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

Good afternoon, everyone. I am Kyle White, I am the lead analyst of paper packaging here at Deutsche Bank. I thank you all for being here. Very excited to have Oliver Graham, CEO of Ardagh Metal Packaging here with us and participating again in the conference. Just for a little heads up, the format of this event will be fireside chat Q&A for about 30 minutes or so. If anyone wants to ask a question, I'll pause throughout the presentation and ask if there is a question in the audience. And because it is webcasted, just wait for a microphone to get to you so that people listening in can hear the question as well.

With that, I guess we'll just -- we'll start off with -- just go right into it, Oli. I guess to start, just kind of the lay of the land, how the current conditions as you would characterize them demand relative to what you saw in the first quarter, how have things progressed?

Yes. Thanks. Great to be here. So I think what we've seen in Europe and North America in the last few weeks is some strengthening of demand. So we've seen some good sales rates. And what we're looking for there is to see those rates persist through the remainder of June and into July to be sure that, that sell-through is really sticking with the consumer. So we think that's roughly as we anticipated it, which is that there would be some pickup in promotional activity, some pricing improvement in the market from a consumer point of view and that should translate into sales. I think we don't see that as being a huge thing. So I mean, I think the consumer goods companies have had a good run without...

Sorry, we do have a -- it's a constant fire alarm, we'd be getting because of the air quality here in New York. So if you guys can hear that on the webcast, we'll probably wait until the fire alarm goes off. So it doesn't cause too much of a disturbance. Apologies.

[indiscernible] because of smoke...

It is because of the smoke. So the fire alarm is going up because the smoke's coming in -- but there is no fire. So we're still good to go and continue.

That's good to know. So look, I think there's been a lot of discussion about promotional activity, a lot of questions about it today. Clearly, consumer goods companies have had a good run, raising price and not losing that much volume relative to historic norms. So it's not that we think they're suddenly going to have a massive price reduction or massive reduction -- increase in promotions. But we do think during the year, we'll see more of that kind of activity. I think input cost inflation will moderate and therefore, there should be a relatively margin-free opportunity to reduce some prices and we think they have probably reached the limit of price from a consumer perspective, from a retailer perspective. And therefore, you'd expect them to turn a little bit to the volume lever to get sales growth as we go forward. So it's not that we've baked in some enormous number, but we do expect some strengthening of demand. And it could be that what we've seen in the last few weeks is exactly that, and we'll know better by the time we're at our Q2 results in late July, well, I think we'll have a good sense for how the summer is going. I think that's Europe, North America. Brazil has been a bit weaker than we expected. So a couple of factors there. Obviously, we have one customer going through a judicial restructuring process, and that's led to some destocking in Q2. We think they're trading reasonably well in the market. They traded very well in Q1. I think there's every reason to believe they'll trade well through the year. But in Q2, it did lead to some destocking in April and May. And then we're still waiting on the pivot back to cans from the major brewer down there away from returnable bottles, we're not seeing much sign of that. So there's some risk probably sitting in Brazil relative to Europe and North America.

Right. You talked a lot about the promo activity, which I do want to get into a little bit later, but first on -- you talked about more recently, seen a little bit of a pickup sequentially, it sounds like in Europe and North America. Any beverage category specifically that you see the pickup in?

Yes. So look, we're finding energy very strong in North America, bigger traditional players, but also new players. We're seeing a lot of innovation across the portfolio coming up. So I think one of the beauties of the North American market is that so much innovation goes into the can now, over 80% full beverage innovation goes into the can. And therefore, you see companies pop. And we've got companies in our portfolio now who a year or 2 ago were literally nothing and now 500 million cans. And so it emphasizes the importance, I think, of being in a number of different spaces in the market, dealing with all customers. And so we're certainly seeing that, again, in the energy space very strong, CSD pretty solid. Then some interesting -- coffee is pretty strong. And we think sparkling water is going to be good through the summer. So it's those sort of spaces. Obviously, we're less mass beer. We have no real position in mass beer. So we're not suffering or gaining anything from the Bud Light situation. And then sells is relatively flat. Obviously, some players winning but some still losing. Yes.

