Ardagh Metal Packaging S.A. Q4 FY2021 Earnings Call

Welcome to the Ardagh Metal Packaging Fourth Quarter 2021 Investor Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Oliver Graham, CEO of Ardagh Metal Packaging. Please go ahead, sir.

Thanks, Orlando. Welcome, everybody. And thank you for joining today for Ardagh Metal Packaging's Fourth Quarter 2021 Earnings Call, which follows the earlier publication of AMP's earnings release for the fourth quarter and the full year. I'm joined today by David Bourne, AMP's Chief Financial Officer; and by Stephen Lyons, AMP's Investor Relations Officer. Before moving to your questions, I will first provide some introductory remarks around AMP's performance and outlook. Remarks today will include certain forward-looking statements. These reflect circumstances at the time now made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in AMP's SEC filings and news releases. AMP's earnings release and related materials for the fourth quarter and the full year can be found on AMP's website at ardaghmetalpackaging.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of the release, which also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA, adjusted operating cash flow and adjusted free cash flow. Details of AMP's statutory forward-looking statements disclaimer can be found in AMP's SEC filings. I'll now provide an overview of AMP's full year and fourth quarter results. AMP recorded full year 2021 revenue of $4.1 billion and adjusted EBITDA of $662 million, representing annual growth of 15% and 19%, respectively, on a constant currency basis. Strong underlying cash flow generation with adjusted free cash flow before growth investment capital expenditure for the year of $389 million resulted in a net debt leverage ratio of under 3.7x that was largely ahead of expectation. These results exceeded the plan set out a year ago when Ardagh announced its intention to list the shares in AMP and were achieved against the backdrop of a highly inflationary environment, tight global supply chains and COVID-related challenges. I would like to express our thanks to our colleagues across the business for their unswerving commitment, as well as the support of our customers, suppliers and other business partners. These results also marked a year of significant achievement for AMP, as in addition to listing AMP on the New York Stock Exchange as a leading pure-play beverage can group, a number of other key milestones were achieved, including progressing very well with the value-creating business growth investments. These contributed strongly to 2021 performance and the program has been enhanced by additional project announcements that reflect the strong market outlook. And significantly advancing the sustainability agenda during the year, issuing a $2.8 billion green bond to support the lowering of AMP's carbon footprint and publishing updated ambitious targets in AMP's sustainability report. Looking in more detail into the fourth quarter and focused on constant currency exchange rates, revenue of $1.09 billion increased by 22%, reflecting increased shipments and the pass-through of higher aluminum and other input costs. Adjusted EBITDA increased by 19% to $165 million compared with the same period last year, driven by a strong advance in the Americas. Total beverage can shipments in the quarter were 6% higher than the prior year, despite the demanding prior year comparable when shipments rose 7%. Growth was driven by strong performances in both Europe and North America, with buoyant customer demand reflected in tight supply conditions. This favorable demand backdrop underpins planned new capacity additions in 2022 and beyond. Specialty cans represented 48% of global shipments in the quarter, up from 46% in the prior year quarter and are set to rise to over 50% of our mix in 2022. If you include specialty cans in Europe in that calculation as to some industry players, our specialty mix is still high at 62% in the fourth quarter and 61% for the year. The business contracted on a very high 90% of planned volumes for 2022 and close to 90% out to 2024. Growth of a mid- to high-teens percentage in total shipments in 2022 is anticipated as our highly earnings accretive growth investments continue their ramp-ups or commence production. Now, looking at AMP's results by segment and at constant exchange rates. Revenue in the Americas increased by 28% to $632 million, mainly due to the pass-through of higher input costs. Shipments were 1% higher than the fourth quarter of 2020 with a strong performance in North America, partly offset by principally weather-related softness in Brazil. In North America, shipments grew by 6% for the quarter. Demand remains strong across the broad mix of categories to which AMP has exposure with particular strength in energy and fitness drinks, ready-to-drink cocktails and carbonated soft drinks. The beverage can market remains capacity constrained illustrated by over $14 billion of imported cans into North America in 2021, underpinning ongoing and planned new capacity additions. In Brazil, fourth-quarter shipments declined by a low-teens percentage, measured against a tough comparable, which has grown by almost 20%. Shipments in the quarter were impacted by adverse weather conditions, as well as by COVID restrictions on social gatherings. Overall volumes were flat for the full year. Fourth-quarter adjusted EBITDA in the Americas increased by 26% to $111 million. Growth reflected higher volumes, a strong cost performance and a favorable sales mix compared with the prior year, supported by the contribution from investments made in the latter part of 2020 and through 2021. Looking forward, 2022 shipment growth of over 20% in the Americas is anticipated, led by North America, as customer-contracted new capacity additions come online and support strong broad-based category growth. Recent softness in Brazil is expected to continue in the first half of 2022, but AMP remains very confident on prospects for the Brazilian market, as the long-standing driver of 2-way to 1-way packaging continues to drive demand for beverage cans. In Europe, fourth-quarter revenue