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

Thanks for being here. It's great to be back at our Annual Global Ag and Materials Conference with a wonderful slate of attendees. Thank you and wonderful slate of companies. We're being kicked off by Ardagh Metal Beverage Packaging and CEO, Oliver Graham, for the company. Also in the audience are David Bourne and we're happy to take your questions live mic as we're going through. As you know, Ollie is Chief Executive Officer of the company, a position he's had since January of '20 before taking up the role at Ardagh Metal he was CEO of Metal Packing Europe with responsibility for Metal Packaging Brazil, and also being a Ardagh Group SA, Commercial Director. Ollie has been in the industry for many, many years, wealth of experience. Ollie, good morning. Thanks for being here.

Thank you.

So we're going to get right to the heart of the matter, Ollie. Last week, you provided an update with your earnings report. Relative to your guidance, and there's some puts and takes as always, what do you think best supports your outlook for on the order of 10% EBITDA growth? And what are the biggest headwinds? And where would you say that tensions lie either to the upside or downside to the extent that you can comment?

No, sure. Thanks, George, and delighted to be here. So if we look at 2023, there are 2 things that are supporting the uplift in profitability. The first is an overall volume number. So we've guided to low single digits for Europe and mid- to high for the Americas, and we can talk more about why we've done that. The other piece to the recovery in '23 is inflation in Europe. We, obviously, had a very tough year in Europe last year with the energy situation unprecedented spike in energy prices that led to more than [ EUR 70 million ] of unbudgeted inflation. So we're getting a big chunk of that back in 2023. And then the drag on the numbers for '23 is the fact that we've got a bit more capacity than we need at this point. The industry as a whole had predicted more growth through '22 and '23. And so we have some unrecovered fixed cost absorption in our numbers for '23. So those are the big 3 pieces in the guidance.

Okay. And would you -- at this juncture -- obviously, your forecast is your forecast, and I guess the way you frame it, you have equivalent probabilities to the upside and downside. Would that be fair? Or do you feel at this juncture, we feel pretty comfortable if the volume and the incremental margin maybe the tensions are closer to the upper end than the lower end of, again, on the order of 10, which is...

Yes. I think the key is the volume, right? I think we're back to a more normal situation for the industry, which is that our costs are pretty known and fixed in the year that you're running in. Last year, as I said, it was completely unprecedented to have that sort of degree of inflation in the year, unexpected. We're fully hedged on European Energy for 2023, and that's all been agreed with customers. It's all passed through, so we can see our footprint. We're curtailing a decent amount of capacity to be disciplined in the industry and also to recognize that the growth hasn't come at the pace we all initially anticipated. So our cost picture, I think, we can see pretty clearly. So in the end, the ups and the downs are going to be about the volumes. And so if we talk about the outlook on that, I mean, low single digit for Europe, we're being reasonably cautious, we think. We've got competition out with slightly higher numbers now. There is some mix impact in that. Different can makers have different categories they're in or different customers they're in. One particular end customer and big customer in Europe seen very high growth on the energy side. So we think that low to mid for the market and low single digits is appropriate for us for Europe. And then in the Americas, on the mid to high is really about the fact that we have some contractual positions in both markets coming through. And we do expect the second half to be materially better than the first half in both markets, North America and Brazil, for different reasons. So I know we'll come on and talk about promotional activity. We expect that to come back in the second half in North America. And in Brazil, it's all about actually the inflationary impacts on the can for our customers and when those inflationary impacts reduce, which allows them to push the can in the pack mix more, which we again expect in the second half.

Makes sense, Ollie, makes sense. We'll dive more into that over the course of our discussion. One thing that we frequently think about, and certainly, I'm sure you do, what are the advantages of your corporate structure and having the Ardagh ownership stake, what are the things you need to navigate? And what, to the extent that you can comment, live mic, at a conference, kind of discussions are you having now given the volatility that we've seen in the stock and the results over the last year or so? Have us think about that and how incentivized ultimately Ardagh is to improving performance going forward?