On the promo activity, I guess we've had some early -- I mean I guess, how you would characterize what we've had at the Memorial Day. So we're starting to get into the summer season, which were -- the most important season for promo activity. Any kind of early indication, signs that you could see? And how much visibility do you really have into customers promoting?

Yes, look we don't get sort of a perfect readout in terms of the data. So it's more what we're seeing in the market. Some of the market data like Nielsen and also what we're seeing in our own numbers. So we have the sense at Memorial Day there was more promotional activity. Obviously, Bud Light is leading to a lot of promotional activity, and that may lead to some response but we also saw more promotions on the soft drink side. We did see our numbers strengthen up. Certainly, end of April, early May was not so strong, but the rest of May was very good. And the North America numbers are very good year-on-year. So we think that, that could be the sign that there is some increase in that activity. But we don't have a definitive set of numbers. And again, our logic is that it makes sense, right? I think it makes sense that there would be an increase in it. We don't see it, like I said, at the top going back to immediately where it was before because once you've got to this place as a consumer goods company, you can be much more targeted, thinking about where you're going to go next. You've got general price rises, so you can pick channels or products. And they're much more sophisticated now about the return on investment on these promotions. So we agree with the commentary I've seen in the market in the last week or 2, that it will be quite targeted in the second half. But still, I think it will be an increase on the first half and on the second half of last year. Yes.

Is -- I assume then CSD promotion is what's really key for you guys versus beer. When you talk about targeted promotions, so you're not going back to pre-pandemic with the promotional level and customers getting more sophisticated. What's the long-term risk? And how that might impact your business, how that might impact volumes for you guys if customers are being more targeted in their promotional activity?

I don't see a huge risk there because I think if they're targeted, it is because it's driving some volume. So we'd expect to see volume growth. But we've also seen a big tailwind from the sustainability story in our numbers pre-pandemic that we saw that CSD volumes in North America and Canada started to grow again, having been a drag on the category for 10 years. So I think that, that trend continues. There are obviously challenges of perception, but also have availability of recycled PET, those sorts of challenges that mean that there's a natural pivot towards the cans in those big soft drinks categories. And that's what we think we saw. That's what we think we're still seeing. We're still gaining share even though there's some volume drag in the market, we're still gaining share on the substrate. So I'm not too worried about that. I think if they're doing normal levels of promotion and we're getting the innovation levels that I talked about, and we're getting that pivot away a little bit away from plastic towards cans, I think we'll do well. Yes.

Because you brought it up a little bit earlier, I wasn't going to ask it, but since I didn't think you had much of an exposure, but the situation with one of the large brewers and some of the social dynamics at play, is that an impact to your business at all? Is it potentially an opportunity or just kind of neutral overall for you?

I think in North America, it's relatively neutral. I think it's other players that have the relationships with the other brewers. So hopefully, they're getting some upside from that. Obviously, the downside is sitting mainly with their own captive can maker. So that's obviously nothing to do with us. I think it is having an impact on the overall organization because I mean it's a huge issue. And we don't know how that will play out in other regions yet whether there will be some impact. So we're watching that space. But yes, certainly, a pretty dramatic event.

Sticking with North America, just kind of curious how you're viewing the current supply/demand, both internally yourselves as well as just the industry overall. Where do you think kind of industry utilization rates are? And with that, is there potential opportunity for you or others to make a more permanent capacity reductions beyond what has already been announced from others?

So we're curtailing capacity this year. We've said that. So we're curtailing over 2 billion of capacity in the North American market this year. And with the ramp-up of our facilities and where we see volumes next year, there's probably still some curtailment into next year. Whether we need to do permanent, no decision taken. We'll obviously monitor that as we go through. And if we obviously, like everybody else, if we need to, we will, but no decisions taken on that at this point. We think the market is in the low 90s utilization after curtailment. So I think before curtailment, we would be less, less utilized. But we think that, that is where the market is after curtailment. And I think our view is that the market will stay in that sort of space, either through temporary or permanent cuts. So we think that's a good space for the market anywhere in the low 90s. If you take the complexity of sizes, locations, [ all the rest, ] it basically feels quite full in the summer season. So I think that's a good place for us to be.