increased by 16% at constant currency to $455 million compared with the same period in 2020. Shipments increased by 11% compared with the prior year despite the strong prior year comparable of 8%. Growth was broad-based across the alcoholic and nonalcoholic beverage categories with notable strength in energy drinks. Fourth-quarter adjusted EBITDA in Europe increased by 6% on a constant currency basis to $54 million. The impact of strong shipments in the period was partly offset by input cost inflation with high European energy costs well documented. Looking to 2022, full-year shipments are expected to grow almost 10%, benefiting from the addition of new capacity in Germany and the U.K. during the first half of the year. Europe remains a capacity-constrained market and dialogue with customers continues to confirm a positive demand outlook for the medium term. Turning to AMP's growth initiatives. Excellent progress was made on the business growth investment program during 2021, underpinning projected growth in 2022. Total investment on these growth projects during the year was almost $700 million. This was despite the increasing impact in the final quarter of delays due to global logistics pressures and selective component shortages. Entering 2022, these pressures remain evident and project teams continue to navigate these challenges well. To recap on some of the larger growth investment projects. In North America, 2 new high-speed filling lines in Olive Branch, Mississippi ramped up successfully from early 2021. The first of 2 new lines in Winston-Salem, North Carolina, began production in early 2022, with the second new high-speed line to commence production in the next quarter. Out here in Ohio, brownfield expansion began to produce ends in November, 1 year after the site's acquisition, with can lines beginning to ramp up in the first half of this year. In Europe, new capacity in Germany and in mainland U.K. also starts up in the first half of 2022. And in Brazil, additional capacity came online in Jacareí in the last quarter and will continue to ramp up through 2022. Brazil ends capacity was also expanded in 2021, and additional investments are planned for 2022. In October, we set our plans for a new can facility in the U.S. Southwest. This multi-line plant will be based in Arizona and will add an initial $3.5 billion of capacity to support customer growth. Construction will begin later this year with production commencing in the first half of 2024. The plant will have space for further expansion as we continue to contract customer volumes for 2025 and beyond. The Northern Ireland greenfield expansion is progressing through planning. It will be the only can-making plant on the island of Ireland and will benefit from Northern Ireland's unique trade status. This plant is expected to start producing cans in the second half of 2023. All of these investments are well contracted and backed by a diverse mix of customers and, importantly, expand the strategic reach of AMP's network within attractive markets. Investment of over $1 billion on business growth investments is planned during 2022, including initial outlays on these 2 new projects, all of which generate significant earnings and free cash flow accretion. In summary, the investment program has made significant progress in 2021. Project teams have done an excellent job in managing execution risk, helped to refocus where possible on expansion within existing facilities, thereby leveraging an established skill base, community presence and scale. While not immune from the short-term challenges presented by the global supply chain, our plan set out a year ago to more than double the adjusted EBITDA from 2020 to 2024 remains well on track. The outlook for medium to long-term demand in each of our markets remains very positive based upon long-term secular growth trends supporting the beverage can, which continue to strengthen. These include sustainability, convenience and innovation. AMP continues to partner with global customers to support their introduction in new categories, premiumization, as well as playing an integral role in our customers' sustainability agendas. Secondly, demand for aluminum cans continues to outpace supply globally. AMP faces shortages in supplying customers across the North American and European markets. And the business is mostly sold out into 2024. Finally, current demand levels have resulted in abnormal and uneconomic product flows. Imports into the U.S. market continue to run at elevated levels totaling over 14 billion cans in 2021, an equivalent to over 10% of market demand. Imports are now expected to continue into 2022. Furthermore, inventories remain at low levels and operating rates continue to be elevated. These demand drivers are expected to continue over the medium to long term, and AMP expects to take advantage of additional investment opportunities that meet our strict return criteria and offer attractive paybacks in line with the existing growth program. Turning to sustainability, which is at the heart of everything we do in AMP and our strategy based around the 3 key pillars of emissions, ecology and social sustainability. AMP is committed to achieving science-based targets through the Science-Based Targets initiative, and approval is expected later this year and to delivering 0 waste to landfill by 2025. Ambitious new targets have been set to 2030 that include 100% renewable electricity, a 20% reduction in water usage and a 10% reduction in VOC emissions. Ardagh's sustainability efforts were further affirmed by the recent award of a gold rating from Ecovadis for the sixth successive year, which places Ardagh in the top 5% of companies assessed by Ecovadis. Ardagh also again received a supply engagement rating of A from the global sustainability not-for-profit CDP, ranking in the top 8% of companies who provided disclosures. Ardagh also has an A- rating from CDP for both climate change and water management. And in the next few months, the allocation and impact report are to be published as committed to in the green bond framework for the proceeds that were raised last year. AMP has an important role to play to