Ardagh Metal Packaging S.A. Q3 FY2022 Earnings Call

Welcome to the Ardagh Metal Packaging S.A. Third Quarter 2022 Update Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephen Lyons. Please go ahead, sir. Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging’s Third Quarter 2020 Earnings Call, which follows the earlier publication of AMP’s earnings release for the third quarter. We have also added an earnings presentation onto our investor website for your reference. I am joined today by Oliver Graham, AMP’s Chief Executive Officer; and David Bourne, AMP’s Chief Financial Officer. Before moving to your questions, we 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 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 most recently filed Form 20-F with the SEC and any other public filings. AMP’s earnings release and related materials for the third quarter can be found on AMP’s website at ardaghmetalpackaging.com. Information regarding the use of non-IFRS financial measures may also be found in the Notes section of the earnings release, which also includes a reconciliation to the most comparable IFRS measures of adjusted EBITDA, adjusted operating cash flow, and adjusted free cash flow. Details of AMP’s forward-looking statements disclaimer may be found in AMP’s earnings release. I will now turn the call over to Oliver Graham.

Thank you, Stephen. We experienced a challenging third quarter of 2022. While global shipments increased by 9% compared with the same period last year, earnings were below our expectations. Profits were impacted by a softening in demand conditions relative to our forecast in both Europe and the Americas, together with a reduction in fixed cost recovery. We expect these conditions to persist through the fourth quarter and into the first half of 2023. In response, we are taking a disciplined approach to managing our costs and capacity, including the near-term curtailment of some of our production footprint. We are tightly managing our inventory and have further flexed our growth investment program. Near-term demand headwinds reflect further weakening in the hard seltzer category in North America; inflationary pressures across core categories, including carbonated soft drinks and sparkling water; and further weakness in the beer category in Europe. However, the secular trends underpinning the attractive growth outlook for the industry remain unchanged. Those secular trends have continued as evidenced by, firstly, consistent share gains for the beverage can relative to other packaging substrates. Secondly, the mix of innovation with over 80% of new products favoring the beverage can as their package of choice. And thirdly, ever-increasing engagements with customers to help them enhance their own sustainability profile based on the infinitely recyclable nature of the beverage can. It is worth remembering that in 2019, before the pandemic, before the multiple supply chain challenges we faced, a war in Mainland Europe and now a 40-year record level of inflation, the North American market grew at 3.5%, Europe at 6% and Brazil at 14%. The fundamental drivers of that growth have not changed. These include the growth of categories packed in cans such as energy drinks, the beverage can's effectiveness as a package to maintain beverage quality and communicate to the consumer, the beverage can's efficiency reflecting a very low cost through the supply chain, and the strong sustainability credentials of the can based on its high recycling rates and levels of recycled content. In addition, the beverage can's performance has always proven resilient through economic cycles. So while we are in unusually uncertain times for forecasting, as we look out to 2023, we anticipate market demand growth in all our markets at the level of low single-digit percentages in North America and Europe and mid-single-digit percentages for Brazil. In summary, we are confident in the beverage can's enduring secular growth tailwinds and the maturity of our investment program leaves us very well placed to serve this growth. At this time, we’re focused on managing through a complex operating environment. In addition to the disciplined management of our footprint and our operating costs, this includes addressing our energy requirements, recovering from exceptional inflation, and progressing our sustainability agenda. On that agenda, we were delighted to recently gain approval from the science-based targets initiative for our greenhouse gas emissions reduction target and to be awarded an improved EcoVadis platinum rating as part of the wider ADA Group, positioning us in the top 1% of companies assessed. We recently published our sustainability update report, and we’re also co-sponsors alongside Crown at the Global Aluminum Cans Sustainability Summit in Rome, bringing together organizations globally from across the aluminum beverage can value chain. Turning our attention to AMP’s third quarter results, we recorded revenue of $1.2 billion, which represented growth of 21% on a constant currency basis, predominantly reflecting the pass-through to customers of higher input costs and strong volume mix growth. Adjusted EBITDA of $140 million was 15% lower than the prior year on a constant currency basis. This is principally due to input cost headwinds, partly offset by favorable volume effects from the group’s growth investment program. Total beverage can shipments in the quarter were 9% higher than the prior year with growth well spread across our global footprint, supported by the contribution of our growth investments. Specialty cans represented 46% of global shipments in the quarter, up from 44% in the prior year quarter. Looking at AMP’s results by segment