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

Good afternoon. I'm Anthony Pettinari, Packaging Analyst here at Citi, and we're very pleased to welcome, Oliver Graham, CEO; and David Bourne, CFO of Ardagh Group. I think we want to keep it interactive, so please feel free to jump in with any questions. But Oliver and David, thank you for joining us.

Pleasure.

Thank you for having us.

I guess maybe we could start off with demand trends in North America and specifically kind of early views on '24. You have posted quite strong growth in 3Q. Just wondering if you could maybe start with North America and talk about some of the demand dynamics you're seeing there.

Sure. Yes. So I think we saw that, as you say, we were on the right side of the market this year. We were with some very strong innovation customers, particularly in functional energy space. We had some of our core customers in areas like sparkling water in good growth. And we also had a good year in soft drinks generally and the broader energy drink space was strong for us. We seem to be about a mix of our bottlers and locations. So yes, we've had a -- we've definitely been on the right side of the market trends this year. I think going into next year, we do expect more focus on volume by big brands relative to price, just because there's been a lot of focus on price for the last 18 months which I think worked for them. They got price. They didn't see significant volume reduction. It was just more flat to slightly negative. But I think in recent scanner data, those volume declines are a bit more pronounced, and we probably have reached the limits of pricing plus input costs are moderating. So yes, look, our expectation is that we'll see brands lean in a bit more on volume in 2024, which would underpin our belief that the market will go from being a sort of broadly flat market this year into some kind of growth next year.

And can you just remind us in terms of North America, your split between spiked seltzer, energy?

Yes. I mean we have next to no mass beer position. We'll probably have about 5% in the portfolio next year. Then we're sort of 40-50 carbonated soft drinks and other soft drinks, 10 to 15 energy, 10 to 15 hard seltzers and then the rest is a mix of other categories.

And in terms of promotional activity, you would see that in the spring or you're seeing it now?

Yes, it looks patchy at the moment. If we look at the scanner data, we see some brands are starting to move back into price -- holding price and getting a bit more volume growth and some brands are not doing that. Some are still pushing price a bit. So I think, yes, it will be more as we move into the new year and into the summer period, you'd expect to see a prioritization to some degree of volume.

And the industry saw a strong growth before COVID. It was accelerated by COVID and then there was a certain overcapacity, oversupply situation. As you exit '23 and you think about North American industry supply and then your own footprint, I'm wondering are we balanced or how do you think about those dynamics for North America?

Yes, I don't think we're quite balanced yet. So I think we're moving into balance, and it will take a year or 2 to get fully balanced. The way I'd describe it for ourselves is we had to curtail temporarily this year around 3 billion of capacity. That got us into the 90s utilization rates with the action we've taken, which has now been confirmed to close our Whitehouse plant in Ohio, which obviously nothing we want to do, but we do need to balance our demand and our capacity. The way we see next year is with some growth, we'll be in the 90s without temporary curtailments, we'll be actually in the 90s on a permanent basis. And then we may have some spot curtailments to get us into the mid-90s. So that's on our part. I think as we look at the industry, we think with some growth, we'd expect the industry to be pretty balanced in 2025.

And in terms of competitive intensity or new market entrants, are you seeing any impact? And should we think about pricing as just sort of broadly stable? Or -- I think that North America had a price hike in 2017, 2018. We're 5 years on beyond that. So...

Yes. Look, we don't know yet, right? There are no real repricing events going on in North America at the moment, and there won't be until '25, '26. So we don't really know. Again, with the capacity situation as forecast, we don't expect anything dramatic. So it's a reasonably balanced market. And yes, we're not seeing anything significant on that front.

And in terms of the closure of Whitehouse and the capacity that you have brought off the line, in terms of capabilities, whether it's geographic or specialty can mix, is there anything that you'd call out in terms of being able to do?

No. I mean I think we've introduced -- we're spending a bit of money this year to introduce a bit more flexibility into the network for next year, to be able to swing between sleek and standard because obviously, the hard seltzer volumes didn't come through to the extent we had expected and the industry expected. So fleet volumes came off, and we're making sure we're flexible between standard and sleek for the future, which is where the market seems to be sitting, even though we've had good sleek volumes this year with some of the innovative products. And we'll replicate the capabilities we had in Whitehouse in other plants. So we won't -- there'll be no loss of capability through that.

