Ardagh Group S.A. (ARD) on Q1 2022 Results - Earnings Call Transcript
Operator: Welcome to the Ardagh Group SA First Quarter 2022 Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Paul Coulson, Chairman and CEO. Please go ahead.
Paul Coulson: Welcome, everybody. And thank you for joining us today for our first quarter '22 bondholder call. Today's call follows the release of our results for the quarter earlier today. And I'm joined on the call today by Shaun Murphy, our COO and John Sheehan, our CFO. Our remarks would as usual conclude certain forward-looking statements. These reflects circumstances at the time they're 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. Our first quarter financial report can be found on our website at ardaghgroup.com. I'd like to emphasize that like so many people globally, we are horrified at events currently taking place in Ukraine. And we very much hope that this conflict is brought to a halt as soon as possible. Of course, we have no presence in Russia or Ukraine in Ardagh. And we don't source any materials or services directly from these countries. The conflict has led to steep increases in commodity prices in Europe, most notably in energy. Supplies of inputs have not to date been interrupted, but costs have risen sharply. And this is the topic to which I will return later in this call. Earlier today, Ardagh Metal Packaging, AMP posted its first quarter earnings and held its earnings call a replay of which can be accessed at ardaghmetalpackaging.com. On this call, we will not be providing any additional information regarding AMP. So let me move to the results for the first quarter, Group revenues of $2 billion represented an increase of 19% on prior year levels on a constant currency basis. Demand remains strong in our markets with volume mix up 5% and the balance of the increase represented by passthrough of higher input costs chiefly in respect of metal and energy. Adjusted EBITDA for the quarter of $253 million declined by 12% at constant currency versus the same period last year. Growth in AMP was more than offset by the impact of input cost inflation, especially in Glass Europe, and a weaker than expected operating performance in Glass North America. Looking at things segmentally starting with a brief recap of AMP global beverage can shipments grew by 1% in the quarter, reflecting a strong prior year comparable and driven by growth of 3% to North America. Shipments in Europe are unchanged on the prior year, following a very strong fourth quarter of 2021 which depleted inventory. Brazil showed progressive improvement during the quarter. Revenue of 1.1 billion increased by 25% at constant currency reflecting volume mixed growth and the passthrough of higher input costs. And AMPs first quarter adjusted EBITDA was $145 million slightly ahead of its guidance. AMPs growth projects advanced well in the quarter, and we will see both Europe and North American shipment growth accelerating sharply in the full year. AMP today guided full year 2022 adjusted EBITDA of the order of 750 million, compared to previous guidance of 775 million, principally due to the increase in food costs seen in Europe in recent months. AMP reiterated its planned return $400 million in cash to shareholders in 2022 via dividends with an initial $0.10 declared in respect to the first quarter. AMP also intends to raise 600 million in non-convertible preference shares in the near term as previously outlined. If I turn to glass packaging, shipments during the quarter increased by 6% compared to the same period last year, with double-digit growth in glass packaging Europe and the stable year-on-year out turning glass North America. Demand for glass packaging remains very strong and we are sold out everywhere. Glass packaging revenues increased by 13% to $911 million, reflecting increased shipments and higher selling prices. Adjusted EBITDA of 108 million for the quarter was approximately 10% or 12 million below our expectation at the time, we last updated the market and this was due to higher energy and other costs in Europe and weaker than expected operating performance and higher costs in North America. Looking at our glass business in segments; Glass Europe revenue increased by 24% to 473 million in the quarter compared to the same period last year. Shipments were 10% higher year-on-year following a similar 10% increase in the fourth quarter of 2021. And shipments were well ahead of pre-pandemic levels. We saw strong demand throughout the quarter across all categories led by spirits and beer. Our growth investment initiatives also contributed well. The Russian invasion of Ukraine stoked already high levels of cost inflation, primarily in energy and other products as manufacture requires heavy energy inputs. And under recovery of input costs resulted in adjusted EBITDA of 65 million in Glass Europe, some 5 million below our expectation in February. In response to these cost pressures, which we are mitigating, we implemented significant energy related price increases with effect from 1 April this year. We will continue to monitor energy and other input costs, and we will implement further actions as required to restore an appropriate level of profitability. We expect to achieve substantial progress in offsetting these costs increases in 2022, with full recovery in 2023. In Glass North America, first quarter revenue was $438 million, an increase of 3% in the same period last year, shipments for the quarter were broadly in line with the prior year. Cost inflation was also a feature of the North American market, though at least in regard to energy to a lesser extent than in Europe. Operating performance like expectations, resulting in elevated out of pattern freight costs during the quarter. These factors resulted in a reduction of adjusted EBITDA to 43 million, some 7 million behind our expectation when we updated the market in February on our fourth quarter results. To address the challenges in Glass North America, we have appointed a new Chief Executive and CFO for the business. And we're conducting a root and branch analysis of all aspects of the business, be it operational, commercial and organizational. Our objective is to bring about improved data driven decision-making and embed a culture of operational