and at constant exchange rates, revenue in the Americas increased by 23% to $680 million, mainly due to the pass-through of higher input costs and favorable volume mix effects. Shipments were 10% higher than the third quarter of 2021, with increases in both markets, driven by growth investments and improved momentum in Brazil. In North America, shipments grew by a high single-digit percentage for the quarter. Growth was particularly strong in carbonated soft drinks, but with some softness in sparkling water and continued pressure in the hard seltzer category. Our new capacity additions continue to support shipment growth, but the near-term growth outlook is softer as higher retail pricing for our product impacts demand, resulting in ongoing customer destocking. As we emphasized on our last earnings call, we have added increased flexibility to our network, and we will manage our capacity in a disciplined manner to match supply and demand conditions, including near-term curtailment actions and further measures in 2023. In Brazil, third quarter shipments grew by a low-teens percentage, outperforming the market, which returned to high single-digit growth. Our outperformance reflected customers seeking to diversify their supply. Adjusted EBITDA in the Americas increased by 2% to $102 million in the third quarter. Strong volume growth from increased capacity was largely offset by higher operating costs caused principally by fixed cost under-absorption as we align production with demand. Looking forward, we expect continued strong shipment growth in the Americas as new capacity continues its ramp-up in North America and as the market trends continue to normalize in Brazil, helped by an unrestricted summer period. In Europe, third quarter revenue increased by 19% on a constant currency basis to $493 million compared with the same period in 2021. Shipments for the quarter grew by 9% on the prior year, supported by the ramp-up of installed capacity in the U.K. and Germany. Across categories, soft drinks performed well, but demand has been lower in alcoholic beverages. There was additional continued weakness in the export market for filled drinks due to elevated freight costs. We noticed a slowdown in activity towards the end of the quarter, which may indicate that inflationary pressures are starting to have some impact on consumer demand. Third quarter adjusted EBITDA in Europe fell by 42% to $38 million as input cost headwinds exceeded the contribution from higher shipments. We also incurred costs related to unusual metal valuation timing issues as a result of holding higher raw materials inventory for longer than anticipated while metal prices fell during that period. But we were able to offset this impact through positive one-off factors, and we do not expect this cost to reoccur in the fourth quarter. Looking to the remainder of 2022, shipments in the fourth quarter are likely to see a modest decline, reflecting a strong prior year comparable. As part of our actions to manage our capacity, we will not carry forward the previous year to balance our market needs. We are well advanced on building out our energy hedging target for 2023 and in discussions with our customers to ensure a timely, fair, and effective pass-through of our energy costs. Since our last update, the near-term energy outlook in Europe has improved with gas storage levels in excess of expectations and various emerging national supports and coordinated European-wide energy measures. We will continue to monitor the situation. And as we previously mentioned, the beverage can sector has historically been favored as an essential industry by the government, most recently during COVID. As we look ahead to 2023, the price resets within our multi-year contracts for non-metal and non-energy input costs will benefit from a more significant uplift as calculated by the elevated PPI curve in line with current inflation levels. Turning to our growth initiatives. During the third quarter, AMP made additional growth investments of $129 million. Our investment program is now well advanced and will continue to contribute to future shipments growth. Our project delivery teams continue to deliver our investments largely to budget despite the inflationary and supply chain challenges. As previously outlined, we will be disciplined in our management of capacity and in any additions. And our objective is to match supply with anticipated demand on long-term contracts offering attractive economic terms. We are in constant dialogue with our customers to understand their needs, and we will be reactive to changing demand conditions. In response to the softer near-term demand, we are further revising our expectation for 2022 growth investment to approximately $600 million, split between under $500 million of CapEx and the remainder through leasing. This represents a reduction of nearly $500 million relative to our expectation at the beginning of the year. To recap on our recent growth investment activity, in North America, we started up capacity in Huron, Ohio. We are re-phasing some of the further capacity to come from this project into the first half of next year. Following the previously completed expansions in Winston-Salem, North Carolina, and Olive Branch, Mississippi, we do not anticipate adding any new capacity to the market in the near term. In Europe, our near-term plans include our previously set out capacity expansions of one line each in Germany and France in the first half of 2023. In Brazil, an additional line expansion in Alagoas will complete in the first quarter of 2023. I’ll now briefly hand over to David to talk you through our financial position before finishing with some concluding remarks.