elevate the sustainability agenda across the value chain. In this regard, AMP is a leading participant across industry groups and regularly engages with local authorities and government bodies. As an example, through our participation in CMI, AMP is engaged in a significant program with recycling facilities to increase the capture of beverage cans in the refuse stream in North America. Employees' wellbeing and safety are of great importance to us. The business has operated under the highest standards to mitigate COVID risk and through our BSafe initiative is constantly striving to improve employee safety with continuous training and education. During the year, a new hybrid working policy was rolled out and AMP continues to reinvest in its people through learning and leadership development, as well as an employee wellness initiative. Deep community connections are vital to AMP's continued success, particularly in securing talented people from the communities in which AMP operates. Last year, Ardagh announced a $50 million investment in STEM education across Ardagh's locations in the U.S. To date, partnering Project Lead the Way to fund 276 schools in 47 school districts. Ardagh is currently working to expand this initiative into Europe and Brazil. Moving now to the financial position and capital allocation framework. As well as delivering adjusted EBITDA of $662 million in 2021, AMP generated strong cash flows and maintained a strong liquidity position. Strong underlying cash generation with adjusted free cash flow before growth investment capital expenditure for the year of $389 million represented a conversion ratio of 59% of adjusted EBITDA. Underlying cash generation is projected to grow significantly over the medium term as the pipeline of growth projects come on stream and fully contribute to earnings. Total liquidity at year-end was $788 million, of which over $463 million was in cash and the balance by way of an undrawn ABL facility. Net leverage ended the year under 3.7x adjusted EBITDA. In terms of our capital allocation framework, we recognize the importance of regular cash returns to shareholders, in tandem with growing earnings and cash flow through the substantial investment program. To enable AMP to pursue these twin objectives in future, we intend to maintain net leverage in the range of 3.75 to 4x 12-month forward-looking adjusted EBITDA. This leverage range will govern cash returns to shareholders, and in 2022, we plan to return $400 million to shareholders. We intend to grow future annual returns of capital to shareholders progressively in line with business and cash flow growth. In 2022, AMP envisages paying a quarterly dividend for the first 3 quarters of $0.10 per share, costing approximately $180 million, with the balance of $220 million being paid before year-end of the fourth quarter distribution. Dividends are preferred means to return cash to shareholders, thereby avoiding a reduction in the public float. To enable us to achieve our important objectives of, firstly, implementing and, if appropriate, increasing our significant and profitable development program; and secondly, returning substantial amounts of cash to shareholders; and thirdly, maintaining leverage within the range outlined, we plan in the near future to launch an issue of non-convertible preference shares to raise $600 million. AMP continues to favor organic expansion opportunities over M&A, as there is ample opportunity to strengthen the network in our existing attractive end markets. Before moving to take your questions, I'd like to recap on AMP's performance and key messages. Today, AMP reported strong growth in fourth quarter and full year earnings, reflecting a focus on sustainable metal packaging, AMP's diverse customer base and attractive end markets. Over the last 5 years, AMP has grown EBITDA at a double-digit annual growth rate and by 32% in the past 2 years. In the year since the business plan was presented to the market, medium-term demand prospects driven by sustainability and other secular trends have strengthened, and the beverage can continues to win as the packaging of choice for exciting new product categories. AMP has a clear customer-back plan to grasp this opportunity, and implementation to date is progressing very well with additional growth opportunities expected to arise. The amended capital allocation framework outlined today enables AMP to address shareholders' desire for both the secular growth offered by beverage can packaging, as well as for regular cash returns, whilst at the same time, maintaining leverage at appropriate levels. AMP's plan is expected to deliver on customers' growth ambitions and to provide very strong returns for shareholders. AMP's experienced team continues to actively manage the highly inflationary environment and tight global supply chain. Contract structures are characterized by multi-year agreements with cost pass-through provisions which provide resilience against an uncertain inflationary environment, albeit subject to some occasional timing lags. Looking to 2022, demand in North America and Europe remains strong, while Brazil has experienced softer demand in recent months. AMP expects to deliver accelerated growth in shipments of mid- to high-teens percent at a group level for the year, with some second half weighting as new capacity continues to come on stream and ramp up through the year. Our confidence in the strength and resilience across our end markets is underpinned by further expanding the current growth investment program. Full year 2022 adjusted EBITDA is projected in the order of $775 million, which is after taking account of a $20 million currency translation headwind relative to the exchange rates in the business plan filed with the SEC in February 2021. In terms of guidance, first quarter adjusted EBITDA is anticipated to be broadly in line with the prior year constant currency outturn of $144 million. Having made these opening remarks, we'll now proceed to take any questions that you may have. There are lots of people on the line, so could we ask that participants please limit themselves to one question and one follow-up. Thank you.

