Ardagh Metal Packaging S.A. (AMBP) on Q3 2021 Results - Earnings Call Transcript
Operator: Welcome to the Ardagh Metal Packaging Third Quarter 2021 Investor Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Mr. Oliver Graham, CEO of Ardagh Metal Packaging. Please go ahead. Oliver Graham: Thank you, Jen. Welcome, everybody and thank you for joining us today for Ardagh Metal Packaging third quarter 2021 earnings call, which follows the release earlier today of our results for the quarter. I'm joined today by David Bourne, our Chief Financial Officer and by John Sheehan. Our remarks today will include certain forward-looking statements. These reflect circumstances at the time now made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied, due to a wide range of factors, including those set forth in our SEC filings and news releases. Our earnings release and related materials for the third quarter can be found on our website at ardaghmetalpackaging.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of the release, which also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA, adjusted operating cash flow, and adjusted free cash flow. The details of our statutory forward-looking statements disclaimer can be found in our SEC filings. If I now move to our third quarter results. AMP performed well in the quarter, delivering strong earnings growth despite softness in the hard seltzer to market and the pressures of a highly inflationary environment with tight global supply chains. Across the group, our team has demonstrated considerable operational agility to deliver this performance. And I want to record our appreciation of our 5000 colleagues for their dedication and commitment in supporting our customers growth. Revenue of $1.04 billion increased by 15% on a reported basis, and by 14%, at constant exchange rates, principally due to the pass through of higher aluminum and other costs. Adjusted EBITDA for the quarter increased by 17% to $176 million, a 15% increase at constant currency rates driven by strong advance in the Americas. LTM adjusted EBITDA has now increased by 17% to $637 million at September 30 and we expect further progress over the remainder of the year and into 2022. Total beverage cans shipments in the quarter was 6% lower than in the prior year. And we estimate that approximately half of this reduction is attributable to the residual impact of the cyber incident. Excluding these shipments fell by approximately 3% compared to the same period last year, reflecting softness in hard seltzer in North America, as well as strong comparables in both Europe and Brazil. However, we manage these market conditions well grew earnings strongly and are slightly raising our full year outlook. Specialty cans represented 44% of our shipments in the quarter. Looking at results by segment and the constant exchange rates, revenue in the Americas increased by 16% to $555 million, mainly due to the pass through of higher input costs, can shipments was 6% lower than the third quarter of 2020 with reductions in both North America and Brazil. In North America, we were impacted by softer demand in the hard seltzer market. In response, we redirected production to satisfied continued strong demand, primarily from the non-alcoholic categories and CFD, sparkling waters, energy and other drinks, as well as the RCD market. This operational agility served as well and drove earnings growth despite the low volumes. Our response was hindered to some degree by the residual impact of the cyber incident on our capacity as reported in the second quarter, the impact of which has now passed. In Brazil, shipments in the season, less important winter quarter will lower than the prior year. The market is estimated to have declined by approximately 15% in the quarter compared to an estimated 25% growth in the same period last year, which was due to COVID recovery. AMP outperformed the market trend despite elevated inflation, including the impact of a weaker real on domestic consumer spending power, we are optimistic for the upcoming summer season in Brazil as the longstanding driver of pack mix conversion continues to drive demand for beverage spend. Adjusted EBITDA in the Americas increased by 28% to $100 million. Growth reflected feasible production volume and sales mixtures compared with the prior year, as we further diversified our customer base and benefited from the investments made in the latter part of 2020 and the first half of 2021. The development of and prospects for the hard seltzer market have been a matter of significant discussion recently. AMPs in the Americas as well diversified across multiple end markets, including CSD, beer, hard seltzer, sparkling waters, energy drinks, coffees, RTD cocktails and newer categories including wines, functional infused drinks. This represents a significant change in the profile of the business we acquired in mid 2016, which is highly concentrated by customer and end markets. This diversity coupled with our ability to react to changing market trends that delivered resilience and underpins our confidence in future performance. We expect to announce shortly, a growth initiative to further enhance our flexibility and ability to serve smaller to medium sized customers. Returning to hard seltzer in the third quarter, the category represented a mid-single digit percentage of our North American business and just one of many long-term growth opportunities we see in the North American market. In the context of the AMP group, it accounted for a low single-digit percentage of total volumes. Commentary generally points to hard seltzer remaining a significant beverage sector category, albeit with more modest growth than in recent years, supported by several long-term mega trends. We therefore view it as an important and attractive end market. But note that our growth is well diversified by customer region and beverage category. In Europe third quarter revenue increased by 11%, at constant currency to $483 million, compared with the same period in 2020. Shipments declined by mid-single digits compared to the prior year, being partly impacted by the cyber incident early in the quarter, as well as by an exceptionally strong third quarter of 2020 when shipments increased by 10%. The widespread reopening of hospitality across Europe during the quarter has also provided a modest headwind in some markets, particularly the UK, as consumers resumed on premise occasions favoring draft over packaged product consumption. Third quarter adjusted EBITDA in Europe increased slightly to $76 million. Looking forward, our near-term growth is constrained in Europe pending two significant growth projects, which add to our capacity in the UK and Germany in the first half of 2022. First half growth in 2021 was largely achieved through reducing inventories. And we expect full year 2021 volumes to be in line with 2020 following a very strong final quarter of 2020. Turning to our growth initiatives, these continued to make good progress over the course of the third quarter and are materially on target. In the first nine months of 2021, we have invested capital expenditure, including lease additions of $450 million on these projects, with a full year out turn of approximately $700 million expected despite some delays in the delivery of equipment, mainly a consequence of global logistics pressures, implementation