Thanks, Ollie, and hello, everyone. During the quarter, we issued EUR 250 million of perpetual redeemable non-convertible preference shares and also successfully upsized our ABL facility by $90 million to $415 million. We ended the quarter with a healthy liquidity position of approximately $1 billion, of which $583 million is in cash. This was notwithstanding an impact on working capital due to softer-than-expected demand conditions in the quarter, leading to an elevated inventory position. We expect to see a working capital inflow over the fourth quarter. With our growth investment plan well advanced and further flexed, we anticipate a further reduction in planned future growth investment in 2023. Our cash outlay will also continue to be lowered through leasing activity. As such, we do not anticipate any external market financing needs in 2023. Net leverage at the end of the quarter was 4.5x LTM adjusted EBITDA. As a reminder, currency effects are broadly neutral from a leverage perspective, given the currency mix of our debt and our earnings. The majority of our debt has also been issued on fixed-rate terms, and we have no bonds maturing before 2027. We have today announced our fourth quarter dividend of $0.10 per share to be paid later in November. This takes our cumulative dividends for 2022 to $0.40, which we view as sustainable and is in line with our guidance to pay the $0.40 within the current calendar year. As part of our share buyback program authorized in June, we repurchased a further $32 million of shares in the quarter, and this takes our cumulative share repurchases to $35 million to date. With that, I’ll hand back to Ollie.

Thanks, David. And before taking questions, I’d just like to recap on AMP’s performance and key messages. Our global shipments grew by 9%, supported by our growth investments, which will underpin future shipment growth. Softer-than-expected demand conditions in the quarter resulted in an earnings performance below our expectations, in response to which we’re further re-phasing our growth CapEx, temporarily curtailing some capacity, tightly managing our inventory, and planning further capacity reductions in 2023. Our growth investment plans are well advanced, and we now anticipate a significant reduction in future investments and do not expect any external market financing need for 2023. We continue to progress our sustainability agenda and are pleased with recent third-party recognition of our journey. And in Europe, we’re well advanced on the build-out of our energy hedges for 2023, continue to progress the recovery of our energy costs, and look forward to greater support from the PPI input cost recovery mechanism into 2023. Despite the softer near-term global demand outlook, secular demand trends continue to support the beverage can for which we’re very well placed to capitalize. We see volume and profit growth into 2023, and we will update with more detailed guidance at our full-year results. Our current view of the market leads us to project global shipment growth for 2022 of a mid-single-digit percentage. Full-year 2022 adjusted EBITDA is projected to be in the order of $640 million to $650 million, assuming a euro-dollar parity exchange rate to year-end. This compares to the prior year adjusted EBITDA of $630 million on a constant currency basis. As a reminder, and as a proxy, every $0.01 movement in the euro-dollar rate represents approximately $2 million on an annual basis. Our estimate compares with our previous full-year adjusted EBITDA 2022 guidance of $710 million. Of the $60 million to $70 million reduction, the majority relates to volume mix effects through both a lower top-line benefit as well as weaker fixed cost absorption and manufacturing inefficiencies, with a similar impact expected in Q4 as to that experienced in Q3. In terms of guidance for the fourth quarter, adjusted EBITDA is anticipated to be in the order of $175 million to $185 million, which compares with prior year adjusted EBITDA of $157 million on a constant currency basis. Having made these opening remarks, we’ll now proceed to take any questions that you may have.

And our first question today comes from Angel Castillo of Morgan Stanley.

I was just wondering if you could give us a little bit more color. I know you haven’t laid out any particular, I guess, a specific number for 2023, but you noted that you anticipate volume and profit growth. As we think about all the different buckets and levers that should be benefiting such as PPI or cost recovery and pulling back on CapEx, probably, how would you kind of, you guys, describe that bridge? And could you quantify some of those buckets so we can kind of get a better sense for that profit growth that you anticipate year-over-year?

Angel, I think we’re not going to quantify all of them on this call, and we’re going through our budget process at the moment, and we’ll update in more detail in February. But just to give you some of the pieces that we’ll be talking about there. And as we said, we see both volume and profit growth into 2023. We’ve given you the market guidance of what we think the market will go at, and we’d expect to outperform that market growth. And we also see that we’re going to recover ‘23 inflation in Europe over 2022. But we’re not clear at this point, depending on how that plays out, that we’ll recover some of the loss that we occurred in 2022. So I think those are 2 or 3 of the big pieces. As I say, we’re not going to get into detailed guidance on this call because it does remain an uncertain operating environment, and we want to go through the entirety of our budget process to give the guidance in February.

Understood. Regarding the curtailments and potential shutdowns you mentioned, some of that may still be under discussion. Could you provide an estimate of the size of the assets or the capacity you have in mind related to the strategy, potential curtailments in North America, and the shutdown in Europe?

Yes. So I think we could see $1 billion to $2 billion of capacity curtailed in North America next year. We could see up to $1 billion mothballed in Europe next year. So it’s that order of magnitude as we make sure we balance supply with demand. We’re very focused on remaining in the 90s utilization rate and maintaining a disciplined stance. And so we’ll be doing that in both markets.

