Ardagh Metal Packaging S.A. Q2 FY2024 Earnings Call

Thank you, operator, and welcome everybody. Thank you for joining today for Ardagh Metal Packaging's second quarter 2024 earnings call, which follows the earlier publication of AMP's earnings release for the second quarter. 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. AMP's earnings release and related materials for the second quarter can be found on AMP's website at www.ardaghmetalpackaging.com. Remarks today will include certain forward-looking statements and include the use of non-IFRS financial measures. Actual results could vary materially from such statements. Please review the detail of AMP's forward-looking statement disclaimer and a reconciliation of non-IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham.

Thanks, Stephen. AMP performed well in the second quarter, and we were delighted to deliver a second successive outperformance versus our guidance. This is a testament to the resilience of our business, the strength of our customer and supplier relationships, and the commitment of our teams. Global beverage shipments grew by 3% in the quarter versus the prior year, with revenue broadly unchanged as favorable volume mix was offset by the pass-through to customers of lower input costs. Adjusted EBITDA grew by 18% with strong double-digit growth across both segments. Adjusted EBITDA growth, as anticipated, ahead of shipments growth for the quarter due to an improved operating cost performance and stronger-than-expected input cost recovery in Europe, which drove the outperformance versus our guidance. This increased our LTM adjusted EBITDA to $631 million, which we expect to increase further in Q3. The economic backdrop remains challenging with heightened political uncertainty, ongoing inflation, and pressured consumer spending. However, industry growth expectations in both Europe and Brazil have strengthened year-to-date. Following our strong first half performance, we have increased confidence in our full year outlook, and as such, we are improving our adjusted EBITDA guidance range to $640 million to $660 million. We continue to progress our sustainability agenda and recent notable highlights include the extension and for higher volume of a solar power purchase agreement to 2030, which will cover up to 40% of German demand needs. Our Huron facility, which recently received an ISO 14001 certification, following which all global AMP production facilities are now accredited, demonstrating best practice environmental management and a commitment to ongoing improvement. The completion of our carbon audit for 2023 highlighted a significant reduction in Scope 3 emissions with the absolute emissions reduction more than compensating for the impact from business growth since 2020. Finally, we recently concluded our global biannual employee engagement survey with a significant improvement in participation rates across all regions. Looking at AMP's results by segment: In Europe, second quarter revenue increased by 2% to $566 million compared with the same period in 2023 due to favorable volume mix effects and foreign exchange, partly offset by the pass-through of lower input costs to customers. Shipments for the quarter increased by 5% on the prior year. Growth was broad-based as customers increased their focus on volume growth, favored the can in their pack-mix, and built stock for the summer selling season, leading for sporting events such as the European Football Championships and Paris Olympics. Second quarter adjusted EBITDA in Europe increased by 23% on both a reported and constant currency basis to $79 million due to favorable volume mix and stronger input cost recovery. We expect the stronger input cost recovery to continue and to offset the pricing headwind that we had initially forecast for 2024. For full year 2024, we continue to expect low single-digit percentage shipments growth for our European business as we closely monitor demand patterns and the sell-through to consumers across the summer season. Overall, we're pleased that our full year expectation for Europe has been significantly derisked as this was the area of greatest uncertainty in our 2024 guidance. In the Americas, revenue in the second quarter decreased by 1% to $693 million, reflecting the pass-through of lower input costs, partly offset by favorable volume mix, and equipment growth of 1%. Adjusted EBITDA in the Americas increased strongly by 14% to $99 million, driven by favorable volume mix effects and improved operating cost performance. In North America, shipments grew by 3% for the quarter as we lapped a strong prior year comparable of 18%, which reflected the ramp-up of new capacity. We continue to grow above the market, supported by our pipeline of contracted growth with particular strengths in CSD, sparkling water, and innovative soft drinks. Softer demand in the energy drinks category, which represents about 11% of our portfolio, leads us to modestly reduce our forecast for shipments growth this year to a mid-single-digit percentage versus low single-digit growth for the overall market. We're confident that the market growth rate will increase over time as customers demonstrate an increased focus on volume and innovation, and sustainability trends support the growth of the infinitely recyclable beverage can in the pack-mix. In Brazil, second quarter beverage can shipments declined by 7%, below industry growth of 8%, due to temporary customer mix effects. The second quarter is the seasonal low period for industry sales, which includes downtime taking us from filling locations. Our shipments of ends grew by a strong double-digit percentage versus the prior year period. Overall, we're encouraged by the strong first half of the Brazil beverage can market, which we now believe may grow above mid-single digits percentage this year. Consumption has benefited from a supportive macroeconomic environment, and beverage can growth has been further supported by the pack-mix shift back to one-way packaging. We continue to balance our capacity in Brazil through curtailment of our network, and we closely assess customer demand needs beyond the quieter winter period. Overall, in the Americas, we expect shipments growth in the order of a low to mid-single-digit percentage for 2024, slightly below our previous guide due to the softer energy drinks category in North America. Shipments growth and improved fixed cost absorption will drive adjusted EBITDA growth for the remainder of 2024. I'll now briefly hand over to David to talk you through some of our financial position before finishing with some concluding remarks.

