Ardagh Metal Packaging S.A. (AMBP) Earnings Call Transcript
June 8, 2022
Earnings Call Speaker Segments
Good afternoon. Welcome to Deutsche Bank's Global Materials Conference. We'll just continue on here with the presentations. Very happy to have Oliver Graham, CEO of Ardagh Metal Packaging as well as David Bourne, CFO. We'll be doing a fireside chat, so if anyone from the audience would like to ask a question, just feel free to raise your hand throughout. I'll also take a brief pause, see if anyone has a question. First, I think we'll start with some introductory remarks by Ollie here, and then we'll go into the Q&A.
Super. Thanks. Thanks, Kyle. Yes, so just to frame up the conversation and then we can absolutely go to your questions. I'd probably make three broad observations about where we are as AMP. I think the first is that the overall growth story for the beverage can remains very much intact. The beverage can has always been a growth product. We always had 2% to 3% growth globally. That was off the back of the efficiency of the can, the effectiveness of the can in terms of packaging, high-quality beverages, the capital efficiency as well. And for brand owners, it's great decoration and communication aspect. So it's always been gaining share in the pack mix and always growing globally with liquid growth. And then it was turbocharged, I think, by two trends: innovation, going more and more into the cans. So we saw the -- in the U.S., 75% of all beverage innovation going into cans, up from about 30% in 2013 to that number in 2020. And then the sustainability trend, which, linked with innovation because a lot of the innovation was aimed at younger consumers who cared about sustainability, and the can is a permanent material, truly circular. And particularly when plastic came under pressure and the can became an even more attractive package for our customers. So I think those trends are still, as I say, fully intact. We will face into, no doubt, some economic headwinds. We already are, and we'll probably face some more, but I don't think that changes any of those long-term trends behind the can, and that's why it's such a powerful secular story. I think the second thing to say is, though, that we will face to some economic headwinds. I think the can is very resilient to times of economic pressure. The grocery shop is the last thing to get cut back, and the can is a core part of the grocery shop. But we're not immune to those sorts of pressures. You will, I think, see some degree of consumer spending reduction, we'd anticipate towards the end of the year, particularly in Europe with the way energy prices are so high. And the also is this economic environment and supply chain stressed environment has led to some requirements for us to have out-of-patent discussions with customers in Europe around energy costs and also has led to some disruption in supply chains that affected our customers' ability to meet their own normal demand. So in terms of ocean freight for products that are getting shipped across from the Europe to North America, we've seen a reduction in some of those products. We've seen them struggling sometimes to get trucks to get out of the building facilities. So there's no question, we are in a more disruptive time than we anticipated a year ago when we came to market. But as I say, I think the beauty of the beverage cans is it's very resilient to those kind of times, and we expect to trade through those in a good way. And so then, I think the third overarching message is that the overall AMP story that we came to market with is also fully intact. We still plan to double profitability off the back of a very highly accretive capital investment program. We're well on track on that investment program. So we've got a lot of capacity coming up this year. And if I take the overall delays and issues in the supply chain, I think we've done an amazing job actually of bringing that up at the time we have and at the speed that we're doing. And we did announce, with the capital raise that we did last week that we'd re-phase some capital, but we are not changing the footprint that we're building, too. And so that is really more about a quarter or two of delay and just phasing also naturally with some of the supply chain issues and some of the demand bumps that we had, particularly in Brazil. So as I said, I think those would be my three big messages. The growth of the can is a long-term trend, not a short-term trend. There probably will be a few bumps given the extremity of some of the economic conditions, but our overall growth plan and capital spending is well on track.
Sounds good. I really appreciate those remarks. I'll touch on the last one, and we'll go through all of them, but the last one on the capital allocation, the announcement you guys made last week, pretty timely.
I guess just to start, maybe why the update? Why the change? What was the rationale that drove you to make that?
Yes, I'll comment, and I'll let David join. So I think there were two factors in the story. One is the war obviously changed very significantly the financing markets and the context for the capital allocation decisions. And then secondly, we discovered through investor feedback that some parts of it were valued more than others. We obviously wanted to show our commitment to the share price. And so that's why we made the adjustments we made, the reduction in the press, the reduction in the dividend just to the simple $0.10 that people understood better. And then we were fortunate and we did it well to get out in the market and get the 6% on the bond. So I think all in all, very well received. We've had very positive feedback this week out in New York for that, and we can now put that behind us and focus on the delivery. I don't know, David, if you want to...