Right. Yes. No, look, I think that overall, it's a massive positive for us, a part of a big group with a lot of firepower generally lots of dimensions. The key one that I'd pick out is the fact that it allows us to go to very big customers across our glass and metal positions. So because this majority ownership of both positions, metal and glass, although we operate separately, we can have a seat at the table with very major customers across both, and that gives you scale, which you need with these big customers. So that particularly applies to big brewers, obviously, major uses of glass and we can have those strategic discussions. And as I said, I think that balance is -- we may be the #3 bev/can manufacturer. But actually, in terms of those big brewers where we can be their 1 or 2 supplier, full stop across both substrates. So I think we see that as the main advantage of being in the group. Obviously, there are other advanced -- software advantages the human resource pool we operate in, the overall scale of the combined group in terms of results. And then I mean, challenges, honestly, the group has always been incredibly supportive of what we're trying to do. They were very supportive when we saw the growth of the investment program. Now like everybody else, they're expecting us to deliver the cash that comes from the fact that we put the capital in the ground. So I don't see any issues between their expectations and other shareholders at the moment because there's a very straightforward strategy for the group at this point, which is to grow into the capacity we've put down and to generate a lot of free cash flow.

Are there any more looking towards the cash now coming back to the company and to the shareholders or same...

It feels very aligned because everybody -- I think any investor at the moment would be surprised if I said I'm planning to invest -- I'll heat more cash in assets right now and we've clearly got capacity. So I think the alignment is very strong. We see no issues there. And then in terms of the volatility of the share price, I mean, like our peers, I mean, I just think the combination of things that happened since we listed were really unexpected on the dimensions, the inflation that came to the world, the impact on the Hard Seltzer category, which had been growing at 200%, 300% and have been guided by one of the big Seltzer players to 100% growth for 2021. And then finally, the energy price shock and the war in Europe. I think all of us have suffered for those, if you look into our share prices. So I think we're trying to focus on what we can control right now, get back to growth, get back to operational performance and deliver the cash.

Understood. So my guess will be -- and again, thank you for being here. It's an honor. Most of the companies that we will have on stage over the next couple of days, we'll talk about a growth outlook into '23 and '24, in some cases, off of a challenging '22. And a lot of times I talk to my companies, and they don't realize that, in total, paper and packaging as part of the S&P 500 is maybe 0.3% of the S&P 500. So to some degree, yes, it's terrific that Ardagh is going to grow and every other company that we track is going to grow. But at the end of the day, why should the people who are listening, or in the audience right now, really want to own Ardagh, like relative to everything else that they can own when you're in total 0.3% of the S&P?

Great question. But I think the growth is very real, and we're very confident in it because the beverage can was always a growth project, right? Pre-COVID, post-COVID, 2018, 2019, you look at global growth in beverage cans, it was always 3%, 4%, if not more, globally. And actually, the drag was the U.S. where you had this unusual situation with the focus on PET by some of our big customers -- soft drinks customers. And that's gone away. So I think the growth is very secure, as an industry -- as a total industry and that's because of the efficiency and the effectiveness of beverage cans are delivering beverages to consumers. And then I think the tailwind that's come is the sustainability tailwind. So that's removed that drag from the U.S. market, which gets it back into growth of 120 billion base. And being a prominent material and being the one material in the recycling systems that actually fund most of those recycling systems and have value, that's a huge thing in today's world in terms of the consumer perception of waste and particularly that perception, I guess, around plastic waste. So I think that sustainability piece is huge. And then finally, it's a very consolidated industry structure with the top 3 more than 90% in all the regions we operate in. It's the same top 3, very experienced management team. You kindly said I've been in the industry for a long time. That's true, it's more than 15 years. But if you look across our peers, they're also with very experienced management teams. They've seen the ups and the downs and they know how to look through that. So I think you can also be confident in the way the industry will respond and is actually responding right now to the -- slight overhang on capacity to get imbalanced by, say, the middle of the decade.

Ollie, quick one. We don't have to spend a lot of time on it. What do you think North America grew at industry in '22? What do you think the globe grew at in '22?

So the industry was clearly a bit negative in '22, but we think most of that was hit on the import side. So I think the domestic industry is probably pretty flat if you look at domestic producers. Globally, I mean what we think it's in the usual sort of 2%, 3% around the world.

Last year.

Last year. There's probably a bit of a drag if you take it overall, but because America, in 10 years ago, it wasn't growing probably in that sort of space.

Okay. I appreciate that. Let's talk about promotional activity. There's been a lot of good news coming from one portion of the market a lot. I mean there's been a lot more headlines in terms of the alcoholic beverage companies promoting more this year. It's been a little bit more quiet from what we can gather on the non-alcohol side of the ledger. Would you agree? Would you disagree? What would you have us look towards? And why?

So I think it's clearly true that the soft drinks guys are not there yet, particularly the leader. I think they're also busy signaling to each other, obviously.

Be careful, be careful.