Just following up on Angel’s question. I think at the time of the listing, you outlined the path to maybe 60 billion units of capacity by 2024. Obviously, there have been a number of adjustments kind of along the way. With the curtailments and with the decisions you’ve made this quarter, could you talk about where capacity might be exiting next year or exiting 2023 or in 2024?

So I think that in North America, we’ll have completed the capacity build-out that we described at the time of the listing. I think in both Europe and Brazil, we’ll be behind that curve with some of the rephasing that we’ve done and some of the plans that we have. So I haven’t got the exact numbers to hand. We can give you more detail of those in February, but we’ll certainly be behind Europe and Brazil; we’ll have completed in North America.

Okay. Understood. And then just can you talk a little bit more about the cost headwinds that offset volume growth in the Americas in Q3? I think Americas volumes were up 10% year-over-year. EBITDA was up, I think, a couple of million. Can you just talk a little bit more about sort of the cost bridge for the Americas in the quarter?

Yes. Look, it is all linked to volume. So I mean if you take the miss, it’s 95% linked to volume. But the 3 elements of that are firstly, the, if you like, the straight volume miss, then there’s also a significant mix effect in the volumes that we lost relative to expectations of higher margin. And then the third element, which we referred to in the cost is the under-recovery of fixed costs. So we were expecting, obviously, to run more cans across the new capacity. And when you run fewer cans across that capacity, you get an under-recovery on your fixed costs. So it’s not an SG&A element. It’s a plant operating cost inefficiency driven by the lack of volumes. So you can take 95% of the miss in the Americas, which is in North America, is linked to volume.

I just wanted to focus a little bit on Europe and if you could provide a little bit more detail on some of the weakness in the quarter that you saw there. Maybe some more details on the metal valuation timing issue that you called out. And then I think you said that you noticed some deceleration in demand late in the quarter, I believe, it was because of some of the inflationary pressures. So if you could just provide more details on what you’re seeing from that standpoint going into Q4 as well?

Certainly. Some of the trends we observed in the first half carried over into the second half, stronger than expected, especially in September and continuing into October. There is a noticeable weakness in Northern European markets, particularly concerning beer. We are also seeing increasing challenges in the co-pack segment. Additionally, the filled goods for export remain weaker than we anticipated, as we had expected some recovery in that area. Towards the end of September and into October, we observed continued weakness, which we now attribute to consumer pressures in Europe due to rising energy costs or concerns about impending increases. Recently, two major beer customers reported potential demand weakness linked to consumer inflation. This signals a risk as we approach Q4 and early next year. Regarding the metal issue, it amounted to a mid-teens million dollar impact. However, we managed to mitigate a significant portion of that through various one-time recoveries, including take-or-pay recoveries and the release of some energy hedges. These one-off factors helped us offset the metal issue, and we do not anticipate this concern carrying into Q4.

Got it. And then as we think about next year for Europe, how should we understand or think about some of the headwinds still that you’re facing regarding energy? Are you still expecting a headwind in the first half of the year? Just trying to understand, given the hedging that you have in place as well as some of the cost recovery or your proactiveness goal for unique energy?

Sure. Yes. So look, I think the team has done a lot of work this year and worked very hard to get energy costs recovered both in this year, in which we’re very close to the target we set ourselves, and going into next year, and we’ve had a lot of very constructive conversations with most of our customers. And as a result of that, we have largely split out energy as a cost element in our contractual structures. And that means we’re confident that we’ll recover energy costs in '23 on 2022. At this point, we don’t see ourselves recovering some of the losses from this year in 2023, but we’re hopeful as the PPI curve flattens out, which we’d expected to do next year and going into 2024, that would recover some of those in 2024. We’ve made very good progress on our hedging program. So we’ve taken a very disciplined approach to that since the second quarter, and we’re in good shape now for 2023, and we’re in dialogue with our customers about how much of the remaining open portion they want to leave open or they want to hedge out, which obviously is subject to their volume commitments and making sure that their volume commitments are solid around those hedges. So I think overall, we’ve done a good job, if not a very good job around energy this year.

We can move on to George Staphos of Bank of America.

Thanks for the details. Ollie, David, I guess the first question I had for you is, could you remind us again what your expectation is for market growth and your growth in ‘23 and then longer term? And with that as the context, assuming those market and Ardagh fundamentals are hit, those trend lines, when would you expect that you’d need to add capacity, say, differently? How many years, assuming the market and your performance play out as expected? Can you go without adding new lines, new capacity, recognizing that you’ll have some latent capacity as well, 2 billion to 3 billion units worth from the mothballing and curtailments that you expect to do in ‘23?