excellence across the business where we have real scale and market presence. This will reduce complexity and increase profitability. In North America, demand for glass is very strong but due to capacity and operating constraints, and existing contractual customer commitments, we are unable to accept significant and very profitable new business. This position will however change as the majority of existing customer contracts expired over the next few years and as the new executive team that we've installed drives improved operating performance. Turning to our growth investment program, our growth projects advanced well during the quarter. And despite some increased supply chain pressures, they remain largely on track. Costs have seen upward pressure but our teams are successfully managing these challenges. As outlined earlier today, AMP is ramping up production facilities in Europe and North America as well as progressing it's announced greenfield beverage cans facilities in Northern Ireland, Brazil and Arizona. In glass packaging, our targeted growth investments in Europe have performed very well. We have also decided to construct a greenfield glass packaging facility in Brazil backed by long-term customer contracts. This plant will be located on the same site in where AMP is constructing a new can manufacturing plant. Following the completion of this investment in Brazil, which is expected to be completed in less than two years. The Group will have a presence in both beverage cans and glass packaging manufacturing in each of Europe, North America and Brazil. And this is a unique position for Ardagh which underpins our strong relationship with our global customer base. Turning now to the acquisition of Consol. Last November, we agreed to acquire Consol which is the leading glass packaging producer in Africa. The Competition Commission in South Africa has now recommended approval of the transaction subject to conditions which are acceptable to us. The Competition Tribunal, which is the final decision maker there, held a hearing this morning as which no material issues were raised. And we expect the final clearance to be granted imminently with closing to follow very soon thereafter. Consol is a very attractive business and one that we're excited to have joined our Group. It operates invested glass production facilities in South Africa, as well as smaller facilities in Kenya, Nigeria and Ethiopia. It has a wide customer base, which is highly complementary to that of Ardagh. Glass consumption in Consol's markets is growing strongly driven by long-term trends including population growth, heightened sustainability awareness, rising income levels and shifts to premium one-way sustainable glass packaging. Console will next month, commission a second furnace at its Nigel facility outside Johannesburg. And we have committed to build a third furnace at this Nigel plant. Following completion of this third furnace, the Nigel facility will produce around 400,000 tons of glass each year. During the quarter, we continued to advance our sustainability agenda and pursuing the detailed roadmap which we have laid out. Recent geopolitical events in Europe have highlighted Europe's dependence on imported glass and have provided a renewed impetus to lower this reliance. We have decided that we will employ a new furnace technology in a scheduled rebuild of one of our existing furnaces in Germany next year. This will enable the traditional gas and electricity mix to be inverted from where it is now in favor of gas to being in favor of electricity. And over time, this will allow the switch to renewable electricity as a fuel source, thereby materially decarbonizing the glass production process. We are also investigating other technologies to decarbonize the glass production process. During the quarter, we continued to develop our STEM education program in the United States and elsewhere. Our U.S. program is now operational in some 320 public schools in the communities where we operate. I turn now to our liquidity and capital structure. Cash and available liquidity was 2.4 billion in the Group at the end of the quarter, including $1.7 billion in cash. 1.5 billion of this cash was at Ardagh Group, with some 600 million of this to be used in the acquisition of Consol. In the current environment, we see marriage and maintaining additional liquidity, enabling the Group to take advantage of attractive opportunities that may arise such as Consol. A significant proportion of the 770 million dividend declared last December was used to repay 485 million of our HoldCo debt. We do not envisage any further distributions to HoldCo in ‘22 or ’23, other than dividends of approximately 100 million required to fund the HoldCo interests coupon payments. So before I conclude and to recap and turn to the outlook for the remainder of '22, demands has remained strong in our markets, testament to the customer and end consumer appeal of sustainable glass and metal packaging. And despite supply chain and logistical challenges, our growth investment program, which as you know is mainly focused in AMP is largely progressing to plan. The acquisition of Consol in Africa as a new strategic growth platform to our business. Event since our last update have exacerbated already elevated input cost pressure as well as creating increased economic uncertainty. Demand for our customers products and for our packaging has demonstrated resilience in all environments, most recently during the pandemic. We anticipate that this will remain the case now. In terms of inflationary pressures, we are actively working to recover these increased costs through pricing actions and other measures. We expect to make good progress in the current year with the balance recovered in 2023. We now anticipate full year 2022 adjusted EBITDA of the order of $1.27 billion, compared with previous guidance of $1.35 billion and including Console from 1 May, full year 2022 EBITDA is expected to be on the order of 1.4 billion, of which 750 million comes from AMP. Year-end net leverage at our glass, including Consol, and the receipt of the dividend from AMP is expected to be around 5x adjusted EBITDA. So having made these initial remarks, we'll be very happy to take any questions which you may have. Thank you.