And we will first hear from George Staphos with Bank of America.

Congratulations on the progress in the year. My 2 questions, the first one relates to margin. If you can give us a bit of color in terms of what was driving the SG&A reduction in 4Q? And then broadly, for Europe, how should we think about that from an EBITDA standpoint relative to your $775 million guide? And then secondly, if you could give us a bit more thoughts on how you think about the preference shares and the offering relative to the value return and the dividend, laying $400 million in total for '22? Some additional thoughts there would be great.

Sure. Thanks, George. So I think the cost improvement in Q4 was really about probably about the growth, so we were covering SG&A in a more effective way. And I think that we've obviously kept very tight cost control through Q4, recognizing some of the challenges in the global environment. And we see European margins, I think, are progressing well as per the plan, so we don't see any immediate shift to the medium-term guidance on that. I think as we signaled in the Q3 results, and we are, again, signaling today, there are some minor lags in inflation recovery in Europe for 2022, and that's one of the reasons we adjusted guidance by about $20 million after the $20 million of foreign exchange translation. And then on the preference shares and the value return, I mean, I think the overall points we made in the remarks that we recognize that returns to shareholders are important. We want to continue with our growth investments, and this is the second generation that we also discussed during our investor roadshow last year that we're into now, and we want to keep leverage at appropriate levels. And so we felt this was the right way to go with the preference shares and the dividend return.

And up next, we'll hear from Anojja Shah with BMO Capital Markets.