Sure. Yes, George. As we move into 2023, we anticipate low single-digit market growth in Europe and North America, and mid-single digits in Brazil. We expect these figures to improve in 2024 and beyond as the macroeconomic conditions stabilize, along with the hard seltzer category, which we anticipate will start stabilizing in the first quarter of next year. We also expect that the sustainability of our can performance will continue without the current operational disruptions we are experiencing. Therefore, we project higher growth numbers for 2024 and beyond. As I mentioned earlier in the call, we believe we will outperform these numbers in 2023. We will provide a specific figure in February, and there are reasons to think this positive trend might extend into 2024 as well. Regarding specific regions, Brazil may require additional capacity sooner than Europe and North America, which can likely manage through a reasonable estimate of 2023 and 2024 without needing extra capacity in those areas.

I guess second thing then is, could you remind us, if you’ve said before or give us some input, in terms of where you sit with your contracts and when you have sort of the next stage or a relatively large tranche coming up for renewal across the regions? However you’d like to present that.

Sure. So I mean we obviously went into the listing process pretty well contracted. And that means that it’s really the middle of the decade in any of the regions before we have any major contract renewals and actually increasingly in the Americas, those contracts are going out more into the 2026, 2027 timeframe, particularly on some of our specialty contracts. So the middle of the decade is really the time that we’d expect to see some degree of contract renewal. And that’s why we’re looking to make sure we’re in good balance by then.

Understood. And I guess my last question in two parts and I’ll turn it over related to that. As you think about it, your discussions with your customers and where their growth expectations were relative to what’s materialized during 2022. What, if anything, are you doing differently in terms of incorporating their growth expectations relative to what you ultimately think will play out in terms of demand, in terms of how you then pivot from a capacity standpoint? And said differently, are you haircutting their expectations any more than normal based on what we’ve gone through the last 3 quarters? Or do you view most of what’s happened in terms of the demand shortfall relative to expectations, purely just consumer fatigue, consumer kind of withering because of the inflation? And relatedly, are you seeing any signs yet? We haven’t really seen it from our vantage point, but are you seeing any signs yet that your customers are beginning to promote more volume relative to what we’ve seen in the last 9, 12 months?

I think the answer to the last question is no, not really. In fact, during this quarter, we saw a major CSD player pull promotional activity out of one of the major retail channels in the U.S., and we saw an immediate impact on our volumes. So I think at the moment, it still looks like retail prices are rising on average and that’s working for our customers and for retailers in terms of the balance of price and volume. And we haven’t really seen anything different in Europe; we would have expected potentially going into a World Cup to start to see some more activity. But I think the input cost inflation means that our customers are still essentially prioritizing price, which is understandable given the environment. So I think we haven’t seen any return to promotional activity yet. I think we would expect to see that going through 2023 and into 2024, once this wave of inflation is through and settled with the consumer. And so that’s why we’re hopeful for the back end of ‘23 and into 2024 that we’ll see another uptick in volumes.

So yes, we’ve seen a little bit of slowdown here, obviously, in North America. I guess can you elaborate on that? Are you seeing that across categories? I know that a lot of folks have pointed out the weakness in seltzers. But are you seeing that also in sparkling water and coffee and teas and CSD? Maybe you can just kind of flesh out what we’re seeing and what you’re seeing in different categories?

Sure. Sure, Arun. Yes, look, I mean, it obviously is a decline in growth relative to our expectations. We grew 9% in North America. But the main drivers of the gap to our expectations were indeed seltzers. So they’re down 10% year-to-date in dollar terms, and they were up by 13% in September. And Q3 is against a relatively softer comp for 2021, which was the time when seltzers first began to come off the boil in North America. So seltzers were definitely part of it, but we didn’t see any recovery there in Q3. But then it’s true that in Q3, the point I just mentioned, we did see softness in the core categories relative to expectations, again, because of pricing. So I think retail pricing rising, the pulling of promotions meant that although we’ve still got growth, we definitely had less growth than anticipated, and that was in our big core categories of CSD and sparkling water. We’re not very present in mass beer in North America, so we didn’t have any particular impact from the beer sector.

Okay. That’s helpful. Looking ahead a couple of years, what will it take to see some improvement? Will it depend on better personal income levels, lower prices, or continued substrate conversion? What factors would you be considering to enhance the growth rate from this point onward?