to-date is largely on plan. To recap on some of our larger growth investment projects. In North America, our two new high speed sleek lines in Olive Branch Mississippi continue to ramp up during the quarter. Our expansion at Winston Salem, North Carolina is well advanced and we anticipate producing cans from the first of these two new lines around the end of the year, with the second high speed line commencing production in the first quarter of 2022. In Huron, Ohio, our new brownfield expansion will begin to produce end next month, with can lines beginning to ramp up in the first quarter of 2022. Labor markets across the U.S. remain tight, we have made good progress with hiring and continue to add well qualified candidates to support our growth plans. In Europe, our new line in Germany will start up in the first quarter of 2022 and with a significant U.K. investment also coming online in early 2022. In Brazil, the expansion project at our Jacareí plant is progressing well with startup expected around the end of this year. We are also adding capacity at our Manaus end plant. Finally, planning and development work on our greenfield expansion in is also progressing. We continue to minimize execution risk across this breadth of projects primarily by focusing our expansion on existing facilities, thereby leveraging our established skill base community presence and scale. Equipment supply has tightened and shipping has recently given rise to some delays but our projects remain largely on track and will deliver significant capacity growth in 2022. Our expectation for medium to long-term growth and beverage can demand has led us today to set out two further strategic expansions. We intend to build new multiline beverage can production facilities in the U.K. and the southwestern United States to support our customers growth. The U.K. investment will build on our leading presence in one of the strongest performance beverage can markets in Europe, while the U.S. expansion represents an important strategic enhancement of our geographic footprint in that market. Operations are scheduled to commence in 2023 and 2024 respectively, with full production achieved in the next phase of our growth plan beyond 2024. These projects are envisaged in the pipeline of potential growth opportunities we had previously detailed. They will be built out on our phased basis in response to market demand and as is the case with our 2021 to 2024 growth plan, investments will be fully backed by customer agreements. They will also require no new equity. We will provide further detail on these new projects in due course but see demand underpinned as follows. Firstly, long term secular growth as the beverage can take share of the pack mix due to its convenience appeal, and in particular sustainability. Innovation remains skewed to the beverage can and while COVID has resulted in a backlog of new product introduction. Customer Feedback confirms the strength of their forecasts for beverage cans in all our markets. Secondly, inputs into our co-markets have continued to run at elevated levels, with well over 10 billion cans imported to the U.S. market by the end of August, compared with over 8 billion units in the full year of 2020, which was itself a record. Thirdly, continued very low inventory levels, as well as unsustainable operating rates are expected to normalize across the beverage industry overtime. Moving to our financial position, liquidity totaled in excess of 0.8 billion at the end of the third quarter, including $0.5 billion in cash and the ABL entered into during the quarter. Net leverage ended the quarter at 3.8x. Subsequent to our second quarter earnings call in early August, we completed the SPAC transaction and following completion of the exchange offer earlier this month, the free float of AMBP has increased to 25%. In parallel with our investment in new sustainable packaging facilities, we are more generally executing and leading sustainability strategies concentrating on environmental and ecological barriers to a greener planet, but also focusing on the social agenda of our people in the communities in which we operate. The board of AMP is passionate about sustainability in all its dimensions and as we have said before, we believe it represents a long-term tailwind for our business. When we invest in new facilities, we have set an ambition that each of those facilities will be class leading in terms of sustainability. We continue to work with our customers, suppliers, communities and industry bodies to promote collection and recycling. We have developed detailed 10-year plans across our business to ensure that we achieve our ambitious 2030 targets for CO2, VOC, waste and water. We are actioning those plans including focusing on increased renewable electricity usage starting in North America and we are moving forward on light weighting energy efficiency and a host of other initiatives. Our community connections are vital to our success, particularly in securing talented people from the communities we operate in. To that end, Ardagh announced earlier this year a $50 million investment in STEM education in those communities. We are delighted to report that the initiative has captured the imagination of our people and their neighbors and is progressing very well. We will shortly issue our 2021 sustainability report setting out our 2030 targets. And as outlined earlier, we are also progressing initiatives to enable us to better serve smaller to medium sized customers with sustainable metal packaging. So to conclude before moving to take your questions. Today we reported strong growth in third quarter earnings, reflecting our focus on sustainable metal packaging, our diverse customer base in end markets and our operational agility and responding to market changes. This has demonstrated the transformation we've made in the diversification and resilience of our business in the last five years. On an LTM basis, adjusted EBITDA has now increased by 17% or $92 million a year, year-to-date to 637 million. We expect further growth over the final quarter and a modestly raising our guidance for 2021 adjusted EBITDA of at least $660 million, finishing ahead of the 2021 targets set out in the business plan, which we published in February of this year. Under this plan, we will significantly increase our manufacturing capacity, so as to achieve our objective of more than doubling EBITDA to over 1.1 billion by 2024. We expect the beverage cans to continue to gain share in each of our markets and AMP as a pure play beverage can manufacture with a strong platform in each of its markets is very well placed to benefit. Our contract structures characterized by multi-agreement with cost pass through provisions provides significant resilience in an inflationary test environment, albeit subject to some occasional timing lags. Execution of our business plan has been strong to-date, and we remain firmly on track to achieve our 2024 objectives despite well publicized delays in cost pressures in parts of the global supply chain. Under the plan, free cash flow conversion will also be strong. We estimate it at 75% plus before growth CapEx given our modest level of maintenance CapEx, low cost of finance and efficient working capital model. We therefore have a very strong and highly visible growth platform, which is both value creating and free