Greetings and welcome to the Ball Corporation Fourth Quarter 2022 Earnings Call. At the start of the presentation, all lines will be in a listen-only mode. As a reminder, today’s call is being recorded Thursday, February 02, 2023. I would now like to turn the conference over to Dan Fisher, Chief Executive Officer. Please go ahead, sir.

Thank you, Carlos, and good morning, everyone. This is Ball Corporation's conference call regarding the company's fourth quarter and full year 2022 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that 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. Historical financial results for the divested Russian operations will continue to be reflected in the Beverage Packaging EMEA segment. See Note 1, Business Segment Information, for additional information about the sale agreement and a quarterly breakout of Russia's historical sales and operating earnings. The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Joining me on the call today is Scott Morrison, our Executive Vice President and CFO. I'll reflect on 2022 briefly, and Scott and I will discuss key drivers and financial metrics for 2023, and then we will finish up with closing comments, the outlook, and Q&A. Let me begin by thanking our employees and stakeholders for their hard work and support. As I reflect on 2022, I'm struck by the magnitude and pace of change we have navigated. The commitments we are prepared to achieve, and the prompt and decisive actions that were made by our team in a fluid and ever-changing macroeconomic and geopolitical backdrop. Our full year and fourth quarter comparable net earnings reflect our EMEA, aerospace, and aerosol operations coming in as expected, offset by the impact of our Russian business sale, softer volume in North and South America, planned inventory management impacting fixed cost absorption, and the effect of high-cost inventory and the timing effect of customer sell group. Global beverage can shipments, including Russia, increased 0.8% in 2022 and decreased 6.1% in the fourth quarter. Excluding Russia, global beverage shipments increased 2.1% in 2022 and decreased 0.9% in the fourth quarter. North America beverage can segment shipments decreased 0.3% in 2022 and decreased 7.1% in the fourth quarter. EMEA beverage can segment shipments, excluding Russia, increased 8.6% in 2022 and increased 11% in the fourth quarter. South America beverage can segment shipments decreased 6.3% in 2022 and decreased 4.2% in the fourth quarter. Other non-reportable beverage can shipments increased 48.2% year-to-date and 48.5% in the fourth quarter as a result of continuing to provide support to domestic European customers. Our global extruder aluminum bottle and aerosol business continues to benefit from new refillable, reusable bottle offerings and higher recycled content aluminum bottles for personal care products. Shipments in this segment increased 12% year-to-date and 14.5% in the fourth quarter. And our aerospace team increased their backlog 20% year-over-year. In response to the previously discussed unfavorable swing in beverage can volumes relative to our early 2022 expectations and as a result of our sale of our Russian businesses, we optimized our global cost structure, deferred certain projects, and took actions to right-size our North and South American manufacturing plant systems by consolidating high-cost, less profitable facilities into scalable facilities capable of delivering our customers a portfolio of can sizes, enabling category and pack size innovation for our customers in a more agile way moving forward. In EMEA, newly constructed facilities will ramp up during the first half of 2023 and provide much-needed cans to our customers across the region. It is also important to celebrate the accomplishments achieved by our team during 2022, including shipping nearly 115 billion innovative aluminum cans, bottles, and cups to our customers, delivering numerous environmental space science and defense technologies to study the impact of humans and the environment on our Earth. Weather satellites that protect life and property from extreme weather events on orbit and defense technologies to ensure the safety of our homeland, the warfighter, and our allies; and deep space marvels like the James Webb Space Telescope to view previously invisible images via the Ball-built mirror assembly and optics. Joining the World Economic Forum's First Movers Coalition to lead collaboration across the aluminum industry to prioritize circularity and decarbonize the industry, achieving aluminum stewardship initiative ASI certification across our global footprint, remaining on the 2022 Dow Jones Sustainability Index, North America, for the ninth year, receiving an A- in the CDP's climate change questionnaire in 2022, which recognizes the company's commitment to maintaining best practices in corporate climate citizenship through its net-zero carbon emissions commitment, renewable electricity coverage, and ongoing assessment of climate-related risks and opportunities. Receiving a perfect rating on the Human Rights Campaign's annual Corporate Equity Equality Index CEI, receiving a 2022 ranking of 90 on a 100-point scale on the 2022 Disability Equality Index DEI, reflecting the meaningful progress the company has made in creating a workplace that enables employees with differing abilities to support its global mission and being recognized as the 2023 industry leader for the industrial good sector for the just capital and CNBC's Just 100 top-performing companies on ESG factors, including ethical leadership, cultivating an inclusive workplace, use of sustainable materials, and carbon reduction. And our global team supported 2,800 non-profit organizations across 30 countries and contributed 30,000 volunteer hours across our communities. Drive for 10 continues to be our vision. We know who we are, we know what is important, and we know where we're going. Together, Ball will one, execute our strategy of preserving our planet and delivering value by creating circular aluminum packaging solutions for single use, limited use, and refill, and providing exquisite environmental space science and defense technologies. Second, we will provide our employees and communities the resources and opportunities to succeed. Third, we will be our customers' and suppliers' partner of choice to enable organic growth, achieve sustainability goals, and drive innovation and technology development. And four, we will be a disciplined capital allocator by unlocking value and efficiencies from existing operations with limited future capital investment. In doing so, we will generate free cash flow, grow earnings and EVA dollars, and be good stewards of our cash flow to de-leverage and return value to our fellow shareholders. Consistent with our commitment at our Investor Day and on our third quarter earnings call commentary in 2023, we can deliver our goal of 10% to 15% diluted earnings per share growth, including the Russian business sale headwind. The next quarter will remain choppy as we work through higher-cost inventory, complete the optimization of our North and South American manufacturing footprint, ramp up our new Kettering U.K. and Pilsen, Czech Republic plants in EMEA, and the previously disclosed 2022 customer contract breach in South America. We'll benefit from the previously identified and executed SG&A actions while continuing to receive the PPI cost recovery throughout 2023, which overall will lead to a back half weighted year. During the Q&A, Scott and I will strive to provide additional clarity on the external environment and cadence for 2023 based on what we know today. We also continue to reiterate our investor field trip long-term goals for global volume growth, fueled by sustainability-driven substrate mix shift, product category impact size innovation. Our global beverage teams have positioned our businesses to deliver the year with an eye on the future. In 2023, and excluding Russia, we estimate in the range of 4% global volume growth for Ball with North America flat to slightly down, South America volume up mid to high single digits, EMEA volume up high single digits, and our other non-reportable business volumes up mid to high single digits as new EMEA capacity ramps up and exiting 2023 exports from Saudi Arabia into EMEA wind down. Our global beverage businesses' work will be complemented by our aerospace and aerosol businesses' continued success. We appreciate the work being done across the organization and extend our well wishes to our employees, customers, suppliers, stakeholders, and everyone listening today. And with that, I'll turn it over to Scott.

