 4% to 6% in the medium to long term still applies to all markets. We need our customers to revert to a more sustainable pricing strategy, which they have traditionally relied on. Currently, they are setting prices above inflation, which is affecting margins. If there is a slight shift back to a healthier pricing strategy, we could see an increase in volume in North America. Our business in Europe remains strong and continues to grow, and we are investing in that area. South America entered a recession earlier than other regions but appears to be recovering now. As we move into 2023, we anticipate some growth benefits, especially from tailwinds in the fourth quarter leading into the first quarter. We're already noticing early signs of that. In North America, it largely revolves around pricing, and we've been closely monitoring the situation in Europe, particularly regarding energy and natural gas pipeline flows. The feedback we are receiving from our customers, along with investments in substrate penetration and aluminum, suggests that the continued demand for cans in that region reaffirms our belief that it’s not a question of if but when we will see improvement.

Our next question is from the line of Christopher Parkinson with Mizuho.

You did this a minute ago, but can you just break out just kind of your intermediate-term views for the substrates? You mentioned alcoholic, nonalcoholic energy drinks, RTD off of perhaps a lower basis. How should we be thinking about bridging what's happening right here right now versus, let's say, the first half of '23, specifically North America?

It's challenging to provide insights into the start of 2023 because these figures significantly affect our pricing strategy for customers. Our customers have increased prices by over 20% year-over-year, while their volume remains unchanged. If this trend shifts towards lower price increases and greater interest in volume, it would enhance all these figures. With that context, let me review the categories once more. The total alcohol category decreased by 3%; domestic beer fell by 5%; import beer rose by double digits; craft beer dipped slightly by 3%; hard seltzers dropped nearly 20%; food and beverage grew by 20%; and ready-to-drink cocktails soared nearly 60% from a small base. Nonalcoholic categories experienced slight growth, with CSD up by 1%, energy drinks by 8%, and sparkling water down by 5%. Overall, this results in 0 growth for the industry during the quarter. Looking ahead to the second half of the year, please refer back to my comments on pricing for customers. That will influence end consumer behavior and drive volume, which is our main focus concerning customer discussions.

Understood. I have a quick follow-up regarding Latin America, specifically Brazil. There seems to be some volatility in the fourth and first quarters, but it appears to be improving slightly. There is optimism related to the World Cup in the fourth quarter this year. How should we view this situation and your confidence in the expected boost towards year-end based on the insights you have in the alcoholic category?

Thank you. Both Q4 and Q1 experienced significant declines. As I previously indicated, the purchasing power of end consumers increased by 30% to 40% in Q4 and Q1 compared to the previous period. In Q1, our hectoliter volume decreased by nearly 20% in that market. However, we observed a slight recovery in Q2, which aligned with our expectations. In the early part of the third quarter, we are seeing a return to double-digit year-over-year growth in South America. The current state of the world remains highly volatile. While one month does not define a quarter, the trends are consistent with our forecasts, especially with upcoming elections, additional stimulus in Brazil, and the World Cup occurring in the winter quarter.

Our next question is from the line of George Staphos with Bank of America.

Dan, if you could help us understand, to the extent possible, what was going on in North Las Vegas and what your plans are there and kind of the background there. Will you need to supply to the customers that should have been supplied by that facility from other facilities or not?

The answer is no at this point. We have put a pause. We've had conversations with the anchor tenants there, those customers. Think about this as a 6- to 9-month rephasing. We can engineer and put the lines in. The current challenge with the phasing is the speed at which we can hire labor. So this is absolutely going to happen; it’s just a matter of adjusting the timing.

Okay. And then this question has come up a couple of times with my peer analysts, and I want to take another try at it. So you're still guiding to a long-term 4% to 6% growth rate for the can. You mentioned it's very difficult to determine at this juncture, and we understand what the growth might look like this year because part of it is driven by what the promotional strategy will be from the customers. And you obviously can't speak for or know exactly what the customers are going to do. So with that as a backdrop, how can you have confidence, what gives you confidence, if there's a way to quantify at all, in the 4% to 6% and how it might vary across the regions?

