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

Thanks, everyone. For our final afternoon session, we've saved the best for last. Very pleased to welcome for Oliver Graham, CEO; and David Bourne, CFO of Ardagh Metal Packaging. I think, Oliver, maybe if you can give some introductory remarks, and we'll kind of jump right into Q&A with the group and thank you for coming.

No, thank you, everybody, for taking the time. We're delighted to be here. Thank you, Anthony. So yes, look, you've all seen our Q3 results. So Q3 was a challenging quarter for us and I think increasingly visible for the industry. We actually grew 9%, which is the sort of number we have all enjoyed over the years, but was significantly below our expectations. And that did impact the profits that we were anticipating to make. And it is leading us to become much more focused now on our costs and our capacity position as we exit 2022 and go into 2023. If you look across the year, I mean, it is fundamentally a demand story in terms of the miss to our expectations. And if you break that out, the 2 factors in North America, first of all, we saw in the first half that hard seltzers didn't recover after a weak second half last year. And then the second half of the year has really been about price inflation in our core categories in the CSDs, sparkling waters where significant price increases at retail have impacted our volumes. In Europe, it's been more about the rapid reopening of the on-trade and some supply chain disruption, both for Phil Can Exports and for just customers getting product to market. And then Brazil, it's really the inflationary environment that we've had a strong year in Brazil. We've gained some share, and we've outperformed the market. I think we remain very comfortable in the thesis that we've articulated throughout about the secular demand drivers for the can. If you take it back to 2019, and I mentioned this on the Q3 call, Europe grew at 6%, North America grew at 3.5% and Brazil grew at 15%. So you didn't need nothing to do with COVID. You had a little bit of hard seltzers in there for North America, but you also had good growth coming off of the back of the sustainability tailwinds that really picked up in the last part of the previous decade. So none of that's changed from our point of view. We see over 80% of innovation coming into the beverage can in North America. We see continued substrate share gain for the can relative to both glass and plastic in North America and in other markets. So we're very comfortable with the overall story. We're now going to be sitting -- as we exit 2023, we're going to be sitting with 80% to 90% of our business growth investment program complete. So particularly in Europe and North America, we're not going to need to spend any additional growth CapEx to be able to grow for some number of years actually into that capacity position. So we're sitting poised and ready for the growth that we think will come in the market. On the sustainability front, we were very pleased to get our SBTI accreditation in Q3. We also got back the [indiscernible]. As you know, we've got a green bond. So I think we're living the story of the beverage can as a very highly sustainable product and we're living that as a company as well. We did lower guidance at Q3 to mid-single-digit volume growth for the year to $640 million to $650 million of EBITDA. We won't update on 2023 EBITDA until our Q4 was in February despite many attempts that have been made to give a number over the last 24 hours. But we did say we anticipate shipments growth and profit growth into 2023. We said we see North America running as an industry at low single digits and ourselves a tick ahead of that. We said we saw Brazil at mid-single digits. And again, ourselves a tick ahead of that and Europe at low single digits, and we'll be on and around that kind of number we think. And this is underpinned now, if I look at our profit growth into 2023, by good inflation recovery in all of our markets supported by some specific energy pass-through mechanisms in Europe. So with that, I'll just hand over to David for a couple of quick remarks, and then we can go into Q&A.

Very good. Thanks, everyone, and thanks for attending. So we've said we're not going to provide 2023 guidance to the market, but aligned to our comments that our growth investment plan is very well advanced. And with a further reflection of our plans, we expect growth investment in '23, '24 significantly since 2022 levels. With an increased focus on near-term cash generation, we don't expect to seek to go to market today any financing during the course of FY '23 as a consequence. So AMP operates with a very strong balance sheet, approximately $1 billion of liquidity at both Q3 and projected for the year-end. And just to remind, we've also got a very well turned out capital structure with none of our green bonds, which are on attractive fixed rate terms, maturing before 2027. In this context, and with an increased focus on near-term cash generation, we very much view our $0.10 quarterly dividend as sustainable within our capital structure. Cash flow generation will clearly further improve as we grow into our expanded capacity footprint over the coming years. I think with these core messages, Anthony, will hand back to you.

