Greetings and welcome to the Ball Corporation 3Q 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, November 3, 2022. It is now my pleasure to turn the conference over to Dan Fisher, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone. This is Ball Corporation's conference call regarding the company's third quarter 2022 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company's latest 10-K, and in other company SEC filings as well as company news releases. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the Notes section of today's earnings release. 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 provide some brief business performance commentary. Scott will discuss key financial metrics, and then we will finish up with closing comments and Q&A. Let me begin by thanking those of you who attended our Biennial Investor Field Trip in late September. It was great spending time with many of you in-person. We sincerely appreciate you taking time to meet our team to listen to Ball's unwavering strategy for our agile aluminum packaging portfolio and our aerospace technology security, science and sustainability solutions; to learn from our continued transparency on macroeconomic dynamics, impacting our industry; and to engage with us on the actions we have taken…

Thanks, Dan. Year-to-date 2022 comparable diluted earnings per share were $2.34 versus $2.52 in 2021, and third quarter comparable diluted earnings per share were $0.75 versus $0.94 in 2021. Year-to-date and third quarter sales were up due to the pass-through of higher aluminum prices, higher volumes with improved price mix and higher aerospace performance, partially offset by currency translation and inflation in Europe. Comparable year-to-date and third quarter diluted earnings per share reflects strong results in North America and aerospace, and a lower share count, offset by higher interest expense, higher comparable effective tax rate, comparable operating earnings declines in EMEA attributable to the sale of our Russian business, cost inflation and unfavorable earnings translation and lower comparable operating earnings in South America continued to be driven by regional customer mix. I'd like to take the opportunity to proactively address working capital and why cash flow will be better next year. 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. And while we are protected for metal price changes in our P&L due to our effective inventory hedging program, it does impact the cash flow and the amount of metal payables. Earlier this year when we saw the vibes 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, no P&L impact due to Ball's effective inventory hedging. The net result is less billed in the accounts payable than originally planned. The end result will be a use of around $800 million in working capital for full year 2022. This will normalize next year as both metal prices and our…

Thanks, Scott. I appreciate your help as always. And my best Scott Morrison impersonation minus the expletives, the world is in a really challenged state, but we're not geopolitical unrest rapidly changing business conditions and unprecedented macroeconomic trends are unsettling. Here is what I know. During 2022 and since assuming the role of CEO, we have endeavored to be transparent and decisive. In doing so, it has led to an uncomfortable, yet necessary set of actions, which have impacted colleagues and communities. Yes, 2022 has been an unprecedented time and at Ball we are going forward with what we know, our Drive for 10 strategy and EVA discipline. In addition, our well capitalized footprint is serving resilient demand for our products and technologies. We will benefit from contractual pass through of inflationary costs, the cost out actions already implemented or nearing completion, a more conservative short term view of volume growth, the focus on cash, and we have the best team to navigate, change, unlock value and beyond 2022, achieve our long-term diluted earnings per share growth goal of 10% to 15%, inclusive of the divested Russian operating earnings headwind. Thank you to everyone listening today and with that we're ready for questions.

Thank you. [Operator Instructions] The first question comes from George Staphos, Bank of America. Please go ahead.

Thank you very much. Hi everyone. Good morning. Thanks for all the details and for taking my questions. I guess you've given us some of the outlook for fourth quarter Scott, and we appreciate that. Trying to adjust for Russia in Europe, should we expect more or less the same type of year-on-year trajectory across the other segments? How should we consider whatever sort of inventory reduction you may need to see? And how that'll hit the segments, we would guess it'd be North American in particular. If you had a couple of quick thoughts there. And then I a couple of followings after that.

Yes, I think most of the inventory, kind of the absorption hit will take on will be in North America as we adjust inventories down. Through nine months we saw North American can shipments increase just under 2%, kind of full year, we think it's going to be flattish. In Europe, Russia will be the big drag taking out roughly $30 million of earnings; inflation is a bit higher in Europe than – we'll see a comparable inflation impact in fourth quarter as we did in third quarter, which is about $10 million. And we've got some start-up costs too as we ramp up Kettering and the Czech Republic. So that will be a bit of a drag. When we look at – aerospace had an incredible fourth quarter last year that won't repeat. It would be more normalized this year. And then in South America we're not quite seeing the bump from World Cup that we had expected. And so I think they will finish the year. We thought we could get back to even, and that probably won't be the case when we look at South American volumes.