Thanks, Dan. Full year 2022 comparable diluted earnings per share were $2.78 versus $3.49 in 2021 and fourth quarter comparable diluted earnings per share were $0.44 versus $0.97 in 2021. Full year sales were up due to the pass-through of higher aluminum prices and aerospace performance, offset by currency translation and inflation in Europe, and fourth quarter sales were lower largely due to the sale of our Russian businesses. As Dan mentioned, fourth quarter and, to a large extent, full year diluted earnings per share reflect higher aluminum aerosol results, lower corporate expense, and a lower share count more than offset by higher interest expense, higher comparable effective tax rate, comparable operating earnings declined in North and South America and EMEA attributable to the sale of our Russian business, cost inflation, and unfavorable earnings translation. I would like to take the opportunity to proactively address the year-over-year results in our North and Central America segment. 50% of the North and Central America operating earnings decline in the fourth quarter was driven by unfavorable swing in fourth quarter volumes versus 2021. We were up 5% in the fourth quarter of 2021 and down 7% in the fourth quarter of 2022. The other 50% reflects the confluence of unfavorable fixed cost absorption that was planned entering the fourth quarter, customer mix, and the timing effect of high-cost inventory ahead of customer sell-through. This larger than expected headwind is the byproduct of volume declines, aluminum price volatility, and our proactive decision to greatly reduce production to meet current market conditions during the quarter. The segments earnings are anticipated to rebound late in the first half of 2023 as high-cost inventory sells through and volume production stabilizes across the consolidated plant system. After July, segment earnings will accelerate further as we enter the busy summer selling season and all of the contractual inflation recovery will be effective. As we explained on our third quarter earnings call, during 2021, we ramped up our metal purchases to meet what we expected would be strong 2022 growth in North America. We did this at a time of rising metal prices. While we are largely protected from metal price changes in our P&L, it does impact the cash flow and the amount of metal payables. Earlier this year, or earlier last year, when we saw that volumes would not materialize as expected in 2022, we began to reduce metal purchases. This also coincided with declining metal prices, which reduced the metal payables even further. Again, typically not a material P&L impact due to our inventory hedging. The net result is less billed in the accounts payable than originally planned. The result was a use of over $900 million in working capital for the full year 2022. This will normalize in 2023 as both metal prices and our metal take should stabilize. As we sit here today, some key metrics to keep in mind. We ended 2022 in a solid liquidity position with over $500 million in cash and $1.5 billion in committed credit availability. 2023 CapEx will be in the range of $1.2 billion, driven by cash outflows related to prior year's projects. We will generate free cash flow in the range of $750 million in 2023 and initially focus on deleveraging. Our 2023 full year effective tax rate on comparable earnings will be in the range of 20% and full year 2023 interest expense will be in the range of $415 million. Full year 2023 corporate undistributed costs recorded in other non-reportable are expected to be around $90 million. Including the $86 million Russian operating earnings headwind, comparable operating earnings should increase over $200 million in full year 2023; comparable D&A will likely be in the range of $560 million. Recall that in 2022, we returned over $830 million to shareholders. As we look forward, the year-end 2023 net debt to comparable EBITDA is expected to trend towards 3.5 times, and we may want to drive it lower. Last week, Ball declared its quarterly cash dividend and in alignment with our Investor Day commentary after we navigate the first half of 2023, we'll address the path to resuming share repurchases. Rest assured, as fellow owners, we will manage the business through the lens of EVA and cash stewardship, and we will effectively manage our supply chain and customers in this current economic climate to secure the best cash, earnings, and EVA outcome for our shareholders. We are happy to have 2022 behind us, and I'm excited and optimistic for 2023. And with that, I'll turn it back to you, Dan.

