Earnings Call Transcript - AMBP Q1 2023

Stephen Lyons, Investor Relations

Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging's first quarter 2023 earnings call, which follows the earlier publication of AMP's Earnings Release for the first quarter. We have also added an earnings presentation onto our investor website for your reference. I'm 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 first quarter can be found on AMP's website. Remarks today will include certain forward-looking statements and include use of non-IFRS financial measures. Actual results could vary materially from such statements. Please review the detail of AMP's forward-looking statements disclaimer and 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.

Oliver Graham, CEO

Thanks, Stephen. We delivered a solid performance in the first quarter and met our market guidance, due to disciplined cost stewardship, actions to improve manufacturing efficiency, and stronger input cost recovery. In light of our resilient start to the year, we are reaffirming our full year guidance. We delivered global shipment growth of 3%, including 5% growth in North America and 2% in Europe, and adjusted EBITDA of $130 million, in line with our guidance. Our adjusted EBITDA result represented an 8% decline on a constant currency basis versus the prior year quarter. The contribution from shipment growth was more than offset by higher operating costs. Looking into Q2 and beyond, we see inflation recovery in Europe that will drop through its adjusted EBITDA as we set out in our forecast. Global demand remains restrained by sustained retail price inflation, but we are encouraged by the early signs of a pickup in promotional activity in North America, especially in non-alcoholic beverages, and a broader moderating outlook for consumer pricing supported by an easing of input cost inflation. Input cost recovery in Europe through the annual reset in our PPI mechanisms and a more effective pass-through of direct energy costs, and good volume growth in North America drove an adjusted EBITDA performance in both regions that was ahead of expectation and offset the softer performance in Brazil, where industry demand is slowly recovering. We continue to manage our capacity in a disciplined manner through curtailment actions that moderate our footprint ahead of growth in demand and position the business for a period of investment-free growth. Adjusted EBITDA is anticipated to accelerate through the year due to inflation recovery and volume improvement. Our expectation for industry growth in 2023 supported by positive secular tailwinds is for a low single-digit percentage growth in the Americas and a low to mid-single-digit percentage growth in Europe. We continue to project significantly increased adjusted EBITDA and positive adjusted free cash flow in 2023 with further improvement into next year. We are committed to our quarterly $0.10 dividend. Turning to our sustainability agenda, we were awarded a first-time leadership A rating from CDP on supplier engagement, which followed the first-time A- rating for water management and a B rating for climate change disclosed in our last update. We are proud to have committed to the International Aluminium Institute's Aluminium Forward 2030 initiative, and we continue to progress our sustainability targets. Turning our attention to AMP's first quarter results. We recorded revenue of $1.1 billion, which represented a growth of 2% on a constant currency basis, predominantly reflecting higher volumes. Adjusted EBITDA of $130 million was down 8% on the prior year on a constant currency basis. The contribution from higher volumes and stronger input cost recovery was offset by the under absorption of higher operating costs and the expected impact relating to the timing of recognition of inflation recovery in EBITDA. Total beverage can shipments in the quarter were 3% higher than the prior year, with 5% growth in North America and 2% growth in Europe, offsetting a 1% decline in Brazil. Looking at AMP's results by segment and at constant exchange rates. Revenue in the Americas in the first quarter increased by 1% to $645 million, mainly due to higher volumes, partly offset by the pass-through of lower metal and freight costs. In North America, shipments grew by 5% for the quarter. Demand remains restrained by sustained higher retail pricing, but with greater resilience experienced in non-alcoholic categories, which represent the majority of our North American business. The hard seltzer category accounted for 8% of North American shipments in the quarter, with the segment remaining under pressure. The impact to our business is offset by growth across other categories, including carbonated soft drinks, energy and wellness, and spirit-based ready-to-drinks. We have completed our planned capacity additions in North America, and our investments in Huron, Ohio, Winston-Salem in North Carolina, and Olive Branch, Mississippi position us favorably for future growth. We're encouraged by the early signs of an improvement in demand with a small increase in promotional activity, which we expect to strengthen over the coming months through the peak summer season. In Brazil, first quarter shipments declined modestly, underperforming the high single-digit growth in the market due to customer mix effects as well as some customer destocking. One of our customers in Brazil entered a judicial reorganization process in the period. Our exposure to the customer was at a historic low position, and due to our security coverage, we do not foresee a material credit risk at this point in time.