Thanks, Ollie, and hello everyone. We ended the quarter with a liquidity position of $405 million, an increase from $329 million at the end of the first quarter, which is typically the seasonal low point for our business due to our working capital cycle. Adjusted operating and free cash flow for the quarter was ahead of expectations due to a tight focus on cash management. AMP incurred total CapEx of $36 million for the quarter, which included $10 million of growth CapEx. We reiterate our expectation for growth CapEx for 2024 of approximately $100 million and maintenance sustainability and IT CapEx of the order of $120 million, in line with our steady long-term run rate. We anticipate a further reduction in growth CapEx again in 2025. Our net leverage ratio reduced to 5.8 times from 6.2 times at the end of the first quarter, and we expect a further reduction through H2 and for the ratio to end the year around 5.2 times. This will be supported by LTM adjusted EBITDA growth, further working capital net inflows, and lease principal repayments. We anticipate a more meaningful leverage reduction in future years. We have announced today a new $300 million secured financing commitment from Apollo directly to AMP, which we expect to draw down in the third quarter and will be neutral to our net leverage ratio. This term loan facility is for general corporate purposes and increases our forecast for year-end liquidity to approximately $0.9 billion. The facility is subject to customary closing conditions, the bonds will not be callable for the first year, and it is scheduled to mature in 2029. The facility also preserves the flexibility to continue to pay the current level of ordinary and preferred share dividends, but caps dividend payments at the current level while the facility remains in place. Accordingly, we have today announced our quarterly ordinary dividend of $0.10 per share to be paid in September, in line with our guidance and capital allocation policy, which remains unchanged. We would also reiterate that AMP operates with a stand-alone capital structure, which is structurally and legally separate from that of Ardagh Group, our 76% long-term majority shareholder. With that, I'll hand back to Oli.

Thanks, David. So, before moving to questions, I'll just recap briefly on AMP's performance key messages. Global shipments grew by 3% in the second quarter, with Europe growing by a strong 5%, further building on the growth in the first quarter. We continued to outperform the market in North America, growing by 3% despite lapping a strong prior year of 18%. Adjusted EBITDA growth for the quarter was ahead of guidance for a second successive quarter with both segments delivering double-digit year-over-year growth, and our strong first half performance gives us confidence to improve our full year adjusted EBITDA guidance range to $640 million to $660 million. Our EBITDA guidance is supported by global shipments growth approaching mid-single-digit percentage, improved operating cost performance, and stronger input cost recovery, and we expect continued strong adjusted EBITDA growth in the second half of this year. In terms of guidance for the third quarter, adjusted EBITDA is anticipated to be in the order of $185 million, with growth across both geographic segments compared with prior year adjusted EBITDA of $171 million on both a reported and constant currency basis. So, having made these opening remarks, we'll now proceed to take any questions you may have.