And I guess finally, just in North America, from a destocking standpoint or inventory standpoint, your customers, where are we in that?

So I think on -- as I say, on our side of the market, so not in mass beer, we think that's through. But obviously, with the situation that occurred this year in mass beer, there must be some, I guess, some stock sitting in the system somewhere. But from our point of view, if the customers we're dealing with are not hearing it or thinking about that.

And in terms of that kind of large brand in beer having difficulties this year, did that have any sort of secondary impacts on you? You're not in beer, but I'm just wondering as [ indication of ] footprints or...

No, not really. We didn't see it. Obviously, some of that -- when it was with the captive can maker, someone else has announced with one of our peers. So we didn't really see any direct or indirect impacts on us.

I guess this is a seasonally slow period in North America and in Brazil, we're getting into the summer. It's been a very volatile year. Can you talk about Brazilian demand as we go into '24?

Yes, it seems to be strengthening. So we've had a good run of months that is earlier than normal for the summer season. So September, October, November, all strong. I think we need to see that persist through December, January, to be able to be sure where we're at. But if that does persist, then we've got a good recovery going on in Brazil. And the market might even get back to flat for the year, which, after a pretty poor first half, would be a strong second half. I think the debate that was going on in the industry is would the recovery coming this summer or next summer. We'd always been thinking this summer. And then with the poor first half, we began to wonder, will it be delayed into '24. So yes, we're hopeful now that we're seeing a good recovery this year, and that will obviously help the situation in Brazil, generally, for the can makers.

And there were some kind of substrate shift dynamics during the pandemic from cans to glass and maybe that. Can you remind us sort of where we are in that?

Yes. I think there was a very strong shift into cans from -- there was a long-term shift into cans and then there was a very strong additional shift into cans between sort of 2018, '19 and 2022, driven by the lead brewer in the market. And then they made a tactical -- which we always felt was temporarily, switched back into returnable for reasons of inflation on the cans. And I think the evidence suggests that, that was a short-term tactical move, and that now cans are back in growth. We obviously don't know exactly how they will play that into 2024. But normally, they want to hold share, and so we'd expect them to compete also in the off-trade.

And you talked about sort of utilization in North America. I guess, Brazil, it's maybe a more volatile market. I don't know how you'd characterize supply/demand in Brazil. And then maybe a related question, there's a #3 brewer there that had financial distress like the impact of the market.

Yes, they're out of that now. So just to take that one first. Their judicial restructuring process is finished. It's all cleaned up. I think ourselves and one of our peers has talked about that being over, and we're very comfortable with the outcome and they're trading well. So I'm glad to say that was an unexpected turbulence in the year that looks like it is over. I think Brazil did run into quite a significant overcapacity situation at the back end of last year and going into this year, and people took action. And we slowed some ramp and we stopped the building of a new plant there. So we -- and that's still fully stopped. And we will again curtail some capacity in 2024 to be balanced in the 90s utilization. So we'll basically take a line out. And that line will be properly down for the year. And then if this growth continues, I think we'll see Brazil do what it always did, which is put everybody under pressure again very quickly. And we're already seeing some shortages on particular sizes in particular regions. So I think it could correct very quickly if this level of growth continues.

I had a question, and it's not specific to Brazil, but maybe just Americas or in Europe as well. I think historically, can volumes were viewed as maybe recession-resistant or very defensive over the last 5 years -- 5-plus years. Producers have talked a lot about premiumization, so you have slim cans. You have new categories. Just wondering like in a period of consumer stress or if we think things worsen in '24, do you think the bev can is -- is there a kind of a discretionary component of bev cans that just did not exist in previous cycles? Or is there anything from this year and the consumer stress that you've seen that would suggest that?

