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

Good morning, and welcome to Citi's 2021 Basic Materials Conference. I'm Anthony Pettinari, packaging analyst here at Citi, and we're very pleased to host Oliver Graham, CEO; David Bourne, CFO; Stephen Lyons, VP of IR; and John Sheehan of Ardagh Metal Packaging. I'm going to turn it over to Oliver for some introductory comments, and then we'll jump right into our discussion, and for those on the line, they can submit questions to me through the portal or just e-mail me also if you need any disclosures. So with that, Oliver, I'll turn it over to you for an overview of Ardagh.

Thanks, Anthony, and thank you, Citi, for hosting Ardagh Metal Packaging today. We're delighted to be back here in New York after some time away, and welcome to you all in joining us virtually to get -- today. So as Anthony said, I thought I'd start quickly with a few overview slides before moving to the Q&A. Just as a reminder, our remarks contain certain forward-looking statements, and we refer you to the disclaimer on Slide 2 of the accompanying investor presentation, which is also uploaded on our website. Before I run through the investment case, for those less familiar with AMP, it's worth briefly recapping on this year's listing process. Following the February announcement of the proposed combination with the Gores [indiscernible], AMP, formerly wholly owned by the Ardagh Group, subsequently began trading on the New York Stock Exchange in early August. The attraction of this REIT to market was that AMP could fully share with investors its long-term growth plans to take advantage of supportive megatrends. AMP has a meaningful free float of 25%, while Ardagh Group remains a supportive and committed long-term majority shareholder. Turning to Slide 3, where we summarize the investment case. AMP is the only 100% beverage can pure player scale in the market. We're a leading player in each of our markets, top 2 or top 3 player in every case, and we're an outstanding ESG investment. Our products are 100% infinitely recyclable, and aluminum is one material that can become 100% recycled in time. AMP's multifaceted growth is supported by long-term megatrends in each of its markets as well as environmentally conscious end consumers. We are driving an inflection point in beverage can demand, which I'll speak to in greater detail. AMP is an entrepreneurial owner manager culture where an experienced management team acts as owners and has delivered consistently, particularly in terms of the increased diversity of the business and improved contract terms achieved over recent years. We have nimble decision-making because we understand risk in the business, and we have key layers of management. AMP also has outside relevance to our large beverage customers. Due to our combined glass and metal position with the Ardagh Group, which we can maintain because of the majority ownership that Ardagh Group has of AMP. No other manufacturer in packaging has this outsized relevance with the very largest beverage customers. Finally, we have a clear and ambitious long-term growth plan. We aim to more than double EBITDA by 2024 on the back of over 50% growth in volume, and this is all backed by attractive customer contracts. Turning to Slide 4, where we delve into the business in greater detail. As you can see, we're a leading global player with 24 production facilities across Europe and the Americas. The 24th was acquired late last year located in Huron, Ohio and has now started ends production and will begin can production early in the new year. We have a well-invested asset base with highly experienced and best-in-class teams, and AMP is a leader in specialty cans with over 40% of our volumes being in specialty formats, which will significantly increase through our growth investment plans. We have a diverse range of leading customers, many global in nature and names which will be very familiar to you and with which we have deep-rooted, long-standing relationships and with whom we contract on a multiyear basis. Finally, as I'll outline later on, we continue to see strong growth rates, which we expect to continue for the foreseeable future. Moving on, I'd like to talk about our ESG proposition, as shown on Slide 5. Today, AMP is a leader in sustainability, not only in our industry, but across packaging. We have a clear sustainability strategy that covers all aspects, environmental, ecological and social, and we recently published our 2021 sustainability report, which extended our commitment out to 2030. I'd encourage you to read this document. On the environmental side, we are committed to adopt science-based sustainability targets and have set targets for other areas out to 2030, including water, zero waste and landfill and on the water, a 20% reduction in intensity. And last but not least, we're a leader in social sustainability focused on giving back to the communities in which we operate as well as