Thanks, Scott. We will continue to be agile and decisive in the current environment. We must do what is right to ensure supply-demand balance, foster innovation, and stimulate equitable sustainability policy which will further broaden the use of circular aluminum packaging solutions and provide continued fuel for our organic growth. In addition, our aerospace team will continue to partner with our customers to deliver world-class solutions for some of the world's greatest challenges and opportunities. Yes, 2022 was an unprecedented year in Ball's history, and I am encouraged about our ability to deliver the year with an eye on our future. Last week, Scott and I reviewed our 2023 operating plan with the Board, and our business' ability to deliver on that plan is on track. We look forward to generating free cash flow and achieving our long-term diluted EPS growth goal of 10% to 15%, deleveraging, and returning value to shareholders. Thank you to everyone listening today. And with that, Carlos, we are ready for questions.

Thank you, sir. Our first question comes from the line of George Staphos with Bank of America. Please go ahead.

Thank you. Hi, everyone. Good morning. Thanks for the details as it going. So, I want to thank you, first of all, for all the details in terms of what you're expecting in terms of performance cadence, particularly within North and Central America. Can you give us a bit more view in terms of what your underlying assumptions are in terms of your volumes as it will progress through the first half, the promotional activity and programs from your customers? What you're seeing in terms of innovation from customers right now? And if you were in our seats, as analysts and investors in your stock and we saw something not materializing or something developed that would undermine your expectations, what would it be?

Yeah. Thanks, George. So, as we sit here today, the volumes in EMEA are in line. Heading right out of the gate in North and Central America, they're in line. I think we're a little soft right now in South America versus my commentary on where we think the year is going to end up. The biggest element that I think is misunderstood, George, relative to our expectations on volume and why we're a little bit more bullish is aluminum prices have come off. But that doesn't mean that's necessarily the cost position for our customers. So, as they lap their hedge positions heading into the second quarter and the second half of the year, with the price increases that have gone into aluminum beverage packaging plus the actual costs coming off, there are significant profit pools that our customers are going to be able to step into. As I said, right out of the gate, we're much closer to what we anticipated in terms of volume. In North America, in particular, given the December falloff on all consumer products has changed the behavior patterns initially this year with a lot more price promotion and cap. Will that continue for the balance of the year? I would suggest it will, given the backdrop that I provided relative to costs. But Europe continues to be incredibly strong. North America is off to a good start. I think there's a little bit of a wait and see in terms of the volatility in South America. But having said that, the real cost positions that some of our major customers down there will lap in terms of hedge positions will stimulate optimism in the second half of the year. The PPI pass-through is being managed. We are in good shape. All of the cost actions and the footprint reductions that we've talked about are on track. Maybe I'll turn it over to Scott just for some positive signs relative to inflation, currency, and some other things that are starting to move in our direction from a more stable environment. But 2023, as we sit here today, I'm feeling really confident about.

I'll touch that, and then why don't you touch innovation as part of this question. Yeah. George, I think why we feel optimistic is we are definitely seeing input costs moderate. Whether it's European energy is not going to be as bad as what people predicted. We're largely hedged in Europe, lower than where the spot price is today. That really squeezed us last year. We're getting all the PPI pass-through. We started to see freight rates, warehousing, lots of input costs moderating. And so, as we sit here today, we feel pretty good about kind of the cost input side being in a much more stable place. You kind of had long-term rates kind of peak. Short-term rates are still ticking up a little bit, and so we'll feel that in our interest expense for 2023, but we feel much better. Dan, why don't you talk about the innovation.

Yeah. Reflecting on your comment and question around innovation. Certainly, in the alcohol space, we continue to see a lot of innovation, which is a good thing because the combination of the innovation. Something is going to win. As we always say, George, we don't know what's going to win; something is going to win, but it also increases the pressure on the beer category to compete. Those two things will equate to improve volume outlook. So, we're helping to fuel the innovation, number one, but we also have a lot of customers that we sell beer cans. We'll benefit one way or another depending on who wins.