Thanks for that Scott. Second question I had for you is, is there any update on the net commercial and price cost outlook that you initially relate to us at the Analyst Day as you look to 2023? Has anything moved of significance that you would want to relay as we're again trying to build and bridge to 2023 off the 2022 base that you've given us?

Sure. I think we're having the most progress in Europe for 2023. The team has done a remarkable job, they have been doing that since the outset of the year. Obviously inflation has continued to go up, George.

Yes.

But we continue to go back and continue to work those. So I think we're in a really good spot to not only benefit from our contractual pass through that's already built in to our contracts that have the most meaningful impact obviously in Europe, western Europe, and in North America. And on an ongoing basis, I think, you are hearing this from other participants in the industry if there are things that are extraordinary in the contract, especially from a supply chain standpoint, those are going to have to be passed through immediately. And so that's the stance we will be taking moving forward. We're not going to continue to chase inflation of an extraordinary nature, specifically Europe energy prices.

Okay. So maybe Dan, I recognize it's tough to say on a live mic, but should we assume those pluses and minuses are kind of balancing and therefore the outlook you gave us remains the outlook into 2023 on that front?

Yes, I think, that's exactly right, George.

Okay.

I think as we sit here today, and Scott will give more context to this, we're steering based on the baseline we just gave you on 2022 to the high end of our 10% to 15% for next year as we sit here today.

Okay. Thanks for that. And then my last one, you talk about a near term more conservative view on growth. And looking back over the last four or five quarters and as you are hearing from your customers going forward, what are they saying about their volume expectations into 2023 and maybe a little bit past that? And what are they saying in terms of cans relative to some of the new growth initiatives that are out there, whether it's non alcoholics or ready to drink? And then in turn, how are you, for lack of a better term, haircutting that commentary in terms of your growth outlook, not just near-term, not just fourth quarter, but playing with real capital dollars over the next two, three years? Thank you, guys, and good luck in the quarter.

Thanks. Yes.

Yes. Thanks, George. I think it’s a good news, bad news story for North America. I mean the reality is what we’re seeing, and I’ll give you the most recent data that we have, kind of the prior 12 weeks. Total consumption is down – total literage consumption is down in the U.S. The good news is that when we look at that relative to the can, the can is significantly stronger than tetra glass and plastic combined. So our declines are muted compared to what everyone else is experiencing in terms of substrate mix. The areas that continue to grow, it’s probably easier to talk about what’s still growing, and we have nice exposure to those areas. Our energy is continuing to grow in the prior 12 weeks. Import beer continues to grow, cider, F&Bs continue to grow, and craft beer is flat. Everything else is a modicum of decline. And if I were to bracket the two big buckets right now, this is just can volume. Non-alcoholic, down about 1%; and total alcohol, down a couple percent. You can double and triple those declines for the other packages and substrate mix. So feeling really bullish about the circularity story for the long-term. But inflation is clearly hitting the end consumer right now. And that is absolutely in our thinking. And Scott, maybe you want to talk just at a high level in terms of 2023 and some of the higher-level assumptions you have. But the one thing I will say that gives me room for optimism is we are a recession-proof business, a resistant business. What we’ve been experiencing is inflation. As we transition into the recession piece, there’s a very good likelihood that the can starts to get promoted. And I think with higher credit card, interest rate increases on folks that have interest-only mortgages, that will – and that’s what we’ve heard from our customers. They said, at some point, the can will get promoted. But as long as the elasticity curve remained somewhat strong with the price increases, that’s what we’ve experienced to date. And I think we’re kind of on the precipice here, George. We’re not counting on upside, but we’re right on the precipice of seeing a decline, and that decline manifesting potentially in a better outlook for cans.

Yes. I would just add, George, I have a real sense of optimism as we move forward from where we’re at right now. Last quarter, you probably could hear the challenges and the tough actions we needed to take in my voice. Well, we’ve done all those. We’ve taken the actions on plant closures. We’ve produced SG&A meaningfully. We’re scrutinizing all of our investments to a greater degree as we move forward. And all of these actions will help us ensure that we have improved results in 2023 in a more – off a more modest base of growth that we’re expecting. So we see nice improvement across all of our business units moving into next year. The contractual pass-throughs on inflation will help, and the cost-out actions will definitely help. So as we sit here today, I feel really good about us moving into 2023.

Thank you very much, guys. Good luck.

Thank you.

Thank you. The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Yes. Thank you. Good morning, everyone.

Good morning.

So want to continue on the discussion on North America and demand. And you just gave some comments on promotions, and that’s obviously being important into 2023. I guess given the capacity actions that you’ve taken, but also maybe the capacity utilization that you didn’t fully take advantage of earlier in the year in your own system. Just to clarify, do you – can Ball North America can shipments be up in 2023 from where you sit today?