being committed to the diversity and inclusion agenda. This year, we announced a $50 million, 10-year investments to deliver STEM education to over 500,000 students in the communities in which AMP operates across the U.S. On Slide 6, you will see that the strong industry growth in beverage cans is the result of multiple favorable megatrends, which vary by geography. In North America, new products and emerging categories are most significantly driving growth. The design and sustainability positioning of the can, coupled with a shift to specialty, are key positives over other substrates. It is estimated that about 75% of new beverage product launches are now in cans. In Europe -- Europe leads the way on sustainability, and both consumers and regulators are driving increases of aluminum in place of plastic and other materials. New products and specialty cans also drive this market. The Brazil market benefits from strong overall GDP growth over time and a change to one-way packaging away from returnable glass bottles. These megatrends will ultimately affect all markets, and sustainability and new product trends driving growth in Europe now will be a tailwind in Brazil 5 to 10 years from now. In addition, across the board, for retailers and others in the supply chain, the cans' transportability, efficiency in terms of packing and shelf space and robustness all enhance its appeal. Turning to Slide 7. As you know, back in February, we outlined significant plans for $1.8 billion of growth investment CapEx to drive a doubling of EBITDA out to 2024. The confidence in our growth investment plan is underpinned by our expectation that the growth for the foreseeable future in the industry represents an inflection point and a fundamental change in demand. The market is short, and supply is unable to maintain pace with projected demand growth for years to come. Historically, the industry had grown at 3% to 4% rates in established markets. Those same markets, North America and Europe, today are growing at a 5% to 7% rate with Brazil projected to grow up to 10% annually, and to this, over the level of can imports into the U.S. market this year potentially to reach mid-teens into billions of cans as well as the backlog in pack mix conversion and product launch due to a lack of supply. It is clear that it will take the industry years to catch up to the current demand levels. So turning to Slide 8 and to how we intend to drive shareholder value and allocate capital. We see an attractive growth runway ahead of us, and investing to support our customers' medium-term demand growth for sustainable packaging is one of our goals. We aim to double our adjusted EBITDA between 2020 and 2024. Our growth projects are customer-backed under long-term agreements with investments in 2024 largely focused on expansion within existing facilities. This facilitates timely and effective execution, for example, by tapping into our existing skill base and networks as well as shortening lead-in time. As is evident, these projects are highly value accretive and are compelling relative to both market multiples and our own cost of finance. Our business model is highly cash generative with low-maintenance CapEx requirements, reflecting a well-invested asset base, while we continue to focus on working capital optimization. Our financing costs are also low. This results in cash conversion based on adjusted EBITDA less maintenance CapEx [ was ] some 90% in 2024 with discretionary free cash flow before growth investments and start-up costs of the order of $0.8 billion. In the near term, we expect to primarily deploy this capital in pursuit of growth projects, which are both value and free cash flow accretive. Returns to shareholders, most likely by a dividend, will also be a consideration. In terms of leverage, we aim for a level in the range of 3x to 3.5x. We have strong access to capital markets and will require no further equity to execute this growth plan. Before moving to Q&A, to conclude, an update on recent developments. Our market backdrop remains attractive, and we have a clear road map to take advantage of this opportunity. We recently reported a strong third quarter despite some end-market volatility. Inflationary and supply chain strains are everywhere and seem set to continue, but our growth projects remain materially on track. AMP remains focused on medium-term growth, and 2 weeks ago, we detailed a new $200 million greenfield investment in Northern Ireland, which have been flagged in our third quarter results. The second project noted in late October in the Southwestern U.S. will be detailed in due course, and we made a small bolt-on acquisition in Canada to enhance our ability and flexibility to support small customer growth. And finally, we published our 2021 sustainability report, as I mentioned, which you can find on our website. So Anthony, with that, I'm happy to answer any questions that you would have.

Oliver, can you hear me?