It would be challenging to break down the regions. I can confirm that globally, we expect to grow in the mid-single digits this year. Like you, I have not encountered a geopolitical, inflationary, or macroeconomic situation as unstable as the current one, yet we are managing within the range. Additionally, we maintain regular communication with our customers and our suppliers of filling equipment. In the past 90 days, there have been three significant multibillion-dollar rolling mill investments announced. Discussing 2023 in relation to regional dynamics is somewhat difficult at this time, but we will have a clearer view during our Investor Day. We are entering our budget discussions, and we will be actively engaging with customers around the world to stay informed. I remain confident in the factors that will support our circularity and sustainability initiatives, which align with our growth plans established a couple of years ago. Those plans still stand.

George, I believe everyone has a tendency to focus on recent events and wonder how they will affect the future. However, the sustainability benefits of the can and the long-term appeal of the package remain unchanged. We recently had discussions with our customers in Europe, where plans are in place for 118 filling lines at our various clients over the next few years. This indicates that customers view this as a long-term investment. Although some short-term actions are causing disruption in North America, the can will continue to excel in the long run. We were enthusiastic when we projected a growth rate of 4% to 6% at our Investor Day in 2018. Although growth has accelerated and is now stabilizing, it still aligns with that original forecast. If everyone steps back and looks ahead, all the advantages of the can remain intact. In the short term, we need to address localized supply-demand imbalances and focus on managing our SG&A costs, which may have become excessive. We are examining our departments to determine necessary expenditures versus unnecessary ones. This will prepare us for when inflation stabilizes and when we realize the benefits of the contractual escalators, and we expect favorable results from that combination.

Sure. Scott, I appreciate that. And my last one is a great segue. So with that as a backdrop and given your input to take a longer-term view relative to a last, whatever, 30-, 90-day view, you also reduced your value return target from $1.75 billion to $1 billion. Can you help us bridge how you get there? What were the consideration in terms of dropping that?

Thank you, George. Yes, we are expecting to earn less than we originally anticipated for this year. We will be using about $350 million in working capital. In the second quarter, we increased our inventories in anticipation of a stronger season in North America, which ultimately did not materialize. We will need to focus on that in the latter half of the year, and we still forecast a working capital use of around $350 million. It's too early to determine the outcome of the sale of our Russia business, so we remain cautious on that front. Additionally, we are facing a customer issue in South America with a client who has defaulted on their contract and is not making payments. All these factors lead us to reduce our current return value projections. However, I want to emphasize that our long-term focus remains unchanged. Looking ahead to next year's capital, we anticipate a significant reduction in growth capital, allowing us to invest more gradually over an extended period and ultimately enhance our returns to shareholders.

Our next question is from the line of Anthony Pettinari with Citi.

We're coming off a number of years where North America was sold out and we were importing cans from all over the world. I just want to understand how you think the North American market sits or maybe where your system sits once these closures are completed. Could there still be some slack in the North American market? Will you be back to essentially running full out? I'm just wondering, directionally, if you could talk about where North American operating rates may be exiting the year.

Yes. Thank you. There's a confluence of events that are happening, and this is a short-term or near-term answer, which is, there could be flat capacity for the near term, simply because we're ramping up large asset bases: Pittston, Glendale. And we've made further line investments over the last couple of years. So the efficiencies of all of those lines are improving really nicely. So they were anticipating a higher volume number. So I think in the next 6 to 9 months, I think there's a wait to see exactly the dynamics relative to supply-demand. But rest assured, we have an industry leadership position. We understand. We've taken a view to optimize the network. We've consistently done that over the last decade. Strong belief in the medium to long term, but we need to meet the world where it's at right now, and those are the decisions that we took yesterday.

Okay. That's very helpful. And then just as a follow-up to that, I mean, is the situation in North America solely that your customers are seeing lower volumes with promotional strategies and tougher inflation environment? Or are you walking away maybe from some business that doesn't meet the current thresholds? Or is it some combination of those 2 things? I'm just wondering what you can share there.

We are not stepping away from the situation. Historically, we have only walked away if we don't achieve an EVA return. This isn't a recent trend. Currently, our customers are raising prices ahead of inflation, but their volume is non-existent, and we are being affected by the lack of volume growth.

Anthony, I would just add, in terms of the customers, we've entered into some new contracts recently that we like the economics on those contracts a lot. And we'll start to see those benefits as we get into '23.

Our next question is from the line of Mike Leithead with Barclays.