Thank you. We'll go first to Stefan Diaz with Morgan Stanley.

Hello everyone. Thanks for taking my question. Maybe to begin, liquidity improved ahead of your expectations and we usually see a working capital release in the second half. Can you expand on why you decided to secure that $300 million financing agreement?

Sure. Yes, I'll start, and then I'll pass it to David. So, I think we wanted to demonstrate the resilience of the business and the strength of our balance sheet, and we wanted to increase that resilience and strength in a quarter where we had a credit downgrade. So, we decided to take that action to get us to nearly $1 billion of liquidity at year-end, which will also put us in a very good position into next year. So, that was the overall objective, and I think that will carry us well through the next 12, 18 months. David, do you want to add anything?

Yes, I'll just add to that. Despite that, there's no significant change to our free cash flow forecast or to our leverage position for FY 2024, which as I outlined in the prepared remarks, falls to 5.2 times. So, we aim to utilize that cash to lower our usage of the ABL facility and some of our factoring facilities. So we see it as a very low-cost option in order to strengthen and project that strong business resilience. For modeling purposes, I know some people will ask; we kind of expect that facility will incur a net interest cost of around about $10 million per annum. So, it felt like a low-cost option to take out.

Great. Thanks for the color. And I know you're not big in mass beer in North America, but maybe you could expand on what you're seeing by category in the region, particularly in energy?

Yes, certainly. So, I think we're seeing strength in the soft drinks arena. So, carbonated soft drinks, particularly sparkling waters, are very strong. We see a lot of strength in our portfolio in sort of innovative soft drink categories. The gut health wellness position is going extremely well in the market and in our portfolio. On the soft drink side, yes, the energy category has been the one that was weak in Q2. It's a big category that has had a couple of great years, and it seems to be taking a bit of a breath at this point, and we expect it to return to growth. There's a lot of innovation in that space. Some new players where growth is naturally plateauing after a couple of amazing years. But that has been a bit softer in the quarter than we'd anticipated. And then if you go into the alcoholic side, actually cocktails, particularly flavored mixed cocktails, are very strong, both in the market and in our portfolio. We're growing into beer, but we can see that beer is a bit weaker based on the scanner data, but we do have growth in that category this year through contractual gains.

Great. Thank you so much. I'll turn it over.

Thank you. We'll take our next question from Mike Roxland with Truist Securities.

Thank you, Ollie, David, and Stephen for taking my questions and congrats on the continued progress.

Thank you.

First question I had is how much of the demand growth that you're seeing in Europe this quarter and last quarter do you think could be attributed to a pull forward of demand related to the Euro comp to the Olympics? Just want to get a sense of whether there has been a pull forward of demand and whether there could be some mean reversion or some softer growth in the back half of this year.

Yes, good question. I think we see aside from the Euros and the Olympics, we do see customers leaning back into volume growth for their revenue this year, which we had anticipated. We also see the can gaining in the pack-mix with the efficiency of the can and also the sustainability credentials. So, we think these are just the factors that we used to benefit from that are coming back after a year or two of lesser growth with inflation in the market. We're not putting a huge amount of this on the Euros or the Olympics. There was a lot of innovation in our portfolio in the first half, which you could attribute to some promotional SKUs as well as new products. We had a lot of requests for fresh production through Q2. In fact, we probably could have had another point or two of growth if we'd been able to produce all of it. But inventories were low, both on the customer side and our side going into Q2, putting pressure on our fresh production capacity. So, yes, I think you'd expect the Euros and the Olympics to have had an effect, but we think the main thing is a reversion to the traditional growth of the European beverage can market, which has always been very strong. We are being cautious in our guidance, as you can see, because we want to go through the summer period and make sure that there aren't pull-forward effects. But at this point, July is looking very strong. It would be above our Q2 performance so far if the trend continues. So, we're probably being a little bit cautious as we look into the second half.