David Bourne, CFO

Thanks, Ollie, and hello, everyone. Moving now to our financial position. We ended the quarter with a liquidity position of approximately $0.5 billion. Cash outflow in the period beat our expectation but reflected the usual seasonality in working capital with a working capital outflow in the quarter of $346 million. We will continue to focus on working capital efficiencies, and our guidance for a full-year working capital benefit of approximately $100 million remains unchanged. In the quarter, AMP incurred additional growth CapEx of $90 million and maintenance CapEx of $36 million. Our expectation of the current year is unchanged, which includes growth investment of just under $400 million.

Oliver Graham, CEO

Before moving to take your questions, I'd just like to recap on AMP's performance and key messages. Our global shipments grew by 3% led by growth of 5% in North America and a solid performance of 2% in Europe. Both businesses performed ahead of our expectations, offsetting a softer performance in Brazil and supporting the delivery of our adjusted EBITDA guidance. We're encouraged by the early signs of a return to promotional activity and the easing of customer input cost inflation, which supports our expectations of improved H2 volumes. We will continue to closely monitor demand conditions and balance our capacity in a disciplined manner.

Anthony Pettinari, Analyst

Oliver, the full year guidance, I think, implies a pretty strong second half earnings inflection, and I'm just wondering if you can speak to that. And is that driven primarily by kind of volume recovery or maybe cost? And then if there's any sort of trigger date for contract resets for PPI or any kind of mechanism like that, that we should keep in mind as we kind of think about the rest of the year?

Oliver Graham, CEO

Sure. Yes, Anthony. Look, I think there's a couple of things in the full year guide. There is some acceleration in volume received in our guidance in the second half, and we can talk more about the markets and why we've got that assumed. But there is also an acceleration of our inflation recovery. I referred to it in the remarks, but there's some drag in Q1 from the timing of the recognition of those PPI mechanisms into EBITDA, and that drag has gone after Q1. So we also get some enhanced inflation recovery in the subsequent quarters.

David Bourne, CFO

I'd say you put those three components together, you're at or very close to covering the dividend mix.

Oliver Graham, CEO

Look, I think we've signaled along that the dividend is demonstrating the cash-generative nature of the business. And as we pivot from a strong investment period into a period where we're running to fill the capacity and drive cash generation, we think the dividend becomes completely sustainable and is a very good fit for our proposition. So we continue to monitor that, obviously, on a month-by-month basis, and we continue to monitor our overall capacity because we do intend to keep utilization in the 90s over the next few years. Our European business takes a step up from here because we lose the drag from the accounting treatment on some of the inflation pass-through. And yes, back to my previous comments, what I think you're seeing in Europe is a lot of volatility in demand across different players because they're operating in different parts of the market. Right now, you need to be operating in economy or price competitive parts of the market or you need to be discounting into those parts. I think our European market is pretty resilient on the can side, very strong sustainability tailwind still, and again, good innovation coming into the can.

Gabe Hajde, Analyst

I had two questions on Brazil. In the short-term, it feels like there's sufficient capacity, and as well as pressure on the consumer. What's your view on the long-term market dynamics, particularly in regard to the transition from returnable glass to one-way packaging?

Oliver Graham, CEO

Yes, look, I think in one-returnable transition to one-way can ... the customers want to use the shelf and have some premium positioning around glass and then some mass volume driving around cans. And actually, what's happened in Brazil historically is that was held back by a lack of one-way glass capacity. And so the cans took all the growth as the returnables declined. But the main problem at the moment is to try and to get that from a position where there is almost no one way. And our growth will be much more significant given the capacity position, given the consumer adoption of the can and given the significant shift we expect out of two-way.

David Bourne, CFO

So we're working very hard this year to get that inventory back aligned through the year, and that's our $100 million working capital inflow for the year is our step along that particular journey.

Oliver Graham, CEO

We expect that to continue once the normalization occurs around the very high inflation that's occurred on the can in the last 6, 12 months in Brazil. And as I said in my other remarks, I think there's a few other categories very ripe for the can, including the sports drink as well. So there's good space for additional innovation still to come. We're pretty balanced in Europe. I think that category, though, overall, I think, is beginning to move, and we expect to see that shift continue.

David Bourne, CFO

Our investment profile is front-loaded in terms of we are finishing off projects largely that have been crystallized, started last year and are under flowing through.

Oliver Graham, CEO

Thanks, Ellen, and thank you to everyone on the call. Just to summarize again, we met our Q1 guidance, and we reaffirmed our full year as we see a strengthening in the demand environment and improved EBITDA recovery through the year.

Operator, Operator

Thank you. We will now proceed to take any questions that you may have.