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

Good morning, everyone. Welcome to the Credit Suisse Ninth Annual Virtual Industrials Conference. I'm Curt Woodworth. I cover metals and mining and paper and packaging here at CS, cover Ball and Crown also covered the legacy Ardagh parent company. We're very pleased to have Ardagh Metal Packaging with us today at our virtual event. This was spun out of Ardagh, basically comprised of the legacy assets of Ball and Rexam. We're very pleased to have the CEO of the company with us today, Oliver Graham, who has been with the company since that acquisition and prior to that was a Commercial Director at Rexam. So welcome, Oliver. We're very pleased to have you at the conference. I know Investors are very well aware of your peer group. They're getting to know are Metalpack more now that you're sort of separate entity, but perhaps you could have some introductory comments. I know there are some slides prepared and then we can get into the Q&A portion.

Sure. Yes. Thanks, Curt, and thanks to Credit Suisse for hosting us today. We're delighted to be in New York. As you said, we have a few opening remarks and some slides, and then we'll get into the Q&A. So welcome, everyone, joining virtually today. So I'll run through these slides. I would just say they do contain forward-looking statements, so we refer you to the disclaimer on Slide 2 of the accompanying investor presentation, which is also now uploaded on our website. So just before I run through the investment case, for those less familiar with AMP, it's worth briefly recapping on this year's listing process. So following the February announcement of the proposed combination with gas, AMP, formerly wholly owned by the Ardagh Group, subsequently began trading on the New York Stock Exchange in August -- in early August. The attraction of this route 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, 25%, while Ardagh Group remains a supportive and committed long-term majority shareholder. So if I turn to Slide 3, we summarized the investment case. So we're a preeminent, pure play, 100% beverage can company, focused on 100% sustainable products. So we're the leading player in each of our markets. We're either #2 or #3 market share in all of our markets, and we're an outstanding ESG investment. Our products are 100% infinitely recyclable. And aluminum is 1 material that can become 100% recycled in time. Our multicluster growth is supported by long-term mega trends in each of our markets as well as environmentally conscious and consumers who're driving an inflection point in beverage can demand. And I'll speak to that in greater detail in a couple of slides. AMP's entrepreneurial no manager culture with an experienced management team acting in the best interest of the business have delivered consistently, particularly in terms of the increased diversity of the business from a customer point of view and improved contract terms achieved over recent years. We have nimble decision-making because we understand risk in the business, and we have a few layers of management. AMP also has outsized relevance for our largest customers as longstanding and deep beverage can relationships are complemented by the Ardagh Group's glass business. And these very significant gas relationships, combined with our metal relationships give us an outside seat at the table that is completely unique in the beverage can industry. Finally, we have a clear and ambitious long-term growth plan. We aim to more than double EBITDA by 2024 on the back of an over 50% growth in capacity. And this is all backed by attractive customer contracts. If I turn to Slide 4, just to give an overview of the business. We have 24 production facilities across Europe and the Americas. The 24th was acquired late last year, and we bought a site in Huron, Ohio, where we're now building both ends and [Audio Gap] Okay. Apologies for that. I'll keep referring to the slide there on our website. So the numbering refers to slides on the website that people want to download. But obviously, the commentary is relevant with or without the slides. So just recap to the beginning of Slide 4. We're a leading global player, 24 production facilities across Europe and the Americas, the 24th we bought late last year in Ceron, Ohio, and we've started end production now and we'll start can production there early in the new year. We have a well-invested asset base. These were good assets brought out of Rexam and Ball at the time of the divestment, with highly experienced and best-in-class teams. 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, names could be very familiar to you and with which we have deep-rooted long-standing relationships and with whom we contract on a multiyear basis. And finally, as I outlined later on, we continue to see strong market growth rates, which we expect to continue for the foreseeable future. On Slide 5 in the deck, which we talk about our ESG proposition. We're a leader in sustainability, not only in our industry, but across packaging. We have a clear sustainability strategy that covers all aspects, environmental, emissions, ecological and social, and we recently published our 2021 sustainability report, extending our commitments out to 2030. On the environmental side, we have committed to science based sustainability targets, and have set a target for 100% renewable electricity by 2030. 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. We have set a target of 0 waste to landfill across our plants by 2025 and a 20% reduction in water intensity by 2030. 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 intrusion agenda. This year, we announced a $50 million 10-year investment to deliver STEM education to over 500,000 students in the communities in which AMP operates across the U.S. On Slide 6 of the deck you'll see that strong industry growth in beverage cans as a 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 the sustainability positioning of the can, coupled with the shift to specialty cans, are key positives over other substrates. It's estimated that around 75% of all new product launches in North America are now in cans. Europe is leading the way on sustainability and both consumers and regulator are driving increased use of aluminum in place of plastic. New products and specialty cans also drive this market. The Brazil market benefits from overall GDP growth 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 can's transportability, efficiency and robustness all enhanced its appeal. In Slide 7 of the deck you'll see the investment in demand outlook. And 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 of the foreseeable future in the industry represents an inflection point and a fundamental change in demand. The market is short and suppliers are unable to maintain pace with projected demand growth for years to come. Historically, the industry has grown at 3% to 4% rates in established markets, those same markets, North America and Europe, today, are growing at 5% to 7% rate with Brazil projected to grow up to 10% annually. Add to this over the level of -- add to this the level of can imports to the U.S., potentially reaching mid-teens billions of cans imported from around the world as well as the backlog in pack-mix conversion to metal due to a lack of supply and it's clear it will take the industry several years to catch up to current demand levels. On Slide 8, we lay out the shareholder value proposition for AMP, and how we intend to allocate capital. Firstly, we see an attractive growth ahead of us and investing to support our customers' medium-term demand growth for sustainable packaging is a key goal of the company. We aim to double our adjusted EBITDA between 2020 and 2024. Our growth project, backed by customers under long-term agreements with investments in 2024, largely focused on expansion with existing -- within existing facilities. This facilitates timely and effective execution, for example, by tapping into our existing skill base of networks as well as shortening lead times. 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 of some 90% in 2024. With discretionary free cash flow before growth investments in startup of the order of $800 million, in the near term, we expect to primarily deploy this capital and pursue to growth projects, which are both value and free cash flow accretive. Returns to shareholders, most likely by dividends will also be a consideration. In terms of leverage, we aim for a steady state 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 turning to the Q&A, just 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 seems 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. Finally, as I mentioned earlier, we published our 2021 sustainability report, which you can find on our website. So Curt, with that, I'm happy to answer any questions that you may have.