cash flow accretive for our shareholders. Having made these opening remarks, we will now be pleased to take any questions that you may have. Operator: Thank you. And we'll go first to George Staphos with Bank of America. George Staphos: Hi, everyone. Good morning. Thanks for taking my question and thanks for the details. I just wanted to make sure I understood on Europe, what are you looking for the fourth quarter in Europe both in terms of volumes and earnings? I want to say I thought I heard you say something about even but I just want to make sure that I didn't catch that incorrectly. And then, I had a couple of other questions. Oliver Graham: Sure. Hi, George. No, we actually I don't think said it that way. We think we'll be mid-single digits in volumes for the final quarter. And then obviously, I guess we signal at least 660 million on the EBITDA, which is that for another 176, I want to say chat with David in a minute. But yes, so volumes up in the fourth quarter is the forecast. George Staphos: And the mid-single digit that's for Europe and overall for the business as well. Oliver Graham: Yes, that's AMP overall. And then, it's yes, it's in the same ballpark for Europe and the Americas. George Staphos: Excellent. Thanks for going through that. The second question I had, could you talk a little bit about the new facilities and new projects you announced today, both in the U.K. and the Southwest, I realized it's a little bit tough to talk about these things live, Mike, but any highlights about the facilities, the capacity that's being added? And in particular, in the southwest, there have been a few other facilities announced by pure companies in the region. What's so attractive about the Southwest these days? Is it that you were seeing more filling locations going there? Are the states and municipalities making it more attractive? Is it a great place to hit California? If you can give us a bit more detail on those two new facilities particularly around the southwest we'd be interested? Oliver Graham: Sure, yes. So look, I think we will come with more details on the capacity and investment levels. So they are both multiline facilities. they'll both be serving a whole range of customers. And as we said in the remarks, they'll be backed fully by customer agreements. And in terms of the Southwest. I think all of the above that that you mentioned. So I think our analysis and obviously that of our peers and customers is that the West Coast is very undersupplied at the moment in terms of capacity. I think that's because of certainly California, a big market. You'll know with your experience in the industry, that capacity has been removed from California over time. But it continues to grow in a very healthy way. And you do have particular policies and consumer attitudes to plastics on the West Coast. So I think that's a big market with a very significant growth trajectory in years ahead. And then we also have, to your point, big filling locations going into the southwest of the United States, including, one as you know, that is actually not incremental sales volume to the U.S., but is actually the replacement volumes that were being produced in Europe. So we also have to take that into account when you consider the capacity going in. So yes, I think, when we look at it, and when our customers are looking at it, there's clearly still room for growth. This for us is a very strategic long-term investment, if you look at our geographic footprint, we don't have a Southwest location, we only have Fairfield on the West Coast. And so we see this is a very long-term play in the market, not just a short term reaction. George Staphos: And so you want give us capacity on the for the time being would that be fair? Oliver Graham: No, that is fair, we have it anchored with enough customer volume and enough contracts to know that we can announce, but we're still going through some conversations to detail out the final volumes, capacity and investment. George Staphos: My last question, hard seltzers are now about 5% of your mix in North America recognizing this is not scalpel like precision. I think prior quarters, you said it's been 10% to 15%. So would that suggest hard seltzers in the quarter were down multiple pins in terms of percentage points of volume declines? Or was it a less negative effect in the quarter in terms of volume declines? Thank you. I'll turn it over. Oliver Graham: So obviously, there was a correction hard seltzers in q3, it's very public, out there about the inventory build that took place. And therefore the reduction in fresh production that was needed. We'd expect it to turn back into the historic norm once that inventory is flushed through the system. I think we said it in the remarks. I think hard seltzer continues to be a great segment. If you look at what our customers have done to build that segment, it's been an extraordinary story. And once this stage is over, I think both the big two, have made some pretty compelling arguments for why there should be growth in the years ahead. Clearly not at the levels it's at now. So we never bet the growth plan on hard seltzers. We've always been a very diversified play both in North America and obviously in the other two regions. We expect some growth in that segment going forward, once the inventory rush through. I think it's clear the category got pretty complicated this year for the consumer. And I think the analogy has been made with the energy category that went through a similar kind of high growth, then over complication, lower growth, and then returned to growth once it simplified and clarified for the consumer. So I think it's fair to expect something similar to happen with hard seltzers. Operator: We will go next to Mike Leithead with Barclays. Mike Leithead: Great. Thanks, guys. Congrats. I wanted to pick up or follow on to the North America discussion. I guess first, can you just talk about your ability or flexibility to pivot some of those sales away from hard seltzers like you talked about? Do you simply find other customers to buy those cans or the hard seltzer customers having to pay some sort of recourse for not hitting projected levels? And secondly, just the broader question of, I appreciate hard seltzer is only a small piece of the pie. But does this alter at all how you think about further investment in the U.S., I know you're going to say you still find the market attractive since you announced the new plan. But just given the market may have overestimated seltzers a bit here that we didn't expect to stay one two quarters ago? Does it give you any pause or any need for added risk buffers for uncertainties as you're investing for growth projections two, three years out here? Oliver Graham: Thanks, Mike. So just the last part of your question. First, I think one thing that's happened in the 12 months, since we first put our growth plan together has been the strengthening of forecast by other customers, outside the hard seltzer space and to remind everybody that CFD is 10 times the size of the hard seltzer category. So 10% in the hard seltzer, 1% growth in CFD and some of the big CFD customers are predicting significantly more than that now. So I do think it's important, that overall the market has strengthened in terms of their forecasts for the out years underpinned by the mega trends that we talked about in our investor