I'd just say that there were a number of pieces to that jigsaw puzzle that it was appropriate, but they all came together at the same time. And it allowed us really to get out almost in front of the market, particularly when the senior secured [indiscernible] fixed market opened up fractionally for us and gave us a window in which to -- in which to raise what we think is a good piece of paper there alongside the piece of paper we have on the press, which we think turbocharges, takes us through quite nicely and well into '23 in terms of our BGI program. And I think kind of it's the right blend for us in terms of mixing the commitment to that investment growth where we were getting to an appropriate leverage for the business. We've given that 3.75 to 4x forward guidance. We'd expect to be below that for FY '22, but that's our midterm guidance range. And I think that gives a good framework for investors to think about into the long term while balancing that we think with our operating cash flows and the confidence we have in those, that we can manage a growth program and an appropriate yield and return back to investors at the same time.
Yes. And then sorry to get too detailed on it, but since it is a relatively new announcement, it's the first time kind of addressing it. The dividend, it's still a pretty hefty dividend yield around 6%, $0.10 quarterly. Do you still plan on having a progressive? Or do you think that's the right dividend level for you currently?
We've said that we're more at that level for the moment, but we've not ruled out any changes in the future. But for the moment, we're with the $0.10 per quarter.
Yes. And then the share repurchase authorization, understanding that one of the issues you have is the free float. So it's always kind of, I think, initially why you had a higher dividend. But now you've introduced the authorization. Is there a time line of when -- or do you expect to execute on all of that authorization that you're willing to share?
I think it will depend on a number of factors, including how the share price trades into the future. Clearly, with where the share price is at the moment, there was value in that share buyback program for AMP as well as externally. We have the flexibility through that authorization to execute and are choosing as a management team between now and through the end of '23. And we'll have some intent to do some of that in the short term. But yes, we've got full flexibility on how we play that out over the next few quarters of this year and into '23.
All right. And then on the CapEx, the growth capital going to $700 million versus the $1 billion target for this year, how much of that was driven by the increased use of leasing versus just delaying of projects given supply chain or kind of market conditions?
Just north of $100 million. So between 1/3 and 1/2 was leasing, and the rest was phasing, taking account of some of the demand weakness in Brazil. So it allowed us -- we were able, actually with some relatively natural delays to the project, to just phase those into '23 and some cash into '24. We also rephased the new project in Arizona into the middle of '24 and with capacity ramp there and then some cash management in Europe on the other side.
Got it. So just rephasing your projects, but longer term, no change to the overall total growth capital or growth plan, right?
So the overall footprint has remained intact, and we'll pick our moment to take the capacity to the final points.
Sounds good. I want to go a little bit around the world to talk about what you're seeing in the market conditions and all the major regions that you play in. I guess starting with Brazil, because you talked about the rephasing there. What do you think is the reasoning for the weakness kind of more recently? How would you characterize operating rates currently in that region as well?
So I think the weakness was a combination of some weather-related factors in the summer, some COVID-related shutdowns and then some economic pressures. You have the devaluation of the reais, no support for the consumer from government through COVID. And the metal package is becoming a bit more expensive because a lot of our costs are dollar denominated. So the valuation increased the price of metal cans. LME was also increasing. So I think all of that added up to an economic squeeze, which we saw from about Q3 onwards and through Q1. I think now we're seeing a significant recovery. So I think that clearly, something has turned the corner consumer-wise because we're off season. So that's good news. And then we'd anticipate even more recovery October to February when we go into the summer season. We've got the election done. We've got the World Cup in the summer season, very unusual and always a very positive thing for Brazil, the World Cup. Hopefully, we have a proper Carnival season outdoors and active. And hopefully, the weather is better. So I think that our customers see could be a very, very good somewhere in Brazil at the end of this year. We're also seeing very strong demand in our numbers. We are gaining a bit of share in Brazil. We always signaled that in the SPAC process that we were anticipating some share gain from the diversification of our customers' supply mix and also our -- and therefore, our diversification, we were quite concentrated customer-wise coming in post the acquisition by Ardagh. So we strategically we're looking to do that. And on the back of some good customer relations, we will gain a bit of share as well.
