Ardagh Metal Packaging S.A. Q1 FY2022 Earnings Call

Welcome to the Ardagh Metal Packaging S.A. First Quarter 2022 Update 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, Jess. So welcome, everybody, and thank you for joining today for Ardagh Metal Packaging's first quarter 2022 earnings call, which follows the earlier publication of AMP's earnings release for the first quarter. 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 the impact from the current war in Ukraine, AMP's performance and outlook. Remarks today will include certain forward-looking statements. These reflect circumstances at the time they are 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 first quarter 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. Before I turn to the trading performance in the first quarter and the outlook, let me first make a few comments on the Ukraine, Russia conflict. When we presented our quarter 4 results on the 24th of February, we could not have envisaged the consequences of Russia's invasion of Ukraine that same day. Like so many people globally, we are horrified by the events currently taking place in Ukraine and hope that this conflict is brought to a halt as soon as it's possible. AMP does not have any employees or operations in the region, and any past sales have been at de minimis levels. We have not experienced any disruption to either our customer sales or to our supplies arising from the conflict. We source no aluminum can sheet from the region nor had any agreement to source any future supply to underpin our growth ambition. The conflict has exacerbated what was already a challenging backdrop in terms of inflationary pressures and supply chain bottlenecks. Our multi-year contracts contain pass-through mechanisms that share inflationary cost pressures across the supply chain. However, specifically in Europe, such is the magnitude of the short-term exceptional spike in our energy and related input costs that we are taking corrective action to recover these costs. Turning our attention to AMP's first quarter results. For the first quarter of 2022, we delivered a good result in line with our guidance, despite the challenging backdrop of unprecedented inflationary and supply chain pressures. AMP recorded revenue of $1.137 billion, which represented growth of 25% on a constant currency basis, predominantly reflecting the pass-through of increased input costs. Adjusted EBITDA of $145 million was both 1% higher than the prior year on a constant currency basis and against our guidance. This reflected a positive volume and product mix contribution, which was offset by inflationary cost pressures. Total beverage can shipments in the quarter were 1% higher than the prior year, which reflected a strong prior year comparable when shipments rose by 8%. Growth was driven by our new investments in North America as European volumes are largely capacity constrained ahead of the ramp-up of new capacity from the current quarter. Customer demand remains strong across North America and Europe, and supply conditions remain tight as evidenced by continued imports into the North American market. Specialty cans represented 48% of global shipments in the quarter, up from 44% in the prior year quarter, and we remain on track to increase this share to over 50% of the mix this year. Looking at AMP's results by segment and at constant exchange rates. Revenue in the Americas increased by 27% to $638 million mainly due to the pass-through of higher input costs. Shipments were 2% higher in the first quarter of 2021, with growth in North America, partly offset by further softness in Brazil for part of the quarter. In North America, shipments grew by 3% for the quarter. Demand remains strong across a 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 continued imports into North America so far this year, despite recent capacity additions. In Brazil, first quarter shipments declined by 4%, but outperformed the market, which fell by over 20%. Shipments in the quarter were impacted by pressures on consumer spending and restrictions on social gatherings. We have recently seen some signs of recovery with improved sales in March that have continued into the current quarter. First quarter adjusted EBITDA in the Americas increased by 9% to $89 million. Growth reflected higher volumes in North America, strong recovery of input cost inflation and strong cost management. Looking forward, we expect a significant acceleration in shipment growth in the Americas, led by North America, as customer contracted new capacity additions come online and support strong broad-based category growth. We expect a gradual recovery in Brazil and weighted towards the second half of the year. AMP remains highly confident on the medium-term prospects for the Brazilian market. In Europe, first quarter revenue increased by 23% at constant currency to $499 million, compared with the same period in 2021. Shipments for the quarter were unchanged on the prior year, ahead of an anticipated ramp-up in activity from the second quarter arising from new growth investments. As previously disclosed, we experienced a delay to our planned ramp-up of new U.K. capacity, which is now operational, but we also experienced a fire in one of our German plants. Without these two events, our shipments would have been 3% higher. There has been some short-term impact to the off-trade market in parts of Europe from the reopening of the on-trade as social restrictions ease, most notably with alcoholic beverages in the U.K., but our shipment activity in the quarter largely reflected our own inventory and capacity constraints after a strong fourth quarter. First quarter adjusted EBITDA in Europe fell by 9% on a constant currency basis to $56 million as performance was impacted by exceptional input cost inflation. This was in line with our expectations. Looking to the remainder of 2022. Full year shipments are expected to grow strongly, benefiting from the addition of new capacity in Germany and the U.K. during the current quarter. Europe remains a capacity-constrained market, and dialogue with our broad mix of customers continues to confirm a positive demand outlook for the medium term. Turning now to AMP's growth initiatives. Significant progress was made on the business growth investment program during the first quarter of 2022, with a total investment of $110 million, underpinning the anticipated pickup in shipments. Our project teams continue to effectively manage global logistics pressures and minimize potential delays and disruptions to bring new capacity online in support of our