Great. Thank you for the overview. I think when we look at sort of the history of our metal pack, I think initially, the business had fairly high concentration to more of some of the commodity beer channels. I know the company has done a pretty impressive job to reposition the mix commercially over the past several years. And part of that transition was getting into energy, other areas like hard seltzer. So I'm just wondering, as you map out this pretty aggressive growth curve of 50% volume increase into 2024, can you help investors understand kind of the moving pieces of where that growth is coming from? How much of it would say be alcoholic versus nonalcoholic? And then in terms of the contract structure, how do you get confidence around strength of the contracts, whereby in the event such as we saw this year, where hard seltzer disappointed, that the company has tactical flexibility or capability to pivot around or the contracts provide some stability in terms of take-or-pay? Because I think there is a concern in the market that, optically, the growth looks very high and how companies are going to kind of deal with this transition because it will be lumpy at times like we're seeing this year.

Sure. Yes. So look, I think if you take the North America market, we see our growth coming from a whole range of areas actually. We do still see some growth in hard seltzers off a lower base from this year, and we paid that back this year in line with our customers. So we still have some growth in our plan, part of which is already being sold in the market today and is actually a replacement of imported cans. And part of it is we expect some single-digit growth rate in the category once we've cleaned out all the SKU proliferation and complication that came in this year, which, I think, just ended up confusing the consumer and not helping the category. And it's been a good analogy drawn with the energy category, which went through a similar phase of everybody piling in a loss of growth and then shake out, #1 and #2, then manage the category with the retailers get good promotion, good innovation, and you'll get some growth. So we still have hard seltzer in the plan, obviously, to a lower absolute level than we would have seen 18 months ago. But that has been replaced by a whole series of other customers and categories where there's significant additional growth. And I'd point to a couple of areas. In the alcohol space, it's really the ready-to-drink cocktails, which are going extremely well, and where we have some very strong customer positions. A smaller one in the alcohol space is wining cans. That's going well for us in Europe, and it's coming now in America. And then it's really the broader soft drink space. We're seeing CSD, core CSD end growth and with projections that we've not seen in recent years. We're seeing the energy sector, as you said, also very strong and not just the traditional players, they are very strong, but all the other new types of energy drinks that are coming to market with vitamins and enzymes and electrolytes, that's a very attractive space. All the sparkling waters and infused waters, very interesting space. And we do see in the time of this plan that still water will come to the market in cans. We're not betting on it. We're not putting a huge amount of capacity assumption around that, but we do start to see now new players come into the market with still water, more than new players than the incumbent, to be honest. And so we think those -- that trend will accelerate through to 2025. If you took Brazil, it's mostly a beer story, as we said, 2 way to 1 way. And if you take Europe, it's a broad-based story across beer and soft drinks, again, some similar themes, energy, coffee-in-can, very big innovation category in Europe, again, the broader soft drink space looking very positive. And we think there is some tilting there of customer portfolios from PET into cans. Then you asked -- sorry, about -- the second part of your question is about contract structures. So we have a range of volume penalties, if you like, ranging from traditional rebate structure right up to take-or-pay, contracts with customers large and small, and we're comfortable that those are very important penalties for customers. So they're certainly not -- it's not a free ride just to throw a volume number over the fence and see if it plays out. We're obviously conscious that there will be some intent to do that. So we're looking always across the portfolio of our customers when we're planning new projects. And we're confident from the other market trends that the sort of projections we're seeing are reasonable. But to your point, we're absolutely focused on diversifying the business. You mentioned we were 70% or 80% with 3 customers in North America in 2016. Those 3 customers are now 30% of the business. And we remain very focused on that diversification. And that's what helped us this year when, as you say, we had a bump in the road, which is normal these are consumer beverage categories. You can't rely on every customer and every category, every quarter, you get a bump and then we were able to pivot away to very attractive other customers and categories, and that helped support our results.