Yeah. We'll be hoping for more consumption during the Super Bowl and other things. My other question, I'll turn it over. Thanks for all the color. So, you talked about reduced CapEx. That's certainly not a surprise, but that also includes your tail on spending for existing plants as they are coming up. I know it's not 2024, but is there a view you can give us on what CapEx might look like or what the delta might look like as we look out to 2024 and 2025. Thank you very much, guys.

Sure. Most of the spend this year, George, that $1.2 billion are things that are already in flight. And as we've talked about, we will have enough capital on the ground after completing these couple of things in Europe. We'll be in a pretty good spot. So, I would expect, although it's February 2 of 2023, I would expect in 2024, we'll see that drop further.

Yeah. The internal conversation, George, quite candidly, is we've spent the capital we need to grow into over the next two to three years. We could most likely spend at D&A levels in 2024 and 2025. If we have a reason to invest, it will be with a strategic customer, one or two. So, I think you'll start to see a much more disciplined, level-loaded capital approach relative to D&A spend moving forward.

Thanks very much.

Our next question comes from the line of Christopher Parkinson with Mizuho. Please go ahead.

Great. Thank you so much. Can you just talk a little bit more about North American volumes, specifically how much you believe was more just industry sell-through, specific customer destocking? And anything idiosyncratic to Ball given the shutdown in Phoenix? Just anything to break down those three variables would be very helpful. Thank you.

Yeah. I think it was back half of the quarter, and it's no different than probably every other end consumer product in the retail shelves. Customers pushing price pushed it too far, and there was price elasticity that kicked in. Beer was down the most. I think what we're seeing is a return to more promotional activity here right out of the gate in Q1. I think there's recognition of what happened there in the last four to six weeks of the year, which is well publicized. Since we sell to everyone in every category and every channel, we were impacted by all of that. But I can tell you, there's a different behavioral pattern setting in relative to our customers and their promotional activity. So, I think this will normalize, and we'll start to move into a more sustainable underpinning for growth moving forward.

Got it. And just as a very quick follow-up on some of your Latin American commentary. Could you just very quickly just discuss the market dynamics? Obviously, it was pretty difficult during the first half with Carnival and everything else, and then kind of easing that helpful. World Cup rebound, which didn't necessarily materialize. But just given the easy comps on 2022 and your comments on a preliminary basis for the beginning of January, how do you think you believe the market will ultimately materialize throughout the balance of the year given the low comps just given the industry? And then also any perhaps just very quick comments on market share trends. Thank you so much.

I want to highlight that the main cost for our customers regarding aluminum cans is closely linked to our hedge positions. In the latter half of the year, cans will be the most affordable option with the highest profit potential, encouraging our customers to promote aluminum packaging at that time. You mentioned the World Cup in relation to the fourth quarter. We did observe an increase, but it fell short of our expectations. We recognized this early in the quarter and adjusted our strategies accordingly. We have Carnival and a few other events to consider. The environment is not as heavily impacted by COVID as last year, which brings some optimism. Although South America started off less favorably than we hoped, it’s only the beginning of the month, and we remain optimistic about improvements in the latter half of the year.

I would just add on South America. In the first quarter last year, we will lap the customer breach that we had. So, that will we won't have that volume as we look forward.

Thank you so much.

Thank you.

Thank you.

Next question from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead.

Great. Thanks for taking my questions. Good morning.

Sure. Good morning.

We've clearly observed destocking and some impact on consumers due to inflation. You mentioned that this might be shifting with deflation, potentially allowing your customers to promote the product. Could you elaborate on what you're experiencing in that area? If you're noticing this change, what is your growth and volume outlook for North America this year, considering the closures you faced last year? Thank you.

As we sit here today, I'm optimistic about what we're experiencing. However, I remain firm that for this year, we are expecting flat performance. We are projecting our earnings increase to be between 10% and 15% EPS growth, aiming for stable results in North America until we are more confident that customer behaviors will continue to support promotions throughout the year. That's our current position.

Okay. Maybe I can ask the question a little differently. If you think about the $400 million or so that you delivered in Q4 EBITDA, maybe there's a little bit of seasonality improvement in Q1 2023. Q4 2023, I imagine, could look like Q1 and then Q2 and Q3 would be up seasonally better. But still, that would fall short of $2 billion of EBITDA. Is that right? I mean, what are some of the levers you guys can pull to maybe get back to that level? Or is that maybe more like a 2024 and 2025 kind of range that we should be thinking about?

I think in the first quarter, a year ago, things were pretty good. Our volumes were up and it looked strong. We're not going to have that kind of performance this time.

And then we had Russia.

In North America, the volumes were good, so we will face challenging comparisons in the first quarter. However, as we look ahead to the remaining quarters, we expect to see significant improvement year-over-year in each quarter in North America.

