BALL Corp Q2 FY2023 Earnings Call

Greetings. And welcome to the Ball Corporation 2Q 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterward we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Thursday, August 3, 2023. I would now like to turn the conference over to Dan Fisher, Chairman and CEO. Please go ahead.

Thank you, Malika. Good morning, everyone. This is Ball Corporation’s conference call regarding the company’s second quarter 2023 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause 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 Russia operations will continue to be reflected in the Beverage Packaging EMEA segment. In addition, the release also includes a summary of non-comparable items, as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Late in the quarter, the company also announced that it is considering options for its aerospace business. There are limitations regarding the depth of commentary we will provide on that topic today. If and when additional comments are necessary, they will be made via a separate public press release. Joining me on the call today is Scott Morrison, our Executive Vice President and CFO. I'll provide some brief introductory remarks. Scott will discuss key financial metrics and then we will finish up with closing comments. Our outlook for the remainder of 2023 and Q&A. Let me begin by thanking our employees for working safely and with the utmost level of agility while fulfilling our customers' needs. On our first quarter call, we said that our second quarter would be choppy and that was the case. Our team delivered solid second quarter results amid tough year-over-year comparisons, including $47 million of higher interest expense, the $40 million operating earnings headwind from the Russian sale, and global beverage volumes down 11% driven by the Russian sale impact and a notable domestic beer brand experiencing demand disruption in North America. I'm proud to say that our team did an excellent job of managing both costs and working capital levels to deliver the quarter and position the business for a stronger second half. Looking forward, we will continue to benefit from notable inflation recovery, cost-out actions, and improved operational efficiencies. Our inventory levels are in good shape with plans to improve further. Our North America team is managing in real-time the balance of the U.S. mass beer brand and our improved demand forecast from other customers, which should unlock additional opportunities during the second half. Cash flow is kicking in, and we are studying opportunities to accelerate deleveraging and the multi-year return of value to shareholders while also developing additional innovative packaging solutions to grow the business going forward. Around the globe, beverage cans continue to win relative to other substrates and we continue to leverage the contributions of our two new facilities in India, our customer mix, scale, plant footprint, innovation, and capable teams across the organization to ensure the best outcomes for all our stakeholders. In our aerospace and aluminum aerosol businesses, operational performance and demand for our products continue to grow. In aerospace, our one-not-book backlog increased one billion and the unique technologies we provide to support environmental and national security needs remains in high demand. In our global aluminum aerosol business, we continue to serve new categories and offer reuse and refill bottle innovations to a broader set of customers and occasions. As we look ahead, all of our businesses will continue to unlock additional value for Ball stakeholders in 2023 and beyond. Consistent with our prior commentary, in 2023, we remain positioned to deliver approximately $750 million of free cash flow to deleverage and return value to shareholders, and we anticipate the potential of achieving the low end of our long-term goal of 10% to 15% comparable diluted earnings per share growth, including the Russian business sale headwind and exceeding that long-term comparable diluted EPS growth goal, excluding the Russian sale headwind. During the Q&A, Scott and I will strive to provide additional clarity on the external environment and cadence for the remainder of 2023 based on what we know today. Our global beverage teams continue to position our businesses to deliver the year and have an eye on the future. For the full year and incorporating year-to-date trends, our customer mix and excluding Russia, we now estimate flat global volume growth for Ball, with North America being down low single digits, South America volume up mid-single digits, and EMEA volume up mid-single digits. We appreciate the work being done across the organization and extend our well wishes to our employees, customers, suppliers, stakeholders, and everyone listening today. With that, I'll turn it over to Scott.