I was wondering if there's any way for you to outline the financial lift you expect in 2022 from the new capacity coming online? And also, if you're assuming any start-up costs in your EBITDA guidance?

Yes, I'll pass that to David.

Yes. So start-up costs, exceptional for this year for start-up costs of $30 million. Prospectively, we expect that to be around about the $60 million mark in FY '22.

And then I think in terms of the lift from the capacity additions, I mean, we've got somewhere $6 billion, $7 billion of capacity addition coming on this year. I don't think we're giving an exact breakdown of the EBITDA linked to that versus the underlying business, but that's the level of growth, and I think we gave the overall percentage growth by region. So obviously, they're a big driver in the growth of EBITDA from 2021 to 2022.

Yes. And just to clarify my earlier point on start-ups. Of course, under IFRS, they don't sit within EBITDA, they sit within the exceptional category, so just so you're clear on that one.

Okay. And then for my second question, I just wanted to ask a bit more about Brazil. So it sounds like you were flat in '21, but you're still optimistic about long-term growth there, and you're building a new plant this year. Can you just talk about the growth that you expect for 2022, and then also your medium-term growth expectation?

Yes, we're very optimistic about the market. Brazil has consistently been one of the top can markets globally for the last 25 years, with just one year of no growth, which was in 2016 due to significant economic pressures. There is a long-term shift from two-way glass to one-way packaging, and currently, one-way glass is in short supply, leading to increased demand for cans. Additionally, the beer sector is expanding alongside the economic growth, making it an appealing market for cans. Last year, the market grew by 5%, but that growth was attributed to a customer's own can plants rather than traditional can manufacturers. However, we anticipate that growth will now return to the can makers. We maintain our long-term growth forecast of 6% to 10%. The beginning of this year appears somewhat weak due to a few factors. The summer has been unusually rainy and cold, and COVID-19 is impacting events like Carnival, which usually boost can sales. There's also some economic downturn linked to currency devaluation. Moreover, we are experiencing a minor disadvantage in our results due to our customer mix, but we expect this to improve as we diversify our customer base in the coming years. We're projecting low-teens growth for the year, with a stronger performance expected in the second half, especially in Q3 and Q4, coinciding with the World Cup, which typically drives positive results in Brazil. This year, we're starting a new line at our Jacareí plant in São Paulo, which became operational at the end of last year and is currently ramping up production. Additionally, we have plans for another line at our facility in Northeast Brazil later this year.

And our next question will come from Arun Viswanathan with RBC Capital Markets.

I wanted to explore the volume growth a bit more. I'm a bit confused because you mentioned 6% in North America and 6% overall, but it seems like you have 11% in Europe. It would be helpful to gain some clarity on this. Additionally, I'm interested in your thoughts on volume growth in these two regions going forward. Could you address that first?

Yes. So the math to get to your 6% overall is that we had negative low-teens volumes in Brazil, so your Americas number is the mix of those 2 and with the strong Europe, you get to your 6% full year. So what we were seeing in Q4 was the poor performance of the Brazilian market, which is well-documented in the industry data and as confirmed by our peers. Then going into this year, I think we signaled in the remarks over 20% growth in Americas and just short of 10% growth in Europe for the year.

Okay. And then I guess, I also wanted to follow up on the European market a little bit. So again, yes, good growth. Would you characterize that market as running relatively full or sold out potentially? And if so, is there an opportunity for pricing and potentially moving some of those contracts up? Is that necessary within your European business?

Yes. So the market is definitely short and capacity constrained at the moment, and we're getting a lot of inbound requests this year and for future years, so it's definitely an imbalance there on the supply and demand. And as a result, over the last few years, we have seen contracts strengthen in Europe in a similar way to they strengthen in North America. I think we've said before on these calls, we're happy with our European contract situation. The only thing we flagged in the Q3 and we're flagging again today is some lags in the way that the inflation pass-through works, which will have an impact in the first half particularly of this year. But otherwise, we're happy with our contractual situation in Europe.