Yes. Look, I do think normally the can is a heavily promoted item at retail. And the can is an incredibly efficient way to deliver beverages to consumers. And as a result, it can support significant promotional activity, which drives our volume. So we’d expect that to be a major thing to come back into the mix once this inflationary wave is through, and that will be very, very positive for our volumes. I think the second factor is that we see over 80% of innovation in beverages coming into the can. We’d expect like the hard seltzer wave to see the next wave of successful innovation driving growth. And that’s probably particularly in North America, but we see those trends also in Europe. In Europe, we do need the overall inflationary environment to come off. Clearly, the energy situation is extreme for governments and consumers. So I think, again, once that comes off, which we hope it will, then we should see the consumer revert to more confidence, and that will mean more items in their weekly grocery basket. I think we feel we’re going to be resilient in Europe to the economic environment because the can is traditionally resilient as a relatively promoted item. We also have some pack mix advantage. The LME falling was a disadvantage to us in terms of our inventory revaluation timing. But for the can in general, it’s highly positive that LME has fallen to the levels it’s fallen because it makes it more competitive in the pack mix going into 2023. So we think that we will be resilient to that economic environment, but we do recognize the economic environment is somewhat negative. So once that comes off, I think that will also be very positive for the can. I think the sustainability tailwinds that we had will continue. I think there is increased regulatory pressure on plastics, and the plastic recycling system remains under very great strain. Difficult to get recycled PET and it’s very high cost. And then in Brazil, we just need the market to return to what it was doing pre-pandemic, which is it was substituting very rapidly from two-way packaging into one-way, and most of that was going into the can. And if you think that we were growing at 14% in 2019, you can see why we’re confident that we’d be over 5% going into 2024. So I think those are the 3 or 4 really big factors. And that’s why we’re very confident in the growth of the can because what we see at the moment is essentially a set of transitory issues that are impacting our end and our customers’ growth.

That’s very helpful. And if I could just ask 1 more question. So given that backdrop, if you were to increase your financing, what would be the avenues there? Is it further green bonds? Or what are some of the options ahead of you if you were to ratchet CapEx back up?

I mean that would be the main one. I think that we’d look to, David...

Yes, I think that's correct, Ollie. As we have indicated, we will keep pursuing leasing activities related to our growth investment program. The green bond issuance has typically been in our standard regions and remains the most probable option. We have ample capacity within our covenants and other mechanisms to facilitate this. However, I want to emphasize that, as mentioned earlier, we do not foresee the need to pursue this in 2023.

How is it possible to get some sense of just order of magnitude on the CapEx number for ‘23? I mean you’ve been quite clear that it’s going down from the sort of $600 million of kind of growth capital this year, but just order of magnitude.

I mean it’s a meaningful reduction. I’m not talking about $50 million. It’s a meaningful reduction from that $600 million. So I mean, we will give you the detail in February, but you can certainly take off a significant sum from the $600 million.

Could you discuss the considerations involved in building the co-located plant in Brazil? Over the past two to three decades, companies in the container industry have typically focused on a specific product or material. However, your new plant will produce both glass and metal. I'm interested in your thoughts on whether this decision might limit your options in the future.

Yes. Mark, we should be clear. It’s not one plant. So these are two separate plants next door. And obviously, I can’t really comment on the glass side of the house on this call. That’s an ADA piece. But just to be clear on the AMP plant, that’s underpinned by a number of contractual situations. You’ve seen our growth this year in Brazil has been significantly above market. We anticipate the same next year, and that underpins the plant. So we’re confident that that will be a good investment. We don’t have the exact timing on it yet because clearly, the market has been softer than we anticipated this year. So we’re working through that as part of our business planning process. But we’re still confident that that’s a good investment and will be underpinned by some strong contractual positions.

Yes. And just if I could, are there like shared services at the two facilities? Just curious why put them together in one location then.

It's not really about that. It's more related to the discussions we've had with customers, which obviously aids in team collaboration and support during the build phase. However, the plants themselves don’t have any specific synergies.

The next question is from Jay Mayers of Goldman Sachs.

I would like to follow up on the previous question. Assuming a significant reduction in growth capital expenditures from the $600 million this year, could you elaborate on your thoughts regarding other capital allocation priorities, particularly between returns to shareholders and maintaining a strong balance sheet? Any insights you could share about these priorities would be appreciated. Additionally, considering your current leverage is at 4.5x, which is at the higher end of your target range, and understanding that your target is based on forward EBITDA, how do you plan to approach leverage moving forward, especially since growth has been a bit slower than anticipated?

Ollie, shall I pick up?

Yes.