communications. So that'll be sustainability, the issues on plastics, that's also portion size control, smaller portion size favoring the cans, it's the image of the can and the way it's been associated with certain categories. So I think that's a very important part of the story that as we said all along. We like to add hard seltzer category, we've got some fantastic customers there, but we never, bet the growth plan on that. And so, when we looking forward in North America with the projections that we've got and we're not at the higher end of the market projections in terms of growth, we still see significant gaps of capacity in it, it is worth remembering how many cans are getting shipped in empty from all over the world this year, I think one of our peers predicted it could be 13 or 14 billion cans by the end of the year and that is an extraordinary amount of very uneconomic and very unsustainable cans to be coming to the U.S. So the first thing that has to happen is we have to put that domestic capacity in place, and then we have to put capacity in to service the growth in the market. So as I say, all our modeling, and the many other categories we're in and when we look at the capacity has been announced, we think there is still certainly space. I think we noted, the facility in the southwest will come up during 2024, we will phase it with demand. So it's a very, I think appropriate, please scale the investment for the market conditions. Mike Leithead: Great, that's helpful. And then just on CapEx. I think in some of the previous documents, you talked about 900 million spending this year on CapEx, it looks like the last few quarters are running at something like 500 million to 600 million annualized run rate. So can you just update us on the CapEx spending trajectory. And then in the medium term, would the new plants today be additive to the '22 and '23 CapEx provided in some of the earlier documents? Or was that already contemplated with some of the projections you have out there? Thank you. Oliver Graham: Yes. That is additive to that the ‘22 and ‘23 guidance we gave in the investor communications during the SPAC process, but it is contained within the communication we made in that process that we were discussing projects, further projects up to 1.4 billion of capital. So it was signaled but I think we signaled that we were having customer conversations that would lead eventually to further announcements, but it is additive to the specific numbers in the documents. And then, I think I'll pass to David in a second. But yes, we're running slightly behind on the CapEx. But it's mainly just cash flow management and a few delays on, certain pieces, but it's not materially impacting our overall project progress. But I'll just ask David, to comment on that. David Bourne: Yes. So I guess your point nine figure takes in 0.1 of maintenance CapEx, actually we're running slightly better than expectations, which is very pleasing. On our business growth investments, we had a $0.8 billion number in the market that was always around about position, we think we'll come in at 0.7 which should be a rounded down position. What we have done is transfer some of what would have been CapEx cash flow into leasing arrangement. So you will see our lease additions year-to-date of 89 million. And so we're just making sure we've got efficient finance structures around the business growth investment that we're putting in. Operator: We will go next to Kyle White with Deutsche Bank. Kyle White: I wanted to just talk about the supply chain and to see how overall the pressure points you may be feeling. Is a supply chain having any impact on customers meeting demand or your ability to bring up the capacity on time? Oliver Graham: That's a great question. It's definitely putting pressure on our teams and our customers. So you'll have seen, in the U.K., we have freight shortages, that meant our customers are struggling to get product to the supermarkets, which we think is part of what happened to us in the U.K. in this quarter. Other than that, I don't think it's significantly affecting the sales line. On the project line, we do have sort of bumps from parts that don't show up that you'd have always expected to show up. But when we take it in the round, as we said in the remarks that the projects remain materially on track. And they're not changing our view of 2022 or the track through to 2024. Kyle White: If I could just follow up, given just a labor situation and labor availability, should investors expect maybe I know you've done a lot to derisk the capacity additions and bringing them online at existing facilities. But should we expect maybe a slower ramping of the new additions just given the labor environment there? Oliver Graham: Not without I think that to the extent they have any minor delays in ramp up, it's not due to labor. I think in the industry generally is got ahead of it significantly on these projects in the last few years, and we've certainly front loaded it. So now, we don't see any ramp up delays on our side because of labor. Kyle White: Just following up on kind of the supply chain overall. Can you just provide any details regarding the magnesium situation? I know it's very dynamic and fluid. But what are you hearing from your can suppliers on this? How big of a concern is it for you for next year? What are you doing to try to manage the situation right now? Oliver Graham: Yes. I think messages that came out in the market the last week or two, we're broadly aligned with those. So it's more of an issue for ends metal when can sheet because of the recycled content in the can and the different alloys, it's probably more of an issue in Europe than North America. But nevertheless, it is clearly a significant issue. We think we're fine on availability, talking to our suppliers through the end of the year and into next quarter. But then clearly the situation needs to be monitored very carefully. And we're doing that with our suppliers. It is leading to significant cost spikes, which we're talking to both our suppliers and our customers about, as those are pretty extreme. So yes, we're monitoring the situation day-to-day at the moment. We don't see a reason to call it as a significant availability or operational issue, but it's certainly got some cost issues in it. Operator: We will go next to Mark Wilde with Bank of Montreal. Mark Wilde: Just coming back on these two new plants, is it safe to assume that they were not embedded in that 68 billion units target that you put out there for 2024 added into that? Oliver Graham: Yes, good question. Not completely, actually. So the U.K. plant is replacing some capacity that we had already planned in the U.K., in an existing facility. So that is not completely additive. And we'll be able to give more detail, obviously, when we get this specific announcement. The Southwest plant is additive to the U.S. capacity build. Mark Wilde: Okay. And then also on the capital side, can you talk a little bit about, sounds like modest delays and timing, any thoughts on just changes in capital cost over the last couple of years in terms of adding new capacity? Oliver Graham: Yes, I mean, there's some inflation in obviously in steel and concrete, which we'll need to take into account on these new projects. Fortunately, we were well through the contracting and planning through the