Oh, yes. Yes, we have ample dry powder. Keep in mind, the big investments that we’ve made, we’re still on the journey of increasing the efficiency curve and the start-up range. And so yes, we can grow mid-single digits here for the next couple of years in North America without any additional investments.

We’re just building a plan that’s more conservative, and we’ll have the ability to toggle up if our customers need that demand.

Just are you actually planning to be your shipments to be up mid-single digits next year? Or that’s what you have the capability for? I just want to clarify that point.

No. That’s what we have the capability for. We’re planning for flattish to slight growth.

Got it. Okay. That’s really helpful. And then I guess as a follow-up in Europe. Obviously, there’s a lot of noise in the accounting with Russia, but we stripped that out. Where do you think you are today on price discussions with customers and recouping some of the energy and other inflation that you’ve been absorbing and kind of visibility that, that can maybe potentially flip to a tailwind at some point in 2023?

Yes. Well, on energy specifically, we’re in a pretty good spot. We’ve got 95% of the energy that we can hedge has been hedged. So while energy will go up next year, we feel like we’re in a pretty good position to control how much it goes up, and we’re having active dialogue with our customers on that front of them absorbing those costs because we’re not going to absorb them.

Okay. Great. That’s all. Really helpful. I’ll pass it on. Thanks.

Thank you. The next question comes from Ghansham Panjabi of Baird. Please go ahead.

Hey guys, good morning.

Good morning.

Good morning. I guess, first off, on your comments on metal sourcing in 2021. For 2022, obviously, prices have changed between then and now. Did you secure that additional metal specifically for customers based on contracts? Because I’m trying to understand why customers would pay you yesterday’s prices in context of lower prices today for metal.

No. We hedge – so we hedge our inventory, Ghansham. So we don’t take P&L hit. So we bring in inventory with an expectation of when it gets sold, and we hedge that price risk. So it’s not – that’s why it’s not showing up in our P&L. It’s just really a cash flow hit.

Got it. And you said, just to clarify, $800 million hit in terms of working capital year-over-year for 2022? And then if so, what is the base-case expectation for free cash flow this year? And what kind of reversal could we see next year on working capital?

No. Well, I mean, if you take $800 million use of working capital and the CapEx we’re spending, we’ll have – it will be – we’ll have negative free cash flow of over $1 billion. Next year, we expect the working capital element to be greatly reduced. And we expect – that what’s where I was talking, we’re going to reduce our CapEx. We have reduced incentive comp payments that go out next year. We have – we don’t need to fund our pension plans. Our pensions are in really good shape. So there’s a bunch of other elements of cash flow that we’ll be able to generate next year versus what we experienced this year. And we’ll have more earnings.

Yes. Good point. Thank you.

Thank you. The next question comes from Mike Leithead of Barclays. Please go ahead.

Great. Thanks. Appreciate it. First question, I just wanted to ask about Europe or EMEA. Obviously, you guys are still posting pretty strong growth there. Relatedly, I would think the inflation pain there for the consumer is much worse just given where the economy is. So can you maybe just talk through kind of what you’re seeing there, and maybe some of the resilience relative to the inflation paying that?

Yes. One of the things that we’ve seen, I commented earlier in the call, but we have seen a shift from on-prem to off-prem, which has benefited the can. So they’re – the end consumer is – absolutely, their energy bills and their homes, right, are impacting their discretionary spend. And they are already making choices. The areas of strength continue to be beer and continue to be energy drinks, which we have a really nice portfolio there. So we may be benefiting a little bit from mix. But the end consumer has been quite resilient to this point. We are seeing the beginnings of shifts, but those shifts are manifesting in more resiliency and more of a shift toward the can. Obviously, I think the anecdotes I can bring you from Europe are folks aren’t as concerned about this winter as they are about next winter with the natural gas reserves. We’ll see how that manifests in terms of additional inflationary pressure moving forward.

Great. Thank you. And then just briefly, Scott, I just wanted to clarify on your cash flow answer to Ghansham just now. I know it’s hard to – who knows where metal prices will be next year. But just as we sit here today, this year, we’re going to have an $800 million hit to cash from working capital. Should working capital be a source of cash? And roughly, how much do you think you could get back next year, as all else equal?