Yes. So thanks for the question, Jay. Look, I think you’re right, we’re at 4.5x leverage on trailing LTM basis at the moment, I would envisage being in a very similar position at year-end at this point. That will leave us well placed in terms of liquidity going into 2023. In terms of our capital program, clearly, we’re being conservative with that capital program in terms of cash outflow spend deliberately in order to preserve our balance sheet liquidity and keep within the leverage position that we feel comfortable with for the longer term. And so we’ll continue to kind of look for opportunities to prudently manage both the balance sheet and cash conservation and look at working capital initiatives and that sort of thing. So I think there are plenty of levers at our disposal. But I think the key message at the moment is that, from a balance sheet perspective, we’re very well placed. For example, over 90% of our debt is fixed interest and term 2027 to 2029. So I think we’ve given ourselves a very stable platform with which to manage the macroeconomic headwinds that we’ve been discussing.

Appreciate that color. And I guess just as a follow-up. The preferred equity that was put in place this quarter with RSA, can you just comment on how you kind of view that portion of the capital structure? Is that going to be permanent for kind of the foreseeable future? Or is that something that you could see once financing conditions improve? You look to maybe try to put in place a cheaper piece of debt or something there.

Well, I think the key attributes of those preference shares are the non-convertible, but they are redeemable at any time. So we have full flexibility on that going forward. We have no intention to exercise that flexibility at the moment. Clearly, they are supportive of our overall balance sheet position and our liquidity. And I think from an AMP perspective represented for a good piece of paper. So yes, we’d have optionality on that and perhaps at some point in the future, but no plans in the short to medium term.

My first question is about the inflationary pressures affecting demand. Are you noticing a shift in consumer preferences towards other products or a change to less expensive materials, whether that's plastic or glass? Or do you believe it's primarily due to consumers buying less overall, maybe because they're spending more on essentials like rent and gas?

Ed, yes, I think it’s more that they’re buying a bit less, and that’s because there’s less promotional activity. So when there’s less promotional activity, obviously, they’re not picking up 12 cans; they’re picking up the number of cans off the shelf instead of the promotional pack. We actually see in the data for North America that the can is still gaining share at the expense of plastic. And I think that’s very interesting because 10 years ago in similar economic conditions, I suspect you’d have seen a shift towards PET, particularly big 2-liter bottles of Cola. So I think that shows you the strength of the sustainability support that the can now has. And one of the reasons that underpins our confidence for the future growth of the can. I think going into 2023, it’s difficult to pick exactly where we sit substrate to substrate. But all I’d say is that, again, the LME fall is very potentially very significant because that is a reflection of cheap energy in the Far East. And for Europe, in particular, that means that the can will be highly competitive. And so I think we’re well placed going into what will be a difficult year and potentially recessionary environment.

Got it. And my second question, just on the back of Jay’s. More directly, I guess, which lever would you pull first in order to preserve cash? Would that be just lowering CapEx to maintenance levels? Would that be turning dividends off, not buying back shares? I guess just what point of weakness would you have to see before turning off the dividend?

Yes, we don’t see any scenario for that at the moment. So I think we’re very comfortable, as David said, within our liquidity position and within the forecast we have for cash going into 2023. The obvious right one to address is the growth capital just because the weakness then is actually because demand is lower, and we do need to balance supply and demand, staying disciplined in our industry. So that’s always where we’re going to look first to our overall capacity to conserve our cash.

On a couple of cash flow items. On the $600 million CapEx, of which $500 million is CapEx, $100 million is leasing, does that include or exclude the $100 million of maintenance CapEx?

So to be clear, Roger, just under $0.5 billion of cash business growth investment and $0.1 billion of leasing, and then there’s $0.1 billion of kind of maintenance CapEx; that’s the right way to look at it.

And then you talked about the Q4 ‘22 working capital inflow. Any way you can size that for us?

Yes. Look, I think it will be a significant inflow. So triple digits, and it will take us much closer to where we would expect our normalized position to be at the end of the year. Q4 is a natural seasonality inflow for the business anyway, but we’ve taken actions relatively early on in Q3 to manage our inventory position and particular actions around the raw material input to that. That means that if you look at our balance sheet, you’ll see our trade payables have fallen while our inventory has kind of held its position. You can assume the natural follow-through on that will be that in Q4, those payables and inventory position will kind of rebalance more in line with where you’d expect that long-term balance to be.

Got it. And lastly, it shows the preferred shares are payment of the dividends at your discretion. Is the dividend? Is it a cumulative preferred where if you miss a quarter, you make it up later on?

That’s correct.

