Ardagh Metal Packaging S.A. (AMBP) Earnings Call Transcript & Summary

Good morning. Welcome to Deutsche Bank's Global Basic Materials Conference. Hope everyone is doing well. I'm Kyle White, the lead analyst of Paper and Packaging here at Deutsche Bank. I'm pleased to have Ardagh Metal Packaging participating in our conference today, which is the beverage can business being spun out of Ardagh Group. From the company, we have CEO, Oliver Graham. He has been the leader of Ardagh's metal beverage business since it was acquired from the Ball and Rexam divestitures in 2016. Prior to that, he was the Group Commercial Director at Rexam. Our format for today will be a fireside chat with Q&A for the next 30 minutes or so. [Operator Instructions] Deutsche Bank Research is actually restricted on the company given the current transaction. So I will not be participating. Instead, I have my colleague, Niall Cullinane, who will conduct the Q&A. He is the Managing Director at Deutsche Bank on the banking side and knows the company very well. But first, I'll hand it over to you, Oli, for some introductory remarks.

Thanks, Kyle, and thank you, Deutsche Bank, for hosting Ardagh Metal Packaging today. As Kyle says, I'll make a few introductory remarks, and then we'll move into a Q&A format. And please, as we say, type in questions that we can see if we can take in the slot. So look, we're delighted to be here, even if it is virtually. I thought it would be useful just to spend a few minutes outlining AMP's business as we've set out in our filings with the SEC. So we're a leading global pure play in the beverage can market. We have 24 production facilities, the latest of which is currently under construction in Ohio. We have a very well-invested asset base and a highly experienced management and operating teams coming from our background of Rexam and Ball acquired by Ardagh in 2016. And since the formation of AMP almost 5 years ago, Ardagh has consistently invested in our business with a focus on specialty cans. These represent 44% of our volumes currently, and we have built a highly attractive specialty footprint in all our regions. In addition, we have a clear sustainability strategy that covers all environmental, ecological and social aspects. On the environmental side, we've committed to adopt science-based sustainability targets. On the ecological side, it's about ensuring and promoting the circular economy for which aluminum is one material that can become 100% recycled in time. And we are a leader on social sustainability, focused on giving back to the communities in which we operate. AMP today is a result of a focused management-driven transformation in the period since the formation of the business in 2016 to improve its positioning and growth prospects. We took the time after the acquisition to integrate and combine the various assets into a truly unified and high-performing organization. In parallel, we targeted new high-growth beverage categories and new high-growth customers, which helped us to significantly diversify and improve our customer mix, especially in North America. Further, we focused on the higher-growth and higher-margin specialty cans segment, which represents over 80% of the capacity that will be added under our growth program. This is a key driver of our profitability as specialty cans will make up 55% to 60% of our product portfolio at the end of the investment program. These transformation benefits are augmented by favorable medium- and long-term industry dynamics, mostly driven by consumer megatrends, and our asset base provides us with the opportunity to capitalize on these multifaceted growth opportunities. In North America, growth is primarily driven by new products and emerging categories. An estimated 75% of new beverage product launches today are in cans. And in recent years, demand has required a significant level of imports into the U.S., and there remains a backlog in pack mix conversion due to a lack of supply to satisfy innovation and conversion. Europe is leading on sustainability, and both consumers and regulators are driving increased use of aluminum. New products and specialty cans contribute further to growth as does our leading presence in some of the faster-growing markets, such as the U.K. and Germany. In Brazil, currently the fastest growing of our markets, long-term GDP growth, growth in beer and the switch to one-way packaging from returnable glass bottles is underway. In addition, across the supply chain, the cans functionality, efficiency and robustness all enhance its appeal, while the potential conversion opportunity from plastic, which faces significant consumer and regulatory pushback, is very significant. We estimate that a shift of only 1% of the current plastic market to aluminum would translate into a 5% increase in the total industry volume demand for beverage cans. In summary, the industry growth we expect for the foreseeable future represents an inflection point for our industry. We're over 95% contracted out to 2022, and we expect to be largely contracted through 2024 by the end of this year. Our customers are very focused on making sure they can support their growth plans in the years ahead. And recently, we have seen both contract renewals accelerated and contract durations lengthened. AMP also enjoys outsized relevance to our customers, including major brewers and spirits producers, given Ardagh's large and highly complementary relationships with them on the glass side, and this is unique in our industry. In late 2020, we launched a $1.8 billion 2021 to 2024 business growth investment plan, involving the addition of approximately 21 billion units to our capacity, of which over 10 billion units will be in the U.S. and the balance between Europe and Brazil. We have derisked these projects commercially by means of our diversified customer base and long-term customer contracts as well as operationally by focusing our investment on what we term under our roof projects, which means add-on or extension to an existing plant. This strategy enables us to leverage our existing infrastructure and skill base. If you take North America, we have 3 main projects to add capacity by the end of 2022. In Olive Branch, Mississippi, we have recently added 2 high-speed sleek lines to our existing plant. We're currently replicating this investment in Winston-Salem, North Carolina. Thirdly, our higher brownfield plant will leverage the existing infrastructure and workforce at our nearby Fremont facility. Similarly, in Europe, where we plan to add significant capacity in the U.K. and Germany to meet our customers' growth, our projects are largely expected to be under our roof. In Brazil, each of our 3 facilities will be expanded, while we will also build the one greenfield facility in our plan. The team that is building the greenfield has built new plants in Brazil over the years, including our Manaus ends plant in 2018. This investment program underpins our projected medium-term growth, is proportionate to the market development and offers attractive returns and is highly free cash flow accretive. We reported a very strong first quarter 2021 performance in late April, with global beverage can shipments increasing by 8%, with similar growth rates in the Americas and Europe and specialty volumes ahead by 16% compared with the prior year. And our investment program is fully on track. Momentum remains strong across our business, and we executed very well throughout the period. Inventories remain low across our business, and we look forward to continued progress over the remainder of 2021 and beyond, in line with our growth plans. With that, I'll hand over to Niall and our Q&A. Thank you.