Okay. Great. And then just lastly, just on Europe, it sounded like you're somewhat a little bit more constructive on. Could you just describe that? I'm just trying to square that away with some of the inflation that they saw. Last year, you had some energy price inflation that was pretty stiff. So, is that what's also giving you some relief and potentially pushing some volume upside in Europe? Thanks.

We experienced a very strong volume year in Europe, which was not affected by the reduced discretionary spending of end consumers. The aluminum package performed exceptionally well. The strength lies more in the aluminum packaging and the durability of cans in Europe than in discretionary spending levels. Your observation is correct. Our contracts allow us to pass on much of the inflationary pressures we faced in 2022 back in 2023. If inflation continues to moderate as it has, even a slight decline will still support ongoing volume growth at a high single-digit rate. We will have capacity coming online in two major facilities to capitalize on this growth. We expect to increase profitability due to stable inflation and because we are addressing previous inflationary pass-throughs. We are very optimistic about Europe's performance in 2023.

I would expect to exceed $2 billion of EBITDA in 2023, and I would be disappointed if we didn't.

Okay. Thanks.

Next question from the line of Ghansham Panjabi with Baird. Please go ahead.

Yes. Good morning, everybody.

Morning.

Morning.

So, Dan, just kind of building off your recent comments, you've been quite vocal about how higher beverage price pressure volumes along the supply chain, including at your end. How much do you think volumes were impacted in 2022 just based on the dynamic in Beverage North America? And as it relates to your comment on Europe resilience, was that also boosted in 2022 by just the comparison from the reopening across Europe relative to the prior year? And do you still see sort of that momentum continuing into 2023?

I'm not completely sure I can break down that difference in your first question. However, I can tell you that the promotional activity during the peak season, which was absent last year, had a significant impact. Despite that, we still saw some growth, reminiscent of the growth rates from 2018 and 2019 compared to what we experienced in 2022. I would estimate that the difference we missed out on because of the lack of promotions during peak season was likely around 1% to 2%. As you know, that last billion cans is where profit is really made in a fixed-cost business. Currently, we are seeing a positive start in terms of how the beer companies are promoting and how our customers are assessing their needs, especially as elasticity curves have changed recently.

But I would say in Europe, Ghansham, the sustainability push in Europe is not slowing down. And I think that will help. We know how many can filling lines are going in Europe in the next couple of years. That's why I think we're bullish on the outlook for Europe.

I think the reopening, if anything, would have slowed our growth because the on-premise is overwhelmingly kegs. Despite that return to on-prem, we're still growing at the high single-digit rate. I continue to be bullish about what's happening in Europe. I've said this a number of times, and I think I've said this to you. I'm most bullish on Europe in the medium and long term. In the short term, obviously, they have to figure out energy that will impact every industry, every business. But for us, the sustainability underpinnings are tremendous, and we're excited about these new assets that we're ramping up here in the first half of the year.

Okay. That's clear. And then for the second question, on the $200 million plus net price cost recovery guidance for 2023, how do you anticipate that will flow through the various beverage can segments? And then separately, did you give a working capital number for 2023 in terms of year-over-year movement?

For 2023 working capital, we expect to get to that $750 million of free cash flow. We expect working capital to be a source around a little over $300 million.

On the net cost pass-through and net recovery, it's overwhelmingly Europe and North America, and it's 60% North America, Scott, as he's nodding. You'll see, in Europe, it comes in a more linear fashion over the quarters. In North America, you'll see probably 60% of that coming in, in the second half of the year. July 1 is a big date for lapping one particular customer contract.

Fantastic. Thanks so much.

Next question from the line of Anthony Pettinari with Citi. Please go ahead.

Good morning.

Good morning.

Just following up on Ghansham's last question, you reaffirmed the $200 million inflation recovery target. Scott, you mentioned inflation and energy coming in lower than expected, maybe in some cases materially. I'm just wondering if that's something that would cause you to raise that $200 million target or maybe it's too early in the year? Or do you think about sort of the benefits of those lower costs in a different way? Or is there a lag? Just wondering how we should think about that.

I'll answer it, and then I'll let Scott give you a more detailed answer. We prefer to be heroes in December than off to a slow start here. But Scott, go ahead.

No, what I was going to say. It's only February 2. I think the optimism we're feeling is that it appears a lot of the trends are more helpful to us. So, all those things will be beneficial. But we've got to see how volumes show up. That's the big wildcard. We're getting out of the gate in a more positive and constructive way. We're building our plan on a more conservative basis, but we'll see. But definitely, things seem to be turning into a little more tailwinds than headwinds that we had last year.

That's helpful. I have a few quick follow-ups regarding Latin America. Regarding the changes in Brazil, can you provide more details on the cost savings? Also, how will your operating rates in Brazil look once this is completed? Lastly, how would you describe the performance of the South American businesses excluding Brazil?