Yes. I think the number for you guys in North America that you're telling right now is 2 billion units. I guess the question is then what kind of growth rate does the market need to see for that capacity to be absorbed? Or is there a number that you're looking for? Or if we're in this flat market environment, was that then cause you to make a more permanent action?

So we think that the market will have growth, the 2 tailwinds I talked about, the sustainability tailwind and the innovation tailwind mean that we think that the North American can market will grow. So we're confident in that. And then we also have some known contractual situations that date back to really the pandemic in that period where customers were seeking to diversify their supply or we had particular relationships that mean that we also see some step-up in volume into '24. So with where we're sitting today, no decisions needed on permanent. We do see some more curtailment in '24. And then we'll just monitor the situation as we go.

Shifting to Brazil. You talked about a little bit earlier, but just kind of curious how you see lay of land there? How are the conditions there for the consumer? I know you briefly talked about destocking one of your customers and another private competitors said something similar but just more underlying demand and how the consumer is doing down there?

I mean definitely weaker than Europe and North America, even though the consumers are under pressure in Europe and North America, I think there's more resilience, more [ safety net. ] There was some degree of COVID savings that we certainly didn't see in Brazil. And there was more inflation, higher interest rates with the devaluation of the Real. So definitely more stressed, I think, than Europe and North America on the consumer level. And then, as I say, we've got these 2 specific situations, which somewhat unique to that market, obviously, with the judicial restructuring of one of our major customers, which did lead to a destocking in April and May. And then with this pivot back to returnable bottles, which is a strategy that we had moved away from for 3 or 4 years by the major brewer in the region, which they signaled they expected to unwind in the second half and going into '24. But the timing of that, I think, is uncertain at this point.

I'm not trying to get you to update your guidance or change your guidance, but it sounds like Brazil may be a little bit weaker and then the destocking effect from this potential customer. Are those 2 potential headwinds relative to initial expectations coming in? Are there other offsets that would counteract that?

Yes. Obviously, we'll wait until the July to give the definitive picture, but it's true. There's a bit more weakness there than we expected. And Europe and North America are more tracking as we expected, but we've got the whole of June to go through. So we'll see whether there's good offsets.

Yes. And then on the rationale in terms of shifting back to the can in Brazil as a large customers hedges for aluminum start to roll off and it makes it more of a cost-competitive substrate, I guess if conditions down there remain weak and the consumer is still in a challenging spot, what's the incentive for that large customer to move from a cheaper option in returnable glass versus can? What gives you the confidence that they'll actually do that?

So the logic for them doing it is the one they eventually arrived at back in 2018, 2019, which is they kept losing market share because the other brewers could discount in the off-trade, and the consumer and the retailers also like that was trending towards the one-way package. So the strategic decision taken was to hold share and to gain share back, having lost share. Obviously, in the short term, you're right, there is some risk that they stay with the margin in the returnable and concede a bit of share in the short term tactically. So that is a risk, I think. And we don't quite know where they're at that. Certainly, the signaling earlier was that H2 would be better. But for me, there is a bit of risk in that with what's going on in the organization.

Yes. Moving over to Europe. So you're curtailing some capacity in Europe as well. I guess given the demand profile that you see right now, when do you expect that capacity to be absorbed, but not have to have temporary curtailments there?

I think next year, we'll pretty much fill our capacity maybe a little bit into '25. So I think it's a similar story to the U.S. in that sense. I think over '24 and 2025, it will fill up. We also have -- I think we announced already, we're closing on steel line there, which will help situation. So I think that Europe will be on a similar pathway to North America, yes.

What's the long-term view of Europe? It's one of the larger regions with kind of the lowest can penetration relative to some of the other developed regions. Is there -- what's the opportunity in terms of raising can penetration? Can we ever get to maybe not levels that North America has, but closing the gap there?