I don't think so. I think that it's still a relatively affordable treat, right? So if you take consumers coming under pressure, we typically see out-of-home holidays falling away and at-home being more resilient. And that -- in the at-home occasion, the desire for something, not just drink, eating, very basic, they're having some treats within there. So I don't think we've ever seen some of the more specialty or premium products have suffered. And we haven't seen that particularly this year in Europe, where there is clearly some degree of pressure on the consumer with energy prices and mortgage rates. So in fact, the people that are suffering are mainly mass beer players who aren't pricing competitively in the market. They're the ones that are suffering the most rather than people with a proposition, bit of premiumization. So no, I think we are still resilient to lower economic activity. And the only possible exception, but it is a bit speculative, is that this year, there was still some post-COVID reaction in terms of people wanting to go on holidays or wanting to do out-of-home activities having been restricted in that over the previous year. So that is a possible hypothesis, not any real data to suggest that. But I think all of this washes out into 2024, and we will be in normal trading of things.

Maybe just rounding up on the regions. Europe, it seems like there's been a little bit more stress there recently. Can you talk about Europe going forward?

Yes. I think clearly, the brands expected a better summer and built stock for that. So we had a good June, good second half of May, July. We're still going quite strong when we did our Q2, and then it really fell away in August and September. So I think -- and then there was some destocking activity and now we're seeing people running quite tight on inventories through to the year-end, probably running for cash a little bit and being a bit cautious about where the consumer is at. So we've seen all the numbers now from the major can makers in Europe. So clearly, the market was off a percent, 1% to 2% in Q3. And we think Q4, it won't be so different. So the question is, how does it look into '24? Again, I think we'd expect to see brands leaning more on to volume, having taken a lot of price and suffered volume losses. But obviously, we have to wait and see just to what extent we get back there. So I think like all three regions, the way -- if you go back to 2019, Europe was 6% growth, U.S. was 3% to 4%. Brazil was 10%. In a way, the question is, has anything fundamentally changed? I mean that those growth rates should be achieved in my view, nothing has fundamentally changed. I think the trends that were there in terms of innovation, sustainability, the switch from returnable in Brazil. I think those fundamental trends continue, but we've obviously been held back by significant retail price inflation and the consumer weakness. So really, we're talking about at what speed do you get back to that kind of growth rate? And I think we'd be thinking that Europe again should be in a low single-digit growth next year for beverage cans. But we need to wait and see exactly where the brands pitch it, and we'll know more about that, I think, in Q1.

In terms of trend volume growth in Europe being higher than North America, can you talk about some of the drivers there? Obviously, we've seen that [ various areas ]...

Yes. I mean, Germany, obviously, is a big driver. So Germany went through a period with very low can volumes. As a market it has very low, therefore, per capita consumption relative to other developed economies. And so it's on a long-term path back to a more normal rate. So even in this year, we've seen growth numbers in the high singles for Germany, while the rest of the market suffered. So that's a big factor. There's still some glass substitution on the beer side. There's still some plastic substitution in sort of Eastern Europe. And then I think the sustainability trend is big in Europe. So I think that affects brands thinking about the pack mix between cans and plastic. So that was definitely something we felt in 2018, and 2019 was driving growth because there wasn't a differential between PET margins and can margins for the big customers. So it was easier for them to switch into cans in Europe, was what we could see. So those are the two or three factors that drive Europe a bit ahead of the U.S.

Maybe on the financial side, can you talk about the step up in cash in '24 and the cash generation that you see?

Yes, sure. So yes, I mean, clearly, this year has been a strong working capital inflow as we've kind of destocked ourselves. And that progress has gone beyond where we would have originally set out at the start of the year. So we will close this year out with approximately $700 million of liquidity, maybe a fraction or ahead of that, of which circa $300 million is in cash. And then as we go into next year, what you'll find is that our business growth investment program drops away because we've now got 2- to 3-year runway of broadly -- of earnings growth that's broadly investment free other than small flexibility projects that we will do. So our business growth investment will drop from circa $300 million this year to circa $100 million next year, and then lower again for '25, '26.

And then in terms of target leverage range and dividend, can you just touch on that?

Yes. So we're at 5.7% at the end of Q3. We will -- our capital allocation policy will be a sustainable dividend. First and foremost, I think that suits both the majority and minority investor base, and then deleveraging beyond that. But I think realistically, with the cash profile that we'll have over the next couple of years, a lot of that deleveraging will come through the earnings growth rather than substantial net debt reduction.

Oliver, you talked about promotional activity in North America. I'm just wondering if there's similar things you could say about Latin America or Europe, slightly different markets, but...