They're quite resilient in countries outside of Brazil, even with the high inflation levels in Argentina. Our volume increased by double digits in that country year-over-year, showcasing its resilience. Chile is performing well, and Paraguay is doing very well too. Other markets we export to are also doing well despite geopolitical turbulence and inflationary pressures; our team is managing these challenges excellently. In Brazil, the focus is less on cost savings compared to expenditures, as labor is significantly cheaper there. Shuttering a facility won't yield near the savings as it would in Europe or North America. However, operating in a tighter supply/demand environment allows our other facilities to maximize their capacity, which generally enhances efficiency, reduces spoilage, and supports the day-to-day management of our plants. This improves their ability to manage quality, maintain customer relationships, and optimize their supply chain. That's where we see the savings, benefits, and impact on our earnings profile in South America.

Okay. that’s helpful. I will turn it over.

Thank you.

Next question from the line of Adam Samuelson with Goldman Sachs. Please go ahead.

Hi. Thank you. Good morning, everyone.

Good morning.

The first question relates to demand, particularly in North America. Dan, your comments indicated that January has shown a strong start, possibly with an increase in promotional activity. You seem to focus more on the beer category compared to CSD or others. I would like to know if you are observing changes in customer behavior and promotional intensity across all categories, or if this trend is currently limited to beer. Additionally, in your discussions with customers across various beverage categories, are you noticing any increase in innovation and new product introductions that provide you with more optimism?

I think that's a great question. Beer is increasing its promotional efforts because it experienced the largest drop in volume. This drop in volume correlates with the level of promotional activity. You're noticing this trend across all categories, as all were down in the last six weeks of the year. However, it's especially noticeable in beer, which is likely why my comments have focused more on it, especially with a strong increase right at the start of the year. Some of this can be attributed to the Super Bowl, which is just two weeks away. While promotions and boosts are always expected during this time, the impact is more significant this year due to the volume decline. Regarding innovation, I mentioned this earlier, but I can elaborate. There is innovation happening in every category, but the most significant advancements are occurring in alcohol and mixers, particularly cocktails. This trend has been consistent, especially compared to the days when COVID created a shortage of SKUs as companies focused on getting cans out. As major consumer packaged goods companies shift towards becoming beverage companies, they are increasingly investing in alcohol and cocktail innovations. You will likely see this continue throughout 2023. There are certainly other projects in development, but what is planned for retail is primarily focused on cocktails and related innovations.

Got it. And then, I appreciate you gave different segment-level detail for the different can business. I'm not sure if I might have missed a view on the aerospace performance for the year and where you think that's tracking?

For 2023, we expect to exceed 15% growth in earnings, and currently, it looks like we'll be over 20%. We're starting to tap into the backlog we've accumulated over the years and are seeing repeat projects. Our defense platform is performing exceptionally well. After navigating some challenges in the supply chain in 2022, things have stabilized. We anticipate a significantly improved earnings performance from our aerospace business moving forward.

Great. That’s helpful color. That’s all I have. Thank you.

Next question from the line of Phil Ng with Jefferies. Please go ahead.

Hey, guys.

Hi, Phil.

Hi, guys. Good morning. Appreciating earnings will be a little tougher in the first quarter and likely down, do you have enough levers where earnings will be up year-over-year in Q2? And I think you're targeting 10% to 15% earnings growth for 2023. Is that predicated on the 4% volume growth you were mentioning? Or is it more of a flattish backdrop like you previously guided to?

I think we'll start to see momentum in the second quarter definitely. It depends on volumes. But as things kind of roll in, we get some PPI pickup here in the first quarter, but as Dan mentioned, the bigger chunk of it comes in the second half of the year. First quarter will definitely be softer year-over-year given some of the challenges. And we're still working through some of this inventory, both in North America and in South America. So, that's where you'll see most of that impact. But then I would expect in North America, we'll see nice earnings improvement as we get into the second quarter and year-over-year as we look through the rest of the year.

You should see sequential improvement, right, Q2, Q3, Q4 throughout the year, both with the PPI, and the fixed cost savings. Keep in mind, Q2 from a volume standpoint was quite challenged in North America. We get a little modicum of promotional activity there in the peak season then I think our plans, as Scott indicated, are more on the conservative side. Where we would need volume to achieve our plans is Europe, because we are opening up two facilities there. But Europe has been the most resilient, and the anchor customers are the most resilient that are going to be the tenants of those facilities.

But just to be clear, guys, to hit your 10% to 15% earnings growth, you need 4% volume growth? Or is it more flat? Because I thought at the Analyst Day, the messaging was more flat, and we still can get to like 10% to 15%.

In North America, it's flat.

Okay.

Global is 4%, North America, it's flat. Mid- to high single digits in Europe; mid-single digits in South America. That's how we get to the 4%.

Okay. And then, on Latin America, in general, certainly Brazil has been really choppy, and there's certainly some social unrest. What gives you confidence kind of deliver the mid to high single-digit growth in 2023? It's just been a pretty tough environment for some time, especially Brazil. Any contractor up renewal in 2023, 2024 in that Brazilian market?