[ Good afternoon ], and thank you for joining us. Just to start on, could you talk about your individual geographies, the growth trends that you are seeing? And how that's going to play out for the recently announced capacity additions that you have announced along with your peers in the industry?

Sure. So look, I think the North American market has been very strong for the better part of 2 or 3 years now. And we certainly saw these trends coming, particularly in the first part of 2019, they became very clear to us. They accelerated through 2019, and they didn't really miss a beat with the pandemic, neither positive or negative. In fact, we saw the trends go straight through the pandemic without any real change in trajectory. And these trends are driven by some significant megatrends at the consumer end, and it's not just one trend. So there is a piece of it, which is new product categories, particularly hard seltzer, but now that is really a broad space around beer, wine and spirits, including cocktails and other mixed drinks. We see another trend that's around water, sparkling waters, enhanced waters, refreshment, reenergized drinks, some of which is just innovation in the space, some of which is actually substitution from still water and plastic. And we see a significant sustainability tailwind, which is appealing to millennials. And we know from research we've done and others have done that they are making product choices on the back of those kind of considerations. And so we see 75% of all new drinks in North America being launched in the beverage can, which means that the next decade of growth in the beverage space will be largely in cans. So these trends are very strong, and that's what's led to a growth rate of over 6% while we still had the CMI data, we could see that. Last year, we estimated we were short, the industry domestically, by about 10 billion cans. Somewhere in the region of 8.5 billion were imported, probably 1 billion to 2 billion were not served by the industry. Interestingly, this year, the rate of imports is actually accelerating relative to last year. And I think we've heard numbers now where people are estimating up to 14 billion being imported this year. We know of a major customer importing 4 billion, and which we'll be taking some next year. And we don't see the growth slowing. If you look at ourselves and our competitors for Q1, they all reported 7%, 8% growth, even 12% growth. So we see the growth rate of over 6% the CMI was tracking actually accelerated in Q1. And so we're unconcerned by the capacity additions that have been announced. Our modeling would suggest there need to be several more announcements before we get that market into balance between the capacity that we see announced and the demand that we see coming. We think that the market sometimes doesn't model the same way we do ramp-up curves, true sellable capacity. Starting up these greenfields is not straightforward. So we're very clear in our minds that the market actually needs more capacity than has been announced to meet this level of growth.

And just as you play that out, when do you see the market coming into balance?

I think we're quite aligned with our competition here and the sort of communication they put out, which is around the middle of the decade, I think there is the possibility the market comes into balance. I think then the next question is whether still water in plastic makes a step change into aluminum. And we think that's a very real possibility. There are some changes that need to happen. Some of the big players, I think, need to face into the fact that the depreciated PET assets will not be renewed and need to be renewed with aluminum assets. But we think that's very possible given the consumer response to plastic. And if the still water market transfers in a very significant way, then that's what we think of as the third wave in this story. The first wave being the space around alcohol. Second wave being the current space around energy, refreshment. I think that third space would be the still water transition. If that happens, honestly, we'll be short for the entire decade.