Well, we actually – if you go back to 2021, we had a big source. So it started in 2021, and we got the benefit of bringing in more metal and the metal payables being higher in 2021. So we saw that benefit in 2021. We’re giving that back essentially in 2022. So that’s why, I think next year, we’re not going to build a plan based upon that much volume growth. So we won’t – our metal shipments will be more measurable, if you will, more controllable. And so we don’t expect this kind of swing from a working capital standpoint. We see it much more balanced…

Fair enough. Got it. Thank you.

Thank you. The next question comes from Christopher Parkinson of Mizuho. Please go ahead.

Hello. Thank you for taking the question. Just to circle back on your – the plan – the initial planning for 2023, you just hit on Europe and hit on some comments in North America. What about just Latin America just given, obviously, some of the headwinds that were incurred during the first half of the year, the World Cup being in the fourth quarter, a normalized Carnival and some like a more customer-specific issues? So if you could just hit on that – the region holistically, it would be very helpful. Thank you.

Sure. I think, as Scott already indicated, if you’re thinking about sort of high-level volume assumptions as we sit here today, we’re thinking flattish in North and Central America. We think we’ll be in that kind of 4% to 6% range in both South America and in Europe. South America, keep in mind that we walked from a major customer in the beginning of 2021. And so our comps begin to be much easier, if you will, relative to that dislocation in – excuse me, in 2022, they become – we lapse that in Q1 of 2023. So a like-for-like business, we should be growing in that 4% to 6%. And we don’t anticipate any more customer dislocations heading into that – the year. Brazil beer consumption has continued to get better throughout the year. The can is continuing to win. And I think what you’ll see is a much more stable South America region in general, with the exception of Argentina is always a wildcard. So we expect a modicum of growth everywhere inclusive of Brazil heading into next year.

Got it. And just given all the noise and the kind of the puts and takes on some of the various substrates and demand categories, could you just comment on your overall wins in terms of aluminum cans for new launches? I mean, is that still relatively in line with what you’ve been discussing over the last few analyst days? Just – and specifically, if you could hit it on plastic and containerboard, that would be quite helpful. Thank you.

Yes. So a real quick trip around the world. The can is – we have – we’re underpenetrated in Europe, the lowest substrate penetration of the three big regions with the most regulation mounting in Central and Western Europe here heading into 2025 with some producer responsibility bills. The most pent-up demand in terms of new can filling lines is in Europe because of those regulations and because of the steer toward aluminum. In South America, we’re still winning. Ex-Brazil, there’s still a huge shift from returnable glass into aluminum, and aluminum continues to win. And in North America, the new product introductions are still coming out in cans. The thing that’s muting that, as I said earlier in the call, is overall consumption is down. And so that’s really the biggest issue relative to – there’s nothing that’s changed in our circularity story or the fundamentals underlying our belief in the medium to long-term. But the inflation has caught up to the end consumer, and we’re seeing less consumption across the board in North America.

Thank you very much.

Thank you.

Thank you. The next question comes from Mike Roxland of Truist. Please go ahead.

Thank, Dan, Scott and appreciate the questions. Just – first off, just you mentioned, Dan, that shipments grew 2.5% in North and Central America. Is there any way to parse that between the two regions? And really, what I’m – yes. So between – like what did North America grow in 3Q versus Central America? And the reason I’m asking is because you just bear in your commentary, you mentioned slower beer demand. I think some of your peers have called that out as well. And some of the beer companies themselves in their earnings calls have noted volume weakness given consumer inflation. So given that beer is a pretty important end market for you in North America, just trying to figure out what North America did standalone versus the combined North and Central America?

Yes. I think overall, similar level of resiliency in both. The things that were advantaged for us are probably our energy mix in our portfolio, which is stronger; our import beer mix in our portfolio, which is probably stronger. So those are the two things that have given us some underpinnings. And our strategic partners in both the non-alcohol space and the alcohol space are winning. So those three things have given us probably a modicum of growth that’s in line or a little ahead of what the industry has. Not a great deal of difference between North America and Mexico, Central America.

Got it. Okay. Perfect. Thank you. And then just wanted to get your perspective on what you think it’s going to take ultimately for the industry to have better volumes. Is it matter – is it just a matter of the fillers and beverage companies realizing they need to drive increased throughput, as you mentioned earlier? Is it a matter of just ultimately seeing payer inflation that should drive better – hopefully, drive better consumer spending? What do you think ultimately gets you over the hump despite seeing those better volumes?