back end of last year in the early part of this year for our existing project portfolio. So we see much less impact there. But yes, that clearly is some inflation on some of the underlying costs for the new project, they don't change the fact that they're still very, very free cash flow accretive and value creating. So the paybacks are still extremely attractive. But nevertheless, there is some additional costs, and it's fair to say. Mark Wilde: Okay. Can you give us any kind of just early color, the efforts that you flagged that serve a small and medium sized customers? Oliver Graham: Look, I think this is all about making sure that we can serve short runs, with metal packaging. So, it's a variety of initiatives, but one in particular, that we hope to announce soon to meet the needs of either startups or big customers who just want to run trials and test that in the market. Because, we have built these lines for super efficiency, we've had to do that for our customers to meet their efficiency and cost and price targets. And that doesn't suit very well, when you're trying to do small runs, and startups and trial volume. So that's what we're looking into. And as I say, we've got a range of initiatives there. We've got one that we hope to announce very soon. Mark Wilde: Is it possible, some of this might involve kind of a shift from traditional kind of printing technologies to perhaps more digital print in the beverage can market? Oliver Graham: I mean, you do see trends in that direction, Mark. So I think, that's an interesting point. And it is obviously the printer that is causing some of these issues in terms of run length, so it's a range of things and yes, we'll be announcing very soon. Mark Wilde: Okay, all right. Just finally, for me, just one more on this hard seltzer issue. Do you have some sense of the contribution of the hard seltzer category to sort of the overall North American volume growth over the last two or three years? Oliver Graham: I think the figure we had a key to was it 190% growth of hard seltzers July 4, 2019, to July 4, 2021. And that was probably off a base of pretty small base, right, 1 billion, 2 billion. And I think we're measuring it around the six this year. So I think it's not -- did you think that the market is going from something like 100 billion to 120 billion, even less than 100, probably 97 billion 120 billion. You can see that it's a key part, as I said in my remarks, I think it's a great category we like it. Amazing customers have done, some fantastic innovation there. But when you look at the total market, the other growth is also very significant. And the latent filling capacity that is out there, the cans with these trends that are driving pack mix shifts, that gives us a very significant tailwind for the beverage kind of that’s what our growth plan is built around is the diversity of 10 markets that are all in growth in beverage cans. Operator: We will go next to Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess, so back to the magnesium question. I guess I wanted to get a little bit more details on, you noted that the pressure is likely more in Europe. And you also noted kind of sufficient supplies through the end of the year and into next quarter. I guess, that comment on sufficient supplies? Is that a regional comment? How would you kind of comment on magnesium supply as it relates to North America, Brazil and Europe, your major regions? Oliver Graham: Yes. That was actually sort of a global comment. It's less than an issue in Brazil at this point. So that was really referencing both North America and Europe. We're in very close contact with our suppliers on this. The situation is extremely dynamic, as I think, as you know, as referenced in the other calls and notes that have come out the last two weeks. And we see some green shoots of improvement, but we can't call it yet, I think to be absolutely sure. So, yes, that's about where we are at the moment, we're monitoring it every day, the supply base are very much focused on it, we're looking into alternative sources with them. I wish there some and others, I think it's a bit easier in North America as referenced in the other calls and notes, there is domestic supply. So yes, that was the context of my comment. Arun Viswanathan: Great. And then another question on this. As it relates to pricing, you guys obviously had signed up a number of contracts, as you refer to on a long-term basis, as you were building out some of the brownfields additions. And extending your current contracts, I would imagine that they had assumptions in there for various items. Were there assumptions in there as well for magnesium or is that a pure pass through? Or how should we think about that you noted significant cost pressure? So should we expect the cost of a can to go up significantly and that potentially to impact demand in late '22 or into '23? Or what's going to be the impact if we do see a significant increase in costs as it relates to magnesium? Oliver Graham: Yes. I don't think it's at the level where you're going to hit consumer spending and especially when you think we've already had significant rises in aluminum, it was premium, which are very material in the eventual can price through to the consumer. And we certainly seen our customers has been commented on putting some of those into the markets. So I don't think it's magnesium that's driving, or going to drive significant changes in the can price at retail. I just think within the context of our supply chain, there's some pretty big numbers if it carries on playing out the way it's currently playing out. And that would be a conversation that we'd have to have with suppliers and customers. I can't go into the details of contracts on the call but we would need to have conversations both ways. Arun Viswanathan: And just last one on this topic, there's been significant innovation on sizes and just curious if there's any thought of alternatives to 3004 alloys or whatever it may be to reduce the consumption of magnesium. Is there any other material that that would make sense to consider just given the concentration of supply coming out of China? Oliver Graham: Yes. Not that I'm aware of. I mean, there are discussions like that about recycled content into ends, and whether different alloys could be used, but it's extremely complicated. And obviously, the end is a critical component for the safety and functioning of the cans, we can't mess with it too much. So no, I don't think so. And it's not like magnesium is a scarce material right on the planet. It just happened to get very concentrated into supply from China, which now looks like a strategic mistake. So I don't see this as a long-term issue for the can. Arun Viswanathan: And then, just on the market in general, so you're referred to a resumption of growth in the CSD markets, and maybe some other categories as well, new categories, which are potentially offsetting some of the moderation in hard seltzers or even more than offsetting, especially given the size of the CST market. What would you kind of comment on as far as some of these shifts? Are they structural or not? Are you hearing from your customers that CSD is something that in cans, is that something that they're willing to bet on? We're just curious, because, it seems like their profitability in PET and other areas was a little bit higher, as