customers' growth ambitions. To recap on some of the larger growth investment projects, all of which are backed by multi-year customer agreements, in North America, the first of our two high-speed lines in Winston Salem, North Carolina started production during the first quarter, and the second line is now also in production. In Huron, Ohio, the first of the new can lines will commence production shortly to be followed by a second line around midyear, with further capacity to be added later in the year. As outlined with our Q4 results commentary, our new multiline plant in Arizona will add an additional initial $3.5 billion of capacity to support customers' growth. Construction will begin later this year, with production commencing in the first half of 2024. In Europe, new capacity in the U.K. has started production this quarter, as well as in Germany, as part of an expansion project that will also see further capacity addition in the first half of 2023, while our new facility in Northern Ireland is progressing through planning. In Brazil, we continue to make progress towards the addition of new capacity at our Alagoinhas plant towards the end of the current year. We are also progressing our greenfield facility in Manaus. Investment of approximately $1 billion on business growth investments is planned during 2022, all of which are expected to generate significant earnings and free cash flow accretion. We remain confident in the long-term secular growth drivers supporting the beverage can that we've previously outlined. We also see no deterioration in end consumer demand in the current environment, reflecting the defensive nature of our products. The global can sheet market is in tight supply, but we are fully contracted to support our multi-year capacity growth, and our supply is predominantly sourced locally. Therefore, notwithstanding near-term inflationary pressures, we remain on track to deliver on our plan to more than double adjusted EBITDA from 2020 to 2024, supported by our growth investments. Now focusing on progress towards our sustainability goals in the quarter. We continue to advance our ambitious sustainability agenda. As part of our social pillar, in March, we celebrated International Women's Day as an annual reminder of the efforts we need to make together as a society in working towards equality by celebrating women's achievements and accomplishments. Coinciding with Earth Day, we announced plans to install on-site solar generation at our site in the Netherlands. This follows similar initiatives already in place in our plant in Austria. These installations are part of our overall goal to move towards 100% of electricity from clean and renewable sources by 2030 as well as contributing significantly to our overall CO2 reduction. We continue to progress a number of renewable on-site and off-site power purchase agreement opportunities in Europe and North America towards our 2030 target. The war in Ukraine further underpins the importance of limiting our use of fossil fuels. And in Europe, renewable sources now represent close to half of our electricity needs. In the quarter, we also received a supplier engagement rating of A from CDP, which positions us in the leadership band. Our leadership position on supplier engagement also complements our leadership positions that we occupy for both climate change and water management. We will shortly publish the allocation and impact report as committed to in the green bond framework for the proceeds that were raised last year, recognizing our focus on energy efficient, state-of-the-art new investment projects as well as our focus on maximizing the proportion of high recycled content in our products. We continue in parallel to develop our STEM education program in the U.S. and elsewhere. Our U.S. program is now operational in some 320 public schools in the communities where we operate. Moving now to our financial position and our capital allocation framework. As well as delivering adjusted EBITDA of $145 million in the first quarter that was in line with our guidance, AMP maintained a strong liquidity position in what is seasonally a quarter of working capital investments. This also follows positive working capital movements in the fourth quarter that were ahead of expectations. Adjusted EBITDA minus maintenance capital expenditure was $125 million or 86% of adjusted EBITDA, which illustrates the strong underlying cash generation looking through the seasonality of working capital movements. Total liquidity at the quarter end was $450 million, of which $225 million was in cash, and the balance by way of our undrawn ABL facility. Net leverage ended the quarter below 4.2x last twelve months adjusted EBITDA. As we set out in February, we intend to return $400 million to shareholders in 2022 or $0.66 per share. Today, we have declared a first quarter dividend of $0.10 per share, and we expect to follow this with further dividends of $0.10 per share in respect of each of quarter 2 and quarter 3, with the balance being paid before year-end. We intend to proceed with the planned issuance of $600 million of non-convertible preference shares and envisage net leverage at the end of 2022 being well below the forward-looking adjusted EBITDA leverage guidance of 3.75 to 4x, which we outlined in February. Before moving to take your questions, I'd like to recap on AMP's performance and key messages. Today, AMP reported first quarter EBITDA that was in line with our guidance. Progress on our growth investments in the quarter positions us for a meaningful step-up in shipments activity across the remaining quarters in 2022. The medium-term demand outlook across each of our markets remains strong and underpins our earnings and cash flow accretive customer-backed growth investments. Our plan to more than double adjusted EBITDA from 2020 to 2024 remains on track. Full year 2022 adjusted EBITDA is projected to be of the order of $750 million, using Q1 average FX rates compared with our previous guide of $775 million, which was on a comparable basis. This reduction reflects unprecedented inflationary pressures, particularly in Europe, arising from the impact of the war in Ukraine for which we are taking corrective action. Our guidance for global shipment growth in 2022 of between a mid- to high-teens percentage remains unchanged. In terms of guidance for the second quarter, adjusted EBITDA is anticipated to be in the order of $180 million versus the prior year of $168 million on a constant currency basis. Having made these opening remarks, we will now proceed to take any questions that you may have.