Got it. That's very helpful and thank you. And then just two quick questions to finish it off here. Last call, you mentioned that you may find offsetting cost actions to drive better price-cost. Any color you can provide on what those cost actions might be? Have they been implemented? What's your take on the amount of the company could benefit from and over what time period? And then just lastly, you mentioned increased flexibility that you're building into your North American network to respond to challenging changing market and customer demand patterns. Any additional color you can provide on that as well? Thank you.

Sure. Yes. So look, on the first one, I think we mentioned in the prepared remarks that we did have improved input cost recovery in the quarter versus our expectations at the beginning of the year. In some of our bigger categories, especially energy, that has offset what we thought might be a pricing headwind in Europe. So, I think we've got a good balance now of pricing and cost in Europe, which helped us outperform our guidance and raise our full year guidance. We anticipate further cost reductions as we go into 2025 and 2026 across the business. In terms of North America, we have adjusted our footprint now returning to some standard capacities for 12-ounce and 16-ounce cans, while also adjusting our footprint to accommodate 26-ounce cans. We're now well positioned for all the market trends and can adapt as needed. We do anticipate being able to fully utilize our capacity over the next couple of years.

Thank you. Good luck in the quarter.

We'll take our next question from the Bank of America.

Yes, hi guys. Good morning. Thanks for the time. So, in the Americas, despite volumes only coming in at low single digits overall and a decline in Brazil, you still had pretty solid margins in the segment. So, I know you called out input cost recovery, but was there perhaps anything on the mix side that allowed you to perform the way you did in that region?

Yes, a little. So, I think we did have some positive mix. And then we had clearly a better cost performance, which was a significant driver as we grew into our operating footprint and also rationalized our footprint. Although we don't like doing it from a team point of view, it was necessary to do with the capacity we were carrying in North America. So, that also helped our cost performance. We've done the same thing in Europe with the steel line. So, both on the input cost and on the operating costs, we delivered better performance, and a little bit of mix played a role as well. We're seeing good end sales in Brazil, which can also be counted as a mix effect in the quarter, contributing to positive margins. Looking into July, growth looks pretty positive, particularly in North America, which is again likely to be above the Q2 number. We’re feeling positive about our performance; we are over 7% year-to-date in the first half, which matches pretty much anyone in the market and is clearly ahead of market growth. So, we're looking positively towards the year-end even though we have some tough comps. We have a 20% comp in Q3 and 12% in Q4. Strong growth in 2022 does create challenges for what we can achieve this year, but we're still expecting to perform well.

Okay, that's helpful. And then I guess as we move into Q3 and Q4, I know you called out an uptick in promotional activity. What has that looked like above what you were observing last quarter? And how do you expect that to impact volumes in the second half?

Yes, I think we've been saying it for 12 to 18 months that we expect promotional activity to normalize over time. It has continued to do that in Q2, and we'd expect it to continue that way. It's probably been slower than we'd anticipated; our customers were able to achieve more on price than we might have thought. And not surprisingly, they kept pushing. For revenue growth, we believe they'll need to lean more on volume going forward because they are approaching the limits of pure price increases. Thus, we do expect continued improvement in promotional activity across all our markets through the remainder of the year.

Okay, thanks. I'll turn it over.

Thank you. We'll take our next question from Josh Spector with UBS.

Yes, hi. Good morning. I wanted to follow up on the North America volumes. You mentioned that Q3 has a pretty tough comp. Your guidance implies that your volumes will grow, call it, a couple of percent in the second half. Is that the right way to think about that? Or would you expect that to accelerate at all when you talk about outperformance versus the market?

No, I think it's probably a bit ahead of a couple of percent in our numbers to get to mid-singles. But I don’t see a particular acceleration. The market we're calling it low single, but it looks like it's toward the lower end of that range right now. So, mid-single will, in our view, clearly outperform the market by some distance. We should land in that mid-single area, which would mean low to mid in Q3 and Q4.

Thanks. That's helpful. I just wanted to ask on volume leverage here. You alluded to some additional cost help over the next couple of years. Your EBITDA growth relative to volumes is maybe a bit more than 2x this year. As we frame 2025 and 2026, how should we be thinking about that leverage? Or I guess it’s easier if you want to separately quantify the cost savings versus the operating leverage? Thank you.

