Ball Corp. plans to permanently close can manufacturing facilities in Phoenix, Arizona, and St. Paul, Minnesota, and delay construction of a new plant in North Las Vegas, Nevada, the Westminster, Colorado-headquartered company announced today during its second quarter financial results.
Ball, the world’s largest manufacturer of can packaging, said the plans to cease operations at the two facilities and delay building a third were “in response to the deceleration in customer demand late in the second quarter” and “to address localized supply-demand imbalances.”
The company did not indicate how many employees would be affected by the closures. MPR News reported that 110 workers would be affected at the St. Paul facility, which Ball acquired in 2016 from Rexam.
“We announced those closures late last night and so it’s very raw, very sensitive right now for a number of our employees,” Ball president and CEO Daniel Fisher said during a call with Wall Street analysts.
According to Fisher, the two landlocked, three-line facilities were built in the late 1960s and mid-1970s and had a net capacity of about 4 billion units.
Ball CFO Scott Morrison declined to discuss the fixed costs of the Phoenix and St. Paul facilities, but said when Ball closed similarly sized two-to-three line facilities in the past “about roughly $30 million of fixed costs for each facility” came out of the closures.
Morrison indicated that one of the facilities will likely close in the back half of 2022, while the other would close “early next year.”
Ball operates 15 other can manufacturing and can end production plants in the U.S., according to its website. The move to shutter two facilities follows actions taken by the company to rightsize its customer base by increasing the order quantity for printed cans to 1 million per SKU.
Meanwhile, Fisher assured analysts that the North Las Vegas project “absolutely going to happen,” although the timetable has been pushed six-to-nine months.
“We can engineer, we can put the lines in, the phasing impediment right now would just be the speed with which you could hire the labor,” he explained.
Ball leaders seemed to put the decision to close the plants at the feet of its customers, who they said have taken price increases over the last year in excess of inflationary cost pressures. Fisher said the pricing behavior of its customers has occurred each quarter over the last four quarters, with its customers raising prices by 7% on average.
“So you’re getting to a point now where year over year, you’re looking at 20%, almost 30% price increases in some of these products,” Fisher said. “That absolutely has an impact on discretionary and consumer buying. And we’re looking at that and we’re making adjustments, we’re optimizing our footprint. This is a near-term balance for us.”
Fisher highlighted that total alcohol was down -3% in the second quarter, “mostly driven by domestic beer.” Non-alcoholic beverages were “a bit more resilient,” he said, with carbonated soft drinks and energy drinks growing and total non-alc beverages up +1%.
Morrison said Ball was “building inventories for what we thought would be a more robust season here in North America that didn’t show up.”
Fisher added that if Ball’s customers “moderate back to less price tag and more interest in volume, all of these numbers will be improved.”
Ball’s customers’ price increases were a recurring theme throughout Thursday’s investor call.
“This is 100% our customers are putting up price, and in advance of inflation, and their volume is zero, and we are impacted by the zero volume growth,” Fisher said.
Fisher, in his prepared remarks, stressed that “cans continue to win in the fastest growing beverage categories and underlying demand for aluminum packaging continues to be resilient, despite retail shelf price increases by our customers ranging as high as 20%.”
“Early indications are that North American customers will continue to emphasize price over volume during the second half of 2022,” he added.
Fisher called on Ball’s customers “to return to a semblance of pricing strategy, which they’ve implied and implored over decades,” instead of “pushing forth price in excess of inflationary costs” and “margining on that.”
“If there’s a modicum of return to a different pricing strategy, we will benefit from that in terms of an uptick in volume in North America,” he added.
Although Ball has more visibility into the North American market than in the past, Fisher stressed that the company does not “have access to pricing strategies by our customers.”
“What you used to see as if they raised the price 2%, their volumes would decline 1% or 2%,” Morrison added. “And for a period of time, that hasn’t happened. But I think we’re going to start to see that in their volumes.”
Fisher offered that Ball’s customers who are “simply passing through inflationary costs, and not margining up,” are “growing significantly.”
“And so it’s usually resilient,” Fisher said of the North American can beverage market. “What’s decoupled right now is customers putting up significant price over and above inflationary cost pressures and margining up, so that’s going to have a volumetric impact. That’s not recession. That is a pricing strategy. So I just refer back to customers that have taken a middle of the road pricing approach and just pass through cost, they’re growing right and we’re growing with them.”
Decisions by Ball’s customers to increase price has led the company to back away from double-digit growth projections in North America, Fisher added. In spite of “economic challenges” this year, he said Ball globally would deliver 5% growth in 2022. Fisher described the North American can beverage market as “volatile times” as the company attempts to “anticipate customer pricing.” Stil, Ball’s North America business is tracking flat to slightly up through July, Fisher said.
Asked about the North American can market which had been sold out, Fisher said “a confluence of events” are happening and in the near term, “there could be slack capacity for the near term” due to Ball ramping up “large asset bases” in Pittston, Pennsylvania, and Glendale, Arizona, and investments in canning lines that have increased efficiency.
“In the next six-to-nine months, I think there’s a wait-to-see exactly the dynamics relative to supply-demand,” Fisher said.
The Numbers
Worldwide beverage can shipments from Ball increased +3.3% during Q2.
Overall, the company reported a net loss in Q2 of $174 million on sales of $4.13 billion, compared to $202 million in net earnings, on sales of $3.45 billion at the same time in 2021.
At the halfway point of 2022, Ball reported net earnings of $272 million on sales of $7.85 billion, compared to $402 million in revenue on sales of $6.58 billion at the same time in 2021.
In Ball’s North and Central America regions, Q2 earnings were $164 million on sales of $1.78 billion, compared to $193 million on sales of $1.52 billion during Q2 2021.
Through the first six months of 2022, Ball reported $338 million in earnings on $3.38 billion in sales, up from $333 million on sales of $2.82 billion during the first half of 2021.
Ball Records $435 Million Impairment Charge on Russian Business
Due to Russia’s invasion of Ukraine and Ball’s suspension of investments in its Russian business unit, the company announced it has recorded a $435 million non-cash, long-lived impairment charge on its business in the country.
Ball is seeking a sale of its aluminum packaging business in Russia, which represented about 4% of the company’s total net sales and 8% of its operating earnings in 2021.
Ball’s plants in Russia accounted for about 5% of the company’s 112.5 billion global beverage can unit shipments in 2021.