Yes. I think -- I mean if you look at the growth in Brazil in the last few months, it would suggest that the brands have gone a bit more aggressively back into retail. We talked about it, but what went wrong for the can in Brazil was the growth in LME priced in dollars, the growth in Midwest premium price in dollars, the growth in conversion, costs of aluminum price in dollars with the real weakening. So that inflation that we saw everywhere was particularly exacerbated in Brazil. And so the brands did push those price rises through into retail, and that obviously, significantly affected volumes. And even with that, they complained they didn't make the margins they wanted to, which is why Ambev pushed back into returnables. So I think it's clear that in the second half, there has been a push -- with the input costs moderating, there has been a push back into more competitive retail pricing. And that has sort of met our consumer. I think they've had 3% GDP growth as opposed to forecast 0 at the beginning of the year. That's meant the consumer has obviously feeling a little bit stronger. So that would underpin the growth that we're seeing. So -- and then in Europe, I think it's still very mixed. And I think the customers are little bit -- our impression is sitting on their hands until the year-end and working through our business planning cycle to figure out exactly what their strategy is for 2024. We remain confident that there should be an increase in promotional activity because all the logic would point there, but we do need to see it actually happen.

Yes. In terms of the trend volume growth by region that you kind of gave, not that you necessarily see those next year, but substrate substitution, is it a point or a couple of points in terms of those underlying growth rates? And is that mostly from glass and a little from plastic? Or -- I don't know if it's possible to sort of generalize.

Yes. No, it's definitely a decent portion of it. Because if you take beer and carbonated soft drinks in Europe, they don't have a lot of liquid growth. So we are benefiting definitely from pack-mix substitution, either out of some glass, particularly two-way glass, or as we say, out of plastic. And then in North America, again, I think the CSD players were pushing hard into plastic in the period up to, say, 2016, '17, and then we're more benefiting from them just sort of pulling back on that journey and just rebalancing back into cans. And certainly, even 2 years ago, we were getting quite strong volume projections from our major CSD customers in cans. So I think there is a desire to balance the portfolio that way. And so that is a mix of pack-mix substitution and the innovation that's sitting in that portfolio. So yes, I mean, the can definitely benefits from pack-mix substitution and its growth numbers.

Is it possible to say in North America, whether you've seen a little bit of shift there because the brands specifically -- sustainability concerns around plastic because that's something that was talked a lot about before the pandemic, and there's questions as to whether it sort of -- I think it was on hold during the pandemic?

Yes. No, in fact, we still gained share. If you look through the period and including through the period where most of them were in volume decline this year, we still gained share versus other substrates. So obviously -- I mean they're very heavily invested in plastic, right? And a big part of their portfolio is in plastics, so they're never going to say anything too strong or publicly around this, but we clearly -- and they don't say this is why we're coming with this volume projection, but we're clearly seeing volume projections that go ahead of just liquid growth in the market. And they are significantly ahead of where we were 5 to 10 years ago. So I think it's a reasonable proposition that there's some shift going on there to de-risk their portfolios.

And then I guess in Europe, glass substitution. I mean, there's a view that maybe glass is viewed as a premium product more in Europe than it is in North America. I don't know if you agree with that, but...

It certainly occupies that space in the beer shelf or in the bar. And I think that is more prevalent in Europe than in North America. I think that's fair. So brands use it to premiumize, to get higher price per liter. But clearly, glass had a lot of input cost inflation in Europe with the energy crisis. So that's held them back this year a bit. So -- but I think they'll have that place because I think brands will want to do that hierarchy. And that's fine by us, right? We're happy to grow with the volume in the mass in the midranges. And we do grow actually in some sort of craft-type spaces as well.

Yes. Maybe just shifting to the cost side. I mean you obviously have pass-throughs on aluminum. But as you look towards '24, are there any kind of items on the cost side from like an escalator perspective that we should kind of keep in mind? And can you just talk about cost categories?