Sorry, obviously, clearly talking about that lever in their earnings results. So look, I think that this comes back second half. I think that at some point, revenue is -- growth is revenue growth. And I think at some point, that lever will run out of road because the consumer has been very resilient -- unusually resilient, to the situation probably because of COVID savings. And so we'd expect that to reach a limit. We expect the retailers to reach a limit with it. I think that if you look at their proposition, it's very unusual what they accepted last year in terms of price pass-through. They've been very resistant to that kind of thing for years. So they basically accepted for a while there was inflation. I think as soon as the inflation numbers come off a bit, the retailers would be like, right? We're done with that. So I think they will push back. And therefore, someone will push for volume. Once someone pushes the volume, they all will have to do some sort of response. I think they are getting more surgical with it. So they are getting better at promotional focus and choices, but still, we only need it to come back a bit and then the sort of growth they predicted for '22, one of them predicted high single digits to us in cans. It doesn't have to be high single digits for us to hit our numbers this year.

And do you think, to the extent that you have a view on this, that, that cohort group of customers might see stronger margins once the hedges come off and so they'll be more incented to push volume?

I think they're going to have a lot of firepower as a result of that. Because if you think that most of them are hedging probably on a rolling program that meant they could be averaging over $3,000 on LME per ton going into this year. And then that rolling program that should be in the $2,000 -- low $2,000s now, that's a lot of firepower to play with and keep margin and drive a bit of volume. Quite apart from our inflationary pass-throughs will start to moderate a bit as we go forward. So yes, we're very positive about that side of things, especially versus other substrates because I think there's other pressures in other substrates.

What do you think about the prospects for 20-ounce PET to be still the convenience store package. It's been that for, I don't know 15 years. It's a very profitable package. And is there any way the can, can take more of that realistically with whatever offering you might have and why?

Yes. So look, I think, obviously, the cost of PET are rising. If you're going to maintain that sustainability position, right and particularly on the West Coast, they're having to prioritize with a lot of recycled PET. And recycled PET is very short in supply, and therefore, pretty expensive. And because everybody is going after recycle PET, right? It's not just the beverage producers, it's the one source of a genuinely recycled plastic where you can claim it doesn't just disappear into a ski jacket tomorrow. So everyone is going after it, and therefore, it's pretty expensive, and that starts to normalize the margin structure versus the can. And that will change behaviors in the bottlers as they start to think about what they prioritize. And then the other piece is that there are some consumers, particularly younger consumers, who will not buy plastic now. And you see it in certain channels and in certain segments. Now I think the question for us is do we need reclosability? And this question sort of bugs the industry for years. We are pushing ahead with reclosability. Now even though it will require a little bit of plastic, we still think that, that proposition is helpful for certain occasions, certain consumers. So that, I think, is a piece to the puzzle. We don't have to have it. I mean you see that in the U.S. market, people drink 24-ounce cans without reclosability, 16-ounce cans, 19.2-ounce cans without reclosability. So 20-ounce without reclosability, it can be done. But if you think about the occasion, the traveling, the car or whatever it is, we think it is helpful. So we are also pushing on that dimension.

Would that be just something attached to the side or...

No, no. It's the way the tap works. I mean there are propositions out there already today. There's so-called [indiscernible], but it's got to be very user-friendly. It's got to be very intuitive, and it's got to be very low plastic, and it's also going to be able to run through filling lines.

Understood. Any questions from the audience for Ollie or for David? Linda is at the ready in the back of the room, if anyone has a question? If not, we'll proceed. Also, I just want to mention cash [indiscernible] from our crack team are in the front. If you have any questions now or later on. Let's talk about sustainability. This new rolling mill capacity as it comes in, can you quantify what it will mean for overall supply to North American producers? Are there any other increases coming globally? And what would it mean for the recycling rate, which is key for the can sector and the producers really versus other materials?

Yes, great questions.

And then we'll hit world piece.

Sure, exactly and [indiscernible]. So we think that the -- say we get a couple of the mills, right? Because I think 3 have been talked about. I think it's pretty secure that we get 2. That could be 20%, it could be more than 20% additional rolling mill capacity for the North American market. Now there are a lot of imports coming into North America from -- mainly from China, but also from other Asian markets. So a significant proportion of that is replacing imported can sheet. And obviously, it's not just for beverage cans, it can also be used in other sectors. So I think -- we think they're very secure investments for the supply base to make. In terms of what it means to recycled content and recycling rates, it can only be helpful because those mills will need used beverage cans just to support their economics. And they're going to need to start getting them domestically. At the moment, the U.S. imports a lot of used beverage cans. I mean we have 75% recycled content in our aluminum, but we only have a 50% or so recycling rate in the U.S. So you can see a lot of used beverage cans are getting imported from other markets. That isn't a long-term sustainable position because you need -- those used beverage cans will start to feel demand in their domestic markets. So the U.S. does need to get recycling rate up. We've targeted, as part of the can makers Institute, a 70% recycling rate by 2030. In Europe, we've actually targeted 100% with Metal Packaging Europe because we're sitting at much higher. We're sitting at 75%, 77% today and deposit schemes are coming right across Europe as we speak. I think it will need some deposit legislation in the U.S. to change behavior. We see that being discussed actively, in some states, we think will go by 2030, and we think that will pick it up, which, obviously, is good for the can, good for the planet, significant reduction in CO2 in the rolling material.