Operator: Thank you. And we'll take our first question from James Finnerty with Citi. Please go ahead.
James Finnerty: Good morning. Thank you. Just on the guidance, I didn't get a chance to run the math yet. But what's the implication for glass EBITDA based on the new guidance for full year '22?
Paul Coulson: Well, the guidance is down, as I said, to 1.27 billion from 1.35 billion. So it's on the order of 50 million in glass and 25 million in AMP.
James Finnerty: Great. Thank you. And then on hedging, just want to get an update there, in terms of how you are hedged going into the year and how your hedged currently, especially against net gas prices and energy prices?
Paul Coulson: Yes. In respect of gas, we were hedged about 70%, which is our normal policy going into the year, then we generally layer it during the year. Now obviously, following the war, and it started the war, gas prices jumped. And as I said earlier, we've taken steps to charge our customers for these hikes in glass in gas rather. And I'm talking about Glass Europe right. The situation now is that we have about 30% of our remaining gas for '22 unhedged but that's masked by the fact that in the event that it goes above certain levels, or current levels or levels that we've estimated now with customers, customers will be billed for that. But we do plan as we are each all the time layering in more hedging as we move through the year.
James Finnerty: Thank you. And then just a technical question, what's the RP capacity at ?
Paul Coulson: $1.3 billion.
James Finnerty: Thank you so much.
Operator: We'll take our next question from Ed Brucker with Barclays. Please go ahead.
Ed Brucker: Hey, thanks for taking the question. So you mentioned that you expected substantial progress in 2022 and then before covering 2023, which sounded like I guess the cost recovery is that just because you're expecting inflation to go down from here or stay the same, and you are able to pass more prices through? Just wanted to get better since what you're saying there?
Paul Coulson: Well, no, I don't expect inflation to go down far from us. But what I'm saying is that, there may well be to the extent that we don't recover costs and there's many costs here much more than just energy, you've got other input costs, like soda ash, like , like packaging materials, et cetera. Many, many other things where there's a very severe inflation as well. And to the extent that these aren't recovered from customers through the additional measures we've taken this year, our pricing would be rebased to reflect these costs and recover them next year. That's all I was saying.
Ed Brucker: Got it. And then, I think margins, especially in Europe are probably a bit more of a mess than I had expected. Here, and maybe a bit more than competitors, too. I just want to get a sense for the reason behind that. And are you able to give a breakdown or even a rank in order of how energy and logistics and then raw materials affect the results and maybe especially in Europe?
Paul Coulson: Well, I mean, in Europe the reduction is about $5 million. And it's made, it's largely energy or energy related matters. There are other things like logistics, like other inflation as well. But by and large, it's operating overheads being a little higher as well than were planned. But the main elements in it are energy and other products, which are heavy users of energy. So I mean, it's a relatively small amount of difference to what our expectations were.
Ed Brucker: Got it. And then, you mentioned in last call, that you're looking to reduce leverage. And that could be a priority. I just wanted to get a sense for where you think that's going to come from. And you've already said you kind of want to simplify the cap structure, what would that look like and then what you're planning to do maybe with the ARD Fin pick notes that become callable here in November.
Paul Coulson: Well, I'm not sure I ever indicated we wanted to simplify the capital structure. And we have no plans to do anything with the ARD Fin toggle notes, when they become callable, later this year. Maybe what I have said today is that we will not be making any further distributions to HoldCo shareholders, which would mean also, as you know under that mechanism, half of any distributions that would be going to HoldCo shareholders would go to reduce HoldCo debt. But we're not planning to make any distributions to HoldCo to shareholders at all, in '22 and '23, except to cover the interest on the toggle notes. So our position is very clear on that.
Ed Brucker: Got it. Thank you.
Operator: And we'll take our next question from Roger Spitz with Bank of America. Please go ahead.
Roger Spitz: Thanks very much. I just want to make sure I heard a few of these things correctly. Can you say that Glass Europe, the volume was up 10% and the Glass North America the volume was stable? Did I hear that correctly?
Paul Coulson: Correct.