Our first question comes from George Staphos with Bank of America.

I wanted to clarify the EBITDA guidance for the year. Although the wording has changed, the basis of your guidance has not. Essentially, on a constant currency basis, you're indicating that you don't intend to engage in currency forecasting, and neither do we. Given the current situation with currencies, you're estimating around $750 million. Is that accurate? And is this the same baseline you projected last quarter when it was $775 million?

Yes. George. No, I think that's exactly right. I think we've taken the average run rates given the volatility of FX. There is a small risk if you took today's spot of the order of 5% to 10%. But I think the $750 million seems like a fair way to present it relative to the $775 million and given that was using the average Q1 rates.

Okay. And the actions that you're taking to offset the inflation that you've been seeing, can you talk a bit about what that means in more detail and when you actually expect that to materialize? Is it something that shows up later this year? Or is it something that, given the markets, the lags and so on, that it would be more of a 2023 benefit that you'd be receiving? And relatedly, can you talk to the degree to which you are unhedged on energy prices in Europe?

Certainly. At the beginning of the year, we were about 75% to 80% hedged, with some positions still open. We regularly seek external advice on our hedging strategy and have been managing this on a rolling basis. While I won't provide specific percentages on our current hedged position, we are continuing to hedge as we progress. Regarding the actions we're taking, we're engaging in discussions with our customers. Given the significant spike in energy costs caused by unforeseen events, we believe it's appropriate to currently address this as a pass-through with our customers. Additionally, the impact of these actions is more likely to be felt in the latter half of this year rather than in 2023.

Okay. Lastly, I'd like to address your continued optimism regarding the growth in beverage cans and the current market demand. However, I would like to point out that your growth in Europe, excluding disruptions, was 3%, and North America also saw a growth of 3%. Three years ago, we would have considered that a strong volume growth. In comparison to recent quarters, this seems somewhat lower. Why are you confident in the growth outlook? What is your long-term growth forecast for the market? Are there any emerging weaknesses that we should be aware of, or do you see consistency across your markets and the broader market?

Yes, I can go through each region. We view Europe as a mid-single-digit market for the medium term, and during the quarter, we received many inquiries for additional projects. There was some weakness in beer during the first quarter, particularly in the U.K., where COVID support had been in place. The rapid reopening in the U.K. required our customers to quickly shift to kegs, which we see as a temporary adjustment. Additionally, there’s some pressure on exports from Europe due to the high costs of ocean and international shipping right now. We consider these as isolated incidents and remain optimistic about Europe’s market potential. We didn't increase our capacity in Europe last year, and only started adding capacity early this year, which was delayed by COVID impacts and equipment issues. We had strong growth in Q4, which strained our inventory, and alongside the capacity constraints, we couldn't offer more. Overall, we are confident about Europe. In North America, though the inventory overhang from seltzer is still being managed, we've seen some operators rebound into our numbers as the quarter progressed. The ready-to-drink cocktail sector is also showing promise, and retailers are preparing for a significant summer in this area. Other categories like energy drinks are performing well too, with innovations emerging in still water. North America’s outlook is positive. In Brazil, we anticipate GDP growth to bolster beer consumption, and we’ve seen a recovery in March and April. Our customers are optimistic about the coming months, especially with events like the World Cup and Carnival. We expect Brazil to return to the growth trajectory we previously projected, above 5%. For North America, we see a realistic growth of 3% to 5%. Overall, while there are specific challenges, we remain confident in the medium-term outlook.

We'll go next to Mark Wilde with Bank of Montreal.

Can you help us understand how much of a negative impact you expect this year from unrecovered energy costs in Europe?

Yes. I mean that's essentially the $25 million in the guidance. So basically, the $775 million to $750 million is entirely European, either direct or indirect energy inflation.