Definitely. So look, I think you've got a number of reasons for that. So Germany is 1 where you have low can penetration because of the deposit scheme that was put in place in 2003, that was very punitive to the can. So can volumes went from 6 billion to 8 billion to 0 overnight. Germany is on a long-term recovery back to more normal penetration rates for a developed market. You have Eastern Europe where you have relatively lower penetration rates where, again, we're on a journey to a more normal per capita rates. So yes, I think absolutely, Europe will continue to grow beverage cans. I think you've got very strong growth in the energy sector in Europe on the liquid level, so not just on packaging shifts, but actually on the liquid level. And you've got this phenomenon that we're seeing in North America coming to particularly the U.K., where a lot of innovation is going into the can because of the sustainability story. And you have a very active regulator in the European Commission pretty active around single-use plastics. So I think there's a number of tailwinds to Europe. Obviously, Russia, Ukraine was a big blow to what was a pretty strong growth region, not for us, but for others. But the rest of the region, I'd be very confident in its growth next few years.

Yes. What of -- and you talked about sustainability a little bit, what about what you're seeing as it relates to Stillwater? Obviously, that's a massive market that a lot of investors have their eye on in terms of the potential for the can. Are you seeing growth in that market and taken share relative to plastic?

A little bit. I mean I think it is the toughest category just because of the reclosability because of the cheapness of the PET that you can use in that category, obviously, a lot of impacting big PET bottles, 1.5 liters sold as a 6-pack on promotion. So there are some spaces there that are hard for the can to get at. But we are seeing the shift now coming to liquid debt, obviously, that [ poster child ] for that in terms of really getting a rate of sale and a penetration that the can has never got in Stillwater before. So they're showing the way. And now there's a whole series of other players looking at that and launching around that space. And one thing that we think is important for that is the reclosability solution because clearly stillwater often drunk across 2, 3 hours. So we are working hard on reclosable solutions to also bring that benefit to the consumer in that space. So we were always kind of -- stillwater's a mid-decade thing for us, and we still think there's good potential in it for the middle of the decade.

Yes. Sticking with kind of new innovative opportunities, is there any other beverage category that really kind of excites you as a future opportunity that you would call out globally?

Yes. I feel sports is very -- sort of is in the wrong package -- and possibly you could argue is the wrong drink. So I think with all the health and wellness trends and all the sorts of people who are in sports and active, it should be a very natural space for people to attack with different kind of products in cans. Again, I think we need reclosability because the consumer is very used to that and the occasion suits that. So I think if we can get the format right if some people can bring some interesting new products to that space, I think it could be very exciting. It's completely open to our substrate. So I'm -- now it's got some very strong competitors with some very strong brands. So I'm certainly not saying it's easy, but I'm sort of excited by the space. And then there's just a whole bunch of other stuff that we see growth in around the world, coffees, wines that I think will come. And I've got obviously all the space around water functional, the spin drips and all of that kind of product area very hot. And again, its functional energy and that continues to grow, and we continue to get additional products in that space that really grow fast. So those are some of the areas we see very good innovation today.

Yes. Well, I went around the world a little bit. So I'll take a pause to see if anyone in the audience has a question they want to ask. That's fine. I'll keep it rolling. A lot of focus on contracts in North America specifically because of some of the temporary curtailment you're doing and maybe some potential oversupply right now. Can you just talk about when major contract renewals are up for you? And how protected you are if there were to be any kind of discounting as it relates to renewals on contracts?

So yes, most of our contracts go out to 2025 or 2026 or even some beyond because when we did the listing and through the pandemic period, contract lengths extended, and we were keen, obviously, to get ourselves fully contracted. And I think what we've heard from competitors in the last 12 months is they're in a similar place now. I think it came a little bit later because they weren't listing, but now everybody is in that kind of time period. So in that sense, we've got a good couple of years to make sure we're well balanced. And I think at the minute, we have a very good set of contracts in North America on things like inflation recovery and all those clauses that we see coming through every year. So I think at the minute, we're relatively protected for the next few years, and then it will be a question of how all of that activity plays out. I'm confident we know we need the sort of returns we're getting to justify our business returns. And for the next phase of investments, I'm confident that we'll stay roughly in the space we're in today.