I appreciate all the detail, especially by category, in North America. First, is there any update you can provide on the Russia divestment? And Scott, just to be clear, when you gave an earlier answer or commentary about this year's EPS, are you assuming some sort of sale of Russia within fiscal '22?

No. I provided direction on comparable earnings, not EPS, and Russia was included in those numbers for the entire year. We currently have a strong process underway, and it continues to advance. We'll see where we end up. That's all I can share at this moment. I hope to have more details to share during our Investor Day in late September regarding our progress, the situation, the timeline, and everything else.

Great. I appreciate that. I wanted to revisit North America. Customer behaviors have certainly changed a lot over the past three months. With the two plant announcements last night and the delayed new plant, it seems like a significant shift from what we anticipated for 2023 and about 2% or 3% of the North American market. As you mentioned, you take these decisions quite seriously. Is it accurate to say that your growth discussions with customers are evolving considerably? I'm trying to reconcile your medium-term confidence with the adjustments to your plans.

Yes. So just one clarification. The pricing behavior hasn't happened over the last 3 months. We've had, in aggregate, each quarter over the last 4 quarters, our customers have taken up, on average, 7% price increases. So you're getting to a point now where, year-over-year, you're looking at 20%, almost 30% price increases in some of these products. That absolutely has an impact on discretionary and consumer buying. And we're looking at that, and we're making adjustments. We're optimizing our footprint. This is a near-term balance for us. We've optimized the efficiencies across our system. I'll remind you that these 2 plants, 1 was built in 1969, 1 was built in 1975. So that should give you some thought in terms of what we need to do relative to what we've seen over the last year in terms of the pricing behavior from our customers.

Our next question is from the line of Arun Viswanathan with RBC Capital Markets.

So yes, I just wanted to, I guess, drill down further into the demand outlook here. So obviously, we've gone through a period of very robust growth. It looks like we're normalizing into a more historical range. What's it going to take to kind of reaccelerate to maybe a slightly higher rate of growth? You noted seltzers were down 20%, and we've all been seeing the data there. But have you seen any pickup in either the amount of new beverages that are going into cans? Or any trends, as far as still water or anything else, that would potentially drive growth back or accelerate growth as we look out into the next year or so?

Yes. Thank you. So just one major point of clarification. Our historical growth rates were 1% to 2% for 20 years heading into '19. We just communicated, I think, multiple times in this call that we believe we'll grow at 5% this year. So we're 2 to 3x what the historical growth rate is and in line with our long-term investment thesis for growth. As it relates to categories and innovation, absolutely. We're seeing ready-to-drink cocktails growing at 60% off of a small base. We're seeing energy drinks continuing to grow at high single-digit growth rates. If you refer back to several calls over the last quarters, I have said multiple times, our business doesn't move quarter-to-quarter. It moves over 6- to 9-month digestion period. So retail shelf space, filling locations, promotional activity to push around things like RTD cocktails, those things, as they start to happen, they will fill out the retail sales and rebase areas that are seeing modicums of decline. And so yes, I'm very bullish on ready-to-drink cocktails. I'm bullish on energy drinks continuing. CSD, that is a plastic-to-aluminum substrate shift. And despite the 20-plus percent price increases we've seen in those areas, it's still very resilient to flat to a slight growth. So all of those things give me comfort that what we're seeing in terms of an appreciable differentiated, higher growth rate versus historical norms will maintain and continue for an extended period of time.

Okay. I understand that the facilities you are closing are likely more costly and older compared to the rest of your production facilities. How should we view capital moving forward? I know your growth projects are still progressing, but could you outline your thoughts on capital expenditures over the next few years? You've already adjusted your capital returns, but are there other options you might consider for capital expenditures to potentially increase those returns?

Yes, I mentioned that we expect this year the expenses for the second half will primarily involve existing resources. We have favorable payment terms for most of the capital, which is why there won't be significant changes this year. We've reduced our initial estimate by about $100 million from three months ago, bringing it to approximately $1.7 billion. Looking ahead to 2023, as Dan said, we'll be planning in the coming months and will provide a clearer figure at the Investor Day. I anticipate a notable decrease in our capital expenditures for 2023, as growth has slowed to mid-single digits, rather than the double digits some expected. This adjustment allows us to reduce capital spending and provides more opportunities to return value to our shareholders.

Our next question is from the line of Angel Castillo with Morgan Stanley.

