Ball Corporation CEO Speaks About His Company

May.20.08 | About: Ball Corporation (BLL)

On May 19, The Wall Street Transcript interviewed R. David Hoover, Chairman, President and Chief Executive Officer of Ball Corporation (NYSE:BLL). Key excerpts follow:

TWST: Would you give us a brief historical sketch of the company and a picture of the things you are doing at the present time?

Mr. Hoover: Ball Corporation is 128 years old this year. For many, many years, we were best known for the home canning jars that bear the company's name. But in the mid-1990s, we exited the glass container business. In the last decade, we have grown sales from about $2.3 billion to last year's $7.4 billion. Our biggest business is in beverage cans, primarily for beer and soft drinks, and then specialty containers for energy drinks, health drinks and all sorts of new beverages.

We are an international company, primarily in our metal beverage can business. Currently we are focused on international growth, along with investing in our specialty can business in the United States. When I talk about specialty cans, I mean beverage can sizes other than the standard 12-ounce can. In North America, the beverage can market is about 100 billion cans a year and we produce approximately a third of that. We are adding 24-ounce, 16-ounce and small can capacity to grow that business. We are completing a multi-year modernization in North America of our end making operations — the top of the beverage can — making a lightweight aluminum end that uses less metal and runs at a higher rate of speed.

Internationally, we announced recently that we are building a new beverage can plant in Poland; that would be our second plant there. Our newest plant is in Belgrade, Serbia, which has been operating now for a few years. We are looking at Russia as a potential market. We also announced this year that we are building a plant in India. That would be our first one there. We have a business in China. We are seeing that market grow. We are the largest can maker in China. We are also in Brazil with a joint venture partner. We have been in the country for over a decade and we're adding a line in our new beverage can plant near Rio de Janeiro. We are expanding our existing operation there to make 16-ounce cans as well as 12-ounce cans.

In North America, we are also in the metal food and household products business. That's primarily three-piece and two-piece steel tinplate cans for food as well as aerosols. We acquired a business couple of years ago that makes aerosol cans. We are the largest in steel aerosols in North America; we have close to a 50% market share in steel aerosol cans.

In the PET business, which we entered in the mid-1990s, about the time we got out of the glass business, we have seen performance that isn't as good as it needs to be but we were working on that through a combination of raising prices and shifting some of our business into higher value-added containers. We acquired a business a couple of years ago that makes polypropylene containers and PET for the food and specialty markets. We are seeing that grow. So that's the packaging part of Ball, which is about 90% of our total sales.

The oldest part of the company is our aerospace business, and that is primarily here in Colorado. It is 52 years old and it had a record year last year. In 2007, it did about $800 million in sales and $65 million or so in operating profit. So it's a little over 10% of the company and it has contributed to our growth at about the 10% level as we more than tripled our total sales over the last decade.

TWST: What do you do in aerospace?

Mr. Hoover: The business actually got its start about the same time as NASA. We made pointing controls for sounding rockets and we made a series of satellites, Orbiting Solar Observatories that did research on the sun. That business line has continued. A good example of the kind of expertise we have with instruments is the Hubble Space Telescope. There is a servicing mission scheduled for later this year and it will carry two Ball-built instruments, at which point we will have made every instrument on the Hubble Space Telescope.

We successfully completed a program called Deep Impact in 2005, where we sent a two-part spacecraft into space millions of miles to collide with a comet. One part hit the comet and the other part observed what came out of the comet after the collision.

Another area that we are focusing on in that business is remote sensing. We are good at looking out into space and back at the Earth, especially when it comes to looking at the evidence of climate change on the Earth and mapping the globe. We are a partial owner of a business in Longmont, Colorado, called Digital Globe. We built the instrument they call QuickBird and now we have a follow-on satellite — Worldview-1 — up, and the images that Google Earth uses are taken by our instrument. Those are the kinds of things that we do.

We also make a number of antennas that might go on aircraft or missiles. We make phase array antennas that work in space. And a significant part of our business is defense work, most of it classified.

TWST: What have been the principle drivers of the company's success?

Mr. Hoover: During the decade of the 1990s, we changed the company quite a bit. I mentioned that we exited the glass container business, got into the plastic bottle business, and then 10 years ago we bought the Reynolds Metals beverage can plants. At that point, we were about 15% of the North American beverage can marke, and we were largely a North American company. We said we were going to get bigger or somebody was going to get us. We were able to acquire the Reynolds plants and became the market leader; that acquisition worked very well.