Yes. It’s a great question. Again, when I look at the substrate mix, the can is winning, the problem is overall literage is declining. So there is clearly pressure on the end consumer relative to inflation, credit card debt, raising interest rates. There has to be some level of stability in the economy. And then I think we transition back to what we saw prior to the heightened inflation pressures. It is true that when we’ve entered recessions historically, the can has been promoted because there has been a shift from on-prem into more off-prem. And we haven’t seen that yet. So I think there’s been a lot of pent-up enthusiasm because we haven’t been able to go out over the last couple of years that people are spending their money, and they’re in the on-premise channel. That feels as if it’s beginning to shift and the most recent data here in the one and the four-week data. That will help the can, but fundamentally, I think a return to a normalized inflation and interest rate environment provides consumer confidence, and then the can wins on the circularity notes.

I think also the thing that will help is aluminum is off almost $2,000 from its high. And so while all the – while most input costs for our customers are going up, the reality is the actual aluminum has gone down. And so that gives them the ability – they took a lot of price this past year, and that gives them the ability to do a little more price promotion and not give up margin because aluminum has come down so much. So, I think that’s a positive.

Got it. No, thank you. That’s very helpful. Good luck for the balance of the year.

Thank you.

Thank you. The next question comes from Phil Ng of Jefferies. Please go ahead.

Hey guys. Scott, at your Investor Day, I think you called out about $200 million of net pricing benefit, which accounts for inflation from some of the PPI escalators. Is that still a good way to think about it just because inflation is obviously pretty dynamic here? And I think, Dan, you mentioned how you’re making pretty good progress on renegotiating pricing and trying to recoup some of the inflation you’re seeing in Europe. Any color on how much of an uplift that could be next year?

Well, I think on the PPI faster, I think it’s going to be greater than $200 million across all the different segments, because inflation has run pretty hot this year. We’re starting to see input inflation moderate, which would be helpful. So, we should get a lift on the pass-through to kind of catch up some of the pain we’ve had to feel. This year, it’s been mostly in Europe with energy and inflation. Last year, it was North America. So, I think we feel pretty good about those contracts work. We did get the price pass-through in North America and in Europe that we expected this year. The problem is we offset in Europe by currency and by more inflation. We’ll get a lot of that inflation back next year.

The $200 million, Phil – the $200 million is really not mutually exclusive to the ongoing conversations we’re having with our customers. Those ongoing conversations, I’d look at it this way. If we continue to see surprises in terms of increased inflation, especially in energy with surcharges coming from our supply base, those will be passed through directly. And we weren’t behaving in that manner here over the last 18 months to 24 months. So, what I envision is the number that Scott gave you, we’re able to hold to that number next year as opposed to seeing it potentially being eroded like it was this year.

Okay. But the right way to think about it, Dan, would be the $200 million plus, any incremental good work you’re doing on renegotiating stuff in Europe, right? So – and that accounts for the inflation you’re seeing today, correct?

Yes. I would say the ongoing work with customer contracts enables us to see the $200 million flow-through, not have it be muted like it was this year.

Okay. $200 million is still a good way to think about it. That’s great. And then throughout the supply chain, there’s obviously been pretty meaningful destocking. And some of your peers have called that out. They saw a big drop-off in September. So from what you can tell based on order trends into October, November, your customer base, do you have a sense that, Dan, if that’s largely flushed out at this point? And then, Scott, I think you were calling about – calling out potentially curtailing production in the fourth quarter to kind of flush out your inventory. Should we assume that it’s going to be largely behind you? Or there’s going to be some hangover effect starting next year from an earnings perspective as you kind of work that down?

No. Our plan is to take – to get our inventories in line by the end of this year so that we go into next year in a cleaner, more balanced position, so not to have the impact next year.

Okay. On the customer level?

Yes. I think what we’re seeing right now, Phil, is the end consumer is consuming less. And so I think that is – I understand the question in and around destocking. I do think that a lot of those filled goods are now out in retail and they’re being promo-ed. What we need is for the end consumer to start picking up the pace of consumption on the can and for those promos to continue, and then it turns into a positive. We haven’t seen that yet.

Okay. And just one last one for me. Remind us how the promotion cycle usually works in North America. I believe it’s heavier during the summertime. So if your customers do come back and want to step up promotional activity to kind of drive demand in North America, when would the earliest pocket be?

You see a small amount for the Super Bowl, a real small amount. And then you see Memorial Day, Fourth of July, Labor Day. And two weeks prior to each one of those events is when you typically see it. And if you get lucky, you might get some around the holiday period, which – we’re not planning on that thinking – yes, you got it.

Thank you. The next question comes from Angel Castillo of Morgan Stanley. Please go ahead.