No. We have no open contracts heading into 2023 and 2024. The resiliency relative to South America is going to be the stabilization. First of all, lapping the contract breach in Q1. The actual cost position of our customers down there will have the aluminum package be the most cost-advantaged product in Brazil, in particular, with that customer base.

Okay. Appreciate the color, guys.

Next question from the line of Angel Castillo, Morgan Stanley. Please go ahead.

Thanks for taking my question. And just a quick little near-term one. It seemed like that you talked about kind of full year volume growth across the different regions. Could you give us a similar walk for what that Q1 number is and how you're kind of thinking about across the regions?

I think Q1 in total will be down. Again, we had pretty good growth in Q1 of 2022. So, I think we’ll be slightly down Q1 in total. Yeah. I'd say in North America, you'll be flat. In South America, you'll be flat because of the customer breach, so we'll be lapping that. Flat would actually be growth on an apples-to-apples basis. So, we could be a little plus, a little minus there, and we'd expect to be that high single digits growth, mid to high single digits for Europe. That will be a linear number throughout the year. You'll have more opportunity to grow in the back half because of the two facilities that are coming online, but you should see growth right out of the gate in Europe. Then flattish in the other two regions for the aforementioned customer breach and the market dynamics that exist right now in North America.

Got it. That's very helpful. I'm curious about the ranges you provided for the full year. I might be reading too much into this, but it seems like South America, Europe, and others have a wider range, while North America appears flat, maybe even slightly down. That range seems a bit narrower, but it also seems to be the region where we've seen significant deterioration over the last few quarters. You mentioned liquor and cocktails as one area of potential growth through promotional activity. What gives you confidence in maintaining that narrow range as the year progresses? Is some of that related to cocktail liquor volume and the visibility around it? Has it contracted? I just want to understand what gives you comfort in that narrow range.

Well, I mean, flattish. That's not the narrowest range we've ever given, but I appreciate the question. I would say optimism to tighten the range in North America is that we plan on a much more conservative environment. One thing that I think is important to underpin this business and industry in particular. We're generally the first to go into a recession and we're generally the first to come out. What we need to see is that what happened over the last four to six weeks was the elasticity curve on volume and price for our customers has been broken. Now you're seeing volume come off. That means you have to return to some level of promotional activity, which is good for the can. So, we have a big business with all of the customers. It gives us some foothold in understanding the market dynamics. The contracts are secured. We know what we have heading into the year. Could it be up a little, down a little? Yes. That's not going to impact our ability to deliver our 10% to 15% EPS target.

I would also say that it has been more volatile in the last few years, no doubt. Historically, North America has been more predictable. South America has always had a wider range due to the significant movement in volumes. Those economies are more volatile, and you could see much larger declines at times. Despite Dan's comments, you might expect that with 100% inflation in Argentina, there would be a negative impact on cans, but cans actually grew double digits last year. So, it's a bit harder to predict in a place like that.

That's very helpful. And if I may just kind of a quick little follow-up on that. I think one of the areas that historically in a recession has helped is the customer pays back how much they're spending on-prem, and some of the off-prem starts to revise for cans. Have we seen some of that already? Or is that still a potential upside as we think about the near-term and the customer?

I haven't seen that specifically, but you're absolutely correct. Those are the initial signs that indicate we're beginning to come back. We've observed the first signs of promotional activity starting. We haven't noticed any steering between on-prem and off-prem yet, but that usually comes next. You're right.

Thank you so much.

Next question from the line of Mike Roxland with Truist. Please go ahead.

Thanks, Dan and Scott. Thanks for taking my questions.

Sure, Mike.

I have a quick follow-up regarding the weakness in beer that Dan mentioned. You've experienced this directly, and the Nielsen data reflects that beer volumes were quite challenging late last year. How are you currently assessing your exposure to the beer category? Is it still a key market for you? Given the situation with beer, are there any opportunities for you to diversify your product mix?

There's always an opportunity. We're constantly reviewing our portfolio and our customers. Regarding brand owners and brand builders, it's important to note that our historical beer customers are expanding into other products through innovation. We're pleased to see them acquiring and innovating new products and pushing for further innovations. While beer does represent significant volume and will continue to support us in a volume-driven business, this shift towards other drinks and alcohol profiles will create a dynamic within their portfolio. We're supplying the cans, and the specific label they choose is not a concern for us. Our focus is on partnering with successful brands.

Got it. That makes sense. And then just quickly, can you comment on any additional portfolio rationalizations or temporary closures and maybe contemplating? I think last quarter, you indicated that you've taken all the actions you needed to with respect to plant closures. But then there was an industry publication that came out with some details, I guess, in December about temporary closures in Brazil. I think you highlighted it broadly in your press release as well. So first question, are those closures in Brazil temporary or permanent? And then second, quickly, just given the volatility in Brazil over time, and certainly worse in the last few years. Can you walk us through the investment case as to why investing in Brazil makes sense or really doesn't at this point?