Could you give some color as to what overall industry manufacturing capacity look like in both Europe and North America back in 2008 and 2009? And how those capacity utilization rates compared to today?

Yes, I don't have the exact numbers available. However, to provide some insight into what occurred during the financial crash, demand in Europe did decline. In 2008, the market dropped by a few percentage points, about 2% to 3%. The following year, it rebounded with a growth of 5%. Utilization rates remained strong during that time. North America was less affected, although it was already a lower growth market. What sets this situation apart is the presence of inflation, which is affecting consumer demand. Thus, the environment is different now. Nevertheless, we believe the canned product remains resilient during economic downturns because consumers shift from dining out to eating at home. Within at-home consumption, canned goods hold up well. Therefore, I'm relatively confident in our outlook for 2023 despite the current uncertainties.

And just on the energy cost inflation, you previously spoke about the recovery through the surcharges and thoughts presents to the customers and pay those surcharges in the end?

I don’t have the percentage of customers, but we recovered pretty much in line with our expectation, which was around 50% to 60% of what we suffered in this year. And then going into next year, we’re getting up to a very high percentage of our customers who’ve accepted what we believe is a very fair and equitable way to pass through the exceptional situation that we’re all facing in Europe because we only put it through when it’s high; we’ll take it out again when it falls, which it will. And therefore, there’s no ongoing effect of it for our customer base.

Your guidance implies a nice sequential increase in EBITDA from Q3 to Q4. Can you talk about the factors that you’re seeing that lead you to that conclusion?

Sure, there are a few factors to consider. In Q3, we discussed certain metal impacts that we managed to offset, though not all of them completely. We do not anticipate those issues recurring. We're seeing a continued recovery in energy in Europe, thanks to our ongoing efforts there. Brazil is showing a positive trend with customer growth and a favorable mix. Additionally, we've noticed some mix effects in our volumes, especially in North America. These factors collectively suggest that we expect improved performance in Q4 compared to Q3. Let me just confirm with David that I haven’t overlooked anything.

Yes, no, I think that’s right. Obviously, some of our capacity is even further up as well, so that may support the volume number quarter-on-quarter.

Okay. You mentioned that after the quarter in October, there was some additional deterioration, primarily in Europe. Have you incorporated this into your outlook? What specifically do you expect for European volumes in Q4?

Yes, we included that in our outlook for the reason behind the range. We expect European volumes in Q4 to be lower compared to Q4 2021, which was a particularly strong quarter for Europe. Typically, sales in Europe during Q4 decline slightly, and we usually have some stoppages, which we haven't had in the past few years. This situation represents a return to normal conditions. However, we anticipate a slight negative growth trend and have incorporated some caution based on what we've observed in late September and early October.

Okay. And did you see a corresponding weakness in North America over that time frame as well or no?

We have noticed some weakness in North America, particularly in September, which was due to a different reason related to market sales. In September, we experienced a decline of 13 compared to a decline of 10 for the year so far, indicating further weakness. Additionally, some major CSD players have reduced their promotional activities, which we considered as well, and we observed this decline toward the end of September.

Okay. And what’s the expectation for North American volumes in Q4?

We still see growth. I mean, we’ve got capacity coming through, but I don’t have the exact number. So we still see growth in Q4 over Q4 ‘21.

Okay, great. And then last one for me. On the energy side, do you have a sense of how much of a headwind energy is to EBITDA in ‘22 and expectations for ‘23?

In 2022, I think we were at the order of $50 million, of which we offset...

Of which we offset 50% to 60%.

In 2023, we’re not expecting a headwind from energy because of the way we’ve worked with customers to split that out and make it linked directly to the cost of energy. And we’ve also got a significant hedge position in place that’s giving our customers good certainty on what that number looks like.

And as there are no further questions, I’d like to hand the call back to Oliver Graham for any additional or closing remarks.

Thank you, Kevin. So thanks to everyone on the call for your interest in AMP. Just to summarize again, our shipments grew 9% in the quarter versus the prior year period, but earnings were below expectations. That was because of softer demand conditions and higher operating costs. We’re taking action around that, which we talked about at length to align our supply with demand and improve our efficiency. And as we said in Europe, we’re looking forward to a good recovery of our input cost inflation into 2023. I think as we said a number of times on the call, we remain very confident in the secular demand trends that support the beverage can, and we see as we come through this difficult macro environment in 2023 that we’ll see stronger growth into 2024 and beyond. And as we put in place our investment program, we’re very well placed to take advantage of those trends. So thanks for your interest, and we look forward to talking to you again at our Q4 results.

And that does now conclude today’s conference call. We thank you all for your participation, and you may now disconnect.