And when you talk about imports growing as we move from last year into this year, what is driving that into North America? And where are those cans coming from?

I mean they're really coming from all over. Obviously, you do have some significant imports from Mexico. So that's sort of the near shore, but then you've got them coming up from South America, from Africa, from Europe, from the Middle East, from India even, some of them. So they've really come from all over the world. It's very uneconomic, it's very unsustainable and -- from a monetary and a planetary perspective in terms of transporting that much around. And so they have to be relocated to the U.S. production. What's driving is all those trends now. Plus, I think, again, a disconnect between announced capacity and delivered capacity. And again, we're pretty clear that these new facilities take time to ramp up, for teams to get the skills. There's always a gap between nameplate capacity and sellable capacity and particularly in the U.S. now, which is becoming a much more complicated market than in the past with many more labels and customers, that eats into capacity. And so nameplate capacity is definitely not the capacity that is delivered into the market.

You also touched on the pandemic and how it impacted -- or maybe it didn't impact your business. So what do you see as we kind of return to normal, whether it's going back to work, social events, et cetera, on-premise consumption. How do you think that impacts your business going forward?

Yes. As I said, the trends that we're seeing in the business, we saw pre-pandemic. So those growth categories, those growth products, the switch from plastic to aluminum, new launches, all of that was going on. The U.S., unlike some European markets, the shutdowns are much more patchy, irregular, in and out. And so we didn't see a strong pattern linked to the pandemic. No doubt, there will have been some support to off-trade consumption, particularly in March, April last year when there was some pantry loading. But after that, we didn't see the trends very different. And what we are seeing in all 3 regions is, first of all, we're not completely out of this. And second of all, some consumer behaviors are shifting around the packaging choice. We are a very economic form of packaging. People are looking for more at home or outside consumption as they come out of the pandemic. And we're even seeing that some of the categories that are growing, even in the on-trade, are still served in cans. We're seeing quite a significant hygiene trend in the world post-COVID, which is favoring one-way packaging and cans. So at the moment, looking into the way the categories are growing, looking into the customers and what they're asking us for, we see no drop-off in demand post-pandemic.

Okay. And if I just touch on Brazil, in particular, how sustainable do you see the double-digit growth rates in Brazil? And can you comment on the pack mix shift that's taking place there?

Yes. So very sustainable is the short answer and because, particularly, of the pack mix shift. So Brazil, like many developing emerging markets, had a very significant 2-way glass penetration of the on-trade. 2-way glass systems are defended by incumbents in the early phase of development because they are a significant barrier to entry. They have very high capital costs, and they're also very scale dependent because you have a certain number of pickup points and drop-off points and you also have all your washing facilities. What we've seen, and it happened in the U.S., it's happened in Europe, is that over time, the consumer and the retail trade prefers one-way packaging. They didn't like the space, they didn't like the transport, the bottles don't look great. And so you see a sustained trend into one way. In Brazil, that's all going into cans because of the shortage of one-way glass. And when that happens, the 2-way systems break down. And across the U.S., if you look back into when that happened, it happened state-by-state because those scale diseconomies broke those systems. So that's the phase we're about to go into. In our judgment, we're in a very strong phase of 2-way to 1-way substitution. It was accelerated by the decision of the #1 player there to get behind that whereas they were previously very strong in 2-way. They've accelerated it, the pandemic has further accelerated it. And what we see now in the next phase is we'll see the collapse of some of these systems, particularly in the high-income states, and that will accelerate the growth even further. So we see Brazil has probably got the highest growth potential of any of our markets over the next 5 to 10 years.

And I'm also watching questions coming in from participants. One, could you quantify what growth rates you see in Brazil in the next 3 to 5 years?

So we put 6% to 10% in our materials, and we're very confident in that. I've said it before, I think the growth rate in Brazil is currently the growth rate with which the can makers can add capacity.

And well, how the -- could you comment on supply-demand balance in Brazil given the capacity that you're putting in, and others?