I can now.

Great. Great. So thank you for that very helpful overview. Maybe to start off with the growth plan. I think Ardagh has among the most ambitious growth plans in packaging, and you talked about increasing the capacity potentially over 50%. Can you talk a little bit more about, sort of, level of confidence in the plan? And then any potential sources of, sort of, upside or downside risk that you see to those growth targets? And then maybe just, in terms of some of the actions that you've taken since acquiring the bev can assets in 2016 that have set the stage for double-digit growth in '22 and beyond.

Sure, and maybe I'll start with the last part first and then move to the growth. So I think between 2016 and 2020, we really integrated the business. We brought it together, and we focus significantly on our customer portfolio, diversifying that portfolio and improving the margin profile and some of the contract conditions that we had in place, particularly in North America. And so we -- in that period, actually, we weren't investing in so much additional growth. We did invest in Fairfield in the West of the U.S. We did investments in Europe in terms of [ lines ] in the Netherlands and Poland, but it was largely bolt-on investments, speedups, de-bottlenecking. And what that period did is it put in place the foundation for the real growth expansion due in particular to the diversification of the customer base and the relationships we built with customers, both purely on the metal side but, as I mentioned in my remarks, also using the glass metal position that is particularly relevant for the large brewers. So that foundation, the management team, the processes, the integration and the customer base stood us in good stead when we were looking at a growth plan that we put in place in the middle of last year, which was our internal growth plan that we then put into the SPAC process in the early part of this year. In terms of our confidence, we remain very confident in the growth program. If we look across the markets, I think North America, while there has been some weakness in hard seltzers, we still feel confident that category will continue to grow, not at particularly high rates, but at reasonable rates. I think once the shakeout occurs of all the innovation this year, we'll see then the typical beverage category dynamics, which is the #1 and #2 win, and they control the category and manage it in a good way with the retailers. So we expect growth there, but what we've really seen, I think, since we put the plan in place is the growth in other areas, other categories, particularly the broader soft drink space, energy drinks, CSD, water, sparkling waters. That area is very dynamic. Ready-to-drink cocktails on the alcohol space, wining cans, another very attractive opportunity for us, and actually, the -- what we saw this year was when the hard seltzer market did go a bit softer, we were able to pivot and satisfy demand we've been unable to satisfy before because we've been keeping customers on allocation, and actually, that released areas of the market where we had very high-growth customers and very attractive margin customers who needed more cans. So that's North America. I think Brazil, we remain very confident in the fundamental structural shifts that are going on there, both in the growth of the market and the consumers and GDP but also in the two-way to one-way shift, which is very persistent. And then Europe, as we mentioned in the remarks, a lot of sustainability tailwinds. Again, a lot of innovation, not the hard seltzers but coffees, wining cans, lots of mixed drinks coming to market in Europe as well, and so again, we feel very [ short ] And this week, we've been talking to investors, particularly about the fact that when we look into 2022, we're still getting requests for more, as we look into our plan for 2022, that we cannot satisfy. So we feel confident that the growth plan we put out there last February is still intact and that we're looking to double profit on the back of the 50%-plus increase in capacity.

Great. That's very helpful. Maybe just zeroing in a little bit more on some of the regions. I don't know if you can talk about demand trends in the Americas. You talked about some of the other beverage categories taking up the slack from hard seltzer. Can you remind us your, kind of, overall exposure to spiked seltzer? And again, I think you identified soft drinks, but any other categories that have taken up from that relatively slower growth? And then I wonder if you could just touch on the impact of the cyber attack earlier this year maybe on 3Q results, that would be helpful.