Yes. Obviously, we're not guiding for 2025 or 2026 yet, but we do anticipate good earnings growth into those years with volume growth. We talked earlier this year about having $30 million to $40 million from under-absorbed fixed costs within our business. So, we expect that to unwind over the next one to two years, which will give us a positive ratio between EBITDA growth and volume growth. We'll provide more guidance on those numbers in early 2025.

If I can just quickly follow-up there. Is that $30 million to $40 million under absorption, how much do you think you're benefiting from this year?

Well, probably about a third to half is helping 2024. We talked about, I think, a $20 million cost improvement. Is that right, David?

Yes. We would have said we had $60 million coming into the year, and we'll have $30 million to $40 million coming out by the end of the year.

Very clear. Thank you.

Thanks, Josh.

Thank you. We'll take our next question from Anthony Pettinari with Citi.

Good morning. You talked about cans gaining share in the pack-mix in Europe. I'm wondering, as you look across the portfolio, both Americas and Europe, which categories or countries are cans gaining, perhaps most rapidly from glass or maybe plastic or other substrates? And conversely, are there categories or countries where can share is stagnant or maybe even giving back some share?

Yes, good question. I think Europe presents a positive story relative to glass. Glass has faced significant energy cost headwinds in the last two years with the Russia-Ukraine conflict, which places the can at a lower cost position. When mass beer margins are not particularly high, it requires optimization on the pack. Consequently, we are seeing the can benefiting from that this year in the beer portfolio. Relative to plastic, it's mainly the soft drinks part of the portfolio where we see major customers making commitments around virgin plastic and overall recycled content, which I believe broadly helps the can. So, we see the can gaining share in those soft drink categories. I can't think of a category in particular where we're going backwards. Obviously, there are some categories where we're still at low market share like spirits and still waters. But overall, we appear to be gaining share in the pack-mix. In Brazil, there's been a notable shift away from two-way packaging as we've discussed before toward one-way packaging. Some of that is going toward one-way glass, but a lot is going toward cans.

Okay, that's very helpful. Then just two quick follow-ups on Europe. There are some fairly stringent environmental regulations around single-use packaging that are set to be enacted in Europe. As you think about the impact on the can over the next five to ten years versus other substrates, any quick thoughts on that? And finally, Germany, being the biggest market in Europe, has some kind of a special relationship with glass. Can you talk about the long-term opportunity for can penetration in Germany specifically?

Sure. When we look at European legislation overall, we're pretty comfortable that the can will benefit, particularly due to regulation around recycled content, where the can is exceptionally strong. Additionally, our pathway on decarbonization and the actions we are taking, alongside the actions of our suppliers, are also a positive story. Clearly, there are elements of returnable packaging in EU legislation, but there's already a significant amount of returnables in the European market. So, overall, we believe that the can will fare well with most of that legislation. Regarding Germany, we are experiencing a long-term recovery from the challenges faced since the deposit scheme was ill-designed in 2003, favoring glass. Consequently, the German market has been growing at 10% to 15% a year since that time. We do not expect that to change in the near term, as it’s a recovery to a more normal pack-mix once the deposit scheme is rectified, and people find a return path for cans. Therefore, Germany remains a very good growth market, and we believe it will continue for several years.

Okay, that’s very helpful. I'll turn it over.

Thank you, Anthony.

Thank you. We'll take our next question from Mike Leithead with Barclays.

Great. Thanks. Good morning, guys. First question, can you just remind us where you currently stand on the previous North American customer volume dispute? I think as of earlier this year, you're still in some litigation. Just any update you can provide? And relatedly, are you assuming any financial recovery in your numbers at this point?

Yes. Look, obviously, we can't provide running commentary on the call, but we're making progress. We're still very optimistic about our contractual position. None of the guidance we've given to the market reflects that situation.