Roger Spitz: Good. And then, the full year EBITDA, I think you said $1.4 billion. Of course and bev went down by 25 million. I'm sorry, the EBITDA last quarter is close. I thought it was 135 low. So this is up 50, of course, Ardagh Metal Packaging was down 25. I think stuff down incorrectly?
Paul Coulson: Okay. Well, I can take you through that. You're quite right. The guidance in February was 135 of the Group for metal with 775 was in AMP and 575 was in glass, right, Glass Europe and Glass North America. We've taken down our guidance for 50 on the Glass the Europe and North America for the year. We've taken our guidance in AMP down by 25. So that takes you from 1350, down by 75. So the guidance we've given today, 1275. Now, if you then add Consol from 1 May, which and we expect to close Consol in the coming days. As I mentioned, I don't know, you heard me mentioned that they're going to Tribunal hearing today, which is the final arbiter thing. We expect clearance very imminently, and then we'll close it immediately. That add session takes it up to 1400 marked guidance. That's where the 1400 comes from. That includes contribution from Consol from the 1 May.
Roger Spitz: Perfect. And then, lastly, did you give any guidance on Ardagh Group SA for 2022 CapEx, cash action and working capital?
Paul Coulson: John?
John Sheehan: Yes. Hi, Roger. 2022 for the Group, taxes will be around the 80 million, 85 million mark. Interest will be in the high 300 millions mark, cash interest. And then, we got maintenance CapEx, which is, again, the high 300 million. And we will have some other spending on sustainability and projects like that as well. They could add to over the course of the year, so maybe another 60, 70 between that couple of other topics. But the pure maintenance side, it's kind of over 300 million.
Roger Spitz: Thank you very much.
Paul Coulson: Thank you.
Operator: And we will take our next question from . Please go ahead.
Unidentified Analyst: Hi, thanks for the opportunity to ask questions. I just want to follow up on that last one. So total glass CapEx maintenance and growth is what for '22 and '23?
JohnSheehan: Well, in 2022, Chris, total maintenance would be in the -- for the whole group, including AMP would be in the upper 300 millions.
Unidentified Analyst: So I’m just going to keep glass, so what's –
JohnSheehan: Highly 200 million that would be and then there will be some spending and things like sustainability separate to that, but the maintenance in the glass business would be upper 200 million. The growth investments this year, business growth, they'd be rounded to about 100 million. They're separate. They're in the business growth areas. And then, we haven't given anything yet in 2023. But as we said, the profile of the business goals investments is largely skewed towards the AMP business, there's more selected opportunities in glass.
Unidentified Analyst: And cash restructuring in the glass business?
JohnSheehan: Nothing major there. We have startup costs across the group, but they will be in AMP. So nothing major on the restructuring side in glass.
Unidentified Analyst: May I just, it's hard to break them all out. But it doesn't look like you're expecting much free cash flow from glass business in ’22, is that fair?
JohnSheehan: Well, there will be -- the dividend that we refer to coming in from AMP.
Unidentified Analyst: But absent that, it looks like , right?
JohnSheehan: There's a quite a lot of investment going on. And in the current year there is a headwind from input costs. But as we said, we've taken fairly aggressive action to recover that we make substantial progress on that this year, with the balance recouped next year, and demand is tight in all of our markets. And, as we said, in Europe, volumes up 10% in the quarter, that's not a sustainable level to be up that much year-on-year but very healthy. And it's a positive environment for the product.
Unidentified Analyst: And what's the operational issues in North America and the outlook for turning them around, timeframe. Because I mean, if I look at what we're down in Q1, and you're only guiding to 50 down for the year, seems pretty optimistic.
Paul Coulson: Most of the -- a lot of that 50 is in Europe, because of energy and energy related costs and things like that, Chris. But the issues in North America are operational at a small number of plants, but that small number of plants is dragging the productivity and the output down. Secondly, on the commercial side, we have to cycle our way out of some contracts, which are not as profitable as they should be which were entered into at a time when the market was not strong in terms of demand. It's quite the opposite now, there's not enough glass on this very strong demand. So we're in a position to change that. And I think it's a whole series of a mixture of commercial and operational thing, the positive side of it is that there are a number of steps that can be taken, which can have a material effect on the numbers going forward. And I certainly would be very disappointed if we'd start to see progress next year. Given that we can cycle out a lot of these contracts and given that we are taking the actions that are required to sort the thing out.
Unidentified Analyst: Okay. I mean, just looking at what we're down in Q1, I did my math, right, we're down 40 million or so when you're down 50 for the year that implies through this April 1 surcharge gets you up to comping positive. Is that the right way to read it?