Thanks, Dan. Second quarter of 2023 comparable diluted earnings per share were $0.61 versus $0.82 in the second quarter of 2022. Second quarter sales decreased compared to the same period in 2022, primarily due to the sale of our Russian business in the third quarter of 2022, lower volumes, currency translation, and the pass-through of lower aluminum prices, partially offset by the pass-through of inflationary costs. In the second quarter, net comparable earnings decreased compared to the same period in 2022, primarily due to higher interest expense, the headwind from the sale of our Russian business in the third quarter of 2022, and lower volumes, as well as higher corporate costs, partially offset by the contractual pass-through of inflationary costs, fixed cost savings, lower depreciation expense, and SG&A cost out initiatives. To reiterate our prior earnings call commentary, we have been and will continue to proactively manage regional supply-demand balance across our system of plants in the near term. Starting in the third quarter, segment earnings in North America will accelerate through the majority of the anticipated contractual inflation recovery, having kicked in July 1. In EMEA, the business will lap its last Russian earnings headwind in the third quarter and then accelerate to an improved level of earnings in the fourth quarter as they move beyond this multi-quarter headwind and the start of costs for the two new plants. In South America, customer and product mix, which has unfavorably influenced the seasonally slower second quarter, will reverse and consistent with our prior commentary, we anticipate a more robust second half in Brazil as customer hedges roll off and the fourth quarter summer selling season kicks in. As we sit here today, some very consistent commentary and key metrics. We ended the second quarter in a very solid liquidity position with approximately $2.65 billion in cash and committed credit facilities. 2023 CapEx will be in the range of $1.2 billion, driven by cash outflows related to prior year's projects. 2024 CapEx is targeted to be in the range of GAAP D&A levels. We are targeting free cash flow of approximately $750 million in 2023 and focusing on deleveraging. Our 2023 full year effective tax rate on comparable earnings is expected to be in the range of 19%. Full year 2023 interest expense is expected to be in the range of $450 million. We anticipate full year corporate undistributed costs recorded and other non-reportable to be in the range of $80 million. Including the $86 million Russian business sale operating earnings headwind, comparable operating earnings should increase nearly $200 million. And full year 2023 comparable D&A will likely be in the range of $550 million. As we look forward to incorporating near-term demand trends, year end 2023 net debt to comparable EBITDA is expected to trend in the range of 3.7 times. And in future years, we will drive that lower. Last week, Ball declared its quarterly cash dividend. And as Dan mentioned, reducing leverage is our key focus prior to resuming share repurchases. As fellow owners, we continue to manage business through the lens of EVA and cash stewardship and we will effectively manage our supply chain and customers in this current environment to secure the best cash earnings and EVA outcome for our shareholders. With that, turn it back to you, Dan.

Thanks, Scott. We continue to believe that given the economic environment and global dynamics impacting our world, it is a great time for investors to get up to speed on Ball. Our improved results following the challenging 2022 are progressing. Our products and technologies are resilient and provide solutions for our customers. Our focus remains on delivering earnings, free cash flow, and high-quality products to our customers and consumers. And as leverage continues to come down and free cash flow expands, our return of value to shareholders will grow in 2024 and beyond. Thank you to everyone listening today. And with that, Malika, we are ready for questions.

Thank you. Our first phone question is from the line of George Staphos with Bank of America. Please go ahead. Your line is open now.

Hi, thank you. Good morning, everyone. I appreciate the details and congratulations on the performance. My first question is about the volume trends you are observing early in the third quarter across the region. Can you discuss how these trends compare to the year-to-date volume guidance? Are there any regions that still have significant stock of filled products that need to be reduced? How are you thinking about that?

Yes, thank you. In the mass beer space, I think you'd have to look at that on a net basis. Clearly, there's one customer that's got more filled goods right now than the others, and I think they've commented on that. There is a little bit within our portfolio in terms of the energy space where we're working through some inventory. Our largest energy customer in our space in North America is growing at a slower rate than the balance of that space. And so, the scanner data is reflecting more growth than our shipment sales. That normalizes, we believe in Q4 based on the projections that we have. Nothing notable. We're in a really good inventory spot, George. You can see that reflected in our cash generation in Q2. You always have, this is the softer period for South America, so there's nothing really of news there. We expect to start building inventory here in the quarter to execute against the back half of the quarter and then peak season for that part of the world. So absent the obvious mass beer player, not as much.

Okay. What I was trying to ask was about the situation in South America. From your perspective, there isn't a significant amount of de-stocking needed at the customer level, is that correct?

No, we've been running.

Other than your large, I'm sorry, go ahead.

Yes, that's correct. There's nothing meaningful in South America. You always run to get, you're always doing maintenance and there's always a level of curtailment in Q2. And so, there's just not a lot of room to run additionally to build inventory, because you're already planning that you're going to be running full out in Q3. The inventory builds, if you have that effect, typically it shows up at the end of our fiscal year down in South America. If things aren't selling through in Q4, you usually have a bit more inventory heading into Q1. So we're in a really good position inventory-wise. That was something that we commented heading into the quarter. The teams and the plants managed that tremendously, even with the mass beer inflection that showed up in the quarter and persisted throughout the quarter.