that changed, maybe because of function of multipack, or price increases or whatever. But would you say that some of this growth that you're seeing materialize in the last six to 12 months as being more structural, or is that transitory? Oliver Graham: I think it's very structural. So I think and then this piece about PET profitability, I think was a very North American phenomenon. It wasn't necessarily true in other markets, that it was that much more profitable for our customers, because I think it depends a lot on the way they priced it at retail, and what promotional strategies they were pursuing and also the investments they've made in PET blow forming and other assets in their line. So I think that the recognition that cans are a critical part of their pack mix and sustainability story going forward. And also, working with consumers means that they can start to change the way that they price at retail and some of this was already happening, pre-sustainability with the portion size pressures. So we started to see that smaller can sizes were coming to market in CSDs. And the can is advantaged versus PET when the leverage drops per proportion. So we've already started to see that and then they're starting to develop, obviously, consumer strategies around that that mean that the profitability of those portfolios is very good. So I think it's a very long term structural shift, I think that's selling capacity as there, latent filling capacity, so that's available for this. And certainly, to your question they're absolutely coming to us with very strong forecasts and with a lot of confidence in the future of the can, in their categories. And it does go beyond traditional CSD as well into the sorts of products you're seeing in the energy space, the sparkling water, mixed drinks, there are RTD cocktails very strong at the moment. So wine in cans were very excited about we're doing a lot of that in Europe already. And all of that without talking about distilled water, which is still out there and we have a strong belief we will come into cans. So, yes, it's a broad based movement, and I think it's very structural, not transitory. Arun Viswanathan: Great. And then just last one for me, appreciate the updated guidance for '21. I was just curious on your comment about Europe, you do have some capacity coming on there. You're constrained right now. But I think the perception is that North American growth is kind of mid-single digits for the next couple years. Would characterize Europe is similar to that, or better or worse? Has it incrementally gotten better in the last six months or so? What would you say about Europe's kind of midterm growth prospects for you? Oliver Graham: Sure. Yes, I think Europe's always been a growth market with a combination from liquid growth to clear energy drinks and pack mix shifts. And it's got a lot of new category innovation. So it's always been good growth. And then, we communicated, we see it around the mid-single digits. It has been higher than that in some years recently. And I think that view is shared pretty widely by commentators. I think in the last six months, we did see and we'd always signaled that the U.K. in particular did have a bit of a COVID bump in 2020, positive bump, and that did unwind in Q3, and you'll have seen with the Heineken results, that they signaled that across a number of markets in Northern Europe. So I think the market as a whole didn't get better in the last six months, but if I take the market as a whole, looking from 2019 to 2021, it's definitely strengthened and, again, looking forward, I think the sustainability credential that the can and its relevance for certain key growth categories mean that we're very positive about Europe's growth prospects. Operator: We will go next to Gabe Hajde with Wells Fargo. Gabe Hajde: I guess I wanted to hone in on a couple of topics and sorry to belabor the point, but I guess maybe we'll start with Europe. Two part question one, can you give us a little bit more detail in terms of the earnings bridge over there, I think you talked about higher production levels helping you in favorable mix. And then, obviously, shipments were down. And I'm sort of asking in the context of what some others have talked about in terms of obviously, putting material inflation over there. And then, two, I thought you were kind of adding alignment in an existing U.K. facility. So to be clear, is that up and running and contributing? And you're still capacity constrained with that addition or did that not happen? And that's why you're talking about the new factory, not necessarily being additive? Oliver Graham: No. So I'll take the second one, then I'll pass the first one to David. And so that, we have a line coming up in early 2022, in the U.K., in our Rugby facility and that is separate from the new capacity, not confusingly, that new capacity is additive to another line with plant, another one that's coming up early in 2022. And so it's not fully incremental. So that's what we meant. If you remember, in the investor communication we did in the first part of the year, we always have one plus lines down to the U.K. So that did strengthen into two. And now it's strengthening further. If that makes sense. Gabe Hajde: It does. Oliver Graham: Okay, then I'll pass the first question to David, because it's all about IFRS 15, I think. David Bourne: Well, I guess European earnings for the quarter, year, were just slightly additive. You've got on a reported basis, a 3 million movement that 2 million that is Forex translations. So it's mildly additive, that is caused by decent sales mix, we were lapping a quarter with higher COVID costs in the prior year. So our SG&A variance is positive. And that's part compensating for the volume mix. But we do have the IFRS 15 adjustment that increases the contract assets for Europe. So the fact that we continue to run production through the period means that there was a miss in terms of can sales volume distributed, that production volume was loss was lower than that, and that feeds through to that contract assets. Gabe Hajde: Okay. So that, seemingly the IFRS 15 also helped in the Americas, as well as you guys continue to produce at a certain rate versus what got sold through. David Bourne: Correct. So if you take the group picture that the balance sheet move on that contract asset was 22 million in total for the quarter. Gabe Hajde: Okay. Thank you for quantifying that for us. I guess the next question, your ability to pivot sales here in North America to other customers, I'm curious if you are willing to share, if that did in fact go if those cans I guess were sold to CPGs which was selling capabilities for existing and branded products, or if this was I don't know how big of a mix you have for distributors for smaller customers that you may not necessarily have direct relationships with, if you're willing to share that. Oliver Graham: It is both. So we do have very strong co-packer relationships. And they took a good amount. They've been asking for more throughout the year and last year. And so we were finally able to fulfill that. And there is very strong growth there, which I think goes to the point we made in the remarks that there's a backlog of innovation in the U.S. market that has not been satisfied. And we certainly get a lot of inbound inquiries from people with new products and