Yes. And then on inflation recovery, obviously, Europe was a little bit of a challenge previous year in terms of recovering some of the energy inflation that you saw. Where are you at in terms of making sure you have that as a pass-through in Europe and having tighter pass-through similar to what you have in Brazil or North America?

So yes, we did a lot of work on that last year. Clearly, we've never seen energy spike like that ever. I mean hopefully, we'll never see it again. It was completely dislocated and it went from being 3% of our sales, of our cost structure to [Audio Gap] and 15% of our cost structure overnight. So that was something that we'd normally dealt with through the normal PPI mechanisms like we did in Europe, in North America and Brazil. And so we went to customers and talked about special arrangements for that because it wasn't clear last year that how long this was going to continue. I mean it could have been 2, 3 years. We're in a much better space now than anybody thought would be, I think, this time last year. So we have got direct pass-through with major customers on energy now in those contracts for Europe. And I think that makes those contracts equally secure as the North American and Brazil contract.

Moving to capital allocation. Obviously, a big focus for you all. On CapEx, I think this year, you're targeting $120 million to $130 million in terms of your maintenance capital. And then on top of that, a bit under $300 million in terms of growth capital. If we think about -- as we get past -- we're getting to the end of this kind of growth phase for you all, how low can CapEx go now that you've mostly completed your business investment growth plans? And should investors expect a CapEx number close to that lower number in 2024?

Not completely there '24, but certainly in '25, '26. So clearly, for the next 2, 3 years, we can grow into our capacity. So we're expecting very material reductions in our growth investment. And there is still some hangover next year for projects completing this year, plus some additional investments in some flexibility, some different end sizes in North America. So I don't think we'll get down to the maintenance capital next year, but there will be a very meaningful step down from this year. So we're talking -- I think we've seen in the market a number that's 1/3 of this year, and that's perfectly reasonable. And then I think we'll go down from there in '25 and '26. So yes, you can expect very significant reductions in growth capital in the next 2, 3 years.

We get a lot of questions on the dividend, yielding 10% or so right now. So obviously, a focus for investors in terms of the sustainability of that. I guess just talk about your view on the dividend? How important it is for Ardagh? And if the -- if you can pay it off in terms of your free cash flow that you expect for the coming years?

No, obviously, it's linked to the previous comment, which is as we reduce the growth investment, we free up the cash flow to pay the dividend sustainably. So we're very confident in it being a sustainable dividend. We're very committed to it. As -- maintaining at this level. So I think that's absolutely clear. And we see a lot of support from the shareholder base to that because I think it signals the cash-generative nature of the business. And I think it signals the capital discipline that we're going to put into the business the next 2 or 3 years whether we get there entirely out of free cash flow in '24. But certainly, through '25, '26, we see that being very sustainable and [ painful. ]

Yes. You -- earlier, you guys instituted or you started being a little bit active in repurchases, just given the valuation of the stock. I guess what's the view on share value back now given where the share price is? But also it's a little bit different environment to where interest rates are. So maybe just talk about that balance?

Yes. We're probably more on the dividend and then the debt paydown as the priorities before the share repurchase. Just given we need one to come through this period as we bring down the capital investment. So I think those are our 2 priorities before we would go back into the shares.

Yes. [ Ways away, ] but kind of what would be the optimal leverage for Ardagh on a long-term basis?

We've guided to 3.75 to 4x forward EBITDA next year. We think that's a reasonable place to be. It's a very -- as I say, it's a very cash-generative business. In normal time, it's a very stable business. It's obviously been unusually volatile for the last 2, 3 years. But if you look prior periods, it's a business you could pretty much rely on plus or minus a few percent, your profit and your cash flow. So we think that's a good place to be, and that's -- we haven't updated that guidance.

Got you. A couple of more questions, but I just want to open up again for the audience if they had any one -- or any questions? I wanted to go back to the promo activity because it is a very, very big focus for investors. So you said you saw some early signs of pickup in Memorial. Is there a way to give us a sense of how that has played out relative to your expectations, relative to the outlook, it was better or worse or on par?