And then just lastly, I also wanted to just ask about the import situation. So it looks like '21 is going to see double digit billions of units of imports into the North American market. Is that the right range? And I guess, how do you see that evolving over the next couple of years as new capacity comes on? Would it be the case that ultimately you wouldn't see any imports maybe 3 or 4 years out? And if that's the case, which markets would that really hurt? Is it Brazil and Mexico, i.e., how many of the imports now into North America coming from those 2 markets?

Yes. So I think the number we've seen is around $14 billion of imports for 2021. What we hear, and I think we saw it on some of the other calls, is that those imports will persist into 2022. Probably not at that level, but the imports will persist into 2022. They don't come from us, but they have been coming from all over the world. I think obviously, there will be some long-term imports from Mexico, and some cans can travel down from Canada, but they seem to have been coming from really all over the world into North America, including the Middle East, South Africa, and China. Our observation is we do not see those replaced imports as destabilizing any markets we're in. So as far as we're concerned, we're not in those markets, but also these imports are very, very uneconomic, so they're not just going to appear in other markets. And those markets are also growing, so they'll get grown into over time as well. So we don't see any negative from that. And obviously, it's not a very compelling prospect from a sustainability or an economic position that you're shipping empty cans all over the world.

And up next, we'll take a question from Kyle White with Deutsche Bank.

I wanted to go to the Brazil capacity expansion plan. I guess, correct me if I'm wrong, but I thought initially, you were planning to bring up the greenfield plant in the Southeast this year with the additional line in Jacareí not coming up until 2023. Since I've switched those 2 items, is that because of the weaker weather, the economy, or what's kind of the reasoning for that?

No, actually, we addressed that. We made the decision 6 to 9 months ago, and it’s not what we initially planned. We completed the Jacareí project as scheduled in 2021. Instead, we accelerated our investment in Alagoas, where we are adding Line 3 to an existing facility. This was already part of our plan, but we swapped the timing after the greenfield project. We opted to advance Line 3 as it was a more straightforward project. We faced some delays with acquiring land, so we decided to bring forward the Line 3 project and enhance it for 2022, while delaying the greenfield project to the second half of 2023. This decision was made prior to any market issues, and while we are monitoring the market situation, we remain confident about Brazil’s long-term prospects.

Okay. Got it. And then in Europe, are you able to give us a sense of where you're at from a price cost standpoint in terms of what headwind you're expecting for 2022 from higher input costs and the higher energy cost? And then any kind of strategy or proactiveness you can do to kind of recover those costs?

In the $20 million that we mentioned regarding our 2022 guidance adjustments after foreign exchange impacts, the reasons include lagging inflation, softness in Brazil, and some project challenges in the U.K. and the U.S. during the first quarter. This contributes to that $20 million. We have already taken proactive steps with customers and have engaged in positive discussions about issues like increasing magnesium costs affecting our supply chain and other exceptional expenses. Overall, things are progressing well, though some recovery efforts may not reflect on the profit and loss statement until later in the year. We are committed to partnering with our customers to address the additional costs coming down the supply chain, especially given the current volatility in the market.

And our next question will come from Gabe Hajde with Wells Fargo.

First, I wanted to clarify if I heard you correctly about spending $1 billion on the business expansion plan this year, implying a total spend of $1.1 billion. Additionally, as we move into 2023 and consider your leverage target and its implications for potential capital return, I am arriving at a figure of over $650 million. Should we expect the possibility of either increased spending or another special dividend in that case?

Yes, Gabe, we're probably not going to give guidance on the 2023 dividend today, but we were clear that it's progressive from the $400 million. And we are evaluating other investment opportunities. I think we've signaled very clearly that we think the market remains attractive, that the investments we do are highly value accretive cash generating, and so we are evaluating other opportunities. I think this year, we are slightly over $1 billion business growth investments, so you're right with the maintenance. That's another $100, $110 on top, so those numbers are correct. So yes, look, progressive dividend was clearly what we're saying, but we are also evaluating additional investment opportunities in line with the $1.4 billion that we laid out in the SPAC process.

