Ball (BALL) Q2 2023: North America Volumes Drop 8.5% as Mass Beer Disruption Drives Segment Divergence

August 3, 2023 | By EarningsIQ Research

North American beverage packaging volumes fell sharply as mass beer demand disruption weighed on results, while EMEA and South America showed relative resilience. Ball’s cost discipline and inflation recovery offset some headwinds, positioning the company for a stronger second half. Strategic review of aerospace and a focus on deleveraging signal a shifting capital allocation stance for 2024 and beyond.

Summary

• Mass Beer Volatility: North American beverage can volumes declined steeply due to a major beer brand’s demand shock.
• Cost Control Focus: Working capital and SG&A discipline helped offset volume and interest expense headwinds.
• Strategic Asset Review: Aerospace business under strategic review, highlighting Ball’s evolving capital priorities.

Business Overview

Ball Corporation is a global leader in sustainable aluminum packaging, primarily producing beverage cans, bottles, and cups for the beverage, food, and personal care industries. Its core segments are Beverage Packaging North and Central America, Beverage Packaging South America, Beverage Packaging EMEA (Europe, Middle East, Africa), and Ball Aerospace, which provides advanced technologies and solutions for environmental and national security markets. The company generates revenue by manufacturing and selling aluminum packaging and, to a lesser extent, aerospace systems.

Performance Analysis

Q2 2023 results reflect a challenging landscape, with consolidated sales down year-over-year, primarily due to the divestiture of Russian operations, lower global beverage can volumes, and currency translation. North American beverage packaging volumes dropped 8.5%, driven by a significant demand disruption at a major domestic beer customer. This segment’s performance was further pressured by elevated interest expenses and the ongoing headwind from the Russian business sale.

EMEA and South America segments showed more stability, with EMEA volumes up mid-single digits (excluding Russia) and South America expected to rebound in the second half as Brazil’s economy recovers. Cost actions, inflation recovery mechanisms, and inventory management were critical operational levers, supporting margin resilience despite the volume drag. Free cash flow generation improved, and Ball reiterated its $750 million 2023 free cash flow target, emphasizing deleveraging over share repurchases in the near term.

• North America Volume Impact: The steep decline was almost entirely attributable to mass beer, while other categories remained stable or grew.
• EMEA Growth Offsets: EMEA volumes grew mid-single digits, benefiting from new plant capacity and customer mix, partially offsetting headwinds.
• Cash and CapEx Discipline: Cash flow improved in Q2 due to lower inventory and disciplined CapEx, with 2023 spending focused on prior commitments.

Ball’s operational agility and cost management allowed it to navigate a turbulent quarter, but the company remains exposed to category-specific volatility and macroeconomic uncertainties in key regions.

Executive Commentary

Strategic Positioning

1. North America Portfolio Rebalancing

Ball is actively managing a significant channel disruption in mass beer, which drove most of the segment’s volume decline. The company is leveraging its exposure to a broader beverage mix—import beer, energy, and ready-to-drink cocktails—to offset the drag from domestic beer. Management expects the trough in Q2/Q3 to give way to improvement as shelf resets and customer mix stabilize into 2024.

2. EMEA and South America Growth Engines

EMEA continues to benefit from new plant capacity and substrate shifts to cans, with mid-single digit volume growth expected, even as beer remains soft. South America, particularly Brazil, is set for a volume inflection as economic conditions improve and can penetration rebounds from a recession-induced shift to glass.

3. Aerospace Business Under Review

Ball’s aerospace division is being evaluated for potential strategic alternatives, reflecting its maturation into a stand-alone asset. The segment’s $1 billion increase in backlog underscores its value and the company’s willingness to reallocate capital toward core packaging or deleveraging.

4. Cost and Cash Flow Discipline

SG&A and working capital reductions, along with inflation recovery mechanisms, have been critical to maintaining earnings power and liquidity. Management is prioritizing debt reduction before resuming share repurchases, signaling a conservative capital allocation posture in the near term.

5. Innovation and Regulatory Tailwinds

Ball’s aluminum cup and aerosol businesses are gaining traction, supported by regulatory shifts away from single-use plastics. These categories offer incremental growth and margin opportunity as the company leverages sustainability trends.

Key Considerations

This quarter highlights Ball’s exposure to category concentration risk in North America, but also underscores its operational flexibility and global diversification.

Key Considerations:

• Category Exposure Volatility: Heavy weighting to mass beer in North America creates earnings swings during demand shocks.
• Inflation Recovery Levers: Contractual inflation pass-throughs are now contributing to margin recovery and will accelerate in H2.
• Strategic Asset Flexibility: Aerospace review could unlock capital for core packaging growth or further deleveraging.
• Inventory and CapEx Discipline: Improved inventory management and a step-down in 2024 CapEx will free up cash for debt reduction and future shareholder returns.

Risks

Ball faces ongoing risks from concentrated customer exposure, particularly in mass beer, and macroeconomic volatility in South America and Europe. Any further demand shocks or prolonged weakness in core categories could pressure volumes and margins, while currency and interest rate shifts remain external risks. The outcome of the aerospace review introduces strategic uncertainty and potential execution risk if a divestiture occurs.

Forward Outlook

For Q3 2023, Ball guided to:

• Accelerating North America segment earnings as inflation recovery mechanisms take effect
• EMEA earnings improvement as Russian headwinds subside and new capacity ramps

For full-year 2023, management maintained guidance:

• Approximately $750 million of free cash flow, prioritizing deleveraging
• Flat global volume growth (excluding Russia), with North America down low single digits, South America up mid-single digits, and EMEA up mid-single digits

Management highlighted several factors that will shape H2 results:

• Mass beer headwinds will persist through Q3, with improvement expected in Q4
• Brazilian economic recovery and can penetration rebound are key drivers for South America’s second half

Takeaways

Ball’s Q2 underscores the importance of portfolio diversification, disciplined cost management, and strategic flexibility in a volatile demand environment.

• Volume Disruption: North America’s steep volume decline was almost entirely attributable to mass beer, but other beverage categories and regions remain resilient and provide ballast.
• Operational Resilience: Inflation recovery, cost actions, and working capital discipline helped offset volume headwinds, supporting free cash flow and liquidity.
• Strategic Optionality: The aerospace review and focus on deleveraging signal a more flexible, value-oriented capital allocation approach that could reshape Ball’s portfolio in 2024.

Conclusion

Ball delivered a mixed Q2, with North American beer disruption offset by global cost actions and emerging growth in EMEA and South America. Strategic asset review and cash discipline position the company for a recovery cycle and potential portfolio transformation in 2024.

Industry Read-Through

The sharp divergence between mass beer and other beverage categories highlights the risk of category concentration for packaging suppliers, as consumer preferences and brand disruptions can drive outsized volume swings. Ball’s experience suggests that diversified exposure across regions and beverage types, as well as contractual inflation pass-throughs, are increasingly critical for margin stability. Ongoing regulatory shifts away from plastic and toward aluminum packaging are creating tailwinds for both legacy and emerging products, a trend likely to benefit the broader sustainable packaging sector. Industry participants should monitor Ball’s aerospace review as a signal for capital reallocation trends among diversified industrials.

BALL Materials Packaging Deleveraging Volume Aerospace Inflation North America