Yeah. So, I would look at the regions, depending on what's permanent and what's temporary; a lot of times, labor laws dictate that. I would tell you, in North America and South America, we've always managed our supply chain. We will curtail lines. We'll have temporary shutdowns. That's more reflective of how we are managing our South America plant. I think it was mischaracterized as to what we were doing with that. Whether it’s a temporary closure for now, given the existing conditions and economic conditions in Brazil; it's no different in the analysis, right? It’s EVA. We do have a larger risk profile and hurdle rate in places that are more volatile like Brazil. So that's already embedded. It's going to be the length of the contract, the substantive nature and economic underpinnings of that contract, and whether or not we believe we can generate EVA. I don't know, Scott, if there's anything to add on Brazil.

I mean, Brazil over a long period of time has been a really good place to invest. The can share has grown in all of the markets that we've operated. It does tend to be a more volatile region. So you have to live with that volatility. But over the long run, it's been a great place to invest, and we expect it to be a really good place going forward. It is not without its challenges, but that's part of why you can make some pretty good money there, too.

Got it. Thanks for the color and good luck in 2023.

Thank you, Mike.

Next question from the line of Adam Josephson with KeyBanc. Please go ahead.

Thanks. Dan and Scott, good morning. Hope you all well.

Thanks. Good morning.

Good morning, Dan. Dan, one on back to North America. So, your long-term target is 2% to 4%. Last year, you were down a touch. You're seeing the beer companies promote more. It sounds like you're encouraged about what you're seeing in January, yet you're expecting flattish shipments, so that would be two years in a row of flattish shipments compared to that long-term target of 2% to 4%. I guess, just given the low base and the promotional activity you're seeing, why are you not expecting more growth in North America, particularly given your long-term target? I'm just trying to understand if there's something I'm missing.

No, I just think it's earlier in the year, Adam. We've seen a couple of weeks' worth of promotion. That's not enough for us to get overly excited that we'll return to some modicum of growth. The inflationary environment and all of the things relative to a soft economy are still present. I think the can will do well. I think you'll see a trajectory in the second half of the year. That will be helpful with these promotions continue. I'd love to come back to you in six months and say, hey, we're right back on track with the 2% to 4%, but as we sit here today, I don't have enough data points to say that that's going to happen in 2023.

But over time, we’re still kind of in the post-COVID adjustment period, I think. I think 2023 will kind of be the end of that. I would expect those historical rates that we saw before COVID with sustainability tailwinds and all of those things, those aren't going away. Those are going to continue. That's why we think, longer term, those growth rates make sense. But we're still kind of in a period where we're getting through COVID and now through rapid inflation. We’re starting to see things settle down, and that gives us more optimism, I think.

Just one follow-up to that. I understand you mentioned two plants, which accounted for about 8% of your North American capacity in the middle of last year. You were down 0.3% and are expecting to remain flat this year. Do you believe the market grew more than your performance last year, and do you anticipate underperforming the market again this year? Can you provide any insights on how your North American volumes are comparing to the broader market?

I think that's a great question. Our performance was likely slightly below the market due to the size of our beer portfolio, which was the most distressed category last year. This certainly impacted our results. The good news is that if this category returns to more positive promotional activities, we should benefit from that shift moving forward.

The impact on the market will depend on who is increasing capacity and who is activating new capacity. In Europe this year, we are likely to exceed market performance due to new facilities coming online. These dynamics can change from quarter to quarter and year to year. We do not concentrate on market share; instead, we prioritize working with the right customers who are innovative and growing, those who are utilizing our services. We focus more on that rather than on market share.

Right. No, I get that. So, if you end up flattish, would it be unreasonable to think that the market would be up 1-ish just using that?

Yeah. I think that's right. I think that's right, Adam. I think you're thinking about it the right way. Yeah.

Regarding the working capital, can you clarify the expected $300 million source? Can you help me understand where that's coming from in comparison to last year? Are there specific areas where you're anticipating these improvements? Mostly inventory, Adam. We still have too much inventory, and that's what we need to work off. We've got a lot of cash, if you will, sitting in our inventory. As we roll that off, we'll be able to generate a lot of cash from it. That's the biggest chunk.

Got it. Thanks. If working capital normalizes and capital expenditures match depreciation and amortization, are there any other factors you would highlight regarding free cash flow prospects beyond 2023, specifically lower capital expenditures?

We have excellent visibility into both raw materials and finished goods. We're actively managing this every day, which gives us confidence about our cash source for this year.

Carlos, we'll take one more.

Well said, Carlos. With that, we'll close the call and look forward to talking to you at the end of the first quarter. We are excited for 2023. We've got the teams and the plans in place to execute. We'll be following up and iterating on those plans as we look forward to the next time we get together. Thanks.

That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.