So Dan, I wanted to explore a bit further into 2023. I know we will receive more details at the Investor Day, but can you provide any insights on the CapEx reduction and where it might be originating? I assume it could be within North America, or as you consider the future plans you've outlined, where do you think this reduction might come from?

Sure. Thank you. Yes, there's been an awful lot of focus on volume on this call. I think if you reflect on Scott's comments relative to sort of the downturn in earnings that we anticipated 60, 90 days ago, keep in mind, there's been a hell of a lot of headwinds on inflation. That inflation is going to come back to us next year. That number is higher than what we anticipated to get coming into this year. So earnings should be reflective of an improved PPI mechanism. Keep in mind, we pass through inflation in both Europe and North America a year in arrears. So that will be, as we sit here today, a good guy. And we will further document that and bring more specificity to that number a month from now as we do our homework there. And then relative to capital and some of the other comments, I'll turn that over to Scott. But we're good stewards of capital. The stuff that has been going into the ground, we're paying for that now. And then we should be reflecting and rephasing capital over the next year if we continue to see our customer pricing strategy. But more specific, Scott, if there's anything I missed there.

Our aerosol and aerospace businesses are both experiencing growth. We're carefully examining all of our capital investments. We recently had a call with some colleagues about our progress on European projects. We completed the Paraguay plant a couple of years ago and are pleased with the results, which is why we're planning to build another plant in Peru. While growth has slowed down, it's at a more manageable pace, which we believe is beneficial. We're also reviewing capital and costs throughout the business.

That's very helpful. And then as we think about maybe the medium to longer term, I wanted to maybe revisit a couple of things you mentioned. One was maybe on the inventories front, and then I think there was a mention of kind of a customer default that we were kind of dealing with. So as you think about maybe 2022 and what some of these items that might be kind of onetime and we should recover from and should get back to kind of growth next year and give you comfort of returning back to growth, anything else outside of those 2 or others that you can kind of point to that are maybe more specific to Ball or just kind of to this year that we can then look at as we think next year. And industry growth returning back, anything with market share or, again, with the inventory levels, et cetera?

No. Those are the significant issues. I've been in this industry for 22 years, and I believe it's crucial not to reduce production until we reach the summer season. If we aren't prepared to meet customer demand during the summer, we risk losing sales. We anticipated stronger growth in the first half of the year, which led us to build up our inventory. Now, we need to reassess our inventory levels for the latter half of the year and reduce them to more sustainable amounts. Regarding customer defaults, in my 22 years here, this is the first time I've encountered a customer with a legal contract who opted not to fulfill it. I believe this situation is unique. These are the main changes, and as a result, we expect to earn less than we initially projected. This is why we must be cautious about returning value to shareholders in the short term, but we are optimistic about positioning ourselves for better performance in 2023.

Our next question is from the line of Mike Roxland with Truist Securities.

I wanted to delve a bit deeper into North America. You provided some great insights, and we appreciate that. One of your peers mentioned a volume growth of 1% in North America for the second quarter and is guiding for 2023 to see double-digit growth. This peer also mentioned mid-single-digit growth in North America for the second quarter. Would it be reasonable to suggest that perhaps you overestimated growth somewhat in the southwest region compared to demand? It seems you have considerable capacity in that area, as Dan mentioned you have around four lines in a good year, and specifically, Glendale might have three or four lines. So, maybe given the actual demand in that region, you might be a bit too optimistic regarding your capacity expansion plans?

No, I appreciate the question and the thoughtfulness behind it. That's inaccurate. In fact, the southwest is performing as we expected. It's important to remember that we have an anchor tenant in Glendale with whom we operate globally. They continue to grow significantly and in alignment with our expectations at that facility in particular.

I would also point out that everyone in the industry probably has a bit of a different customer mix. And so that could account for some differences in what people talk about.

Got it. Okay. And one quick follow-up. Dan, you mentioned retail prices being up 20% to 30%. Your customer volumes are flat. So it could be that consumers are trading down to some extent given these price increases. Could you remind us of your private label exposure? And any push possibly to increase your private label exposure given the current environment?

