Ardagh Metal Packaging Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 12 speakers on the call.

Operator

Welcome to the Arda Metal Packaging S. A. First Quarter 2023 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr.

Operator

Stephen Lines, Ardagh Metal Packaging Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and welcome, everybody. Thank you for joining today for Ardaan Metal Packaging's Q1 2023 earnings call, which follows the earlier publication of AMP's earnings release for the Q1. We have also added an earnings presentation on to our investor website for your reference. I'm joined today by Oliver Graham, AMP's Chief Executive Officer and David Boren, AMP's Chief Financial Officer. Before moving to your questions, we will first provide some introductory remarks around AMP's performance and outlook.

Speaker 1

AMP's earnings release and related materials For the Q1 can be found on AMP's website at www.ardaimetallpackaging.com. Remarks today will include certain forward looking statements and include use of non IFRS financial measures. Actual results could vary materially from such statements. Please review the detail of AMP's forward looking statements disclaimer and reconciliation of non IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham.

Speaker 2

Thanks, Stephen. We delivered a solid performance in the Q1 and met our market guidance due to disciplined cost stewardship, actions to improve manufacturing efficiency And stronger input cost recovery. In light of our resilient start to the year, we are reaffirming our full year guidance. We delivered global shipment growth of 3%, including 5% growth in North America and 2% in Europe And adjusted EBITDA of $130,000,000 in line with our guidance. Our adjusted EBITDA result represented an 8% decline on a constant currency basis versus by sustained retail price inflation, but we are encouraged by the early signs of a pickup in promotional activity in North America, Especially in non alcoholic beverages and a broader moderating outlook for consumer pricing supported by an easing of input cost inflation.

Speaker 2

Input cost recovery in Europe through the annual reset in our PPI mechanisms and a more effective pass through of direct energy costs And good volume growth in North America drove an adjusted EBITDA performance in both regions that was ahead of expectation and offset a softer performance in Brazil, Where industry demand is slowly recovering. We continue to manage our capacity in a disciplined manner through curtailment actions that moderate our footprint, Ahead of growth in demand and that position the business for a period of investment free growth. Adjusted EBITDA is anticipated to accelerate through the year due to inflation recovery and volume improvement. Our expectation for industry growth in 2023, supported by positive secular tailwinds, It's for a low single digit percentage growth in the Americas and a low to mid single digit percentage growth in Europe. We continue to project significantly increased adjusted EBITDA and positive adjusted free cash flow in 2023 with further improvement into next year, And we are committed to our quarterly $0.10 dividend.

Speaker 2

Turning to our sustainability agenda. We were awarded a 1st time leadership A rating from CDP on supplier engagement, which followed a 1st time A- rating for water management And a B rating for climate change disclosed in our last update. We are proud to have committed to the International Aluminum Institute's Aluminum Forward 2,030 initiative, Bringing together global leaders across the aluminum supply chain with the aim to accelerate progress towards net 0 emissions. As part of the Mission Possible partnership, we have endorsed the industry backed net zero transition strategy, and we continue to progress our sustainability targets And are delighted to have just signed a PPA agreement for solar electricity in Germany, which will provide approximately 20% of our electricity needs. Turning our attention to A&P's 1st quarter results.

Speaker 2

We recorded revenue of $1,100,000,000 which represented growth of 2% on a constant currency basis, basis, predominantly reflecting higher volumes. Adjusted EBITDA of $130,000,000 was down 8% on the prior year on a constant currency basis. The contribution from higher volumes and stronger input cost recovery was offset by the under absorption of higher operating costs and the expected impact relating to the timing of recognition of inflation recovery in EBITDA. Total beverage can shipments in the quarter were 3% higher than the prior year With 5% growth in North America and 2% growth in Europe, offsetting a 1% decline in Brazil. Looking at A&P's results by segment and at constant exchange rates.

