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

Next up, we're very pleased to be having Ardagh Metal packaging. I'm George Staphos from BofA and America's Paper & Packaging. We're delighted to be hosting David Bourne, Chief Financial Officer of the company; and Ollie Graham, Chief Executive Officer of Ardagh Metal. Ollie, as you know, is Chief Executive Officer, a position he has held since January of 2020. Before taking up that role Ollie, was CEO of Metal Packaging Europe with responsibility also for Metal Packaging Brazil, having joined Ardagh in 2016. Gentlemen, welcome. Thanks for being here. Looking forward to a very engaged discussion with a really nice room here today. So thanks, everybody.

I guess it was only last week, probably things didn't change all that much. But let us know if it did. Remind us what the key assumptions are baked into your guidance for '24 $630 million, $660 million of EBITDA? And how to the extent that you can comment, although we are kind of 2/3 through the quarter, how you're tracking against that.

Sure. Yes. Thanks, George. So obviously, the big underpin to the guidance is always volume. So if we go region by region, we assume that Europe will grow as a market in the low singles and that will be in a similar place as the company. We assumed in North America, also a low single market. But there, we assume we're forecasting a mid- to high single-digit growth for AMP off the back of some contractual wins, which I think we've discussed at prior occasions. And then in Brazil, we see the market low singles. It could be higher, it could be a low to mid. There's always upside in Brazil when it comes back. And we forecast some modest growth for us. We're lapping some tough comps in the first part. And so we've got modest growth in Brazil. That all adds up to a couple of billion of volume growth, which is to underpinned to the $50-plus million of the guide we gave on volume mix, which to clarify. Because I think we picked this up on one to ones. That's about $30 million of actual volume on the EBITDA level and about $20 million from fixed cost absorption as we grow into the capacity that we've built. And then another $20 million of the guide, a little bit over is on cost savings. So we've closed a couple of facilities, Whitehouse in this month in Ohio and the steel lines in Weissenthurm in Germany at the end of last year. And then we have some other operating cost benefits, SG&A benefits. So that leads you to about a $20 million plus improvement on the cost line. And then the drag that we called out is sort of mid-teens on price cost. That's a couple of factors, mostly Europe, say 2/3 Europe around the fact that the market was a little bit more competitive in the autumn when the open volumes were being renegotiated. We have some energy costs coming down to us from upstream. And so those are more difficult to get into the market in that environment. And then the rest is just some price positions elsewhere that are normalizing as customers grow. So that's about a mid-teens drag. So that gets you to the top end of the guidance. And the caution in the guidance, I suppose, the range is really around Europe, where we did have a tough second half. So did the competition. So we can see that customers were cautious and so we're also being a little bit cautious coming into the year. But I think it's fair to say, and I said it on the call, but it's continued into this week that we have started the year very well. We're ahead of plan in all 3 regions including Europe or there's clearly some carryover in Europe from November, December into January. So we have to be a little bit careful with that number and we have a tough comp in March in Europe, which I mentioned. But if I look at all 3 regions, they seem to be in good shape. And another encouraging statistic that we've got to now is that actually, the beverage can grew by 1% to 2% in the top markets in Europe in Q4. So you don't see that obviously in the volume data for our customers because it's all a mix of substrates, but it demonstrates the way the beverage can is still winning in the pack mix. And therefore, even when you get lower volume growth overall in packaging, beverage packaging was still getting growth as we saw in Q4 in Europe, which is pretty striking when you think about the numbers that all 3 major can makers have posted and also shows you there was a big destocking effect in Europe in November, December.

So that carryover, Ollie, if you can sort of dig a bit more into that. So you think there's still potentially a little bit more destock that needs to occur in Europe where we think we're done with that, consumption has settled out, and it's just a question of what the inflection and the ramp in growth will be.

Yes. I think that's where we are now. I mean, there was clearly a significant gap between retail sales and our shipments in Q4 in Europe. So we think that, that was pushed pretty low in terms of our customer stocks. And we could certainly see that in our January numbers that a few big players pulled pretty hard to rebuild stocks in January and are still pulling well into February. So we think that's a good sign. And then obviously, that 1% to 2% for the market overall was a good sign in what was a pretty weak consumer environment and also an environment where our customers have gone strongly on price. And certainly, the ones that went strongly on price suffered significantly on volume.