It's very short. I think you've seen it on all the commentary. We're running at record low inventory levels. We did get some additional investment in Brazil in the last 10 years from -- obviously, a new player came in, there's a vertical build. But at the moment, the market is very short. With the announcements that are out there, it's going to remain very short, including our own. So again, we'd expect more announcement there. It's been signaled. The market needs it. I think we're going to stay short easily into the middle of the decade.

If I turn to Europe, obviously, hard seltzers and categories like that in the U.S. have been very, very strong. Has that product translated to Europe? And what has been the customer response to that? And then lastly, are they being packaged in cans?

So the last question -- the answer to the last question is yes. I think hard seltzer is a bit like energy drinks for Red Bull back in the day. The can is somehow associated with the category. The 12-ounce sleek can for hard seltzers is associated with the category in the way that the slim can was associated with energy drinks. So yes, they're definitely coming into cans. I think we don't really know is the answer now at the moment because the launches were all planned and sort of baked in for the last year, at which point, pandemic hit, the retail trade had to go with the high turn SKUs because they were facing very big out of stocks. So they're just stuck with their core products. And there was no space on the shelf or consumer attention on new things. So what we're seeing now is the true launch of these products. Variety Pack MAB is in U.K. supermarkets now. That brings it to a price point that will be interesting. So I think now we're going to see how hard seltzers do. I think we're confident that some of the trends are in place that are in place in the U.S. around health and wellness, lighter drinks, younger consumers, the attractiveness of the can. But we don't fully know until -- I think it will be 12 months before we really know how that plays out.

Okay. Let's turn to capacity. You talked about your BGI program, spending $1.8 billion. It's a mix of under the roof, a brownfield and a greenfield. Can you just talk about kind of the risk profile and how you think about that? Is there an update you can give on the brownfield? And then lastly, your experience, and you touched on it in your prepared remarks, of a greenfield in Brazil.

Sure. So we're fully on track, is the update on all our projects, including Huron. We've added a lot of resource to manage these projects. We're using external -- premier external engineering support to deliver these projects, and they're all fully on track. And the Huron project, everything trending exactly how we want it. I think we were very focused on under the roof on our facility investments at this phase of our growth. I think it's important to remember, this growth plan is a pretty short-term growth plan. It came out of our internal long-range planning process last year. It wasn't anything to do with this process, sales process. And most of it is done by the first half of 2023. And so we were keen to derisk that on all dimensions. And one of the ways was definitely to put it on your own facility because then you are dealing with a workforce that you can switch between the old running lines and the new lines, and skills are the key issue for putting down new capacity. So that's a massive thing to derisk it, plus all the permitting, logistics and all the other advantages of being on an existing facility. Nevertheless, we're happy to do greenfield, and we will do more greenfield going forward. And in Brazil, that greenfield will be in the center, Southeast of the country in Minas Gerais state. It's built by a team that first of all built Tres Rios, which has stayed with Ball. They built Alagoinhas, which has stayed with us, and they built Manaus under Ardagh ownership. So they're very experienced on greenfield. Again, we'll use contractor -- the premier contractor in the industry to support us with that, and that project is well on track.

So one of the questions that is coming up, a lot of projects under the roof, the brownfield, the greenfield. How are you as an organization managing all of this as you put this new capacity into the market?

So yes, so we significantly invested in the U.S. engineering and operations team with additional people and with restructuring the team and reprioritizing people's roles. And then we do work with [ Ross Line ] as I say, the premier engineering contractor in the industry, and we've got a significant amount of their support into the North American project build. Europe, it's a slightly smoother path. We will get external support, but it's more within the bandwidth of what we've done before. And then Brazil, again, we'll use [ Ross Line ], we'll some other external contracting down there, and we have also added to the team. So we saw this coming. We knew in June, July last year that we needed to scale up for this growth. We took those actions in the second half of 2020. And as a result, we're very well placed, I think, to deliver these projects for the rest of this year and for 2022.

You've been very focused on Europe, North America and Brazil. How do you think about expanding into other geographies and, in particular, other emerging markets?

Yes. I think we're open to that. Obviously, there's a lot of growth to serve in the core markets of Europe, North America and Brazil at the moment. We've got customers, we need to support in their growth plans, and that's definitely the main focus of what we're going to do. However, I think over this 5-year period, I could see us moving into new markets. We'll be customer-led on that. I mentioned in my prepared remarks, we have a very good position with major customers with our dual substrates across the group. And so we would want to be supported by them in anything we did. But I think we have now got the scale. We've integrated the business into Ardagh over the previous 5 years. We put in place the platforms you need, and we have a plan for our core markets. I think we now have the bandwidth that we could take on new markets in this period.