Yes. I mean the fact that your volumes were down 6%, I know you said it's more like a down 3% comp if you ex out the cyber incident, but your EBITDA was up 15% constant currency on down volume. So that kind of speaks to, I guess, tactical flexibility within the organization. But obviously, you need volume to really kind of monetize what's going on. So can you speak to how you see the return profile of the business going forward? I know you talked about a lot of the investments you're making are significantly higher -- significantly above your cost of capital. So you can -- can you kind of speak to the return profile going forward? And then in terms of 2022, what are kind of the key milestones you're looking for in terms of monetizing this growth curve? Can you speak to some of the projects, the evolution of the projects more in the [indiscernible]?

Sure. So yes, so we look for around a 20% pretax IRR, which obviously is a very attractive level to be at. We signaled that the overall capital portfolio was, at that time, trending between 3 to 4 ratio of capital to EBITDA. I think that it is extending a little bit more around 4 at the minute with more greenfield and with some of the supply chain inflation, but still very free cash flow accretive, still very value-generative projects, and we're very disciplined around that. So to the point we made about shareholder value, as long as we see those kind of growth projects and as long as we see the industry behaving rationally around growth projects, we will be looking to invest in those kind of opportunities. But if we didn't see that, then we clearly become very free cash flow generative for shareholders. In terms of milestones for next year, so if you take North America, Olive Branch, 2 big sleep lines, they're ramped up now, just a little bit of debugging on certain bits of equipment. Winston-Salem is coming up as we speak. The first line and the second line will come up early in next year. A few bumps on that project were certain bits of equipment in the last few months, but again, nothing to materially disturb our projections. And then Huron, as I said, ends or in production as we always said they would be. And cans will come up in Q1, Q2 next year, and that's on track. Now again, there are bumps in the supply chain, there's no question. You have components that you never expected to be short, a part of some other piece of equipment. And so we are surprised every day, but our teams are working exceptionally well to overcome that. So, so far, so good on Huron, which obviously is a big part of the expansion to North America. So those are the 3 big projects in North America that will support the growth next year. In Europe, we have a project in the U.K., one in Germany, both, again, with minor delays, but coming up in the first quarter. And in Brazil, we completed now an expansion in our Jacareí plant in São Paulo. So that's up and running ready for the season, which we're just going into, the summer season. And so we've got everything in place for Brazil for the growth next year.

And then I guess with respect to the U.S. market or the North American market, you talked about potentially $14 billion, $15 billion of can imports relative to market size of, say, [ $110 billion ], depending on how you define it. And then on top of that, there is onshoring, right? Like Red Bull is building a couple of facilities in the U.S. So I think there's a miss -- somewhat of a misunderstanding in the market that for ARR, the industry to grow mid- to high single digits doesn't necessarily mean that's what kind of the end market is growing, right? Because, theoretically, you're displacing acute kind of imports, then you have this onshoring component that doesn't show up in the Nielsen data, right? Because that's basically replacement capacity from Europe. So I'm just curious, as you think about growth, how much of those imports, do you think, can be displaced by cans? Are you benefiting from onshoring? And then with respect to the raw materials, 50% increase in volume, that's a lot more can sheet, that's a lot more alloys and components. Do you feel the company is well positioned from a raw material standpoint to have adequate supply going forward?