Thanks, Ollie. Let's say, you're at a session with one of your very esteemed and important customers. And they're, obviously, chatting about all the other materials that they rightfully want to deliver to the consumer. And when you or one of your colleague companies say, yes, but you can't really hit your sustainability goals i.e., having 50% recycled content in your packaging by 2025, if you use your current pack mix and therefore, hence -- you might want to use more cans. What do they say?

I mean I think they're very firm on the point that pack mix choices are their domain. And they would prefer it understandably that we don't spend too much time trying to compromise that, especially publicly. But I think that -- and they will also, obviously, never say anything negative by any of their pack mix choices. So what we generally hear -- and what we were hearing going into '22 is that the percentage of can growth required and the capacity required is increasing. And if you say, why do you think that is? There will be an acknowledgment that it is some degree of pack mix shift recognizing the sustainability commitments. That's about as far as the prepared to go and understandably so because they do need to obviously support all their pack mix. Choices given the scale of the other materials in their mix. But I think your point is correct. If you look at all the commitments on reduction of virgin PET or recycled content or whatever it is, they all point to more share of the can in the mix.

Understood. Any questions from the audience? If not, we'll keep forging ahead. You delayed Arizona, North Ireland, Brazil and definitely until demand warrants the facilities and correct me if I'm misstating anything. How many years do you have of growth without requiring new capacity? And I realize it's a broad comment, and Georgia are we talking about North America, are we talking about Europe, but point out what you think is relevant for the investment community to know about that question. And do you have the opportunity over time to further realign production? In some ways, the slowdown has given you an ability to optimize where you wouldn't have had that opportunity a couple of years ago, you're living hand to mouth. So how would you have us think about that?

Yes. No, very fair question. So look, I think we've definitely got a year or 2 of growth without needing additional investment. So I think '24 and '25 are pretty clearly covered in all 3 regions. And then what we'll be doing, I think, is evaluating as we go through '24, what is '26 and '27 looking like? And it's very possible, I think, that in some regions, you might need some additional capacity then, but the scale of that we need to evaluate. And we will be very focused in this phase on making sure we first deliver the cash off our already made investments before we start going into any further investments. And we'll also be very conscious at that point of being disciplined as an industry, making sure supply and demand are in the right place. I think in terms of region by region on your other question, we are taking out some steel capacity in Europe. So we're the last can maker with steel capacity -- steel can capacity in Europe, we've already announced we'll take a line out this year to help balance the network. We have to look at that going forward. I think in North America, it just depends on the growth. But obviously, like you say, there are opportunities to look at -- focus more on the newer, more efficient assets. South America, I don't see any need for anything like that.

Okay. And you're still of the view or you would have us be of the conclusion that for the next few years, there are not any large renegotiations coming up in terms of your customers. So...

That's right.

Just absorbing the capacity, but you're in...

Exactly. I mean the big negotiations in North America won't be until mid-decade '25, '26. Similarly elsewhere, Europe, Brazil, we're very covered through to the middle of the decade.

Okay. So when you ultimately came public, your EBITDA target was something -- I think, north of $1 billion. And look, at the end of the day, targets are aspirational. What would you have the investment community benchmark you to over the next few years. Would you rather we get off that figure per se and rather think about a longer-term EBITDA growth target would you, in fact, have us still bring up every time we have a conference that target? What do you think is...

Probably not that.

No, no, walking aside, what do you want us to evaluate Ardagh's progress?