Paul Coulson: Well, no, Europe will be down from -- Europe will be down from last year. Because the original guidance for Europe for the whole year was fairly flat on last year. And we're taking that down. So Europe will be down a little bit and will be down a fair amount and North America will be done. But I think to your earlier question, it's not right to extrapolate the numbers from Q1, not way again, the shortfall to expectation in Q1 in North America was $7 million.
Unidentified Analyst: Right. And then the final one is natural gas. I just want to make sure I understand all the scenarios. So if we go into a situation where gas is rationed, i.e., the amount of gas is being cut down, because Russia cuts it off. Is that a force majeure so that you cannot serve your clients and you don't have any costs? And then also, other competitors in the market have said that that could potentially be a force majeure event. Is that true or not?
Paul Coulson: I think, well, I mean, we obviously we haven't reached that situation where there's actually no gas, physical gas available, that hasn't arisen. So essentially, we've taken measures to increase prices to reflect these gas price increases that have taken place since particular since the war started. In terms of what would happen if the Russians cut off the gas. I imagine that would become a force majeure situation linked to the war. But we haven't taken formal advice on that to that extent at this stage. Obviously, we're hoping that that doesn't arise and that if there is rationing that we're left intact.
Unidentified Analyst: For Poland and Bulgaria, you don't have any significant exposure, I can't remember –
Paul Coulson: Probably have operations -- glass operations in Poland, and we have can operations in Poland, we don't have anything in Bulgaria.
Unidentified Analyst: Okay. So the recent thing on the payment in rubles for gas for Poland, you still think that that plant still thinks it's going to be able to get the gas from somewhere else.
Paul Coulson: That is our current expectation, obviously, these situations can change. But I'm not aware, as I said earlier, if any breakage in actual supply of commodities, such as gas and electricity, that hasn't arisen. If it does arise, going forward, we'll have to cross that bridge when it comes to us from whether we cease production or cease supply or letting people for the increased cost of the of the energy that's -- that we'll have to wait and see.
Unidentified Analyst: Okay. Thank you. Appreciate the opportunity to ask questions.
Paul Coulson: Thanks, Chris.
Operator: We will take our next question from Jay Myers with Goldman Sachs. Please go ahead.
Jay Myers: Good morning. Thank you very much for the opportunity to ask some questions here. I guess a follow up on the questions from the prior speaker, can you help us kind of think about the cadence of the cost recovery in Europe as we go through the year kind of on the back of your guidance? I mean, you could talk about a price increase going in on April 1, like how should we think about the kind of price cost recovery in 2Q? And then, with your comments about full recovery by 2023? Are in 2023, should we think about improvement in that kind of lag in the second half of the year? Or do you kind of think the pricing cadence you have now can get you positive in the second half?
Paul Coulson: John?
John Sheehan: Yes. Hi, Jay. As you said, we put the increases in place in April. And we're pursuing those, there's a lot of moving parts. So those increases across the board and things like freight in packaging, it's not just energy. So our view really is best on the full year basis, is that taken account of those increases continued headwinds that certainly at current levels on the open position that we have, they will be there for a while. Yes, that nets out to for the full year, the 50 million reduction in glass overall. So it doesn't take a little bit of time, but there's a lot of puts and takes there.
Jay Myers: Understood. And then --
Paul Coulson: But I think Jay the plan would be to rebase things anyway, from the start of next year anyway, to restore to what we would regard as normal profitability. Okay. That's what we will be doing.
Jay Myers: Yes. Okay. Understood. And then, just some of the kind of cash items this year, so you mentioned Consol, that's going to be 600 million of cash for that acquisition. We didn't talk about Trivium, I'm curious if you have any kind of update on the sales process there. And then, roughly 300 million of cash coming in from AMP Bev. So, obviously have some kind of cash needs that we talked about operationally, but other than then kind of those operational cash needs, how should we think about your priorities for that liquidity coming into the business this year?
Paul Coulson: Well, in regards to Trivium process, nothing to add there. I mean, probably said the last one about the company had said is that the sales process underway, no further commentary at all. Secondly, in relation to cash inflows, our priority will be to deleverage.
Jay Myers: All right, understood. Thank you very much for the time and good luck this quarter.
Paul Coulson: Thank you.
Operator: It appears there are no additional questions at this time.
Paul Coulson: Operator, are there any other questions? No.
Operator: There are no additional questions at this time.
Paul Coulson: Okay. Well then, thank you everyone, for joining us on today's call and we will look forward to talking to you again in July. Thank you at the end of July. Thank you with our Q2 results Thank you very much indeed.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