I think if we take the quarter as a whole and looking into the rest of the year is pretty much where we saw it in terms of Europe and North America, probably because April was a little bit weaker and the first part of May. And then the second part of May was a bit stronger. So I think at this point, it's not materially changed our expectations on the quarter of the year in Europe and North America. But I think the interesting question is what happens for the next 3 to 6 weeks because I think that's going to be the acid test of how the summer is going to go. So we'll definitely have much richer information when we come to our Q2.

Yes. And then going back to Brazil with the customer down there, is there any other headwind, not related to the destocking, but from a cash aspect or any exposure there that investors should be wary of?

No. I mean we obviously looked at it for the Q1. So at that point, we determined there was no material exposure that we needed to report on. Obviously, we have to keep monitoring that because the process continues, and obviously, we'll update the market if that changes. But at this point, that's still our position.

Sounds good.

[ JD from Benefit Street. ] I just wanted to touch on price pass-throughs. On the first quarter call, you mentioned you have a little bit of a lag from the PPI reset but that should be fully realized by 2Q. Can you elaborate on exactly which costs are able to be passed through contractual nature? And which are passed through annually versus if there are any that can be passed through quarterly?

So we, like most of the industry are on annual pass-through. So that answers the last part of the question. So we -- and again, like the rest of the industry, just take energy in Europe out of the equation for the moment. We use general PPI numbers to go across our entire cost base. So it covers labor elements, chemicals elements, aluminum coils where we buy those in North America, some of those are bought by the customer. Freight, sometimes is a pass-through, sometimes is included in PPI. So essentially, we're using those general PPI indexes to cover our entire cost base. And then the key is to get the right index and the right percentage pass through to get your full recovery. And that -- I think looking forward, that looks good across all 3 regions.

And those are sort of initiated January and now realized by March or...

So yes, exactly. They're initiated January and then there's some accounting reasons why they don't fully in the Q1 numbers. And then they realize fully Q2 to Q4, that's right.

If I could add on to that. So some companies in this space have given a target in terms of how much net recovery they expect given the PPI and a look back on it, I think it's a pretty big story with the can makers now given the amount of inflation you guys saw last year. Do you guys have a sense or a target in terms of how much cost recovery you're getting this year from your PPI reset, primarily in North America? And then relatedly, how much kind of continues and rolls into next year?

So we said globally, we had a [indiscernible] 40 million of the net increase in profit this year from inflation recovery. And I know there's been some confusion about gross numbers, net numbers, all the rest. So that is a net number, as in -- it's definitely incremental to the fact that our costs have also gone up. And then in North America, I don't have the exact dollar number, but we fully recovered inflation into 2023. So there was no -- and there hasn't been a loss in '22, which possibly was different, I don't know, from some of the market. We had good inflation recovery '21, '22 and '23 in North America. So there was no loss there. It was a Europe issue for us in 2022.

What costs have you seen that have gone up since the start of the year? As we think about this PPI coming through, right, and try to understand how much it could be above inflation from last year that you will actually realize?

Yes. I mean I think that as we came -- as we transitioned into 2023, some of our suppliers have the same type of mechanism with us, right? We have aluminum suppliers or the direct material suppliers, they have also similar reset mechanisms that we then are matching through to the customer. So freight, I think, has got a little bit better this year. But equally, we -- in North America, we basically pass that through. We don't get any particular benefit from that. And then labor, I mean, I think, again, we covered it in what we recovered this year, and I think -- we think we'll recover it in what we are looking at into next year. So for us, it's a relatively straightforward story across the world. The only bit we had a big gap in was Europe. We've got a big chunk of that back this year, and then we don't yet know if we'll get the last small amount back next year because we need to go through that contract reset with the regional customers in the autumn. And then we'll see depending on where PPI sits. But overall, we've had pretty robust inflation recovery in the last few years.

Any other questions from the audience? If not, we'll leave it there. All right. Really appreciate Oliver. Thanks for coming. Thanks for participating. Appreciate it.

Thank you.