Sounds good. I have to push on able to quantify or better phrase recovery, right? Because 1Q was down quite substantially. So what is -- can you provide a little bit more context on what recovery means for what you're seeing right now?
Yes. I think we'll be certainly double-digit growth remainder of the rest of the year, I think is what we're seeing in the numbers. So for us, I think it looks like being strong.
Right. Sounds good. And then in Brazil, there's been this structural shift from returnable glass or returnable packaging to one-way packaging. And the can down there is much more predominantly in beer. How much more opportunity is there longer term from the structural shift? Any way to kind of phrase where you think how much of it's already played out?
So I think we're up to around 70% one way, so I think there's still good runway above that, and we expect that trend to continue and be very positive again. We also have a bunch of categories, not really in can, CSD, very low can penetration. We've got all the new category growth that we see in Europe and North America that's not yet coming to Brazil that will also, I think, naturally go into cans. So I think we see lots of avenues for growth there. I think the can is very well accepted with the consumer. There's relatively less one-way packaging from other substrates. So I think Brazil will continue to be a very good market for cans.
Got it. Moving to the U.S. now. You're in the process of some pretty sizable capacity expansion. They're all a little bit more derisked with the brownfield or adding just lines to existing plants. So I guess how is the ramp-up gone at Huron facility there as well as Winston-Salem?
Yes, really well, actually. So I mean, Winston-Salem, obviously, we said it was delayed. We had some COVID-related issues with a supplier subcontracting out to because of COVID, because of staffing issues, and that led to some low-quality work that had to be redone. Once that was through, which into Q1, Winston has ramped ahead of schedule really well. And Huron is starting up this month, again, it's a short delay, but from what we can see, it's going to run very well against its ramp-up curve. So again, I'd emphasize, I think in this environment, I think we've done a fantastic job. The teams have done an amazing job to bring those up in the way they're bringing them up.
Yes. Is it -- sorry, to clarify, is the Huron the first line coming up this month or...
Yes. Yes, we've had the ends running since Q3, and now we get the first can line this month.
Okay. And do you have a view on the industry overall from a supply-demand balance when we think you will be more in balance and not have to rely on the import situation?
I think back into next year and into '24, I'd expect the industry to balance up. I mean we all were running with unsustainably low levels of inventory. As you say, there were still significant imports. We still had a couple of billion, 2 billion, 3 billion, I think it is year-to-date. So -- and we know some big customers are still bringing in some cans. And the capacity is -- everybody is facing some challenges, bringing up capacity. So I think some of that capacity is coming through a bit slower than people expected. So I think it will be next year when we really get to sustainable operating rates and a more balanced overall network.
That sounds good. A lot of investors are focused on the impact of demand from the inflationary environment and pricing that we're in. So from a price elasticity standpoint, and this is relevant to all the regions you play in, but with some of the new products going on in the U.S., such as ready-to-drink cocktails or craft beer, which can be higher pricing points. Are you seeing any impact to demand on those products just given pricing and price elasticity?
So less on, I think things like ready-to-drink cocktails, I think that category is new. Innovative people are trialing it. And I think that's going well. I think we might be seeing, but it's very early days, a little bit of elasticity in the core CSD type products. We see it in the scanner data. We just -- there's a slight hint of it in our May numbers. Because what we saw in the autumn was that the customers were putting price through and volumes are still growing very healthily. But if you see in the scanner data, you do see now a little bit of interaction between price and volume. Now again, we're shielded from that to some extent because this whole import story is still playing through, the replacement of imported cans by domestic cans. So it's not a clean read through from scanner data to beverage can manufacturer volume. There's a few other factors in there. But I think there might be some elasticity coming. Again in the second half of the year, I think it's possible the consumer will have some pressures on them, North America and perhaps more particularly in Europe with the energy costs that we're facing into.
I was going to ask if it's more prominent in one region than the other, but...