Got it. Fair enough. And then, David, can you just remind us on your cash interest expectations for 2024 as we already start looking ahead to 2025? I appreciate it's still early, but when we factor in the new term loan and some lease repayments, what should cash interest at least initially look like for 2025?

Yes, Mike. I mean, for 2024, we've said around $200 million, and it won’t change this year as a consequence of the term loan facility given the timing of that and the intended use of pushing that. For 2025, I would model that $10 million higher at this stage, as I referenced earlier, I think that's the net cash cost given the use we'll put the loan facility to off that. We’ll see what the other puts and takes are closer to the time when we do our budgeting and provide guidance in February.

Great. Thank you.

Thanks, Mike.

We'll take our next question from Roger Spitz with Bank of America.

Hi, this is Olivia on for Roger. Thanks for taking our questions. So, regarding the July 2024, $300 million Apollo term loan due 2029, what is the interest rate on that term loan?

The dealer is a private deal and is subject to customary closing conditions. So those terms remain private, but I think I've given you some good modeling guidance on what the net interest cost will be for the business after we allocate that cash.

Okay. Thank you. And then the other question we have: can the Apollo facility be utilized to take out the preferred? Or is it prohibited?

In theory, it could. That's not our intention.

Thank you. We'll take our next question from Richard Phelan with Deutsche Bank.

I was pursuing the same line of questioning as the previous question here. The annual interest on the net interest cost seems low in the context of the current facilities. I was wondering if the $10 million net interest only reflected the commitment fee and not the incremental interest if it was fully drawn?

No. So, we're saying that we think that will be the net interest cost to AMP from fully drawing the facility, which we intend to do during Q3 and then putting that cash flow to use within the business. So, think about ABL utilization, which currently has an effective interest rate of about 5.25%. I think some of the factoring that we do has similar rates. Those are the sorts of uses that we anticipate.

Okay. In addition to the potential but not intention to buy preferred, can the same apply to other bonds in the capital structure, similar to the way in which the portion of the new Apollo facility at Ardagh Group S.A. is intended to purchase bonds in the secondary market at that level?

Yes. This will be cash that sits on our balance sheet. As I mentioned in my prepared remarks, there’s no anticipated change to our leverage position as a result of the cash raise; it's primarily to strengthen our business resilience and to demonstrate that strength across our commercial relationships.

I believe our bonds don't return until 2027, 2028, 2029, so there's no real need for action in that area.

There's no incentive for us to do anything with those.

Understood. Just to reconfirm, I thought I heard the year-end net leverage target, which was 5.2 times. Is that correct?

That's correct.

Thank you very much.

We'll take our next question from George Staphos with Bank of America.

Hi, everyone. Good morning. Thanks for taking our question. To the extent that you have a view on this that you can share from your customers, how long do you think the weakness in energy will last? And what do you think is driving it? You mentioned that comparisons are becoming difficult. As the market lapping the progress of new entrants, how much of it do you think is a function of macro and the demographics of some of the larger brands, and in turn, that being impacted by inflation? What are your thoughts? When is the pickup guys? And I had a couple of follow-ons.

Yes, hi George. Yes, I think it's early to know, is probably the honest answer. There is some talk about relatively temporary effects. There's lower footfall in convenience stores, particularly gas stations, with higher gas prices. There’s also some sentiment from one of the big CSD players that their hydration portfolios have benefited from our hotter weather and have negatively impacted the energy category. Thus, there are probably some temporary factors in play, which we only know as we go through the remainder of the year. Clearly, energy drinks have experienced significant growth in the past, so the current drop comes as they’re lapping some big comps. There’s also some consolidation occurring within the sector due to M&A activity. I think there's a lot happening here. The energy category has historically performed highly across all regions, especially in North America. We believe we won't see a significant recovery this year, but expect the category to return to growth next year. This is based on our experience of the past 30 years where we have some very strong players, with strong innovative activity.

No, I appreciate that, Ollie. Second question, one of the other beverage packaging companies mentioned that within North America, particularly in the U.S., the uncertainty surrounding the upcoming election is introducing downstream uncertainty in promotional programs, marketing actions, and operations, which may feed back into demand. Are you observing similar signs in discussions with customers or with other CEOs regarding their plans or lack thereof amid the uncertainty?