Thank you. Oliver, big theme of the conference and a lot of the discussions have been inventories. I wonder if you could talk about your inventories first maybe on metal and then finished cans and maybe how that is playing out in 3 regions [indiscernible]?

Yes, certainly. So we did see some inventory growth this year. We actually took some positive steps to grow coil inventory to deal with potential disruptions in the market. We had Kaiser with their force majeure. We had some concerns about Germany at 1 point in energy. So we did build a little bit of extra inventory on the coil side. And then it's true that when the sales cycle slowed ahead of our expectations, that meant we held more inventory than we had planned on both the coil and the finished goods. And we're busy working that down at the moment. So I think we'll have corrected a lot of that by the year-end. I think the industry as a whole started the year, particularly in North America, with a lot of inventory, and we saw that being worked through in the first half. That was definitely a drag on our numbers in the first half. Customers have lived on allocation for nearly 3 years. And I think that they weren't going to take any risk on that going into 2022. So they did buy a lot of cans and stored them in anticipation of a better 2022 than we experienced. So that was definitely a drag, and we saw some destocking activity, September, in particular, there were some big destocking activity in the market, and that was a drag on our numbers this year. We think most of that's flushed through now, and we think we'll go into 2023 on both our side and our customer side with a reasonably clean slate.

And then your customers obviously trying to recover costs this year and pushing price to the point that it's impacted volumes. I mean to the extent that you can say like you feel like your customers have kind of reached the point of cost recovery where some of those costs may come down now? Do you see further price increases for sort of the end product or...?

We think they're still taking some price at the moment. I think that they've had significant input cost inflation, including from people like ourselves, and they've decided to test that at retail. It was a little bit unanticipated. And I think they saw less volume reduction than they might have expected. And then, obviously, the economics of that are quite good. So I think they are still pushing it, and we're seeing that in Q4. I think -- and we signaled in the Q3 update that we see these conditions persisting into Q4. I think there's a very reasonable position that this -- some of this will unwind next year. They've reached probably some of the limits. You start to see the volumes dropping off now. The inflation will be flushing through their numbers. We have a big tailwind in LME, which they'll have hedged quite a lot of their '22 position in a much higher LME. So as they go into 2023, they've got a tailwind with new hedge positions with a much lower LME rate. So that will give them sort of firepower to go back in the market and get some volume. So I would expect us to return to a more normalized promotional environment, probably Q2 next year. I don't really see it in the first quarter, but as we go into the summer season, you'd expect to see more of that.

And then maybe just first on North America. You talked about some of the challenges seltzer. Can you remind us your exposure of the seltzer and kind of current is?

Yes. We're sort of low teens in North America, low single digits globally on the hard seltzer market. So -- but we have got good portions of the main players. Obviously, that category disappointed significantly this year. I mean, I think I've seen minus 13% or minus 15% year-to-date relative to our expectation that there would be some growth. I mean we didn't predict a lot of growth, but we thought some growth. So that's a big reversal. I think we're finding the bottom. So I mean, I think that as we go into Q1 next year, we'd expect to see that pretty stable. We're not forecasting a huge amount of growth. We're seeing the #1 really recover in terms of taking share. So I think they're over 50% share now. And they, therefore, will get a chance to bring innovation to the category, manage the shelf, manage promotional activity. So I think what we all can see is it's a category that's here to stay. It's going to be a very persistent part of the overall market, but it just isn't going to have the growth that we all thought 18 months ago.

And then maybe another aspect of North America, you've added capacity. In terms of specialty mix, can you remind us where you're going to stand there?

So globally we are around 50 -- low 50s percent specialty and North America is in a similar type place, I think. I don't have the numbers.