Okay, Dan, thanks for that. I want to sort of come back to part of the question as I asked it and ask you to follow and then I'll step down just to be fair to everybody else. So what trends are you seeing early in the quarter volume-wise across the regions if you can talk about, put a number on that if that's possible? And then from our research and contacts, we've seen an uptick in promotional activity. We haven't necessarily seen a pickup in consumption yet. How would you have us think about the efficiency and the yield on promotion and the level of promotion that you're seeing into 3Q? And are we beginning to see some finally, some uptick in beer just based on what we're seeing out of the scanners and why, if that's the case, would you be confident about that continuing the rest of the year? Thank you.

That's a great question. Let's break it down. In North America, there isn't much to report regarding changes in South America since it's still winter there. We expect to see more activity in the second half of Q3. Our discussions with customers continue, and I will be visiting next week. They are on track to meet our expectations, particularly with positive volume trends heading into Q4 in Brazil. We've previously mentioned our optimism about Brazil, which was affected by recession, inflation, and high interest rates, but those pressures are easing. This, along with our hedge positions, is unfolding as anticipated. The main uncertainty lies with Argentina, but we remain confident in Brazil's strength and our projections for the latter half of the year. In North America, both Scott and I have openly shared our observations from the second quarter regarding the mass beer segment, which has been validated by our customers. Our beer partners typically operate at full capacity during the second and most of the third quarters. Any changes in mix will likely come from working capital or available products, meaning the scanner data may not accurately reflect our current situation. We anticipate retail resets, and customers are preparing for increased visibility and velocity on shelves, although we won't see this reflected until Q4. As for promotions, your characterization is accurate. Although there has been promotional activity, it's essential to recognize that many promotions follow significant price increases over the past couple of years. It's less about promotion and more about creating purposeful volume momentum. We have observed private labels gaining market share, which is a new trend compared to recent years and could stimulate volume growth. We believe that certain customers will be more inclined to focus on volume as Q4 approaches, based on our conversations with them. However, until they find the right balance of pricing and volume triggers, they may not see the desired effects in driving volume. While I see similar data to what you're seeing, it hasn't led to the results they hoped for, suggesting they may need to adopt a more aggressive stance, especially to avoid losing share to private labels. That's a lot of information, but that's how we are analyzing the situation and forecasting. We don't anticipate a significant uplift in Q3 compared to Q2, apart from our ongoing challenges in the mass beer segment. In Europe, we are still experiencing slight growth, excluding Russia, and anticipate continued growth as our plant system becomes more efficient, enabling us to achieve mid-single-digit growth as we move through the latter part of the year.

Thank you, Dan.

Thank you.

Thank you. Our next question is from the line of Anthony Pettinari with Citi. Please go ahead. Your line is now open.

Hi, this is actually Bryan Burgmeier on for Anthony. Thanks for your question. Dan, Scott, you've been asked about the possibility of selling or spinning aerospace for many, many years. So, why now for the strategic review? Did something change for Ball for the aerospace business? Is it about capital allocation or returns? Just any detail you can add there and maybe why this is happening now?

Yes, why now is, if you look back five years ago versus today, the business is much bigger, much healthier, much more profitable, and it could fundamentally stand on its own. Those are the key cruxes for why you could potentially do something else with this business. It's really a manifestation of that business has performed tremendously and gotten to a point where it's an incredibly valuable asset. We believe that was the case. And so, we ran a process to validate that. Early indications are it is a valuable business. If and when I've got more to talk about, I'll let you know. It's really nothing about capital allocation and return threshold. It is just that it's a valuable asset. It's increasingly so. And we always need to look at our shareholder value equation and make sure that that asset is sitting in the right spot for the long-term generation.

Understood. Thank you. One quick follow-up here is, Dan, during the quarter, I think you talked about kind of retail points and the supply chain being displaced by the customer mix developments in U.S. beer. Do you have a sense of where we are kind of in that process and maybe when Ball starts to see the benefits of being exposed to some of the other brewers that are doing very well right now?