Five years later, we bought the beverage can piece of Schmalbach-Lubeca in Europe. Right after we bought it, Germany enforced a deposit on one-way containers without a system to recover the containers that killed the market, and an 8 billion unit can market went to 500 million. Still, our business has flourished in the rest of Europe from the get go as the overall market has grown. We see Eastern and Southern Europe growing economically and the demand for what we are doing is growing but we also saw growth, for example, in the UK and in Western Europe as well. We need to get Americans to understand what's good about beverage cans that the Europeans are understanding! Those were the two main catalysts.

Also I mentioned that we made an acquisition two years ago of an aerosol can business and got to be a leader there. If you look at our company in the markets that we serve, primarily in the beer and beverage can business, we are number one in North America and number two in Europe, and those are the two largest markets in the world. We are number one in China and number two in Brazil as well, which is a growth market. We have been in China since 1985. India is a great and developing place and we are building a plant in the midst of four different breweries. They are putting in can filling capability there right now. Another thing is that we developed over time an adherence to creating shareholder value. We were an early adopter of what are called the EVA® (economic value added) principles. You probably heard of Stern Stewart. I think I met Joel Stern in 1972 when he came to Muncie, Indiana. His view was that earnings per share don't count and cash is the only thing that counts. We understood that, but in the early 1990s, we really implemented a program where next year's target for incentive purposes was half the distance between last year's target and last year's actual. So if you are improving that, it means you have to get better every year if you want to make any money. And funny enough, that has a hell of a nice correlation to creating shareholder value. We have seen the market cap of the company go from about $1 billion eight years ago to roughly $5.5 billion today and the enterprise value grow even a little more. We had about close to $3 billion in debt at the end of the quarter.

We also have an ownership culture around here. The members of the senior management group are all substantial shareholders. Much of the shares we have, we defer until we retire. So you know we are long-term owners. We talk a lot about this idea of behaving as an owner in the company. It is one of our five keys to success and we highlight those behaviors when they occur. We run the EVA incentive plan down to the plant floor. With the beverage can plants in North America, the non-union ones, they are on the same incentive process that I am on. People understand that when you invest money you have to make a return in excess of your cost of capital and if we do that, we create value.

We have focused not only on taking advantage of growth opportunities, both organic growth and through acquisitions, but we also focus importantly on generating free cash flow in the company and then we prioritize what we do with that cash flow. I think that our need for maintenance capital is somewhere around $160 million. Our depreciation is $300 million now roughly and this year we have said we are going to spend around $350 million in capital expenditures to pursue growth opportunities. Well over half our cap ex is for growth. We are still on track this year to buy back a net $300 million worth of stock. We paid about a $40 million annual dividend over the four years that will end this year. On our first quarter conference call in April, I said that we expect to return in excess of $1.3 billion through a combination of dividends and share buybacks to our shareholders during the period from 2002 through 2008. So we are focused like a laser on understanding value creation.

As a public company there are many things that are important. You have a lot of stakeholders and you have to satisfy all of them. Fundamentally, we are in business to create value for our shareholders. If we don't do that, somebody else will get to decide what happens to this business. We don't want that to happen. Since we are all owners, how we get wealthy is to make share price go up.

TWST: What about possible problems or challenges? What might you worry about?

Mr. Hoover: That's what people always ask. In today's economic circumstances, what we make is fairly recession-proof, even including the aerospace business to a degree, because there are long-term contracts typically that drive our businesses. While they aren't recession-proof, they don't respond much to recession. In fact, there is an argument that some people make that people buy more beer in cans when their economy is down. I am not sure I believe that, but we don't get hit by a recession quite as much as some other companies. Of course, with the inflation coming back into the economy, with volatility and increases in a lot of the raw materials that we fabricate, I am concerned about that and concerned that we get our contracts to provide goods hedged and covered, and that we don't take risk on things like aluminum, steel and so forth, and that we work closely with our customers because they are facing the same things.

We have decided in this country, inappropriately I believe, to make a lot of ethanol so that the price of feed grains is up. It was on the front of the The Wall Street Journal recently that the price of food is going up and poor people in the world will not be able to eat. There are a lot of stresses on the economy and so I worry about that a little bit.

Interestingly, we just had our credit quality upgraded by S&P. They raised their rating on our bank debt to investment grade. We are right on the cusp between investment grade and non-investment grade. Not only is that a nice thing to have happened, but it's incredible to me that it happens at time where the credit markets are screwed up like they are. Furthermore, that saves us money because we have a pricing grid, so we are going to save $2 million on interest expense for the bank debt. So at a time where there are these uncertainties in the economy, we have a third party looking at our business and saying that we are strong. We didn't necessarily see that coming but we are happy about it.