[indiscernible].

Yes. Yes. So -- and the capacity we've added has been heavily specialty focus. That does mean we're a bit long, specialty capacity next year. We will take some curtailment actions. We've signaled that already, say, up to a couple of billion of capacity will curtail. It can come back very quickly. So we're ready for any uptick in the market. But we will be disciplined and cautious about that in North America in '22 -- in '23, sorry. And we will do some conversion of line. So we'll increase the flexibility on some of the lines to be able to play between standard sizes and specialty sizes to give us the options as we go into 2024 depending on how the market develops.

Can you remind us what you said about curtailments from a capacity standpoint in North America and Europe?

I mean similar sorts of numbers, I think, on both sides of the $1 billion to $2 billion. On the European side, we have some legacy steel lines. So we'll actually close one of those, and then we'll curtail some other capacity on the aluminum side. And then in North America, as I say, we'll take some sleek down a little bit of older capacity, too.

And the capacity that you've added in North America and Europe, when you think about -- we hear about committed capacity, sort of what that means? And in a year like this where people maybe over ordered or double order, how that impacts the utilization rates?

Yes. Look, clearly, customers expected more. I think that there was some degree of caution on their part, having been short for several years, and you never get any prices in procurement and go short of the core product. So I suspect there was some caution to make sure they were covered. So we will be a bit more cautious about some of their forecasts going into 2023, even though I think they are more level set. I also think they did not anticipate -- obviously, the sales guys did not anticipate what happened. And none of the big CSD players or mass beer players went into the year thinking they were going to do lots of price rises because we thought this time last year that the inflation was transitory rather than what became very persistent at the back of the Russia-Ukraine war. So I think we will adopt a slightly more cautious stance. We do have, and I've talked about this a number of times, a range of volume protections in our contracts. We are talking to customers about the more firm commitments that were made, and how we manage the recompense for those and overall see that play out over the next year or 2. We already have some payments in our numbers on take-or-pay contracts for volumes that were not delivered. So there's a mix of things in there, but we will adopt a slightly more cautious stance towards forecasts as we go into '23.

And then we've obviously been through an experience with the pandemic, where supply/demand was really -- the market was undersupplied, and you were importing -- industry was importing a lot into North America. As you think about '22 and going into '23, have you seen a change in competitive intensity in North America versus like pre-pandemic, so there's been some new market entrants and the very smaller...?

Not really. No. I mean I think -- so I think there's a number of reasons for that. I mean, look, I think the industry is fundamentally pretty disciplined and understands the dangers of not being disciplined. I think we're very contracted as an industry through the middle of the decade. That was something we made a big point of as we went into the SPAC process to get ourselves very contracted. I think the others have caught up naturally through that normal cycle of contracting. So there is -- it's not the big volumes out there to play with. So I think we see some normalization of spot pricing just from not available or at prices that would be on anything seen before. You see a bit of normalization of that. But we don't see anything in particular relative to 2018, 2019 at the moment.

If we take the targets you put out for volume growth of Q3 for your public capacity announcement. What does that imply for your operating base this year, maybe the 2 biggest regions.

Yes, we're aiming in the 90s, which is where -- because we've got some ramp still going on in Europe and in North America on the capacity that we brought up and then with those curtailments that will keep us in the 90s, which is where the industry needs to be from a -- that's a healthy operating rate. So that's our target.

And then on the contracts, can you remind us in terms of North America versus Europe contract length? And are there any kind of pass-throughs maybe outside of metal that you need to fix or you're in the process of fixing?