No, that's a very fair question. I mean we're actually just going through a long-range planning exercise in the next few months to sort of nail down a bit more cleanly answers to those questions because I think we're getting not surprising. We get that question a lot. We did go through a very turbulent 2022. And I think at the moment, we're just resetting and looking, as I say, more detail in the next few years, the moving pieces on that target are foreign exchange, which is quite a big drag on that target could be [ $50 million, $60 million. ] We've not built out all the capacity. So there's probably [ $3 billion]. We're not built out and now with the closure of the steel line, [ $4 billion ] of volume that we don't anticipate currently to talk about that number. And then the other big one is mix. So one of the features of the Hard Seltzer growth was also in specialty cans. It was a good margin growth in the industry. I think everybody's talked about that, which is why we were prepared to invest a lot of money pretty quickly. So that also is a -- is a significant drag of the original listing target. So we are not quantified all those number yet, but those are the 3 structural pieces -- I mean it's not as simple as saying we will get to that target we just need time, those 3 pieces would have to do the investments to get to the volume we need the FX to recover. And it's unlikely we have that scale of mix benefit with what we see today.

So details forthcoming. You're thinking about that, but it sounds like it will be more of a growth outlook as opposed to...

Exactly. I think it will be back to a sort of more steady growth outlook with a particular regional focus and also, again, a big focus on cash generation for the next few years before a steady return to capital investment.

Thanks, Ollie. Any questions from the audience? Question at the back?

So what happened with Hart Seltzer? Is the story that during COVID, people just were home and drink a lot more Hart Seltzer and then the industry thought that growth was going to continue once everything reopened and it was just way off. Is that what happened? Or how did everyone want to put so much capacity into the ground that just wasn't the right thing to do?

Yes. No, great question and a question I've been asked many different sources. So look, if you look at the Hard Seltzer story between 2016 and 2019, everybody was like, is this real? Is this a fad, what happens here, right? And the debate got very strong in 2019 because that's when -- I mean, it was growing 350% a year. It grew, I think, 200% a year in 2019, and it started to touch on -- touching distance of a 10 share a beer. And so you saw the debate mature during 2019 from the beginning of '19, which like we don't know is this real? To the end of '19, when everybody is like, this is real. And you looked into the data, our customers had the data. It was cross-demographic. It was not just kids. It was not just one gender, it was absolutely broad scale trial and adoption of hard seltzers with a lot of repeat purchase and some great brands operating in different spaces. So I think that really in the second half of 2019, people got to saying, yes, this is real. And we need -- and we got to -- yes, we look -- we do need to get behind our customers who are saying, you're holding us back here on this growth. And so we then committed investments on between that period. So over those 12 months, end of '19 to end of '20, was particularly when we started saying, okay, we do need to invest behind this growth, and we put the internal plan together in July 2020, that became the listing plan. And then 2020 grew at 200% as well. And I think it's a fair question, which is -- was that muddied by COVID. We didn't see it, right, because the line just kept going. And so we were clear that this looked like it was the same trend just moving on forward, and that there was a structural shift in the industry out of beer, wine and into hard seltzers. And so right through to Q1 2021, when one of the players in the industry came and said, well, actually, we're 100% growth for this year, and we think we may be undercooking it. It looked like this thing was very structurally set. And I think everybody across the industry, you read the Citibank reports, the analyst reports, the customer dialogue, all our peers, everybody got to this is structurally set. And then we have their Q2 results and they went from 100% for the year to 50%, which -- I mean you can see what that is actually saying about the sales line. So the truth is, alcohol categories have fashionability. The truth is people like to drink something and then they like to switch. And the truth is they often like to switch from the generation above to the generation below. And I guess something happened there that nobody saw coming. And we've been through it in a lot of detail, obviously, because we've got capacity in the ground for that, but we're not using at this point. But when I go back over it, I think that the decisions are made on the basis of some reasonably solid evidence.

Ollie, one last question for you, as we're wrapping up here. I know you get this frequently. This year, there won't be that much free cash flow generation. I guess the good news is there's a lot of capital you now have in the ground that can grow into. Tell us why you think the capital allocation strategy makes sense with the preferred, with the common, without a lot of residuals free cash flow at this juncture?

Yes. So we think the dividend signals that this business is cash flow generative, which it is and will be. And we think it also signals discipline that we're absolutely going to be rigorous now about any further investment and make sure we prioritize our shareholders in terms of cash generation. The preferred is a very flexible piece of paper. It was at the time an extremely advantageous piece of paper for AMP. We'll see what we do with that over time. But I think the main point, and we obviously need -- and we will get into paying the dividend out of free cash flow is to signal that journey and to say that that's the path we're on. We're going to be all about, at this point, returning cash to shareholders, not investing it.

Okay. Thanks, Ollie. Please join me in thanking Ollie Graham for a great presentation on Ardagh Metal Packaging, everybody.

Thanks very much.

And I was also remiss in saying Stephen Lyons from Investor Relations, also here from Ardagh. So if you have any questions. Stephen is in the front as well. Thanks everybody. We'll see you back with LPX in a few minutes.