You touched also in your prepared remarks on sustainability. So I'll ask you to elaborate on that. And then when you talk to your customers, where are they focused, recycling, greenhouse gas emissions, the amount of recycling content in your product? How do they prioritize that when they come to you?

No, it's a great question. We had a very good top start with one of our major customers yesterday, so I can give you some pretty direct feedback. Obviously, we're talking to all of them all the time. The major, major priority is CO2. They want us to support their CO2 targets. And obviously, with our material, you can do that in 2 ways. You can do that with increasing the recycling rate, which means they will then focus on recycled content. Or we can work with more greener aluminum, lower CO2 prime aluminum. They are talking circularity just as major regulators are now talking circularity, and we're very supportive of that, too, as a material that can be fully circular. And so we are tracking, and we will be reporting on recycled content levels, and we are working with our supply base to understand where they're going and what their investments are, which I'm very pleased to say they're equally focused on that. And we're seeing more and more investment going into that space. We're also working carefully in industry bodies. So I chair at the moment the European Beverage Commission of the Metal Packaging Europe Organization. And we've just launched a 100% target -- recycling target for 2030 in order to drive that recycled content. And then our customers are expecting. And fortunately, we're completely onboard with that. They're expecting us to do the right thing by our people and by our communities, and we are also shortly to launch some very exciting social sustainability store -- programs as well.

Historically, you've been a glass and beverage can company. Ardagh Metal Packaging will be 100% focused beverage can company. How will the separation impact your business model and as you approach customers?

So we've always, even within the group, approached customers separately between metal and glass in terms of day-to-day relationship management, supply chain, contracting, pricing. What we've done in the last few years is we've brought together the metal and glass side of the business in order to have very strategic discussions with very large customers. And it's a rather small list who really look right across this piece, and that we intend to keep doing. And we can do it because Ball has committed to a majority ownership of AMP going forward, and that gives us the platform to be able to continue those very strategic discussions with major customers. So it's really about the seat at the table. It's about the relevance to these kind of customers. It's never been about trading value. We obviously won't do that and can't do that. It's really, as I say, about having the right strategic discussion and being the right strategic partner for very, very major players in the beverage industry.

Could you touch on the cybersecurity incident and how that impacted the business?

Yes. So we've put a release out there around this. It did have a very significant impact on our day-to-day operating. And it's a great tribute to our teams in all geographies, the way we've managed the situation. It will lead, I think, to some delay on some revenue just because of delayed shipments. We were able to keep producing through the cyber incident. The issue is mainly actually about stock, location of stock and deliveries, which did very unfortunately lead to some disruption for some customers for which we apologize. And I think as I say, we reiterated our guidance for the year. We don't see it impacting our guidance and all the numbers we put into our presentation for this process remain our numbers.

Okay. Then if I turn to just capital allocation. Obviously, you're going through BGI, you talked about the $1.8 billion, so elevated CapEx in the near term. What do you think about the long-term target leverage ratio for the company? And what you're going to get through BGI and the growth CapEx? What is a good maintenance CapEx number for the business?

So we estimate maintenance CapEx around $110 million. Even with the growth, we don't anticipate going up hugely in this financial period just because we're putting in a lot of very new capacity. And then I think it will naturally tick up a little bit with -- in the second part of the decade as we get bigger. In terms of the ratio, the debt ratio, we put out our long-term target to be between 3% and 3.5%, so very much in line with industry peers. And we think that will be supported by the highly cash-generative nature of our investments, and that will allow us still to invest beyond this plan. And as we signaled throughout this process, customer discussions have continued in the last year since we put this plan together. And so we do see more BGI in this plan -- or beyond this plan in the periods, '23, '24 and onwards.

And then as you think about M&A and also capital return, dividends, share repurchase, any thoughts on those fronts?

So I think we don't see major M&A just with the nature of the industry and where it's at, at the moment. We could imagine bolt-on as part of a new geography strategy, again, supported by customers. And then I think dividend policy will be decided over the next 12, 24 months. But I think what's clear is we're certainly not going to restrict the investment potential of the company. We're going to invest in the opportunities that are there.

Okay. Well, I see we're coming up on our window -- our time window here. Again, I'd like to thank you very much for participating in the conference and good luck with the rest of your one-on-ones with investors today.

Thank you very much, Niall. Thank you.

Thank you.