Speaker 2

Revenue in the Americas in the Q1 increased by 1% $645,000,000 mainly due to higher volumes, partly offset by the pass through of lower metal and freight costs. In North America, shipments grew by 5% for the quarter. Demand remains restrained by sustained higher retail pricing, With greater resilience experience in non alcoholic categories, which represent the majority of our North American business. Growth across other categories, including carbonated soft drinks, energy and wellness and in spirit based ready to drinks. We have completed our planned capacity additions in North America with the 3rd line in Huron, Ohio now ramping up along with the other two lines added In the final quarter of last year, our investments in Huron, Ohio, Winston Salem, North Carolina and Olive Branch, Mississippi We're encouraged by the early signs of an improvement in demand with a small increase in promotional activity, Which we expect to strengthen over the coming months through the peak summer season.

Speaker 2

We will show continued discipline with our capacity planning in the interim. In Brazil, 1st quarter shipments declined modestly, underperforming the high single digit growth in the market due to customer mix effect The market recorded a high single digit growth rate against the weak 2022 comparator And was softer than anticipated as adverse weather and more challenging macroeconomic backdrop pressured consumption. We are forecasting volume to grow at a high single digit percentage in 2023 in Brazil, which is underpinned by the recent start up of new capacity in Alagonas, Customer mix and the market recovery strengthening into the second half of the year, supported by an easing of customers' input cost pressures. 1 of our customers in Brazil entered a judicial reorganization process in the period. Our exposure to the customer was at a historic low position.

Speaker 2

And due to our security coverage, we do not foresee a material credit risk at this point in time. We remain in close dialogue with the customer We continue to trade through the process. We are very well diversified in our customer base in Brazil, and we do not expect that the reorganization process will negatively impact on overall beer consumption in the country. Adjusted EBITDA in the Americas decreased by 9% to $81,000,000 in the Q1. The contribution from volumemix was more than offset by an expected fixed cost absorption drag and unfavorable input cost Recovery relative to some overrecovery in the prior year period.

Speaker 2

Overall, the decline on the year reflected softer conditions in the Brazil market With our performance in North America ahead of the prior year and our expectations due to good volume growth and improved manufacturing efficiency. In 2023, we continue to expect strong shipment growth in the Americas in the order of high single digit percentage, Supported by improving market conditions and the ramp up of our investments. Fixed cost under absorption, net of our mitigating curtailment actions remains a headwind to our performance. In line with our previous guidance, we anticipate an uplift in EBITDA generation into the second half of the year As demand begins to normalize in both markets. In Europe, 1st quarter revenue increased by 3% on a constant currency basis $486,000,000 compared with the same period in 2022, mainly due to more favorable input cost recovery.

Speaker 2

Shipments for the quarter grew by 2% on the prior year. Consumer demand remained resilient in the quarter, led by carbonated soft drinks. The beer market saw an overall softer performance in the off trade, but with notable exceptions in the economy segment at both brands and own label. 1st quarter adjusted EBITDA in Europe fell by 8% on a constant currency basis to $49,000,000 The contribution from higher shipments and input cost recovery was offset by higher overhead costs and the known impact from the timing of inflation recovery recognition In EBITDA, performance was, however, ahead of expectations, reflecting our overall strong input cost recovery. For 2023, we continue to expect shipment growth in the order of a low single digit percentage with a more significant increase in adjusted The European Energy market continues to prove its resilience, supported by public policy actions.

Speaker 2

We are fully hedged for the current year and have significantly progressed our energy purchases for future years as prices have fallen. In the Q2, we will complete the addition of further capacity in our La Ciotat plant in Southern France, And our intention remains to close one of the legacy steel lines in Weisenthal, Germany during the year. This concludes the brownfield investments under our initial growth Investment Program. I'll now briefly hand over to David to talk through our financial position before finishing with some concluding remarks.

Speaker 3

Thanks, Oli, and hello, everyone. Moving now to our financial position. We ended the quarter with a liquidity of approximately $500,000,000 Cash outflow in the period beat our expectation, but reflected the usual seasonality in working capital, With a working capital outflow in the quarter of $346,000,000 We will continue to focus on working capital efficiencies And our guidance for full year working capital benefit of approximately $100,000,000 remains unchanged. In the quarter, A and P incurred additional growth CapEx of $90,000,000 and maintenance CapEx of 36,000,000 As previously indicated, our revised growth investment plans are well advanced and cash outflows comprise the finishing of projects Already underway. Our expectation of the current year is unchanged, Which includes growth investment of just under $400,000,000 with cash flow element under 300,000,000 Net leverage at the end of the quarter, up 5.8 times LTM adjusted EBITDA, Was modestly better than our expectation and was despite a strengthening in the euro dollar rate into the end of the quarter.