Yes. So again, maybe reverse order. I think we said about 3% of our volume -- the volume reduction in Q3 was cyber-related in Europe and North America. It was less of an issue in Brazil generally, the cyber attack. We're through that now, and obviously, earnings were protected by the Ardagh Group indemnity. So we don't expect any Q4 or ongoing impacts from cyber in our results. And obviously, lessons have been learned, and the IT plan has been significantly accelerated on the back of that, and some new business continuity measures have been put in place. So hopefully, that's behind us, and obviously, we're going to be very mindful of making sure that doesn't happen again going forward. So yes, so I think that is the key. In North America, in terms of the category dynamics, I think that it isn't just soft drinks. I mentioned on the broader alcohol space that ready-to-drink cocktails are strong. You do see imported beers still strong, just thinking broadly across the industry. So it's not that alcohol has slowed down overall. I think it's just that the hard seltzers piece has slowed down relative to expectations, right? I mean, still, I think we'll be at 20% growth year-to-date. And then I think you look into the soft drink space, you're talking really about lots of spaces, sparkling waters, infused drinks, energy drinks, new types of energy drinks. All of those are very hot, and we think that there's a big piece of this, which is actually some degree of still water substitution but just not going still water to still water. And now we are beginning to see, I think, the first real strong still water candidates going into cans, and they're still small scale. It's still early days, but we're definitely seeing trial. It's not by the incumbents as much at the moment. It's more by new players, and so we're excited by that, and looking forward, we think that will get traction in the next few years.

That's very helpful. Maybe just focusing on Brazil. I think you're potentially doubling your capacity in Brazil through a handful of projects. Just wondering how you view returns on expansion projects in Brazil maybe relative to the rest of your network and, specifically, the impact of cost inflation. And if you could talk a little bit about maybe competitive intensity in that region. Is it -- has that increased meaningfully in recent years? Just wondering if you'd talk a little bit more about the capacity plan and competitive environment in Brazil.

Yes. I think Brazil has been a good market for many years, and we've not seen that change with the entry, obviously, ABIs or Ambev's vertical and can pack. We've not seen it materially shift the dynamics of that market because of the growth, and the -- I think the market continues to behave in sensible ways. I think everybody is looking at it for their next set of growth projects, and we're confident in our plan based on the customer positions we have, particularly around -- we're expanding in the Northeast and then the greenfield with 2 lines. We have the optionality, I think, to make that greenfield bigger, but we're going to obviously wait into next year to see exactly how the market and the customer position plays out. And in terms of returns, those returns are very good. If we look across the portfolio, we don't see, if anything, among the better returns in terms of those projects, but there is some supply chain inflation. So some costs have gone up on those projects, but they still rank among the best that we're doing worldwide.

And then in terms of the -- I think you forecasted 6% to 10% industry volume growth in Brazil in terms of the end markets that are driving that change, and I'm wondering if you could talk a little bit about mix shift between glass and bev cans in Brazil.

Yes. So that is fundamentally about this two-way to one-way switch, so two-way glass into one-way packaging, and that's fundamentally going into cans. One-way glass is very short, and also one-way glass tends to be a premium proposition when it comes in. So the [ mass ] tends to be done through cans. So that continues. There's about 25% still in two-way glass in the market, and we see that continuing to substitute out accelerated by the big brewer there. So that's why you see a sort of more up to 10% prediction for that market. Some of it's GDP growth over time. Obviously, they're going through a bumpy time at the moment, but some of it is that additional growth of the overall market, and it's pretty much all in beer. So soft drinks is pretty flat in Brazil. We do think there are other trends that are going to come in the years. As we mentioned in the remarks, innovation that we're seeing in other markets, we expect to come to Brazil, but at the moment, we're not relying on that. It's basically a beer story.

Okay. And maybe rounding out the regions, I think your capacity plan originally anticipated sort of a 35% increase in the footprint with a series of projects in Europe. Can you talk a little bit about the end markets that are driving the growth in Europe? Maybe what percentage of new business is based on agreed-upon contracts or new capacities based on agreed-upon contracts? And then I think at the time of the IPO, you cited network efficiency improvements and efficiency initiatives as kind of a driver in European bev. Just wondering if you could talk about sort of the projects that you're undertaking there.