In general, we have comparable metrics with others in the industry in that area. A lot depends on the filling partners we have relationships with. It's tough to separate out those private labels; you would need to examine IRI scanner data. The cans we ship often go to filling locations that are already at capacity, which means they may be trading out. We send can volumes to customers that serve as filling sites for the end consumer, and sometimes these are not even labeled cans but rather shrink sleeves, making it challenging to differentiate. I agree that we've seen a trend toward trading down. Usually, this trend starts in rural areas before it reaches urban ones. We observed this in the latter part of the first quarter. You might notice a switch from one 12-pack to another and eventually see volumetric trade-downs. It's less about significant shifts within the category and more about how base labels and high-end labels are traded down to medium ones, and then to lower-tier labels to maintain market share. We haven't yet seen a widespread trade-down in market share, but if price increases keep rising at this pace, there's concern that we might start to see volumetric trade-downs.

Our next question is from the line of Phil Ng with Jefferies.

This is John Dunigan on for Phil. I wanted to stay on North America for a second. Now the tightness that we've seen in the market up until really this year led to a lot of favorable contract renegotiations, which I thought had volume requirements baked in. Is that not the case? Or is some of that just getting pushed out for your customers?

Yes. I'll start and then turn it over to Scott. I would say the new contracts are performing in line with what our expectations were. Keep in mind, that's not the majority of our business. Scott, anything else?

Yes. So all the new assets we put in the ground and the contracts that support those are progressing. I mean, if you take a step back, every contract is going to have some range of what they can do month-to-month. I mean, nobody gets their forecast 100% right. So in our case, where we're at, it's kind of like 95% right. And so that 5%, we're feeling that. But that's kind of normal. But the contract provisions that we've been talking about, the favorable contract provisions that we've talked about for the last couple of years are definitely showing up in what we're seeing.

Okay. And then in terms of like maybe a bull case scenario, you're shutting about 8% of the North America capacity for Ball and pushing out another, say, 4%. So in this bull case where you maybe return to that 4% to 6% CAGR quicker than expected here in North America, do you have any capacity to meet that demand with the ramp-up of your other projects? And maybe you can give some insight on kind of how operating rates look in broad terms.

Yes, absolutely. We have dry powder to step into. We were going to, on an annualized basis, add 12 billion units this year. We're saying we're going to take 4 billion from that. But keep in mind, the knock-on effect from efficiency builds moving forward will enable us to step into growth in excess at the high end of the 6% range, if it shows up. The other thing we're in constant conversation with our customers, anchor tenants and the previously disclosed greenfields that we're anticipating in North America, and we could very quickly move into engineering and executing against those. So this doesn't have an impact really for us to be able to step into really nice growth in '23 and beyond.

Our next question is from the line of Mark Wilde with Bank of Montreal.

I want to just turn at the end of the call here from volume over to the cost. We are in a higher inflation environment than we've seen for 4 decades. Can you talk about what you might be doing or trying to do in some of the contract renegotiations to both speed the pass-through of non-aluminum costs and then also to maybe match up the escalators that you use so that they better square with the actual costs that you're incurring?

Yes, the PPI and CPI escalators we've utilized have generally been effective across different environments. Currently, we're experiencing a short-term challenge due to inflation rising at an unprecedented rate not seen in the last four years. We want to be cautious about overreacting to what has historically worked for us. However, we are exploring ways to tighten contracts to minimize leakage and ensure a quicker response to significant cost changes. Implementing these adjustments will take time. In various emerging markets where we operate, they have effective and rapid cost pass-through mechanisms due to a history of hyperinflation. In contrast, North America and Europe have not experienced this. The annual pass-through has been functioning well, and we are seeing benefits from these mechanisms. Nonetheless, we've encountered another round of inflation, adding approximately $100 million in costs this year that is constraining our operations.

But maybe I'll close by saying that one area we haven't discussed in depth on previous calls is our focus on supply contracts, alongside the significant time we've spent on cost recovery related to our customer contracts. We're putting considerable effort into ensuring that our supply contracts reflect the terms of our customer contracts. This is particularly relevant for our ODMs on the chemical side. It’s important that we do not absorb costs that are unrelated to our customer contracts, as doing so could enhance our margins.

Okay. That's helpful. Listen, one other just real quick one, and I think I know the answer here. But this lower growth you're seeing in North American beverage cans, this is not going to have any impact, is it, on these planned can sheet expansions or the timing around those expansions, particularly the Mana project?