Speaker 3

As a reminder, currency effects are broadly neutral from a leverage perspective in the medium term. Our bonds have been issued on fixed rate terms and non mature before 2027. As mentioned, our growth investment plan is well advanced, Which strongly supports earnings and cash flow growth, lowering net leverage back to 2022 levels by the end of the year Our quarterly ordinary dividend of $0.10 per share to be paid later in June, in line with our guidance and supported by our improving cash generation outlook. Our capital allocation strategy will continue to prioritize dividend sustainability And deleveraging in the near and medium term. With that, I'll hand back to Oli.

Speaker 2

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

Speaker 2

Our actions taken on cost recovery and our well advanced investment program will drive adjusted EBITDA growth and significantly improved Adjusted free cash flow generation in 2023 and beyond. This in turn supports our dividend policy and balance sheet deleveraging. We reaffirm our guidance for 2023, which assumes global shipment growth of a mid to high single digit percentage and adjusted EBITDA growth in the order of 10% Weighted to the second half due to more favorable prior year comparisons and improving volumes. In terms of guidance for the Q2, adjusted EBITDA Is anticipated to be in the order of $170,000,000 which compares with the prior year adjusted EBITDA of $180,000,000 on a constant currency basis. Having made these opening remarks, we'll now proceed to take any questions that you may have.

Operator

Thank We will take our first question from Anthony Pettinari from Citi. Please go ahead.

Speaker 4

Good morning. Hi, Andrew. Oliver, hi. The full year guidance, I think implies a pretty Strong second half earnings inflection. And I'm just wondering if you can speak to that.

Speaker 4

And is that driven primarily by Kind of volume recovery or maybe cost? And then if there's any sort of trigger date for Contract resets for PPI or any kind of mechanism like that, that we should keep in mind as we kind of think about the

Speaker 2

Sure. Yes. Hi, Anthony. So look, I think there's a couple of things in the full year guide. There is some acceleration in volume And I see it in our guidance in the second half, and we can talk more about the markets and why we've got that But then there is also an acceleration of our inflation recovery.

Speaker 2

I referred to it in the remarks, but there's some drag in Q1 From the timing of the recognition of those PPI mechanisms into EBITDA and that drag is gone after Q1, so we also get some enhanced

Speaker 4

Okay. Okay. That's helpful. And then, and I guess, I'll talk about the regional trends maybe in some of the other questions. But just Switching to the dividend, I think you referenced the sustainability of the dividend.

Speaker 4

Just wondering if you could kind of walk us through Kind of the puts and takes on cash and maybe cash step up next year and the sustainability of the dividend trading at a double digit yield currently.

Speaker 2

Yes. I'll give an overview and then I'll let David cover anything further. But obviously, the main Thing that's going on for our business at the moment is that the capital expenditure we have this year is just the wrap up of the projects that we've essentially more or less Completely finished. So we have some payments this year. So the cash CapEx, I think, of the order of $300,000,000 some leasing activity on top of that.

Speaker 2

And therefore, there's a very meaningful step down into 2024. We haven't guided on it, but I think that some of the market numbers we've seen Are in the right order. So that big step down is what then allows us to grow, as we say, investment free into our capacity, And that gets us into a very sustainable position for funding the dividend. I don't know, David, if you want to add anything to that. No, I

Speaker 3

think that's right. I think we'll be adjusted free cash flow For this year, you can assume some EBITDA growth into next year and then that BGI drop and say, you put those Three components together, you're at or very close to covering the dividend

Speaker 4

Okay. That's very helpful. I'll turn it over. Thanks, Anssi.

Operator

We will take our next question from George Staphos from Bank of America. Please go ahead.