Understood. And if we can talk a little bit about Brazil, again, you're up against somewhat tough comps you said. If you can have us, if I heard that correctly, if you can have us take away what you would expect in terms of progressions, not week by week and so on, but just where should you have your strongest quarters? Where should you have your weakest quarters in terms of that modest growth in maybe low single-digit to mid-single-digit growth.

Yes, I think Q1 will be difficult because we had some volumes in last year that then got mixed up with all the situation with returnables and with the situation in North America as well on that major brand issue. So I think Q1 will be more challenged, Q2 should be better. And then we had a strong Q3, Q4 last year. So we're probably lapping pretty much [indiscernible] with Q3, Q4. So probably Q2 would be our strongest quarter. It would be what we'd anticipate.

Thank you for that. Any questions from the audience as we start. Linda's in the back, with the microphone. . What are you seeing right now in terms of promotion from your customers, very frequent topic these days. And what's your sense as well relatedly in terms of innovation? Are there -- I know you can't necessarily give away details in terms of what some of your best customers are thinking. But conceptually, what should we think about in terms of innovation driving volume in the next 1, 2, 3 years?

Sure. So I think it's clear that soft drinks promotions have ticked up. You look at '23, it's better than '22, which is better than '21. We're not back at 2019 levels in North America. And we may not get fully back there, but I think it's clear there's a lean back towards promotional activity and the data we're seeing on the soft drink side. We see it much less on the beer side with all the disruption in that market last year in North America, but we're much less exposed to that. So that's less impactful for AMP. And we'd be hopeful that there continues to be a leaning towards volume by our major customers this year with input costs moderating though, I think, reached the limits to some degree of the price lever in terms of revenue growth. So -- and we see that in some of their results now. So we remain constructive that retail pricing will continue to improve from a consumer's perspective, particularly as consumer real wages catch up. And we see the same phenomenon in Europe. I think the retail sector overall in Europe has said enough of this, we accepted some inflationary pass-through when it was very extreme. But the big retailers in Europe have very strong value propositions around value for money and they're basically saying that's -- we're done with this. And now we're going back to the last 30, 40 years, which is pretty strong competition on price. And obviously, beer and soft drinks have always been a big part of their proposition. So we do see retail pricing, we think, getting more competitive. And again, we think consumers are getting some degree of real wage growth. Obviously, the economies remain troubled. So we're not being overconfident, but we're cautiously optimistic that they'll lean more into volume this year than last year. On the innovation front, I mean, I think the soft drink space is super active. You see all these healthy drinks, the Poppis, the Olipops you see all the functional energy drinks, the CELSIUS' and [ Lemonades], very hot spaces. Still activity in FMBs and other mixed alcohol space is, a bit less meaningful overall and for us. So the soft drink space is definitely where we're seeing most of the activity that looks very strong, sparkling waters, flavored waters and obviously, still water with brands like [Liquid Life].

Do you think there'll be -- to the extent that you -- let me put it differently. How many new products are you working on now roughly relative to, say, 3 years ago. Innovation is good. You just said, it's mostly in non-alc, how does that weigh out in terms of your activity versus a couple of years ago?

Yes, I think it's definitely advancing each year because I mean this stat that we all know, right, that over 80% of innovation is in North America, beverage innovation is going into the can is leading to that process where we get more and more. We also have the digital print companies Hart in North America and Nomoq in Europe that get a lot of small innovative companies coming to them with new products. So we see that pretty early. So yes -- and then actually, we have an interesting start in Europe that we've got double new labels into the business in January, February than we had this time last year, which again, is a sign of skew growth, though, I mean, we've got to be careful. We've got the euros. We've got the Olympics, there may be quite a bit of promo and special edition type activity in there, but still interesting. So yes, we feel very good about the way the can is the main vehicle at the minute for beverage innovation.

The other substrates, are you seeing any momentum in terms of new product introductions. We've actually picked up, surprising tick-up in paperboard in beverage, new products, but that's not actually going to compete head on head with where the can is. But what are you seeing, if anything at all across...

Yes, paperboard is still side of the portfolio, it's true, and we're obviously more carbonated. Well, I think all 3 regions, but particularly where we've got the good data in North America and Europe, we can see that the beverage can was winning in the substrate mix last year, even when volumes are down, we were down less than the other 2 substrates. So at the minute what we're seeing is that innovation trend, the sustainability trends do seem to be supporting the beverage can.

Thank you. Any questions from the audience?