Hi thanks for taking my question. I just was hoping we could unpack fourth quarter a little bit better. I guess just want to make sure I’m understanding correctly. So the bridge that was given for operating income seems to suggest, and correct me if I’m wrong, roughly kind of $307 million for the quarter. Could you just give us a sense for how you’re thinking about that by the kind of segments and regions? And also included in that, what your volume expectations are embedded within that?

I’m sorry, what was the number you gave me?

$307 million. I just basically took 8% off of the [indiscernible] and then less what you’ve done year-to-date?

Oh, okay. Yes. I mean the things I mentioned were absorption in North America and lower volumes than last year. We had a tough comp from last year. We grew 5% last year. We’ve grown 2% year-to-date through nine months. We expect that to be flattish for the year. South America, we had the loss of the customer from last year. That will be a bit of a drag. Europe, obviously, we sold our Russia business. That generated – would have generated in the – it will be in the Q. It’s in the press release, about $30 million of profitability in the fourth quarter. Inflation is running kind of similar to where it was in the third quarter, which is about a $10 million drag, and we’ll have some start-up costs related to our new facilities. Beverage packaging others should still be strong as we continue to import into Europe to meet demand. And our aerospace business had a record fourth quarter last year, which likely won’t repeat. So, I think your – where you’re landing is directionally correct.

And then I just wanted to also revisit the prior question on destocking a little bit more. So, I guess there was a couple of customers that may be mentioned some potential kind of pull-forward ahead of pricing initiatives in October. So, can you just talk a little bit more about kind of what you’ve seen from a September standpoint in terms of shipments in North America and whether there was any kind of pull-forward that you kind of anticipate to be unwinding in the fourth quarter?

No. We didn’t see any of that in September. What we’re seeing through the last four weeks, in particular, is further in consumer decline in the overall beverage consumption. So, we didn’t feel the impacts of a September pull-forward. And we’re monitoring very closely the promotional activity here in the fourth quarter, because as the end consumers stop buying beverages across the board in any setting and if there’s a shift from on-prem to off-prem they can typically will be promoted more and there will be reason for upset. We have not seem that through the first four weeks of the quarter.

Thank you.

Thank you.

Thank you. The next question comes from Anthony Pettinari for Citi. Please go ahead.

Good morning.

Hi. Good morning.

Just wondering equity earnings I think were negative in the quarter after being up I think mid-single digits in 1Q and 2Q. Can you just give some color on what drove that, and maybe just remind us what's in that line after the Metalpack sale?

Yes. We had unusually some kind of one-time good guys in the second quarter and then those kind of reversed in the third quarter. So we'll get – we'll have more normalized equity earnings as we look to the fourth quarter. And the things that are in there are mainly are JVs with Rocky Mountain Metal Container, Guatemala and Vietnam.

Okay. That's...

That was kind of spread across those three basically.

Got it. Got it. And then the $150 million in fixed and variable cost reductions that you outlined for 2023, I'm just wondering if there's any finer point you can put around maybe the cadence of that kind of savings flow through and just generally when we think about kind of quarterly comps next year and obviously a lot of moving pieces, any reason why you'd expect earnings growth might be more first half weighted or second half weighted just overall thoughts there?

I mean, it should come relatively evenly, but we won't get all of the benefit in the first quarters. As Dan mentioned one of the plant closures doesn't happen until the first quarter and some of the folks that are departing won't depart until the first quarter. So we'll start to see more of that benefit kind of Q2 going forward, but it should run relatively evenly.

And was your question specific to the $150 million or were you looking for phasing of earnings?

I guess both. I mean the $150 million makes sense, but yes.

Yes. So the inflation pass through mechanism, the net 200 that Scott talked about that will come through in contractual chunks. So January 1st you'll have some, April 1st you'll have some, July 1st you'll have some, and then we will have an FX drag of $15 million to $20 million mostly in the first four to five months of the year.

Okay. That's super helpful. I'll turn it over.

Thank you. The next question comes in Adam Josephson of KeyBanc. Please go ahead

Dan, its Scott. Good morning. Thanks very much for taking my questions, I appreciate it.

Good morning.

Just one clarification just on the full year guidance. So I think, Scott, you said North America's shipments flattish for the year; forgive me if I missed this. Does that imply about down five to six in the fourth quarter, and if so is that about consistent with what you see in thus far in October?

No, I don't think it'll be down that much.

Okay. Closer to 4-ish, I guess, okay.

Not down that much. I mean we could play that game, but I don't think it'll be down that much.

Okay. Just because I know 4Q is typically a lighter quarter volume wise, so...