Yes. So most of our contracts work with PPI-type pass-throughs. Actually, in the U.S., we have a mix of some labor index and PPI-type pass-throughs that better reflected our cost structure here with some of the soft tolling by our customers where they buy the aluminum. And as we look into '24, I think we're going to get good recovery in those contract structures in all three regions. So -- and then the other piece we moved into in the energy crisis in Europe was direct pass-through of energy with big customers in Europe. So we'll see some energy costs falling, but no EBITDA impact from that in Europe. So I think the only area where we're sort of keeping a watching eye is that I think the repricing season in regional customers in Europe has been probably a little bit more competitive than we originally modeled. And there is some input cost inflation on the metal side. So that's probably the only risk, if you like, to price cost going into '24.

Is that a sort of a Europe-wide statement? Or is that maybe just a couple of individual markets?

Yes. I mean those regional customers are more based across the Northern European markets. So it's probably particularly focused there.

Got it. Got it. Any questions from the room?

Just on that last point, how much of your [indiscernible]

Yes, relatively small sort of 10% is on those kind of 1- to 2-year type contracts on a regional basis.

[indiscernible] restart a kind of a program [indiscernible]

Quite a lot in the short term. So I mean when we talk about being in the low 90s utilization next year in North America, that does mean we've got good runway to grow in '25, '26. So I think you'd need to see those categories growing significantly ahead of where they are today.

Would there be growth in that now [indiscernible] permanently? Or do you think there's a temporary fall in the growth?

I mean hard seltzers do continue to be a bit weak, to our surprise. We thought -- obviously, the whole industry thought they wouldn't stop growing, even if we thought they would grow less fast. And so we didn't see the reversal coming. And it's true that it's not that they're really fully stable yet. I mean certain brands are really winning in that space. So we think it's stabilizing in that sense, but we're still not seeing the full -- for me, we're not seeing the full stabilization of the whole category. So yes, I don't think it's going to turn into a big growth story next year from what we're looking at.

If you look at the valuation of the stock and the dividend yield, do you think that there's something that investors are maybe most skeptical about, whether it's just long-term industry growth rates or something company specific? Or I'm just kind of curious why...

Yes, I'm, honestly, not sure. I think clearly, it's been a difficult 2 years since launch in terms of expectations set and versus where we've had to reset them to. So that may be a drag. But look, we see that the dividend is sustainable, and we can see our plans for the next couple of years. So yes, it's hard to say exactly what it is that's causing the drag.

And in terms of -- you have a large holder in terms of what you can articulate or what they've articulated from a long-term perspective in terms of maybe increasing the free flow. I don't know if there's anything that you can add?

Yes, nothing really to add. I think they've been public about the options they have at their disposal of which one is obviously the AMP stake, but nothing to add at this point. Clearly, no desire at this point to do anything with it.

[indiscernible] curtailments and closure with savings are added in yet. Have you tried to or are you willing to put out what is like a run rate earnings target? Or what's the underlying earnings power of the asset base by [ the brand ] and all these kind of temporary mix, positive/negatives washout?

Yes. I probably don't -- I'm not going to put an exact number on it today, but I mean if you take this back, whatever it was [ 1.1 ], there's a significant amount of FX that's come off that and you can do that math. The seltzer thing is a reduction both in volume, but also in mix, and that's a pretty significant number. And then we've also not built out the network to the level we said we would. And as you say, we've taken some capacity down. So call it, 6 million or 7 billion less than was in the projection. So you can take those big categories, and obviously, they bring it down quite a long way. But nevertheless, you'd still say from where we are today, that gives us quite a lot of growth. So that's the positive angle on it.

If you think about '24, where we stand now, like what do you think would be the biggest swing factors for you that you're not sure about right now?

Probably European volumes, those are the least clear right now. I think North American volumes, we sort of have reasonable visibility on. Brazil, if this trend continues, we've got decent visibility on. I think Europe, we need the customers to come to the table with exactly what they are planning to do in '24.

You had a competitor that acquired one plant in Germany. It's a very consolidated industry, but is there any room for bolt-ons or M&A? Or do you see anything either yourselves or others?

Yes, it's difficult, particularly after the [ Borex ] merger. In these markets, there was a clear demarcation of what could be achieved. I think that single-plant deals are possible, and we can do that one with our market share in Germany. So yes, we could do a single-plant deal somewhere with independents where we're not present. But there's relatively few of those in our markets. So yes, I don't see a lot of M&A activity.

Great. Well, Oliver and David, thank you very much.

Thank you.