There's been very minimal movements in terms of retail displacement. I know those questions are being posed. There's a significant reset that happens kind of tail in the Q3 heading into the Q4 across most of the major retailers. So you will see this net impact fully manifest. Probably not until the first half of 2024 will all of the shakeout happen. So I'm not looking at anything appreciably changing in Q3. But the customers that have the opportunity to take a broader position in the retail, they will be gearing up their supply chains. They will be entering into these new retail positions over the course of the third quarter. And then you will start to see Q4, first half of 2024, where things start to settle out.

Understood. Thanks a lot. I'll turn it over.

Thank you.

Thank you. Our next question is from the line of Adam Samuelson with Goldman Sachs. Please go ahead. Your line is open.

Yes, thank you. Good morning, everyone.

Morning Adam.

Good morning. Maybe just a starting point on, as we think about the guidance and think there was a new kind of qualifier this quarter around kind of the potential to be at the low end of the 10% to 15% long-term kind of range. And I guess help me. Is it just a volume question more in the back half of the uncertainty with some easier comps and the magnitude of bounce that drives kind of the introduction of that qualifier? Or is it further disruption in the U.S. beer? Or just help me think about the range of outcomes that drive potential versus actually achieving?

I would not describe it as a further decline in mass beer. It will remain consistent through the third quarter. From a volume perspective, what we expected at the beginning of the year compared to our current situation is weaker. There probably won't be any significant changes in the next 90 days. The positive aspect is that we're achieving everything we aimed for in terms of operational performance, including the PPI pass-through, some inflationary benefits, SG&A actions, and fixed cost savings, all of which give us confidence at the low end. We wouldn't be able to express our belief in that low end without our current operational performance. It involves mass beer, and we anticipate a change in volume in every region during the fourth quarter. We have discussed the CSD market, predicted the outlook for mass beer, and noted a peak season in South America due to an improved economic situation in Brazil. All these factors are expected, but mass beer in North America was not included in those expectations.

Got it. That's very helpful. As you start to consider 2024 in that context and work with customers, some market share shifts could create additional opportunities. Thinking about the mass beer channel in 2024, if it rebounds volumetrically, do you believe you would gain a larger share from that? Or could some of that potential growth return to one of the captive can makers associated with one of your major customers?

No, I don't believe the captive can makers will benefit. Obviously, they're going to prioritize in the short term their assets. One in particular that's having the marketing issue, we've come to an agreement that we've got a stable go-forward position where we understand what the bottom is. And so, we should see inflection off of that, if they're able to turn around. And then to your point, we are with everyone in the beer space. So we should see net benefits into 2024. I would characterize Q2 and Q3 as a bit of a trough for us right now. So relative to that, and then what happens in the mass beer space and clearly the economy writ large, there's reason for optimism for sure in 2024 and beyond.

Okay. All right. Now, that color is very helpful. I'll pass it on. Thanks.

Thank you.

Thank you. Our next question is from the line of Christopher Parkinson with Mizuho. Please go ahead. Your line is not open.

Great. Thank you so much. I want to circle back to the Brazilian market and everything going on. There's been some macro volatility debates about glass recycling, the relative cost of various packaging substrates. Obviously, the rebound is highlighted and the potential for the rebounds highlighted in your press release. Can you take a step back and just how should we be thinking about that, that evolution during the kind of the fourth quarter which you already highlighted and in the 2024 in terms of kind of like the normalized progression there, just because it seems like they're just a plethora of moving parts which we have to consider? Thank you.

Yes. In an inflationary and recessionary environment, which Brazil has faced over the past few years, we have observed a shift towards returnable glass during similar macroeconomic events in the past. This trend has continued since the second half of 2021. Much of this is related to the economics of packaging, including the price of aluminum and the hedging strategies employed by our customers. With the decline in the cost of aluminum and improved economic conditions, including decreasing inflation and interest rates, we expect to see can penetration in Brazil return to the mid to low 50% range. We are hopeful for improvements in can penetration in the third and fourth quarters, stabilizing by the first quarter of 2024. While we haven't focused extensively on 2024 yet, we anticipate that the economy will improve and the shift back from returnable glass to cans, which has historically been the preferred choice, will follow. Although it may be early in the year to see significant changes due to winter conditions, we expect positive trends heading into the third and fourth quarters, especially in the fourth quarter.

Of course, understood. And just a very quick follow-up on the North American market regarding your volume commentary there. There's been a lot of start and go on various promotional excitations this year and euphoria and then waning, euphoria and then coming back. How do we think about that in the mass beer market? I mean there's been some competitor commentary and optimism for CSD at least a little bit, but what are you actually seeing from your customer base and how is that actually flowing in to your outlook for the second half? Thank you.