Ollie, [ David May ], as we continue, Europe was a bit tougher for the companies in the fourth quarter. Sure, sequentially, things look like they're getting better. But what's been going on in terms of consumption to the extent that you can share in terms of why it looks like it's been a little bit of a weaker region, not just for yourselves but for other players in beverage cans for sure.

Sure. I mean clearly, there was a big cost of living squeeze. So I mean energy, even though it's now normalizing, has gone through the biggest shock we've ever seen on Mainland Europe with the war. In '22, we were hedging at 10x normal rates at times. And so even though governments protected the consumer and got it into a range of 2 or 3 times, still a massive impact on consumer budgets. And then you add into that, interest rates going up, so people who are coming off fixed rate mortgages into variable rate interest, suddenly their mortgage costs could go up 4x. So you certainly saw the consumer under pressure across the continent. And into that environment, if people got pricing "wrong", so if they price too high, there was much more elasticity than usual. So you'd see complete loss of sales if people price too high. And what we saw was the value brands, the brands that were serving retailer-owned brands, doing much better, and we saw some key major branded players doing much worse and their results have come out recently, so you can see them. Particularly on the beer side. So we saw it strongly on the beer side relative to soft drinks, which performed a bit better and energy also more resilient. So I think it was all about the consumer was under pressure, input costs have risen, our customers took different decisions on pricing, which they didn't have great visibility on how those are going to play out. And we do see that customers in Europe are still struggling to forecast. I mean we had a big soft drinks player last year, midyear, thought they were going to grow 2 or 3 points. That didn't. Where, you've seen Heineken with the guide for the year of low to high digit -- single-digit profit growth. That's a pretty wide range for a mass beer player. So you can see they are all still trying to pick exactly where the consumer is at. And we think that will stabilize during this year, but it was obviously a difficult time for the last 12 months.

Thanks, Ollie. And then if we can talk about some of the customer issue. Issue is not the right term, but considerations that you've had in Brazil, where we had one of the brewers had some financial challenges. There were some other customers that shifted from one supplier to another. Where are we in that trend, if you will, right now? And is your volume pretty much stabilized? Have the customers stabilized and what's embedded in terms of any customer difficulties relative to that low single-digit growth that you're targeting right now in South America?

Yes. I think all good on that front, to be honest. I think they clearly went through a judicial restructuring process. One of the major brewers down there, a big customer of ours, they got through that very successfully. They traded extremely well in Q4 and started the year in good shape. So I think that's all very positive in terms of what was an unexpected event last year. Yes, that other major brewer than in Q4 '22, it's true, they push volumes a little bit away once they hit some minimums. Again, much more stable in our mix now, traded again while in Q4, starting the year strong. And then obviously, I think we're seeing also the major brewer down there, didn't reduce their can volumes as much as we might have expected last year with the shift to returnable and again started the year very strong. So we see the market -- we get good data on the market there, up 20% in January. We were not up that much, but it's very good news from the market. So I think we're feeling good about Brazil. Once Brazil comes back, it will come back very strongly.

Thanks, Ollie. Any questions from the audience? We're talking about top line, volume trends, we'll get to earnings in a minute. [Vijender]?

So actually, 2 questions from me. One on your views on the, say, demand outlook for the medium term, given that we have seen some slowdown in the bev can side. So where do you see that heading into medium term beyond 2024? That's the first question. Second question was on your can sheet supply side. So we are seeing more can sheet capacity come online in the North America. So how do you see that -- do you see that as a tailwind in terms of the pricing you can get? Or do you see that as a neutral? Like how does that impact you? Is that a positive -- that's a positive from the supply security for sure, but just in terms of pricing, how do you see that?

Sure. So taking that second one first. I think as you say, it's very positive from a supply security point of view. It's also very positive from a sustainability point of view. We think those new mills will be extremely efficient and also very strong on trying to use renewable energy and also getting recycled content into the mills is going to be a big priority. So we think that's all good news from the beverage can perspective. Obviously, there were big investments, so I think the whole industry has supported them in terms of making sure that those investments would pay back. So I don't see that its some huge pricing game. It was much more about security of supply, especially with all the geopolitical risks we have and the amount of metal that was being brought into North America. So extremely positive from our perspective, those 2 developments. And then the medium-term trends, I always say that if you go back to 2019, Europe beverage can market grew at 6%. I think Brazil grew 10% and North America grew at 3% to 4%. So this is pre-COVID, pre-anything. And there's no reason the fundamentals or the fundamentals that were there then, which is that there's innovation going into the can, and there is a sustainability tailwind for the can. And I know we'll talk about it more, but I think that's only strengthening at the moment. So yes, we remain very constructive, obviously, about the way the beverage can will grow either from liquid growth, from this innovation or certain categories like energy or from pack-mix shift, which we see in all 3 of our major markets.