No. I mean I think contracts all lengthened globally from a sort of 2- to 3-year average to a more 4- to 5-year average, but particularly in North America in the, say, 2018 to 2021 period. So that was a positive trend for the industry. We had customers coming to us to ask to contract early to make sure they were covered. So that was all positive. I think that in that period, we also got a very secure set of inflation pass-throughs in North America. So we didn't suffer any mismatch of inflation in North America on '21 on '20 or '22 on '21. We had no headwinds from inflation in our North American numbers at all. And I think that's because we've made a very concerted effort to strengthen the PPI pass-through clauses that we had in place in North America. So those contracts are looking very secure in terms of inflation recovery, and looking into '23, we see the same thing. But in North America, we should get good recovery '23 on '22. We don't see overrecovery, but that's because we didn't have underrecovery before. So we just see that we're tracking nicely with inflation in terms of our pass-through North America. Brazil has always been secure in terms of our pass-through mechanisms. And so Europe actually became an issue we had to address this year. We've historically been pretty comfortable with our European pass-throughs, but when inflation spiked very quickly, that created some issues with the lag effects on our pass-throughs. And then the second issue, obviously, was the war, which just took energy to totally unforeseen level. So we have very proactively gone to the customer base this year and pulled out energy as a specific pass-through into '23 as a surcharge mechanism. And we've done that against a position which we've now pretty much fully hedged in Europe for 2023. So customers have full transparency and visibility on what that number is going to be. If that goes down in '24 with our hedge position for '24, it will come down. So it's a very equitable mechanism, we believe, but it does mean were fully protected from any energy spikes for the -- for the next few years in Europe. We took the opportunity also to strengthen some inflation pass-throughs given this environment, which is obviously much more volatile and higher than the last 20 years. So we feel pretty secure on that. As we look at '23 on '22, we think we get full recovery on the inflation that's going from '22 to '23. What we said, we said at the Q3 and subsequently here as well that we're not getting the recovery yet at some of the losses we incurred in 2022. We think those come back over more over subsequent years. But if you take it in the round, I think, factually, we're stronger both sides of the Atlantic as a result of the last few years.

And when you say fully hedged in Europe here, are you able to effectively hedge all of your electricity kind of markets [indiscernible].

Yes, we don't have the situation that others talk about, which is the some markets they can't hedge. They're mainly long way east. So no, we're able to fully hedge our market.

Can you talk a little bit more about Europe and your footprint in Europe? Because I think sometimes we think it sort of homogenous, in fact, some of those markets are quite different.

No, absolutely. So we're more Northern Europe focused. So U.K., Benelux, Germany, we're #1 across those 3 regions. Then we have a very strong plant in Poland. So that's the core of the network, and then we have a plant in the South of France and a plant in Madrid, which we're #3 in those -- in that region in the Southwest. So we benefited, and we mentioned this in the SPAC process from the high growth that we had at the time in U.K., Benelux, Germany. We had some share gain as a result of that, not because we're targeting share gain, just that was a mix effect on those countries. That effect reversed a bit this year because the U.K., in particular, the on-trade opened up. We'd always said there was a COVID impact in the U.K. and that we definitely saw the reversal of that this year. But as we go forward, Germany continues to have very good levels of growth. That's linked to a historic situation with a very poorly designed deposit scheme that's now being worked back up to more normal can penetration rates. And then Benelux is actually a very strong market for innovation and co-packing, and the U.K. just as good -- similar characteristics to the U.S. in terms of innovation in cans, soft drinks growth, quite a strong antiplastic sentiment. So yes, we like our footprint in Europe. We think it's in strong markets.

And then -- can you remind us around sensitivity around how on the euro?

Yes. So the pound we hedged most of that out. It's a pretty small percentage. Yes, David, do you want to take that?

Yes. I mean it's about 9% of our total earnings position on the euro mid-20s on top of that. But we aim to kind of match our debt leverage position 1:1. So we're very well matched between -- under debt and currency swaps we do. So that leverage will stay the same as euro or [indiscernible]. From an EBITDA perspective, clearly, if you take that translation risk, and I think you have every cent movement is probably worth about $2 million on EBITDA on a full basis [indiscernible].

And then maybe just rounding out the regions, Brazil, a lot of moving pieces this year with recession and election.