We had a really good quarter last year. We grew like 5% last year; it's not going to grow like that.

Got it. Okay. And if I think about just flattish shipments this year and then similar next year, can you just compare that to '09, I think organically you were down a bit because I think you bought the four plants from AB InBev. If memory serves such that shipments were down a bit organically. Dan, could you just compare what you're expecting this year and next to what you saw in '09? I know you said the one difference is that there's a lot more inflation now than was the case then or any other differences that you would point to now versus then?

Yes. In '09 we were actually up a couple percent and at that's after being down in '08 like 5%. So usually, I mean in my 2022 years here if you get a short-term hit on volumes, it comes back pretty quickly, I mean, the can is pretty resilient. To Dan's point on all the benefits that the can has none of that has changed and so you might see things in a particular quarter given pressures on the consumer or pricing actions on the customer, those things tend to balance out over time. And so I think we're in that period right now where it is more – a little more uncertain, a little more volatile, but we still believe in our customers still believe, which is even more important in the benefits of the can. And so we feel really good about as we get into – this year's definitely been choppier and we feel really good about moving into 2023.

Yes. I think, Adam, your question is a really good one in that. What we've talked about in the question that you're posing really has to do with the recession. Well it really hasn't – we haven't really had it. We haven't been in a recession. We've had inflation and interest rates rising, and we've got customers that haven't really lost volume on the top line and so they've continued to leverage the price mechanism. If we shift into a recession that's when the cans resiliency shows up. It doesn't necessarily show up in 50-year inflationary times depending on the promotional activity and the pricing from our customers. So there's – I do what you may be hearing a little bit more optimistic tone from Scott and I because I think we're heading there and in consumer's behavioral patterns and what we're seeing in the data is they will prefer the can in that environment.

Yes. No, understood. And I appreciate that Dan, and it just, one other one along similar lines with the benefit of hindsight growth shot up in 2019 with sparkling water and then hard seltzer and that was the one, it was the biggest growth year in a very long time for the industry and then the pandemic hit and that kind of skewed everything and it was unclear how much was specific to beverage cans, how much was the pandemic inflating demand for everything. And we've seen that deflate now. So with the benefit of hindsight, how much of the, the growth over the past call three years would you attribute to the pandemic versus growth in hard seltzer or sparkling water, et cetera? And how is that informing your view of what you think the long-term rate of growth is?

I can remember in our 2018 Investor Day, Adam that we talked about the growth then, we were already starting to see it in 2018. So it was well before the pandemic. It wasn't just 2019. So we started to see the growth, we started to see really the sustainability stories start playing out in North America. And you had new product introductions went from 30% five years before to 70% at that time in 2018. Now we're seeing it even higher and so definitely there was some distortions because of COVID and there's some distortions like unwinding COVID, but that, and now we've got inflation and some other things to deal with. But that's where I think long-term all the benefits of the can still exist. And so that's why we feel very confident and very comfortable about how we're moving forward into 2023.

Yes. Adam, I think at a really high level we're paying attention to a basket of countries like the U.S. that pushed significant stimulus into their economies. And if you go back a handful of years, we talked about this in the Investor Day. I mean, there's been 20 billion to 25 billion of additional cans added to the U.S. market over about a three to four year period. That can volume isn't going backwards. So it's there now what's the growth rate on top of that is a very fair question. We believe because of the circularity story because this volume has stuck that we're poised for really nice lift kind of in that medium and long-term range, but we just need a modicum of stability in the economy. And we've seen that in places like Chili was up 25% in 2021, they haven't gone backwards. So they’ve maintained that can penetration on the shelves. And I think the underpinnings of the circularity story are the biggest reason why those have stuck. So that’s – I mean I’m much more in the half-glass-full standpoint than I am that this thing is going to go a different direction.

Right. Can half full, Dan.

Yes. Yes, good call. Fair enough.

Take care. Thanks so much.

Okay, thank you.

Thank you. The next question comes from Kyle White, Deutsche Bank. Please go ahead.

Hi, good morning. Thanks for taking the question. I go into North America. Can you just talk about the competitive dynamics there in that market just given the change in near-term demand profile? Have you seen any changes on the competitive environment? Or is this more of a kind of a wait-and-see as contracts come up for renewal?