The answer as of today is no. We don't anticipate that. These assets will come online in 3 to 4 years from now. We were actually discussing this with a number of people earlier this week, and it was all about moving forward. They strongly believe in the circularity message, as do we. So yes, thank you for that question. I think people are very optimistic about continuing to invest in the circularity story of aluminum and beverage packaging.

Our next question is from the line of Adam Josephson with KeyBanc.

Can you just talk about the visibility you have into North American demand? So I mean, for two years, the industry was caught short. And now you're, in effect, caught long. Can you just talk about what your normal visibility is? How many months of it you have compared to what it might be now?

No. That's a great question. It's actually much longer than it used to be historically because of the fear of missing out regarding our customers being able to adopt innovative practices. The main challenge for us is the lack of access to certain information, specifically pricing strategies from our customers. This is currently a significant factor affecting our volume. Customers tend to keep this information private, which poses a challenge. We're having discussions about their current situation compared to the substantial price increases over the last nine months. This situation calls for a reassessment of our engagement with customers roughly every six to nine months. However, if they decide to implement much steeper price hikes within a 120- or 180-day period, it can lead to the disruptions we are currently seeing in volumes.

What I would say, the thing where we have more visibility to today than we had 6, 7 years ago is the mid- and long-term strategy of our customers, what they're planning to do with their mix, with their package mix and sizes and all of that and the investments that they're making on the filling side. We have better visibility into that. It's the near-term stuff that's a little bit more challenging.

Got it, and I appreciate that. Dan, you mentioned in the release that you observed a slowdown in demand late in the second quarter. However, your customers have been increasing prices for about a year now. Why has this recently reached a tipping point? Why didn't it happen three or six months ago? Why did growth seem to hit a wall all of a sudden?

Yes. There's certainly a recency bias. I don't know if I had a specific answer to that. However, for us, the there's always been Memorial Day to 4th of July promotional activity, and consumers were anticipating that. It didn't come through. There's less going into everyone's grocery basket right now. So I think there's a recency bias. I don't know, Scott, you've got a thought on that?

Yes, we've been examining a lot of economic data, and recently we've noticed more pressure on consumers. In the second quarter, fuel prices rose, but fortunately, they are starting to drop a bit now. However, much of the stimulus money that was injected into the economy has been spent in the early part of the year. Consequently, we're seeing an increase in delinquencies related to student loans and credit cards among individuals aged 20 to 35. This indicates that consumers are feeling more financially strained now that the stimulus funds have largely been used up. Historically, a 2% price increase would typically lead to a 1% or 2% decline in volumes, which we haven't seen for a while, but I believe we will start to observe this trend again. Long term, as conditions normalize, we are optimistic that things will return to a more stable state.

Lastly, you've always mentioned that beverage cans tend to be fairly resistant to recessions. Is that still true now, considering the significant inflation and price increases? At some point, does the demand elasticity take effect, making it unavoidable?

No, I don't think it has changed in terms of being recession-resistant. When you take a step back, we can see that everyone is processing these numbers in real time. We've had some time to analyze them, and the current global situation is quite challenging. However, our earnings are holding up reasonably well. They are not where we want them to be, and we are disappointed with our current performance. But looking at the broader world, things aren’t as dire as they may seem. I believe this business remains recession-resistant, although it is not completely shielded from shocks such as record inflation, a war in Europe, and deflation in the eurozone. These factors will deliver short-term impacts. The rise in energy prices in Europe will also have immediate effects. Nonetheless, the long-term prospects of our business are strong; it will continue to grow, generate cash, and provide attractive returns. We feel optimistic about our position, though we are not satisfied with it. We plan to implement several initiatives in the near term to tackle these challenges, but the long-term outlook remains positive.

Adam, we are much closer to understanding the situation. It’s important to note that customers who are simply passing along inflation costs without increasing their margins are experiencing significant growth. This demonstrates considerable resilience. The challenge right now is with customers who are raising prices beyond inflationary pressures and increasing their margins, as this will affect volume. This isn't a sign of recession; it's a pricing strategy. I want to emphasize that those customers who maintain a balanced pricing approach and simply pass through costs are growing, and we are growing alongside them. Chris, that's all for now. We look forward to speaking with everyone again in 90 days. The investor conference is going to be on September 22. Look forward to seeing as many of you as can make it.

Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.