Okay. Considering that some of the inflation we are currently experiencing may be temporary, have there been any conversations about the overall cost of the can compared to other materials, especially with the current price of aluminum plus premiums? I believe it may be around $0.07 to $0.08 just for the raw material costs, with some additional expense for conversion. I'm interested in how customers are perceiving this.

Yes, absolutely no feedback indicating that there is any substitution occurring because of that. In fact, most of the inbound conversations are centered on strengthening demand. We're not alone in this; every substrate is currently facing challenges, whether it's linked to LME, energy costs, recycled material expenses, or oil prices. Everyone is dealing with the impacts of the inflationary environment, which means the can isn't particularly standing out from the competition. However, the advantages of using cans are becoming more apparent in terms of convenience, sustainability, and supply chain efficiency, especially given the high freight costs. So, there's no negativity here, only positivity from what we can observe.

Our next question will come from Paul Brennan with Golden Tree.

Could you provide some color on your hedging policy for energy costs and to what extent you're exposed to jumping gas prices we're seeing in Europe this week?

Yes. So I mean, we don't take risk on energy, it's the policy, so we have a rolling hedging program that comes into the year typically 75%, 80% hedged, so we have some exposure in the running year. I think in the case of very, very exceptional costs, we would again have to talk to customers in the spirit of partnership. But overall, at this point, it's very hard to know. I mean, clearly, we're in day one of a completely unusual situation, and we don't really know where that's going to land. So at the moment, we're in a typical place for our risk management. It's a small percentage of our costs. I mean, it's low single digits of our overall cost base, and we're going to have to see how the situation evolves over the next few weeks.

And we're moving on to Curt Woodworth with Crédit Suisse.

I was just hoping you provide a little bit more color on kind of the 1Q guide. I mean, if we look at the business performance the last 2 quarters, you put up incredibly strong EBITDA growth and in the case of the third quarter on negative volume. So to be flat on EBITDA appears somewhat conservative. Is there anything kind of specific to 1Q? I know you kind of called out maybe more acute inflation pressure and some of the start-up costs, but just any more color on 1Q would be helpful.

Yes, certainly. We want to highlight three key issues. First, there is ongoing weakness in the Brazilian market that we expect to continue into the first quarter. Secondly, we have noted a lag in inflation across Europe, which we anticipate will also impact the first quarter, although we expect some recovery later in the year. Lastly, we experienced a few challenges during the holiday season in the U.K. due to COVID; the Omicron variant hindered the start of our projects, preventing engineers from entering the site. Additionally, we faced quality issues with certain equipment from North Carolina that required rework due to COVID-related subcontracting problems. These factors are expected to influence our first quarter results in North America, particularly as we had some offsets in previous quarters. Thus, we are acknowledging these three factors that we anticipate will weigh more heavily in the first quarter, with a projected recovery in all three as the year progresses.

Okay. And then with respect to Europe, there's been more discussion in terms of can sheet availability getting higher, can sheet pricing going up. One of your peers has kind of highlighted a mismatch between pricing and when that costs flow through. So can you give us any more color on, I guess, A, your confidence in that you will have enough can sheet availability to ramp your business? And then with Europe, how should we think about the 10% volume growth translating into EBITDA growth given all the moving pieces between costs and start-up costs and things like that?

Yes. There's no question that can sheet, North America, Europe is tight. And what we're seeing to address that is imports coming in from regions which are less tight and the industry has geared up around that significantly in recent years and has some good processes and procedures and some suppliers from other regions that are used to that now. And there are specifics that are hotspots in certain specs and alloys that we're managing through. But if we take it in the round, we've done a lot of work on this during the last year to underpin the growth program, and we're pretty comfortable that we've got that covered. And we don't see a particular mismatch there in the next few years. Obviously, we are seeing PPI rates rise in Europe, which is what will then help address that price cost mismatch because most of our contracts are on general PPI pass-through. So I think the way the inflation curve has gone in Europe in the last 6, 9 months is addressing some of those issues. And we, therefore, don't see a big difference between our volume growth and our EBITDA growth when we look at the figures for this year and the years beyond.