There aren’t a great deal of contracts that come up for renewal each year. I think we believe that we’ve got somewhere in the neighborhood of 80% to 85% of our contracts locked in for the next handful of years. So we’re in a really good spot. There are always contracts that come up that volume could move on the fringes, but it’s such an efficient market and so much has to do with freight that I don’t see a lot of movement in the marketplace. I think it’s a very rational marketplace. We’re continuing to lead, we believe, that supply-demand will continue to be tight for the foreseeable future given the growth prospects of the business. And so I’m feeling good that the pricing and the terms that we’ve locked in here over the last couple of years will maintain. So we’re feeling like it’s an increasingly disciplined market. Things will remain tight, and everyone should benefit from that moving forward.

Got it. That sounds good. And then on the Russia sale, can you just talk about the call option there? What led you to that decision? Any kind of range of what exercise price is relative to the sale price?

Yes. The call option was – it was a great business that we didn’t really want to sell. And we would love to get back there if Russia ever normalizes their behavior, leadership and activities. So we have a call option that starts in year three and goes through year 10. And it depends – the price depends on the performance of that business at the time we exercise the option. So we thought it was absolutely the best outcome we could achieve by getting $530 million in cash into our bank accounts and then have an option to return if things normalize and we’re able to do that. But obviously, right now, that’s not terribly likely in the next few years.

Got it. Thank you. I’ll turn it over.

Thank you. The next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead.

Great. Thanks for taking my question. So I guess, first on beverage cans. I just wanted to understand the contracting process a little bit more. Are your customers essentially signing up for volume? Or is it a range of volumes? Or is it min/max? Just curious because there was kind of a swift slowdown, and our understanding was that most customers were kind of required to take certain levels of volume. So could you just flesh that out for us a little bit? Thanks.

I mean it’s a range of things. There is no one contract structure. So it’s everything from fixed volumes with probably some range, 5% range, up or down. There are some that are fixed for a period of time over a multiyear period. So if you’re short in one period, you’re going to need to make it up in a different period. So it really – the old requirements kind of contracts are becoming fewer and fewer, and that’s where you were more exposed to volatility. But those are becoming fewer as time goes on. We’ve gotten rid of a lot of those requirements-based contracts, which caused more of the volatility. But you’re never going to have something that is 100%. We’re usually talking around the last few percent of volume, and that can matter.

Got it. And then on aerospace, our understanding is that 2022 is kind of a transition year to the next, say two or three year range backlog. Is that right? And so maybe 2023 to 2025, do you expect kind of 10% to 15% EBIT growth for that business? Or how should we think about aerospace?

Over that period, yes. And north of 15% next year is what we’re looking at.

Thanks.

We’ll do one more question.

Thank you. The question comes from Mark Wilde of Bank of Montreal. Please go ahead.

Great. Hi, Dan. Hi, Scott. Thanks.

Hi. Sure.

I just wondered, Dan, any updates on thoughts on CapEx and expansion plans as we move toward 2023?

Yes. I mean, I think as we go into 2023, we expect CapEx to drop by about $0.5 billion. And I would say, given growth rates we see in the near term, I mean we’re going to finish building in Czech Republic, and those have really good contracts supporting those investments. And we obviously have enough capital in North America for the next couple of years. So I don’t think we need to do anything meaningful on that front. So I would expect it to come down again in 2024. And – we’re a fairly big build on the aerospace side, and that’s starting to come down too.

Okay. So that sounds pretty similar to what you were talking about six weeks ago at Investor Day.

Yes. Yes, exactly. Correct.

Okay. Dan, just one other one, and I know this is a little bit challenging on a public conference call, but it does sound like you’ve taken a different tacks in terms of cost pass-through over in Europe. And so as best you’re able to, can you give us some sense of that? Because it sounds like there’s going to be no eating of energy costs going forward.

We are – it’s a nuance. I mean, I think we’re getting out ahead of the risk profile that Europe will present for the next 12 to 18 months. That’s how I would characterize it. We understand fully that they’re going to have to get their act together in the European continent in terms of transitioning to a more secure and stable energy source. And our supply base feels it first, then we feel that the end consumer feels it, our customers feel it. And if the costs go up, they’re going to need to be passed through to the end consumer straight away. There won’t be a lag on these things. And I think that’s the momentum that – and the understanding and the equilibrium that the industry needs to have. And we’re happy to take the leadership position on that.

Okay, very good. Thanks a lot guys. Good luck.

Thank you. Oh, thanks, everybody, for...

I’ll turn the call back over – for his closing remarks.

Yes. Thanks, everybody, for participating. We’re really encouraged in upbeat heading into 2023. We’ll navigate the choppy environment here in the next 60, 90 days, and look forward to hearing you on the next day and seeing you at the next conference call.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.