Okay. And along the same line, can you just talk about any impact from higher converting margins on aluminum can sheet, whether that creates any headwind because maybe you're indexed to ingot price? And as the converting spread would widen, you wouldn't be able to recover all of that. Or is that not an issue?

No, I think the LME and premium are mostly hedged out or passed through. You will notice some impact on our working capital line due to increased LME and premium costs, creating a cash drag, but not affecting EBITDA. The conversion from ingot to sheet is a specific supply-demand issue. The reason it’s being discussed now is due to very high ocean freight costs. These costs have risen significantly for imports into the regions, and our forecast indicates they will remain elevated into 2023. This is a concern for all carmakers, including us, as we plan for our recovery in 2023.

Okay. All right. And then last one for me. Any color you can provide us around Brazil because your 4% drop versus a 26% for the industry is really quite striking?

Yes. It's all about the customer mix. We had a situation in Q4 where our customer base was not performing as well in the market. Now, however, our customer mix is doing slightly better than the market, and that’s what is contributing to the change.

Our next question comes from Kyle White with Deutsche Bank.

In Europe, how many contract renewals do you have lined up at the end of this year to support the cost recovery you mentioned regarding some of the contractual changes?

No. I mean, we're very strongly contracted actually, but I think we're still confident we have the opportunities to address the current inflation environment with our customers. So we see that we do need to do that. I think it is a new environment with this level of volatility, but we see that we can address that going into 2023.

I’m curious about the feedback you’ve received from shareholders regarding the preferred stock since its announcement about a quarter ago. When can we expect the preferred issuance to take place?

Yes. I can't really add anything to the remarks on the timing, but I think we've had a range of feedback across the piece. And so I can't add much more to the remarks on that.

If I could follow up on it. Is it still the plan to have a pretty increasing dividend year-over-year?

Yes. I think that given growth plan and the very high cash-generative nature of the business, I think we see it as appropriate to have a progressive dividend policy.

We'll go next to Arun Viswanathan at RBC Capital Markets.

And congrats on the quarter. So I guess, yes, similarly to some of the questions, you're still sounding very positive on your longer-term outlook. I guess, when you think about the visibility, would you say that you still have visibility out to 2025? Or has that kind of shortened? And then maybe if you could provide a little commentary on the Brazilian market. I know that there's been a little bit of a pullback there, maybe GDP related and other factors like the World Cup. When do you see that kind of normalizing? And what's kind of the trajectory we should expect over the next couple of quarters for Brazil?

Sure. I believe our visibility remains intact. As we indicated in our SEC filing and during the speculation process last year, we are well contracted with solid agreements in place through 2024. Additionally, as we have slightly increased our capacity planning for 2025, we have ensured that this is also backed by contracts that provide clarity on volumes. Therefore, I do not perceive a change in our visibility compared to previous assessments. It is important to note that we are currently in a highly volatile market, particularly in Europe, but we anticipate this is more of a short-term issue rather than a long-term trend. Regarding the Brazilian market, there has indeed been some pressure on consumer spending, compounded by poor weather early in the summer and the significant impact of Carnival being shut down compared to typical summer seasons. We are seeing some recovery right now, although we are entering the low season, which means it is building from a lower starting point. We expect the main recovery to occur in the third and fourth quarters. The period from October to February looks promising, highlighted by the World Cup taking place in the Brazilian summer for the first time, and historically the World Cup has been beneficial for Brazil. Additionally, we are optimistic about a substantial Carnival season, assuming no further setbacks with COVID, and both we and our customers are hopeful for growth during this time.

Okay. And as a follow-up, maybe I could ask about some of the different categories. So Ardagh has a little bit more exposure to the seltzer market than some of your peers. Could you just comment on what you're seeing there? And then maybe if you could comment also on if there's any differences between regions? Are you seeing any improvement in some of those other newer categories in Europe?

Sure. So I think the seltzer market is sort of broadly where the big players are projecting it. I think Boston Beer came out the other day with a sort of 0 to 10 with them at 4% to 10%. We see it in that range sort of mid-high single digits for the year. And what we're seeing then on our numbers is a very significant recovery because the inventory has been worked through increasingly. Some players are faster than others, but that is happening. And we're also seeing the replacement of imported cans in the mix of those customers. So yes, we're seeing a very significant recovery in our sales there and absolutely in line with our forecast. And we expect a decent level of growth for the years ahead. I think that there needed to be a shakeout, and now the main players in the category can start to manage the category properly in terms of promotion and innovation and pricing and shelf management. So we see that's what will happen over the next few years. Plus, I think we see the category as being the seltzer and the ready-to-drink space. And obviously, as I said before, the ready-to-drink cocktail space is very hot, lots of innovation and lots of retailer interest and space being dedicated to that. I think then on other categories, energy, as I said, very strong, and that's the broader energy space. I think sparkling water continues to do very well. And now what we're seeing is this innovation into still water. So we've got a couple of brands. We mentioned Liquid Death on the call before, but people are really pushing into that space in a significant way, obviously, still from a small base, but looking good and that's on both sides of the Atlantic. Coffee and wine continue to be areas going into cans. And in general, I think innovation is still strongly weighted towards cans in the beverage space. And just considering all of what you just mentioned, is there a possibility that you'd be announcing more greenfield expansions? Or how do you plan to meet all that demand? We have indeed announced our project in Arizona. Some of the projects we've revealed have more available space, and we are still in talks with customers about future projects. Therefore, we will assess our capacity needs throughout this year and the next, in addition to our current plans.