Yes, it's been volatile. I think fundamentally an inflation issue, a devaluation issue, cans price significantly in dollars with the metal and the chemicals. So when there is devaluation in inflation, the can does become more expensive in the panic. So there was some shift back to 2-way that we saw, and I think that explains the weakness in the market. We did well. We've signaled through the SPAC process that we expected some share gain in Brazil from some repositioning of one of the big customers to bring us into their mix. We also felt overconcentrated in Brazil with just 2 main customers. So that was something we always saw coming. We also then did gain some additional customer volume that we hadn't anticipated. So overall, we have outgrown the market in Brazil, though. Yes, Q4 is not looking amazing. We're not seeing a well cut bounce. The weather seems still pretty poor. There's still some inflationary pressure. So we're not seeing a particularly strong Q4, but overall the year will be good for us.

And you talked about in the context of Brazil, but just maybe globally, can you talk about substrate substitution and substrate competition between metal and plastic?

Sure, yes. Look, I think that we still see a tailwind for the can in the soft drink space with the pressures on plastic and those pressures come from ESG commitments made by customers to reduce their PET use. Comes from the fact that recycled PET remains quite short or expensive. It comes from the fact that there is still consumer pressure against plastics. So for risk management reasons, I think, the big CSD players have rebalanced their portfolios towards cans, which they could do because they fill in cans and plastics. So it's relatively straightforward for them to do that. And that has removed what used to be a drag on North America can growth was the shift towards PET. So obviously, they're still very committed to PET and filling a lot in PET. But I think it's just removed that drag and given us some share growth, which we still see in the Nielsen data in North America on soft drinks that we're gaining share. We see that in Europe, too, in investments in growth is mostly in can filling lines by the big soft drinks players. Brazil's soft drink is a much smaller portion, but again, can back in growth after being pretty static relative to PET. So we think we're still winning there as we look across the region. On the glass side, that's more a beer story, obviously. So 2-way glass definitely coming into cans, both Europe and Brazil, particularly that's the Brazil story. In the U.S., you do see some 1-way glass to can substitution as cans have moved up the premium positioning in beer and also very good value. So we have seen some substitution cans from glass in beer in North America. That's less true in Europe, but we do recognize there is a potential headwind for glass in Europe next year with the proportion of energy that's in their product. We're not seeing it yet to be absolutely transparent. There's still a lot of pressure on our sister company for more volumes. So -- but it looks like a potential headwind in '23. So yes, for them -- so a potential tailwind for us. So I think overall, we feel well positioned and particularly with LME down, I think that's a big piece to the puzzle for next year.

I mean Germany is obviously the largest market in Europe. You have a #1 position there. The cans are growing, but there's maybe a ceiling to that based on the deposit loss. Can you just kind of remind us...

Yes. So I mean, Germany was a $6 billion can market, right, and then you had a $1 billion $2 billion export business as well, and it went to 0 in 2003, I mean, literally 0. Because of the deposit scheme that was implemented, which was very politically motivated to protect to a glass and the regional brewers have no return path for the can. So you essentially could not really effectively return cans and get your money back, at which point the retailers delisted them completely. We're back in the $4 billion level now. So you can see there's still plenty of runway to get into the $6 billion, $7 billion, $8 billion market. And we've got Spain at $10 billion, U.K. at $10 billion, There's a reason why Germany isn't a $10 billion to $12 billion market on any normal per capita basis. There are a few environmental headwinds. The -- but I don't see those being a real issue because the can has such good environmental credentials, but there are some players in Europe playing the reuse card. But I think Germany is very strong for us. And yes, we don't really see a limit to that. I think it's got a long way to travel.

Are there any -- I mean you talked a little bit about water. Are there any new categories or new products that you're particularly excited about as you think about '23 whether it's ready-to-drink or stillwater or...