Sure. So Europe, I think, is a broad-based demand phenomenon across all categories. So we saw good growth in beer in the northern part of Europe in the last 24 months. Some of it -- some of that was at-home consumption with COVID, which was the reason that it was a bit weaker in Q3 as markets opened up, but some of it is persisting. And then I think we have the Germany position in Europe, which is that Germany obviously went through a very negative implementation of deposit legislation in 2003, a very poorly designed scheme, which essentially took the can market to 0 from 8-point-something billion. And that market continues to recover at a rate of around 10% a year, and we have 50% market share in Germany. So that's another tailwind for our business. And then I think you see reasonable growth in the East, and you also see good growth in soft drinks As I say, we don't really see the hard seltzer piece, so it's more coffee. It's more wine. It's those kind of innovations that are driving the European market. We definitely see the sparkling water phenomenon in good shape, and that's behind one of our investments in the South of Europe and in France is to support sparkling water growth. So yes. And then turning to those investments, we already had some U.K. expansion in our -- in the plan that we put in the spec, but we scaled that up with the Northern Ireland greenfield. We already had the Germany line that we cited in the investment. So we're doing that, and we may pull forward the second line in that overall project, and then we switched out timing-wise, the Spain investment for the South of France, which we're doing for 2023, as I say, backed by that sparkling water. Opportunities to Spain will now come a bit later in the plan. All of those are backed by customer contracts. We're very firm on that in terms of our BGI program to make sure they're fully backed before we commit to those projects.

And I'm wondering if maybe you could talk a little bit more about Germany, just given your market share there. You've talked about sort of a 10% increase in cans in that region. Is that driven by the consumer or the retailer? And I'm just wondering if you could talk about maybe the -- maybe longer-term outlook for the can, specifically in Germany, given, obviously, the population there.

Yes. I mean I think it's driven by the retailer and the consumer because the efficiency and effectiveness of the can in the supply chain. So it's essentially just returning to the sort of per-capita consumption levels that you would expect for a developed market with the consumer buying power that you have, which cans do correlate reasonably well with GDP per capita. And so it's essentially returning to its previous position, and then it will grow normally with the rest of the continent, but that return path means it's got some very significant growth because you have funny products in plastic. You have some beers in plastic that really should not be in plastic. It's not a great product for beer. And so those are wholesale switches that you can see. 2 billion containers need to come out. You see the soft drinks players pushing much more into cans to match the rest of their portfolio across Europe. So really, what you're seeing is a recovery to a more normal can share and can penetration, and then you add to the sustainability tailwind, and you can see you've got another step-up on that recovery. So yes, Germany is a very good market for us, for all the can makers, and we have a particularly strong position there. We have 3 can plants and an ends plant, and so that's a great market for us.

And then while we're on the region, can you provide an overview of the cost pass-through structure in Europe? I think some of your peers had identified Europe as maybe more challenged than North America in some way in an inflationary environment. Other peers have talked about programs to accelerate inflation recovery in '22. Can you just talk about cost pass-through in Europe and maybe contrast that with the other regions that you operate in?

Yes. So the fundamental structures of cost pass-through are not different in Europe to our other regions. In North America, you -- the margin, we have a little bit more pass-through in freight and in some of the metal just because some of the customers actually buy the coils themselves on the soft tolling arrangements. But the other -- the overall structures of kind of PPI pass-throughs are broadly similar. The big difference we are seeing this year was in the timing of inflation in the indexes that we use to pass through cost to customers. So the U.S. spiked up earlier. That means more of that inflation is in the 2022 pass-through number, whereas Europe spiked much later. Had actually pretty negative inflation at the turn of the year, which is in the 12-month rolling average that we use to pass through for 2022. And so some of the big inflation in Europe that's coming in Q4 will form part of a 2023 pass-through. Now we are discussing with customers about smoothing that for them and for us, but contractually, that is the situation. So that's the main issue we see with Europe 2022 is that lag. It's true to say that in the environment we faced in the U.S. the last couple of years, so we enjoyed the tightness of that market, meant we did strengthen all the clauses in our contracts. So they've probably overtaken Europe, having been significantly behind Europe. In terms of the strength of those contracts, they're now slightly ahead. So that is also a factor, but the bigger factor is this timing one when we look at our contracts.