We'll go to George Staphos with Bank of America.

Two final questions for me. Regarding the dividend, if the financing market continues to be tighter than anticipated, and you're unable to move forward with the preferred at your desired timing, would that change your outlook on both the regular dividend and the $200 million in the fourth quarter? The second question, which Gabe mentioned, pertains to what other rigid companies have reported. One of them noted a trend during economically weaker times towards returnable glass and away from one-way formats. Are you observing any shifts in Brazil towards returnable packaging with glass instead of one-way, and if not, why aren't you concerned? Good luck in the quarter.

Thanks, George. I don't have much to add regarding the press coverage. We're confident in our financing activities and our dividend policy. As for Brazil, the answer is no; we don't anticipate a long-term return to returnable packaging. It's quite challenging to revert because consumers tend to prefer cheaper beer available in off-trade settings. However, as you've experienced over the years, a decrease in economic activity might drive some margin-driven shifts back to returnable formats from suppliers. I don't believe those changes will last, especially as the on-trade market reopens. Once that happens, market participants will likely prioritize promotions in the off-trade to capture market share. In recent years, we've seen all major brewers in Brazil align their strategies towards off-trade focus, moving away from the mixed approach seen previously. This shift reflects a period of lower overall demand, where suppliers may prioritize margins in the on-trade. I don't see this as a lasting change. Based on our observations in other markets, once these systems start to decline, they often become subscale and can collapse, leading to greater demand for one-way packaging. We also notice strong demand for one-way packaging, including cans and glass, in Brazil. Therefore, I believe these trends will continue, and what we are witnessing is merely a temporary situation.

Relatedly, one of the brewers is adding self-make glass capacity, and this is not a super new concept. I think it has been out there for a little while. But again, why aren't you troubled by that relative to, obviously, the investments you're making in cans in Brazil?

Okay. I think, George, just because of the shortages in both substrates. So I think that there is a significant shortage in one-way glass as well as in one-way cans. And where we see all the market trends going in Brazil, we see both needing significant additional capacity. And so that particular capacity build doesn't concern us.

We'll go next to Ed Brucker with Barclays.

So Russia is a producer of aluminum and really a large energy exporter, especially in the European area. So I just wanted to see if you've seen any supply chain issues with either aluminum supply or energy availability in the first quarter and then how you're looking at it for the rest of the year.

Sure. So yes, I think on the aluminum side, we don't see any impact. A lot of that was ending up in rolling that was produced and used within Russia. None of our supply sources were dependent on it, and we see plenty of other sources upstream. So we're not concerned on that piece of it. Obviously, the energy is the key one. We don't know better than anyone else at this current stage. It appears that the gas is still flowing. And while it's still flowing, although it's expensive because of concerns over disruption, industry continues. And as long as that's the case, we'll be fine. And honestly, as I say, we don't know better than the next person at this point. We're assuming it will continue in the projections we've given you today.

Got it. And then on to the balance sheet, leverage is up to 4.2, above your leverage target range. Just wanted to get your thoughts on how you plan on getting back to that leverage target. Is it going to be solely through earnings? Or do you see an opportunity to reduce debt? Or is getting to that leverage range kind of contingent on getting that preferred shares done?

No. I think the overall plan projects significant earnings growth, and that is our main way we're delevering. And we'd always plan to have a phase of being a little bit higher than our targets and then coming down over time. But I'll pass to David for any more...

Yes. No, look, our leverage at Q1 is exactly actually in line with where we were internally. We would have targeted. In fact, it's just fractionally below. And as Oli illustrated in his prepared remarks, the cash flow conversion on the EBITDA is so strong that, that gives us a natural deleveraging effect very quickly.

And with no other questions holding, I'll turn the conference back for any additional or closing comments.

Thank you, everyone, for your time, and look forward to talking to you next quarter.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.