Ollie, those growth rates if you can go over them again, is that what you would expect on a going-forward basis past '24, '25, '26?

Yes. Look, I think we -- obviously, we're going to be cautious at this point after the last 2 years. We're nailing our colors to that mask. But I think there's absolutely no reason why Europe can't be a low to mid-single market. There's no reason why Brazil can't be a mid-market and there's no reason why North America, which is now 120 billion, 130 billion cans can't be a low singles growth market. So -- so yes, we feel very constructive about those medium-term trends. And obviously, the last 2 years, a whole series of shocks, which were not anticipated.

Thank you. Talking about -- we'll do one more question on innovation top line. So the fact that we're seeing modest growth, the fact that we're seeing improved promotion, it does sound like there's a lot of depth of promotion. I don't know if you'd agree with that. .

Probably say, yes.

What else can -- your customers do to bring innovation and excitement to the category. I mean we've had flavor extensions. We've had new products. What's left to do? I know it's a very, very sort of open question. And if that hits, is that what we need to get low single-digit growth in North America? Or that would be incremental. And...

Yes. A good question -- that's really a good question. So look, I think we're seeing in our portfolio, these very hot spaces. So I mean, where they generate excitement is by riding the megatrends in the market and those megatrends -- long-term megatrends around health and wellness, in particular, are still playing out. So as I said, I mentioned Poppis, the Olipops this -- the sort of health soft drink space is very active. And I think there is a lot of excitement around that, that sort of space, and that takes you right across, obviously, into flavored water, sparkling waters, all sorts of interesting spaces where there is a lot of growth. And then the other one has been this, again, in the sort of health and wellness, gym, active areas has been around these energy drinks that are picking up a lot of consumption off the back of either the gym culture or other active lifestyle type cultures. We see clearly influencers and social media playing that part, generating excitement, right? So we see products in our portfolio go from almost nothing to 500 million cans last year. Off the back of those kind of marketing initiatives. We see a lot of excitement generated around particular products off the back of celebrity endorsement, which is a new thing where -- we've not seen before.

What are your customers saying about what they either excited by and they can use for an innovation angle or concerned by because of consumption and what it would mean from GLP-1 and what that effect is going to have or -- what effect will be seen over the next couple of years.

I mean we honestly haven't heard a huge amount about it from our customers. It still feels very early to know the take-up and persistence of the drugs, it feels very early to be absolutely sure what impact they'll have on different drink types as opposed to food. And what we've seen...

There's more of an effect on beer versus soft drink [indiscernible].

Yes, so look, I think -- our customers have always been extremely good at pivoting their portfolios to different issues that they face, and this is not a totally new one, right, in terms of sugar and other challenges. So with the innovation we're seeing in those healthy drink spaces. And with the way big customers can orient their portfolios, we're still feeling pretty confident that they've got time, they've got some runway to do that. And they're not really talking to us about it if we think about certainly the near term next year or 2. So yes, I think we just feel we need time for that all to play out. Yes. I think what we're seeing because of the innovation in the category, we're seeing it becomes a bit more of a game of portfolio, making sure you're with a number of customers in a number of categories. And someone will do well 1 year, some will do less well than next. And we see that in the results of the can makers.

To the extent that you can comment, what operating rate do you think you'll be running at -- what operating do you expect for the industry to the extent that you can comment for the industry across your major regions?

So we think that both, we, and the industry are running in the low 90s in Europe and North America this year. And both, we, and the industry with our [ thought ] curtail capacity, obviously, there's been some permanent takeouts in North America. We you also took out, as I mentioned, the steel lines in Europe, and we will keep under review, obviously, our overall capacity position relative to the growth to make sure that we stay in balance.

So low to mid including curtailments from what you see?

Well, we'd be low pre-curtailment. So we think the markets are in the low 90s pre-curtailment which is a constructive place to be because it means you don't need a huge amount of curtailment to get into the mid-90s, which is where the industry needs to be. Once you've got geographic and size mix and seasonality, once you're in the mid-90s, the industry feels pretty full. So we think that sort of space. Brazil will need to curtail to get into the early '90s. So we brought up a line last year, and we'll basically take down one of the old lines in the same facility for at least this year, possibly, next as well, depending on how the market develops.