wanting more cans in order to be able to launch and grow so that was definitely a part of it. And then it was also branded companies. Gabe Hajde: Thanks for the clarity there, Olly. And then I guess the last one, for me. The repatriation of cans and this is something that we've asked your peers, as these cans that are being imported now and I appreciate they're not necessarily from yourself, make their way into their market of origin that do, how does that work into your thinking in terms of your capacity additions? I suspect the answer is, well, they're separate customers. And so we have contract relationships. But it just seems logical to us that those cans would then be available to those customers in that region and potentially be disruptive. So any thoughts there? Oliver Graham: And Gabe, so to be clear, you mean in terms of where they came from, in the capacities? Gabe Hajde: Correct. If we import 15 billion units this year? Oliver Graham: Yes, does that mean you're freeing up a lot of capacity in the markets they came from? I mean, I think the perspective on that and we don't have all the details is that many of those cans are imported from regions outside our core regions. So to the extent that there is available capacity there, when these imports get repatriated, we don't see them as disruptive to our core regions, plus, those other regions are still in growth. So, we think that will get soaked up. As I say, we don't have all the data, but that would certainly be our perspective on it, when we look at when we hear it's coming from and when we look at those markets. Gabe Hajde: Okay, thank you. I said it was my last and I apologize, anything that you could share with us, the materials that were given as part of the SPAC process, and in terms of the EBITDA cadence into 2022, anything, you'd have us think about inflation, or some of these project delays that that might change that, as we sit here today? Oliver Graham: No, we're just, I mean, we're just in the middle of our budget process. But I think if you look at our contract structures, we're pleased with how, the resilience they're giving us, so nothing to change on that as we sit here today, but we obviously are going through the budget process as we speak. Operator: We will go next to Roger Spitz with Bank of America. Roger Spitz: Thanks very much. First, can you say what the September 2021 amounts for the off balance sheet receivables, please? David Bourne: If that’s the case, supply chain factoring 239, direct factoring 134. So total 373, it’s about 40, up on June, reflective of the higher LME. Robert Spitz: Perfect. And for some, you've given the 2020 on CapEx of 900. But perhaps you can update anything on the other cash items like cash taxes had been 50 last quarter working capital, kind of neutral cash transactions 90 for 2021. Any update on any of those items. David Bourne: I would say we're broadly on track with all of those topics actually water. So I'm very comfortable with the guidance we've kind of given up stops all year and actually put out our plan in February's is where we see the free cash flow landing for the full year. Robert Spitz: And lastly, you spoke about light weighting. Just to be clear, are you speaking about down gauging either the best can body and or the end tabs? Oliver Graham: We will look at all ways of taking metal out of the can. So yeah, we have projects going on can body on ends and gauging other ways to lighten the can. Robert Spitz: I mean, even for some of the standard cans I mean, it's probably CSD is probably tougher to lightweight because of the impact on can versus say, perhaps something like beer do would you look to have different cans have different with if you will, depending on what attempt to hold, there's just too hard to have a lot more SKUs like that. Oliver Graham: Yes. I mean, there has been talk about whether we could modify certain elements of the design for different drink types but up to now I think you're right, the complexity is outweighed the benefit. But actually, as you go into more still drinks, you could look at some different design parameters. So yeah, we do have some projects on that. Operator: We will go next to Diogo Silva with PSquared. Diogo Silva: I have two actually. The first one is if you could please comment a bit on the structure of your contracts in Europe in what regards to pass through of inflation in costs. And then the second one if you could please comment as well, in terms of the impact that to the much higher energy prices have on your costing in general, how much percent of your costs are related with energy? Thank you. Oliver Graham: It's a relatively small percentage of our cost, it’s about 4%. And it is true that with the volatility we've got at the moment particularly in Europe that there are some spikes on energy costs that are coming in this quarter. But they obviously get captured in the PPI indexes that we track and pass through to customers, which goes to answering part of your first question. Look, I can't go into too much detail on contracts on this call. But I think relatively simply said we track a number of inflationary indexes. And we pass through proportions of those to our customers on an annual basis. And we're happy with those structures. That can be some timing lags. And actually, the energy one is quite a good example, because it's all coming in Q4. And the indexes track typically through September, October, in terms of pass through timing, so you can get some timing lags. But overall, we're comfortable with the structures we have in the European market. Diogo Silva: Sorry. If I could just clarify on your last point in terms of the of the timing, correctly that your adjustments to prices get done in the kind of September, October timeframe. And so any inflation that you have after that period, basically gets adjusted in the next year, September, October, is that correct? Oliver Graham: Yes. It varies a lot customer by customer, but you do have some of those structures. It's not the you adjust them to be clear, the adjustments always in the following year, but the measurement period can be done to allow people to budget. Operator: We will go next to George Staphos with Bank of America. George Staphos: Olly, David, just one quick question for you. So volumes were down for the reasons that you didn't mention yet. The EBITDA guidance moved up a bit, what in your estimation allowed for the increase in the guidance? And was any of it related to the benefit you got from a commercial standpoint and pivoting to markets that were maybe underserved? If you could provide some additional detail there, that would be great. And then a couple of quick follow-ons. Oliver Graham: Hi, George. I will let David comment. I think that is the principal reason. So I think we were able to serve the markets that were feeling very underserved. And so that worked for both sides. And we also have some other areas of improved efficiency and cost management in the business. So those I think were the two principal reasons. David, I don't know, if you'd want to add. David Bourne: I will just add the impact of the cyber issues. So obviously, that accounts for approximately half of the volume loss. But from an EBITDA perspective, it's neutral, because we have the asset offset with Ardagh Group SA. George Staphos: That's great David. Helpful reminder on that, in