Yes. I think ready-to-drink, all of the vodka, the vodka sodas that people like North Canton are getting into, I think that could be good. So obviously, they've seen the success of that category this year. It's still small relative to the malt-based seltzers, but I think it's got good growth potential. So we're excited about that. I think we do see stillwater coming with a liquid death type approach of really some attacker brands, and we're sponsoring a few initiatives in that space to bring that along. Obviously, a bit harder in an inflationary environment to be at a higher price point, but liquid debt are not slowing down yet. And it's a great example of what can be done. And we're also looking into technology solutions to support that space. So I think those are 2 definite spaces. Others are still strong wines, coffees. Some of those spaces still got a lot of growth in them. So I think there's a number of places, but probably if you, yes, if picked out the 2, it would be the ready-to-drink spirits and stillwater.

And David, I mean, you talked about this a little bit at the beginning, but in terms of thinking about -- you pulled back on a few growth investments in terms of sort of normalized CapEx or CapEx as a percentage of sales or D&A or however you think about it, can you talk about that? And then to the extent that you're generating good cash, debt paydown, return of cash priorities.

Yes. So look, our maintenance CapEx runs around about 100 mark. We probably then got 26 and above that for the sustainability initiatives, IT CapEx spend that sort of , but that's the regular run rate for business growth investment. We'll continue to have a challenged business growth investment in '23 because we've got the hangover project that we completed to '22, or the cash flows related to those projects that some of it will fall into 2023, but you will see a significant drop off from our '22 EGI spend, and we'll give those numbers in more detail in February next year. And then we anticipate that dropping further in FY '24. So we'll probably continue to be cash flow negative in '23. But then positive in '24 and that I think gives us some options in terms of [indiscernible]. So year-end leverage this year, probably around 4.5x LTM EBITDA, which is where we're [indiscernible] Q3. That's partly because while housing business growth investment outflow in Q4 will have a substantial working capital in flow coming in the fourth quarter as well. So I think that leaves us well placed with a strong balance sheet. We like to say with long-term maturities on our debt structure, et cetera. And I think in terms of kind of capital allocation plans next year, we've been very strong to indicate that we feel that the $0.10 per quarter dividend is sustainable. And so we've given a very clear signal of but that's modeled in for next year. I think the share buyback program, we continue to have an authorization up to $200 million on that program. We've done circa $35 million through to the end of Q3. We'll take a pause on that in Q4. We're looking at our liquidity position and making sure where we want to be for year-end. And then as we feel our way into next year, see how the growth is coming up relative to that in the market and we'll check the view on what we want to do there. But that's probably the top element between taking the business growth investment down, keep dividend, share buyback programs [indiscernible].

Just quickly going back to the growth markets like coffee [indiscernible]. You find that those markets are more challenging because they could be short on business, different can sizes, a lot of line changes? Or do you find that they could be higher margin, higher returns because maybe you're not working with this massive customer get a little more leverage there. How does that affect the profitability?

Yes. Usually, they're better margin for us. Now it is important that you cost out properly the cost of complexity in working that through. But most of those situations, we're very comfortable that they are higher margin because the higher retail price typically, the innovative people are bringing them in specialty cans normally. So yes, most of those situations look good to us.

I guess maybe last 1 for me. As part of the listing free float is 25% [indiscernible]. I don't think your main shareholders is probably interested in selling at these levels, but just when you think long term about maybe mechanisms the flow that ARB was able to do that to [indiscernible]. Just any broad thoughts for shareholders to think about the next 3 to 5 years?

Yes. We don't have anything very much to say, right? I think we've got a job to do, which is to grow into the capacity that we've built and meet the expectations that we originally set. I think once we've done that, we'll be able to explore interesting new questions like that. But I think the management team is just very focused at the moment on making sure we deliver against some of those original expectations, which will obviously take us longer than we planned in this market. But yes, that's our sole focus right now.

Great. Oliver, David, thank you.

Thank you very much.

Thanks a lot.