We began the year with the expectation that we wouldn't see promotional activity, but promotional activity does not generate volume momentum. We thought volume momentum would come in Q4 when there are more challenging comps. We still anticipate that. We didn't build in much in terms of volume momentum happening in the first three quarters of the year. And even though you're right, there's increased activity on promotion. It hasn't been enough to move volume. There has been share shift from the major CSD players into private label over the last four weeks. That is usually a light bulb that goes off and folks behave differently as a result of that, but I'm encouraged that what we built into our plan heading into the year will manifest in the fourth quarter. I don't see any appreciable movement in the third quarter, because the promotion to your point is happening, but it's not manifesting in volume momentum yet.

Helpful color. Thank you.

Thank you.

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

Hey guys, good morning.

Hey, good morning Ghansham.

Good morning. Obviously a lot going on. If food is just going to step back and you know the first quarter beverage packaging North and Central America, you know volumes were down roughly 5% and then in 2Q down 8.5. Is that delta purely mass beer or is there anything else that perhaps was a little bit worse on a year-over-year basis?

You are correct in your assessment. The net impact on beer during the second quarter was notable. Trends were stable across the board, which relates to my earlier comments about the CSD sector. In terms of energy drinks, almost all categories are performing similarly year-over-year, with the exception of mass beer, which has seen a decline. Overall, there was a negative growth of 2.5 points in the first quarter and a net decrease of 4.5 points, and clearly, our mix contributed to this decline.

Okay. Thanks for clarifying that and then in terms of the curtailment that you're doing in terms of managing supply et cetera across multiple regions. What was that number for 2Q and how are you thinking about that for the back half of the year as well?

The curtailment in South America is exactly what we planned. I mean candidly it's negligible in terms of the curtailment that we planned in 2Q versus what actually happened. You could say the delta that you just confirmed and volume that was additional curtailment that we took in the second quarter. Apart from that we've got a little bit more curtailment that will manifest throughout the third quarter versus what we entered the year with because of the mass beer phenomenon. Apart from that everyone's in alignment with what we entered the year with and what we expected.

Got you. And then just one final one. You seem generally constructive on Europe on beverage packaging side based on what you've seen so far this year. Just judging by the commentary and just some of the macro news. It seems like the European consumer is just much weaker in terms of spending and trade-downs and so on and so forth. Has your view changed at all in terms of the outlook for Europe specifically as it relates to the beverage can or is it pretty much the same?

The long-term and medium-term outlook remains optimistic as there are numerous opportunities related to substrate shifts due to our current standing. However, the end consumer's situation has definitely weakened compared to the beginning of the year, driven by various factors. The transition from on-premise to off-premise has been beneficial, despite some trade-downs. Our more diversified portfolio, particularly in areas like energy and carbonated soft drinks, has been advantageous. While beer has performed softer across Europe, our portfolio has supported us. Overall, we see more opportunities than some other opinions might suggest. However, it's clear that the consumer market is softer in the second half of the year, yet we anticipate continued robust growth, and our business is performing exceptionally well.

Thanks so much.

Thank you. Our next question is from the line of Mike Roxland with Truist Security. Please go ahead your line is open.

Thank you, Scott and Dan, thanks for taking my questions.

You bet Mike.

I might as well jump on the mass beer right over here and ask the question just you know. How are you just thinking about your portfolio and your end market exposure going forward? I think so, you made the comment that you could see some shares shift later this year until 2024. So you could see mass beer improved and then your volumes are probably not possibly dead out but if there isn't that recovery in mass beer what happens to your volumes then. And so, I guess the question really is, one, let's assume that mass beer doesn't recover what happens to your volumes then. And two, are you actually considering trying to shift your production to other product categories? I made a comment in the press release that you said you're trying to align yourself with customers that are experiencing higher growth, so that means you're trying to really shift or minimize your exposure to mass beer relative to other categories that maybe have more potential on a go forward basis.