Probably enough. I think we've not seen it so obviously in demand in Europe, and we are still a little cushioned, though. I think there's a lot of cushioning from the COVID furlough type payments or government support. So I think that savings rates are still running high still, which probably is impacting that. But we're certainly concerned. I think like everybody is about the impact of these energy costs on the European consumer at the back end of the year when we go into the winter, because they seem to be staying high and that is a significant squeeze on cost of living. Now again, as I said at the beginning, the beverage can is very resilient to these environments. The grocery shop is the last thing to go. The everyday treats are the last thing to go. But we can't say we're immune to it completely.
Right. Yes. On Europe, now moving there. You guys have kind of implemented a new, I want to call it pricing crew, but you're trying to recoup higher energy costs, you and your customers, to recoup that. How is that dialogue been with your customers? What kind of benefits would you expect from it? Or the feedback that you've received from customers on it?
Yes. It's been very constructive. I think it's so obviously an unbelievably extreme event and out of any normal event and a war on Mainland Europe clearly first in 70 years. So I think there is an understanding that it's a reasonable conversation to come and say this spike is so extreme and so unusual that we can have a conversation on how we share that and deal with that, particularly as we can see that prices are being moved at retail and the consumer is eventually bearing some of that. So I think it's reasonable, it's not held in some part of the supply chain. Obviously, we all do our bit to mitigate it and to offset. But I think it's been a very constructive discussion because it is such an obviously extreme event.
Some of your peers are working to maybe have more tied through the pass-through mechanism in terms of cost. Is that something that you believe is achievable over in Europe? Is that an opportunity for you? Or is it a matter of when some of your larger contracts come up for renewal?
So we're very heavily contracted, and that was part of what happened with the deal -- with the SPAC deal. We were very proactive about getting ourselves contracted. So we're more than -- we're essentially 90% contracted through the end of 2024. And so our conversation is more about maintaining the intent of those contracts and that we both entered into those contracts on that basis, whereas I think some of our peers are probably a bit less contracted. This normally can happen. So they're more doing it through a recontracting cycle. So I think we're all in different positions, and we all need to work out our own customer conversations. So we're doing it the way we're doing it, partly because of our overall contractual position.
Are you willing to say when your larger contracts roll off, time line?
Well, yes, 2025, 2026, some are even now out into the -- well into the second part of the decade.
Yes. Got it. I guess just to push a little bit on that. We saw the benefits of consolidation or the acquisition 4, 5 years ago in the U.S., and the industry did a better job of having more pass-through mechanisms. I understand the rationale of it's somewhat determined when your contracts are up for renewal, but do you think that is an opportunity for the industry in Europe? Or are you not as bullish than you think?
Yes, definitely. I mean, I think there's a very reasonable discussion going on are recontracting about these extraordinary cost situations. Now some of this will be covered very naturally by PPI losses, right? I mean, PPI, there's some very high numbers coming now on PPI. So we could be seeing good recovery through those kind of typical clauses. And then I think where there are extreme events like energy, I think there's a very reasonable discussion for everybody about how do those get captured in pass-through, which historically, we've not had to do, right? And so no, I'd be very positive about that. I think this is a time when it's a very reasonable discussion about how these costs get passed through.
What about from an overall just like-for-like returns basis on the can, the margin profile in Europe versus some of the other regions, is there opportunity to kind of get higher turns, get higher pricing on a like-for-like basis, not necessarily just pass-through mechanisms?
So historically, European margins were better. And you saw that in -- you can see that in all the public data, right, that historically, European margins were good. They were healthy. They encouraged reinvestment, which is what we were looking for, so we were always a growth market in Europe. 2% to 3% was a typical number towards the back end of the decade. The 2018, 2019, we hit more like 4% to 6%. So margins were always pretty healthy, both on standard 33-centiliter cans and specialty cans. And then I think the headwind is now this situation, clearly, in terms of both the energy, some degree of imported metal. And so I think the industry will address that in this phase and probably hold margins more than dramatically change them from historical levels.
Got it. I want to take a pause to see if anyone from the audience has a question.
Any thoughts on meeting guidance for the year by the current environment?
So I think there were two things relative to the guidance to the Q2. First is the FX rate. So FX is still running below the -- I think it was 1 12. Was I...
Yes, 1 12 was the Q1 average that we were basing the 7 50 off.