Yes. So look, I think the imports will definitely get replaced by domestic supply because they are very, very uneconomic from a dollar point of view. They're very poor from a sustainability point of view. You think of the additional freight and CO2 of transporting empty cans all over the world. And they also cause significant -- potentially significant quality problems if you don't manage it very carefully because they're being transported long distances, can get damaged. You've got longer time periods between production and filling. So nobody likes imports. I mean, maybe there will be a small volume out of Mexico, Canada or something like that. But certainly, to bring cans out of China, the Middle East, South Africa, that is not a sustainable thing to do on any dimension. So yes, those imports are all going to get replaced, which is it's effectively 5 can plants you've got to bring up to replace them. And then, as you say, we've got growth in the market. And we've got the -- as you say, the Red Bull phenomenon where billion -- a few billion cans of being localized and more will be going forward. So yes, exactly, to your point, I think we've got -- and by the way, then there's another effect, which is inventory. So one of the reasons I think you've seen some of the announcements in the industry in the last few weeks is because all of us are struggling to be efficient with our capacity at such low inventory levels. It needs to increase changeovers, and that actually gets you in a vicious circle. If you're struggling to keep up with customer demand, so you do more changeover to keep customers running and then you end up with less capacity because you're stopping and then you can't keep up with customer demand. So I think that's partly why you've seen some of those moves. So you've probably got another 4 billion or 5 billion to normalize inventory. So if you think 20 billion in the industry is actually just inefficiency or imports, again, now up to 6, 7 can plants that need to be built and run. And then I think the other people -- thing people miss is how hard it is to bring up can plants in really good ways. That's not an easy thing to do. And it's particularly not an easy thing to do in today's supply chain environment, today's labor environment. So we also think the capacity will come a bit slower. We have come across investors who say, "Oh, well, I took that announcement and assumed that, that capacity was available in the second quarter after the announcement," that's not how it happens. I mean it's not even planned that way, right? It will be planned with the first line and then 6 months later, the second line and the third line typically. And then that's if it goes well, and it's easy for things not to go exactly to plan. So yes, I think that's why we're feeling what we're feeling, which is customers are still coming to us for more, and we're still having to say no as we look into 2022.

Okay. And then from sort of the balance sheet cash flow perspective, obviously, the reinvestment requirement is very high in the business right now. But can you speak to kind of long-term thinking around capital return, target leverage? Will there be scope for shareholder returns during this growth phase?

Yes. I think we think there will be. I think it will be in the form of dividends, not in terms of share repurchase because we don't want to diminish the size of the free float. We cited a couple of numbers, right? EBITDA minus maintenance at 90%, would generate $800 million of discretionary free cash flow before projects of an EBITDA of [ $1.1 billion ], that's $1.15 a share of discretionary free cash flow generation in 2024. Obviously, we're planning to spend some of that on projects. But again, I think that we think there will be that capacity in the business to pay dividends. We're targeting 3 to 3.5x, but we're pretty relaxed if we are a little bit outside that envelope at different periods to take advantage of these growth opportunities. So yes, I think the simple answer is we do see the ability to give shareholders some returns that way as well.

Okay. And then I know we're kind of coming up against time, probably goes to the technical difficulty, but when you look at your business, your specialty mix is very high, and I'd argue your volume growth is probably best class relative to the rest of the industry. So strategically, what do you think -- are metal package differently from others? How do you try to differentiate maybe your value proposition relative to your peers? I know everyone is fairly confident in oligopolistic sector, but maybe we could kind of end on that?

Yes. Look, I think we bought all and rent some assets. So it's not that we're saying we're dramatically different. We have good teams, good assets. I think that we're in some growth spaces, partly targeted, partly due to some legacy. So U.K., Germany, strong market share, strong growth. We're in some growth categories in the U.S., again, due to some moves we made in the 2016 to 2020 period. And in Brazil, there's been some repositioning on the customer side of their supply position. So I think that's been advantageous to us. I think we do take customer service and customer relationships very seriously. Not to say our competitors don't, but that's playing out. And I do think that glass metal position is under estimated the advantage of the majority shareholding of to group is we can talk to customers across the 2 substrates. So we don't mix any of the sales teams. We don't trade any value, but we do have a completely different strategic relevance to very big customers from having the 2 substrates and that's a unique positioning. So I think there's a number of things that the competitors are very good, too. But I think we have a number of things there that mean that that's why we're getting that growth, and that's why we're confident in the plan through to 2024.