Yes Mike, let me, this is all North America related I'm assuming, so I'll start there. Let's just talk about the categories, because we're spending an awful lot of time on the domestic beer category, which is which is down and I believe we're at a trough so it will recover from this point and it's consistent with all of the customer commentary within that space. But domestic beer is down 4.5% last 12 weeks, which is a further versus 52 weeks down, nearly 3%. So there's an acceleration of the decline obviously because of the marketing issue, but import beer is up 11%, non-alcoholic beer is up 27%, cider is up 8%, S&B is up 15%, ready-to-drink cocktails are up 41%. As we've seen the evolution of our customers transition to beverage companies, because they're going to be forced to put stuff on the shelf that sells. We've only experienced this phenomenon here for the past 12 weeks and there's a lot that is going to be repositioned and given we participate with everyone in the market, we should win with whatever's going to win in the market. At what percentage? It's a great question. We don't know, but the trough that we're experiencing now in the second quarter the third quarter will improve we should benefit from that in the first half of 2024 I would expect continued benefit throughout that first half of the year. But there's a lot of questions, but I'm confident that these customers understand their world really well, and they know that they need to be putting stuff on the shelf that's going to sell and folks will find a home. Nothing's going to change candidly from that import beer number, the Hispanic population continues to grow. They already have all gut plans to lean into that to add more capacity. So there's an ability for those folks to accelerate. And obviously, we're very close to them. So I'm encouraged. From today moving forward I'm encouraged about what's going to show up in the first half of 2024 and beyond.

Got that. Thank you for the color. And then just one quick question I think you recently restarted production Avital and Venus, George. And so wondering, I think that plan was taken down due to the weak macro and also because you lost a customer contract. So wondering, do you need to bring them up and restart the plant because of your anticipation of better Brazil demand? Did you win new business? Just wondering why you've went up and restart. And I think that was done within the last month or so?

Yes. We're bringing it up for the other customers in that market that are winning and we anticipate that they will win further and take further share as a result of the one brewer who filed for bankruptcy at the tail end of Q1, that's one issue. But we're not bringing that hands up for the customer that we originally built it for.

Got it. Very clear. Good luck for second half.

Thanks very much.

Thank you. Our next question is from the line of Arun Viswanathan with RBC Capital Markets. Please go ahead. Your line is open.

Yes, thanks for taking my question. I guess I just wanted to ask a little bit more on two things. So first off, when you look into the back half of the year and in the next year, you do have relatively easier comps for next year, already down to mid-single digits on the volume side and high single digits for North America. So would that allow you to get back into the, say, that low single digit range for next year's volume growth? And are there any other capacity considerations we should consider when thinking about how your volumes evolve and maybe settle into that low single digit range?

Thanks for the question. As we sit here today, we haven't spent a whole lot of time on 2024, I think for both Europe and South America, given they're growing, we continue to believe that growth will persist. So the question mark will obviously be North America, but as I stated several times in this call, I think Q2 and Q3 we're at a trough. So we should see improved volumes over these periods. I believe that will be enough to push us into growth territory. So the aggregate position and the answer to your question is yes, I believe we will be in that low single digit growth for 2024. We've also stated several times that the capacity we've put in place over the last two to three years is enough to grow into at that range. And so, we should see nice lift in terms of profitability and performance without having to spend additional growth capital. We've spent the growth capital we need and I don't anticipate much in the beverage business over the next two years from a growth CapEx standpoint.

And so with that comp, I guess, when you think about free cash flow, I imagine it could be nicely up over the next couple of years from that $750 million base. Could you just touch on that opportunity as well as the capital that you plan to spend?

Yes, I can get better. No, you're exactly right. I mean, we're going to spend less capital. Just put up a $1.2 billion this year. Next year, we're expected to go down closer to GAAP depreciation. So all that freed up cash flow can go back to shareholders. So I think it gets better.

Thanks.

Thank you.

Thank you. Our next question is from the line of Phil Ng with Jeffries. Please go ahead your line is open.

Good morning. Thank you guys for taking the time and providing all the details. This is John on for Phil.

Hi, John.

Hey. I want to start just, I know it's kind of been beaten to death a little bit, but with the North American volumes down 8.5% in the quarter, obviously much worse than the overall market. I mean, you called out, obviously, that's vastly driven by the mass beer declines. But with the additional capacity that's now in the market over where demand is kind of falling to and supply chains obviously ease globally, have you been experiencing any customer shift or pressure on your contract at this point in time in the North America business?