No, I mean, I feel like our observations suggest that there's an effort to reduce economic activity in the U.S. to counter inflation. This has introduced some pressure on consumers, though there's now an approaching real wage growth. We see that as more related to a couple of years of significant price increases by our customers, which they found largely stuck and kept pushing further. Consequently, prices are now fairly high, and consumers are feeling the pinch on disposable incomes. The economic activity appears to be slightly muted as a result of this, which aligns with the strategy to combat inflation. Our view is that revenue growth will continue to be a target for our customers. Therefore, we believe they will lean towards volume to achieve that revenue growth since the ability to raise prices seems to be hitting limits. Given that we believe the can is well-positioned for this, we maintain a positive outlook on the North American market. We have strong performance indicators in North America, showing growth over 7% year-to-date alongside a robust July performance.

And segued from that, for North America and also for Europe, you mentioned that July trends are better than Q2, though you are perhaps building in conservatism. Are you witnessing or observing any factors leading you to pause regarding demand trends? Lastly, you noted earlier that some volume was missed due to insufficient production capacity. Are we nearing a point where you need to consider adding another facility? Or conversely, how much productivity and growth CapEx-driven capacity growth can we achieve over the next several years without needing new facilities?

Thanks, George. That comment was more about Europe. We noticed that we're being cautious about inventory builds. Our customers have also been cautious regarding that. There was significant destocking in Q4; the industry has commented on that extensively. We saw a recovery in Q1. However, as it turned out, summer has been much stronger than anticipated. Additionally, we experienced substantial demands for new labels, which leads to more changeovers, therefore reducing our production efficiency. We lost some production capacity during a robust demand season. I'm saying this to clarify that I believe we could’ve achieved slightly higher growth if we could have produced more. We don't anticipate needing to add production capacity because our customers will be more cautious regarding inventory and contracting as we approach 2025. We are still bringing up some capacity in La Ciotat in the south of France and expect to grow well into 2025 and 2026 with our existing footprint.

I appreciate your insights, Ollie, and apologies for the mischaracterization between Europe and North America. I'll turn it over.

No problem. Thanks, George.

We'll take our next question from Gabe Hajde with Wells Fargo.

Ollie, David, good morning.

Good morning, Gabe.

I wanted to ask about the implied guidance for Q4 at $155 million. You mentioned increased end sales down in Brazil and just the mix effect of that. Generally, you heard others' comments that you tend to sell can in an end, which must be filled at some point. The implied $155 million is somewhat between 2021 and 2023 in the fourth quarter. Is there anything else, again, related to conservatism, that would indicate profits could decline even if volumes rise more in the Americas versus Europe because I think you had to throttle back production in Europe? How do you expect a positive fourth quarter if you get that volume growth or if it materializes as expected on the profit side?

Yes. Look, I think to your point, we're planning to sell cans and ends. One of the challenges is that we report quarterly and, in Brazil, you experience some timing effects. By the end of the year, we do not expect for that to reflect any differences in sales of ends in Brazil. You’re correct that there are factors affecting our H2 guide in North America that negatively impact EBITDA to volume. It seems more like an overall commentary that we're still being cautious, particularly regarding the European situation, and being cautious generally for H2 to ensure we meet our guidance. David, would you add anything to that?

No, clearly, we expect growth in the Americas segment for H2.

Okay. And this is, again, perhaps steering into conservatism. I think the June data showed some declines in the two biggest categories in Europe, beer and carbonated soft drinks, which fell off substantially in June. Again, depending on the timing of when the Euro Cup started and what data we gather, I'm curious if you've seen this as an on-venue versus off-venue issue. And again, are you not seeing anything in terms of customer sell-through?