Got it. Got it. And then around the original filing for the IPO, you discussed potentially entering new regions, maybe with existing customers expanding their footprints. I think growth in new regions is not included in your formal growth forecast and maybe you could represent some upside. Just curious if you can talk about the view on potentially entering new regions. Has that view changed over the last year? Any thoughts there?

Yes. I think we signaled that we were open to it, whereas probably 5 years earlier, we were not. I think that if any view has changed, it's just we're very conscious of how much we've got on to deliver the growth in our core markets with the additional projects we're announcing. So I think we're not closed to it, but we're recognizing that we do need to make sure the management team has the bandwidth to deliver on what we've got. But look, ourselves and the group are always very open to opportunities. We do have these very good customer relationships at the very senior levels of major customers, and they are the way if we were going to go into other markets that we would do that. So we remain open, but nothing concrete is on the horizon.

Understood. You talked about inflation in the context of bringing on some capacity in Brazil. I'm wondering, if you just think about inflation and material availability and labor availability broadly and the impact on the capacity expansion plans, how should investors think about that? What are some of the challenges that you're potentially facing? Has it changed your view versus a year ago? How are you working around some of these issues? Just wondering if you can give more detail on that.

Yes. I mean we were fortunate that we contracted a lot of the equipment and building and all the rest of it in the back end of last year and the first quarter of this year, obviously, for the plan that we put in the market. So we're fortunate in that sense. I think we talked to the Q3s about the fact that there are some bumps in the road at the moment. Not that we're signaling that's material, but they're definitely -- our teams are having to work very hard at the moment to keep projects on track in a way that they didn't have to a year ago. So I think for us, it's more the forward-looking perspective, which is if you're planning a project now, you probably have to add 3 or 6 months. You probably have to add some tens of millions of dollars to account for steel and construction and labor. That's what it means, I think. So it probably slows capacity ramp-up over the years ahead is my guess, and that's probably the best way for investors to think about it.

Great. Great. And just rounding out, in terms of capital allocation, obviously, growth CapEx is the priority for the next few years, but wondering if you can give a little bit more detail on how you think about potential cash return to shareholders longer term and then, just generally, what you consider to be the company's optimal leverage range.

Yes. So we've signaled the 3% to 3.5%, but we're obviously seeing that as a target over time that we'll work towards, especially where we have some attractive opportunities. I think we don't see that it makes sense at this point to think about share buyback, given the small size of the free float, but again, we've seen them. We're very open, and we just did again, the dividends, we'll definitely be considering those. And we'll look into that policy next year to see the timing of those.

Understood. And then just on the float, I mean, you've increased the float to 25%. So that's significantly higher than the old ARD. Just longer term, in terms of potentially increasing the size of the public float and how that could occur, any kind of broad thoughts on that?

I mean, simply that I think Paul Coulson and the Chairman has signaled he's very open to that. Obviously, it will depend on value. That will be critically important to him. He's a hugely supportive long-term owner of the business. So I think he's not going to be rushed, but he has signaled that he's very open to that. He wants to remain a majority owner, which we are very comfortable with and, again, gives us the opportunity to have this advantaged glass metal position. But yes, so as long as the value is there, I think he's very open to increasing the size of the float.

Great. Well, with that, I think we're coming up on time. So Oliver and team, I want to thank you for your time and availability, and we'll definitely have the opportunity to catch up over the course of the conference. So thank you very much.

Appreciate it. Thank you, Anthony.

Great.