No pressure on the contracts at this point. I think a good reflection of that commentary would be the fact that we're passing through the inflationary mechanisms. So, if you weren't seeing that come through, I think you could probably see that there's been some negotiation that's taken place. And that's not the case. The way I would look at volume, I think we're in a short-term dislocation for the second quarter and the third quarter because of mass beer. That correction relative to curtailments or decline shipments will revert in the second half of the year, but more meaningfully in the first half of 2024. The other thing that we've done is we've managed to inventory. So we built too much inventory last year. We've worked that off. So there's been an elevated level of curtailments relative to versus 2022. We'll be running much closer to scanner data in 2024 and Q4 likely to be a lot closer to scanner data. So those are the things that are well understood within the industry and with our customers. I think the theoretical excess capacity versus the reality versus the intentionality of running to cash, all of those things stabilized heading into 2024 in a, what I believe is a much tighter marketplace with growth underpinning every industry participant moving into 2024.

Understood. Thank you for the details. And then just touching on the, I think if I heard you correctly in the early part of the call, you said you were still exploring opportunities to accelerate the leveraging efforts. Could you maybe just talk a little bit more about what you were referring to? If that maybe meant some smaller divestitures or, other actions that you're taking for that do leveraging efforts?

No, we have what we were referring to as, you know, we've generated a lot of cash here in the back half of the year. We're sitting out a lot of cash. And so we have the flexibility to, you know, pay down whatever piece of the debt we want to pay down. And so that's really what that's about.

Okay. Understood. Thank you very much.

Thank you. Our next question is from the line of Gabe Hajde with Wells Fargo Securities. Please go ahead, your line is open.

Dan Scott, good morning.

Morning.

I appreciate that there's been a lot of ground cover here, but maybe just because we don't have access to the industry data anymore and a perfect, I guess, lens into what the market is. Can you parse out the maybe 8.5% decline in the second quarter and sort of, what's embedded in the second half. I mean, between share shift between the market being soft and then maybe the kind of what's going on with the beer disruption? And then another volume-related question in Europe. I think volume decelerated in the second quarter. I'm curious if that's a function of not having the capacity that you need. You talked about obviously the UK and the Czech facility ramping up. So, I'm just curious if that's what's driving your optimism for the second half to recover. You talked about your largest energy customer maybe being a little bit weak based on sell-through in North America. They're a pretty big customer over in Europe. Is that part of what's driving the optimism or just help me understand because I'm assuming the business in Europe is sort of contracted.

Yes, maybe let me start with Europe. Everything is coming in line with what we anticipated heading into the year. Inclusive of the large energy player. The one area that's softer is beer. I think that's related to the macro environment there. So the higher single digits that we anticipated having the year are going to be closer to mid single digits, but still nice growth. And it's not a function of bringing on the capacity. The capacity that's being brought on is in the growth areas. It's going to be the capacity that's a little less utilized in the beer space. That's what's happening in Europe. Relative to North America, we had a decline, as you mentioned, of roughly 5% in the first quarter. We are in that eight and a half range for decline in the second. We will see declines in the third with a return to some volume momentum in the fourth. What happens in the mass beer space will be the indicator of is it growth? Is it flat? But that's fundamentally, it is the mass beer impact and it is the fact that we're overweight in the beer space and overweight to one customer within that space. So that's the delta.

Okay. Maybe I didn't ask the question explicitly. Do you have any sense for what the market was down in North America? And then last one, if I can flip it in. I think there was $20 million of year-over-year improvement embedded in for the Cup's business, I think there was some basketball championship, that was a good thing for that product. Can you talk about sort of how that business is evolving and maybe expectations going into 2024?

Yes, I think the overall marketplace in North America down slightly, 1%. And so the delta between that and our customer mix is really the delta there. And then on the Cup side, we're seeing incremental improvements. I think an LA Boston Series versus a Denver Miami Series would have helped the cup a little better, believe it or not, but making good ground and good traction in the food service space, things are breaking our way in terms of the regulatory environment as well on that product with Hawaii and now the mid-Atlantic's either banning or contemplating banning single-use plastic cups. So we're looking for trajectory over the second half of the year. I would not say that we will make a $20 million improvement in that business year-over-year, but we will continue to improve against it more in the $10 million range.

Thank you, Dan.

Thank you.

Thank you. And at this moment, I'm seeing no further questions on the phone lines.

All right. Thank you very much. We will look forward to talking to you again in the third quarter. Everybody enjoy the rest of your summer.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.