I would like some clarification on the capital returns. You mentioned that the $400 million is progressive. I understand that you plan to scale this in line with growth. Should we expect continued returns beyond $400 million into 2023? Additionally, you indicated you wouldn't confirm whether there will be another one-time dividend, so it appears you might be suggesting that. I just want to clarify your thoughts on capital return for 2023.

No, absolutely. That's all we're saying that it's progressive annual returns from the $400 million this year, so yes, you've interpreted it correctly.

And our next question will come from Ari Herman with Brahman Capital.

Another question on the growth outlook might be philosophically, if you grow EBITDA by $200 million in 2023 and you keep the leverage at 4x, conceptually, can we think about $800 million of capacity?

Ari, I think we're not going to give exact guidance at all, but it's not a linear thing. We're obviously going to be evaluating it as we go versus our overall investment program and the cash returns of the business. So I think today, we're sticking with what we said, which is it's starting at $400 million. It's going to be progressive. When we say in line, we don't mean sort of straight line, we just mean in line with business growth and cash flow delivery. But obviously, it's very significant returns, and we think shareholders will be very pleased with that balance of cash return and growth that we've seen.

And we'll take a follow-up question from George Staphos with Bank of America.

I have a quick question about the machinery side. It seems like you're not overly worried about the machinery outlook and your ability to support your growth plans through 2024. You mentioned some COVID-related issues in the fourth quarter. Could you provide more details on why you feel confident about your current position regarding equipment availability and engineering resources? Any additional insights would be very helpful. Then I'll pass it on.

We have made significant investments in our engineering and support structures, particularly in North America, where we experienced a rapid increase in demand. We anticipated these needs when we initiated our growth program in the summer of 2020. Fortunately, we have strong relationships with our suppliers, which has helped us avoid major issues. While there are specific challenges and some project delays, overall, we believe our capital program remains on track through to 2024. The delays we have encountered were primarily related to COVID-19, but we are optimistic that we have moved past those challenges and do not foresee anything that would significantly disrupt our plans.

Just a quick follow on that. You said delays in certain areas, I assume that's just the U.K. and the North Carolina that you're referring to.

Exactly. Yes, the 2 I mentioned, so the U.K. and North Carolina.

And do you have a dedicated project management group within the organization now? Or do you tend to contract that out?

We do both. So we have a dedicated project management group in each region, we also have some global oversight and global management, and then we also contract out specific parts of the project to very experienced third-party contractors. So we do a bit of both to get the best of both worlds.

And we will now take a follow-up question from Gabe Hajde with Wells Fargo.

I appreciate that it's early in the year, but you were able to achieve your figures for 2021 despite some challenges, particularly with Brazil slowing down. Can you share your thoughts on whether there are any contingencies in place for 2022? Specifically, how would you handle potential setbacks such as delays in equipment delivery or rising inflation? Today seems a bit volatile, so any guidance you could provide about your confidence in reaching that $775 million target would be helpful.

Yes. Gabe, look, I think it is exactly what we said, right? It's in the order of $775 million, that's our best estimate today with the opportunities and risks we see in the business, and I think that's a fair picture. So yes, it is a volatile operating environment. There's no question about that. It's got a lot more volatile today. But the business is very resilient to different conditions as we've seen through COVID. Typically, in recession, the beverage can does relatively quite well, and we have lots of strong relationships with customers and suppliers to help us navigate through. So look, I think the guidance is the guidance is, it's in the order of $775 million, and that's the balance of the opportunities and risks in the business.

And currently, we have no additional questions in the phone queue.

Okay. Thanks, Orlando, and thank you very much, everyone. I appreciate your time, and we look forward to talking to you again in April.

And ladies and gentlemen, this concludes today's call. We do thank you again for your participation. You may now disconnect.