Okay. And so to the extent that we obviously had good growth over a period, and then we saw capacity respond, what were the learnings from that? And how will you, if at all, differently manage your capacity growth relative to the signals that you see in terms of demand and innovation and demand from your customers to add capacity. Is it going to be a bit more conservative? Or how will you allocate capital differently based on the last few years?

Yes. I think the whole industry is being a bit more cautious in the next year or 2. If you think of what impacted us clearly, the hard sales, it was a big piece of it. I mean to be honest, we mentioned it, I think, on this conference. We waited and waited, but eventually, we went behind it. And I think everybody thought, even if it wasn't going to grow 100% every year, I don't think we thought it would go negative 15% every year. So I think learning from that, obviously, is these alcohol innovations, even when you wait as long as we waited, they can still be a bit fashionable. So we need to -- we obviously -- we did learn that lesson. From a contract point of view, we had some strong contracts in that space. And again, it's public that we've addressed those situations. And then I think if you take the other, big shock was obviously the inflation, the Russia-Ukraine war. Obviously, the situation with a major brand in the U.S. I mean, I guess the learning from that is that very unexpected things can happen. So yes, I think clearly, the industry overall is going to be a bit more cautious in the near term. I don't see contracting changing hugely in the market that we've got today. And we've got plenty of runway on our capacity anyway.

That was one of my next question. So as we sit here today, given your capacity, when do you think you need to start thinking about adding capacity. It sounds like South America is a little bit further behind, but North America and Europe, you have a couple of years to grow?

Yes, I think we've got a couple of years. I mean it's clear in the next year or 2, we don't need any on the base of our plan. And then obviously, it depends how the markets go for '26. So yes, I think it's that kind of time scale that we'd need to start thinking about it depending on particularly geographies, regions, size mix, sometimes you may have to tweak a little bit like we did in North America last year to get standard cans into the mix and also with the closure of Whitehouse, we have to bring a can size into Chicago. So sometimes you're doing those minor network investments. But I think major capacity additions, yes, we're a good couple of years out.

There's a lot of discussion in the last couple of years about the potential for renegotiations, potential is not the right term, but the fact that many of the contracts that have been entered into in the late teens, we're going to be coming up for renewal. Any observations you'd leave with investors in terms of what opportunity, what challenges that timing might mean for you? Or really nothing to worry about because of what we talked about in terms of operating rates and what we're seeing elsewhere in terms of top line.

Yes. I think we're reasonably comfortable with the position now with the industry moving into the low 90s with obviously, everybody clearly balancing their positions. So yes, we have a number of positions in '25 and '26 that need to renew, but we're feeling pretty constructive about those with where pricing is sitting and where capacity is sitting. So yes, we're relatively comfortable on the North America side. Europe, it's more of a rolling set of renewals. And Brazil, yes, similarly more rolling set of renewables. So yes, nothing that's particularly concerning as at this point.

All right. So it sounds like the year has started off at least as well as you had guided, recognizing that was a week ago. But again, we're 2/3 of the way through the quarter. If you're in our seat, what 2 or 3 things would you be really tracking this year in the quarter and in the year to determine how you are sort of resolving yourself relative to that, that guide? Is it all around volume? Or is there anything else that you would have us focus on?

Yes, look, I think beverage can makers are heavily around volume. We have big fixed costs and once we're in the year, that's what you're playing with. So -- and then as we called out, I think Europe is probably the key determinant between some -- the more conservative end and the top end of the guide would be fair. I think, David, is there anything else you would mentioned?

Yes. No, I think that's pretty much spot on. Yes, it's a volume story and it's the fixed cost absorption that comes with that volume growth into our existing capacity.

David, over the next few years, I mean, when you did the SPAC, you had longer-term plans in terms of EBITDA growth and return on capital growth. As you sit here today, I'm not going to pin you on to the quarter, right? But say, 2 years, 3 years from now, what level of return on capital or what level of EBITDA growth would you like to see in the business?

I think certainly, we see sequential EBITDA growth year-on-year through '25, through '26 guidance. The earning power of the business is somewhere in the 8s. And ultimately, by the time we'll get there we'll kind of see that play itself through. But I think with the capacity we have in the business, the ability to grow into it, the overhead absorption that comes with that, effectively, that's what the asset base will support in the medium term.

Thanks, David. I think that's all the time we have for now for Ardagh. If you would please join me in thanking Ollie and David for great presentation. Thanks, everybody, for your questions and attention.