Yes. And then we also mentioned, I think, when we rephased the capital that there was a very modest impact on EBITDA, '22 and '23, very modest, so single-digit sort of numbers. But we're not updating guidance at this point because we need to wash up all the different elements, so we'll come back to that in July.
On still water, what's kind of the latest potential opportunity from conversion out of plastic into still water? Do you think it's more of an opportunity in Europe versus North America, just overall that's there?
I think it's an opportunity in both regions. I think that it will be led by challenger brands because I think it's hard for the incumbents. And most of the big incumbents are not really in cans. So it's a new product to them. It's not like the CSD players who can easily switch. They understand both. They've got filling capability for both. So I think for the incumbents, it's hard. They've got these big assets invested in PET, and they're getting used to the can. So we're seeing some products coming on then. So it's more of the challenges, the liquid debts, people like that, that are going after it. And I think they will absolutely grow and take their share. I think into a recession is a hard time to go after it, right, because there'll probably be a trend towards very large bottles of therefore, cheaper-per-unit product. But I think assuming either that doesn't -- there isn't a recession or we come out of it, and then I think there will be a segment of the still water market that switched into cans for sure. And then that will depend a little bit on some regulatory issues as well, whether it's an even bigger opportunity. We haven't bet on it very significantly through 2025 because I think we wanted to see how that played out. But I think we're still hopeful and confident that, that will be a portion of can demand for the second half of the decade.
Is the dialogue with some of the bigger players in the water market, is that increasing? And then is it a matter of -- you talked about the assets. Is it just a matter of those billion assets become interpretable to where they need to replace them and choosing can-filling line versus just historically a PET?
I think there's some of that in there, which is at the replacement point, it's much easier than cannibalizing the existing. I don't think the tempo has changed that much on it. I think the they're looking at it. They're conscious of it, and they're evaluating and they're trialing products in that space, particularly sparkling products initially, but they're trialing products to see how it works for them.
Yes. And then a lot of focus has been on inventory levels. Just curious if you're able to have line of sight into where you think your customers' inventory levels are?
Yes. We don't have a very clean line of sight into that. I think the issue is mainly in our business was in South and North America, where that had got overfilled. And they seem to be working through. And so we certainly see with one player that, that issue is resolved. So I think we'll be out of that in the next fully in the next month or two, for sure.
Got it. In domestic can sheet, U.S. can sheet, there's been a couple of announcements in terms of aluminum can plants coming online. What kind of benefit is that for you to have localized supply given that you already have a pass-through mechanism for the cost? Does it just -- does it improve efficiency? Does it provide for more margins? Or is it just lowering the cost for your customer and lowering the emissions for your customer?
So I think the issue arose really around ocean freight and some of the overall capacity constraints in the market. Prior to that, actually, there was a reasonable balance between imported and domestic metal. But with that increase in transport costs, the imports became more expensive and certain alloys or types became harder to source as well. So domestic supply is certainly more secure, easier to manage is a better environmental footprint, which is becoming more important. I think it will stimulate recycling rates in the U.S. So there'll be a lot more pressure on getting used beverage cans back into the system in the U.S., which is, I think, a very positive thing for the can. There is the risk, if you look at the second part of the decade, to some sort of carbon border taxes and those kind of regimes. So I think domesticating localizing supply is positive on lots of dimensions, and we're very happy with those announcements.
Yes. And then on sustainability, what are you and others in the industry doing to increase the recycling rates here in the U.S. to be a little bit more comparable to what we're seeing over in Europe? Just any opportunities there?
Yes. So we work strongly in the Can Manufacturers Institute, the CMI. So we've been funding collection facilities to get better collection of cans within their facilities. So these are cans have actually been collected have got there, but get lost in the process. So we we're funding and educating those facilities on how to improve that collection. And then we're pushing on deposit schemes because I think that you do need an economic incentive in certain areas to make sure the consumer wants to bring it back. So we're fully supportive of a well-designed deposit scheme for cans, along with the rest of the industry.
Got it. Any other questions from the audience? Sounds good. Well, I think we'll end it there. I really appreciate the time. I really appreciate your participation.
Pleasure. Thanks, Kyle.
Thanks, Kyle.
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