terms of new products and innovation, it's tempting to just think of these products, as you know, one unit can replace another unit, no problem. But there are different customer preferences, there are different ABVS with different categories. As you sit here in, there's both opportunity and also challenges that sometimes occur when you have infused and mixed products. As you sit here today, to the extent again, that you can talk live Mike on this. Which of the categories do you think could represent the most, either incremental in terms of volume unit wise or percentage wise to the industry over the next couple of years, if you had a couple that you would really point us to be looking to recognizing -- you have a diverse portfolio and diverse strategy. And that's kind of how you run the business in the first place. What would you tell us there? Oliver Graham: Well, I think we've talked over the last six, nine months a lot about this space between distilled water and traditional energy drinks and obviously traditional energy drinks are on fire at the moment as well. But don't need a space that is sort of the mixture of sparkling flavored waters, sort of refresh rehydrate, reenergize that space. And you have companies in that space with new types of energy drink, quite scientific based energy and refreshment type products. And as I say, the sparkling waters, we have some great customers in that space. So I think that whole area that, in our belief there's some degree of distilled water in plastic substitution going on there. That's a bit hidden because it's not going to distilled water to distilled water. And as I say, energy drinks generally are on fire, both sides of the Atlantic. So I think that's definitely a space to keep a close eye on. I think RTD looks pretty good at the moment. And there's some great brands and companies in that space, who will I think be very successful. And then, as I said in the earlier in the call, I think distilled water will come through, go ahead George. George Staphos: Olly, just to be clear, RTD mean, cocktails, or tea, or which RTD are we talking about? Oliver Graham: Yes, I'm sort of, others are looking to the spirit space, kind of the products and brands. I think you've got a lot of a lot of runway. So yes, we're excited to buy those as well. George Staphos: Okay. My last one, and I'll turn it over. Again, tough comps, we understand certainly Brazil's had its other issues as well from a political standpoint, an economic standpoint, recently, we've seen from some other sectors, some moderation and growth in the region. Why are you comfortable? Or are you comfortable that this slowdown that you're seeing is just nothing more than comps and seasonality and isn't reflective of maybe a bigger retrenchment in the consumer recognizing that beverage cans have been a growth category in Brazil for many, many years? We know from our data, but why are you comfortable, this isn't something that maybe is a little bit deeper that we have to worry about for the next whatever, two to four quarters. Thank you, and good luck in the quarter. Oliver Graham: Thanks, George. I think partly because these seem to be picking up on the latest data. So that gives us reassurance. I think because there is this big structural shift of two way into one way. So I think it's fair, there's some inflationary pressure there, do you think of the way our costs go through, the whole industries costs go through, then there's some inflationary pressure there, which clearly was part of what happened over the winter. But I think that the overall picture remains very strong in terms of the benefits of the can and the way it's growing. So like you say, I think it's had 25 years of growth, it's had a couple of bumps, but the underlying structural factors are so strong that we were comfortable, it'll be in good growth in the next 6, 9, 12 months. Operator: The last question comes from Mike Leithead with Barclays. Mike Leithead: Hey, guys, just a quick follow up. David I was wondering, could you help us with the $230 million exceptional item on SG&A just what was that? And can you give us the cash impact associated with that? Thanks. David Bourne: Yes, okay. So I think probably with the exceptional thing to say is, yes, I would term operational, exceptionals and normalized business activities, got about 8 million of startup costs within it, and 4 million of SG&A transformation type activities. So, 12 million there. The rest is all transaction related, the predominant one being the recognition of the share-based payment charge and IFRS 2. So that's the service listing fee that arises on the difference between the net assets at the 4, August transaction date, and the fair value of the shares and warrants at that particular date. So have this been a business acquisition, a pseudonym for goodwill, really. So it's that and the associated transaction fees and redemption premiums that could make up the rest of that. Operator: As there are no further questions at this point, I will hand the call back to Mr. Oliver Graham for any additional or closing remarks. Oliver Graham: Thank you very much, everybody. Look forward to talking to you the full year results. Operator: This does conclude today's conference. We thank you for your participation.AMBP Ratings Summary
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Ardagh Metal Packaging Downgraded to Sector Perform, Shares Down 4%
RBC Capital downgraded Ardagh Metal Packaging (NYSE:AMBP) to sector perform from outperform and lowered its price target to $5 from $7. The company’s shares closed more than 4% lower on Friday.
The analysts believe investor sentiment will remain negative on the beverage can manufacture sector, particularly for the company, given its FX exposure, EMEA exposure, beverage category mix and net leverage of approximately 4.5x. The analysts mentioned they could get more constructive on the company if volumes grow above 3% and EBITDA margins grow through cost-cutting and pricing actions.
The analysts reduced their Q3/2022/2023 EBITDA estimates to $173 million/$680 million/$760 million from $179 million/$710 million/ $810 million. Their full 2022-year estimate of $680 million is below the company’s guidance of $710 million, mainly driven by FX headwinds (stronger US dollar), slowing demand/macro headwinds, and higher operating costs in Europe.
Ardagh Metal Packaging Downgraded to Sector Perform, Shares Down 4%
RBC Capital downgraded Ardagh Metal Packaging (NYSE:AMBP) to sector perform from outperform and lowered its price target to $5 from $7. The company’s shares closed more than 4% lower on Friday.
The analysts believe investor sentiment will remain negative on the beverage can manufacture sector, particularly for the company, given its FX exposure, EMEA exposure, beverage category mix and net leverage of approximately 4.5x. The analysts mentioned they could get more constructive on the company if volumes grow above 3% and EBITDA margins grow through cost-cutting and pricing actions.
The analysts reduced their Q3/2022/2023 EBITDA estimates to $173 million/$680 million/$760 million from $179 million/$710 million/ $810 million. Their full 2022-year estimate of $680 million is below the company’s guidance of $710 million, mainly driven by FX headwinds (stronger US dollar), slowing demand/macro headwinds, and higher operating costs in Europe.