Yes. As I've said, I mean July is looking pretty strong. We have tough comps in both Europe and North America in August, making it look less strong. We don't see substantial evidence yet that suggests a big cutback. But we remain cautious, as you noted, because some of the market data hasn't been as positive as our own observations. The can is performing well in the mix. This explains some of the discrepancies in overall volume numbers and can volume growth. We’ve largely been approached throughout this season by customers seeking additional supply. They seemed to start with low stock levels, and that has been the overall message. As I said, we likely could have sold more if we'd been able to produce more. So, nothing yet supports a bearish outlook, but we're being cautious because we recognize some of the market data shows less positivity.

Okay. And last one for me. Looking at 2025, 2026, it's my understanding that the industry was prudent to forward contract out when demand was constrained. Regarding your position in Brazil, was the second quarter weakness indeed more geographic-related in terms of product production location? We've noticed what feels like some movement in that region, which generally isn't a positive signal. And then, for North America, could you remind us when the next significant contract comes up? I think it's 2027, but that may be incorrect.

Yes. We've got contracts expiring at the end of next year in the soft drink space that we've referenced before and that we'll begin discussions about this year and next. There's ongoing contracting for other customers as well. So, indeed, the situation post-COVID resulted in a significant number of contracts arriving in this timeframe, moderating under different situations. Regarding Brazil, we were not impacted by flooding other natural events; instead, we experienced more of a customer mix issue and some downtime we didn't anticipate toward the end of the quarter, which we expect will recover in the second half.

Got it. Thank you.

Thank you. We'll take our next question from Arun Viswanathan with RBC Capital Markets.

Great. Thanks for taking my question. Hope you guys are well. I just have two questions. The first is on category mix and promotional activity. It seems there has been an uptick in promotional activity with NVAs. Do you think that will possibly cross over to the beer side at some point? If so, to what extent? The second question I had was really around your own mix. Given there's been a bit of a slowdown in the energy sector, is that potentially affecting your slim can capacity? Can you review your ability to flex to other product sizes if necessary, and whether that could be a limitation? Thanks.

Sure. The energy category mainly affects our 16-ounce standard can. While we've built significant sleek capacity in response to anticipated growth in seltzers, we're converting some of that back to standard sizes like 12 and 16-ounce. This puts us in a solid position to address whatever trends emerge over the next few years. On the promotional side, we are observing an increase in promotional activity quarter-by-quarter, but it hasn't necessarily accelerated as hoped. Promotion levels are increasing; however, it hasn't reached the levels needed to significantly boost overall volume. We anticipate this trend will continue because of where pricing sits, indicating consumer resistance; thus, our customers are likely to lean more on volume for revenue growth in the coming years.

Great. Thanks a lot.

Thanks, Arun.

Thank you. We'll take our last question from Stefan Diaz with Morgan Stanley.

Great. Thank you for taking my follow-up. Looking into 2025, your growth investment plan is largely finished; you're gaining customer wins in North America for 2024. However, aside from category or customer differences, are there any specific tailwinds that could drive Ardagh to outperform the market looking into 2025 and 2026?

Not particularly. The primary growth from contractual positions arranged during the COVID/post-COVID period is largely complete. We’re not anticipating particular additional gains; that’s not something we've focused on for the business historically. However, we have had a successful run with customers, built on the quality and service we provide and the relationships we maintain, so I wouldn't rule it out that we could see slight growth. Our position in various categories and their growth rates will influence this. We're strong in Germany, as we've mentioned earlier in the call. Ultimately, we do not expect significant variance from the market growth in 2025 and 2026.

Great. Thank you.

Thanks, Stefan.

That will conclude our question-and-answer session. At this time, I would like to turn the call back over to Mr. Graham for any additional or closing remarks.

Thanks, Katie. To summarize, our Q2 earnings performance was ahead of expectations; this is the second successive quarter we've achieved that. Strong performance from both Europe and the Americas, especially Europe, gives us the confidence to raise our guidance range for the full year. The key trend for 2024 is our increasing predictability across our markets, providing optimism as we progress into H2 and 2025. We look forward to discussing more in our Q3 results. Thank you very much.

Thank you. That will conclude today's call. We appreciate your participation.