Speaker 5

Hi, everyone. Good morning. Good afternoon. Thanks for the details. Maybe just because Anthony set it up, I'll cover the dividend.

Speaker 5

I was going to hit it later. But taking it a different perspective, right, the market is putting a yield On the dividend of around 11%, which suggests investors put a high risk factor On that dividend, so if you agree with that premise and the numbers are the numbers, why have a dividend That's that high and at that level relative to your equity and relative to your cash flow now?

Speaker 2

Hi, George. Yes. Look, I think we signaled along that the dividend is demonstrating the cash generative nature of the business. And as we Pivot from a strong investment period into a period where we're running to fill the capacity and drive cash generation, we think the dividend becomes completely sustainable and is a very good fit for our proposition. So I think we're committed to it.

Speaker 2

We see as we drop off the capital expenditure Into the back half of this year and into next year, but it fits very well with our proposition.

Speaker 5

Yes. And I'll take that at surface level and that's great. I just the point I'd make is the market is putting a very high return on that. So in theory, you might get A lower cost on other cash utilization relative to the dividend with the markets putting 11% yield on. But in any event, Perhaps we want to solve that on this call, but that's the only thing I'd point out there.

Speaker 5

On the promotional activity, What gives you the confidence that and you mentioned I think in non alcoholic that you're starting to see some activity and some improvement, but Why should we expect that that's going to continue going forward? What have your customers told you specifically in terms of why you think Promotional activity is going to pick up, particularly in non ALK over the rest of the year.

Speaker 2

No, absolutely. So look, I think on this promotional question, there's a couple of fundamentals that we should touch on and then we should talk about the timing of it returning. But The fundamentals are that these are very promotional categories. They're very elastic categories and demand does expand with promotional and with price. So They've always been very promotional and there's no reason I think to believe that that won't reassert itself at some point.

Speaker 2

We've seen a very unusual period Where prices rising and volumes are dropping less than historically, but we're clearly reaching the limits of that now. So I think that there's no reason to believe, although our customers are clearly using more advanced analytics to target promotions and they clearly We'll have learned something from the last 12 months. There's no reason to believe we don't revert to a more normal promotional activity for these categories. And then the second fundamental is that inflation is moderating and so you'd expect to see overall average pricing moderating relative to wage growth and Other factors. And then in terms of why we're confident in timing through the rest of the year, I think that we've had signals from customers that they're looking into Additional promotions for Q2 and beyond.

Speaker 2

I think that they've got some firepower, particularly as the LME comes off, they can actually do some Promotional activity without actually damaging margin. As I say, I think they have reached the limit of sales growth Without driving some volume, I think the price lever is at that limit. And then finally, they're not just saying to us, right? They're saying it publicly. And I think the major CSD player In the last week or so, it's absolutely signaled that they want to both carry on hitting the higher end of the market, but definitely Hitting the lower end and the more economically challenged consumers because we don't they don't want to lose those consumers to their brand.

Speaker 2

So I think when you add it all together, it makes All sorts of sense that you'd see some increased promotional activity as we go through the year. And that's what we thought when we gave our full year guidance and our opinion on that hasn't changed.

Speaker 5

Thanks for that, Holly. My last one, I'll turn it over. So we have volumes are getting to pick up. You have accelerated Improvement in PPI recapture mechanisms, yet were down year on year And EBITDA 2Q versus 2Q last year. Can you give us a rough bridge, David, in terms of how we go from the roughly 180 The 170, 2Q versus 2Q?

Speaker 5

Thank you, guys.

Speaker 2

Yes, go ahead, Devin.

Speaker 3

Yes, sure. So effectively in Q2 last year, you had Brazil reopening, which was a volume coming in the off season from transitioning out of COVID, which gave a very unusual off season And that explains the entirety of the bridge. In fact, it's more than the minus 10, it's

Speaker 2

Thanks, George.

Operator

From Morgan Stanley, we will now go to Angel Castillo. Please go ahead.

Speaker 6

Hi, thanks for taking my question and good morning. Just wanted to maybe expand a little bit more on the customer dynamics. You mentioned the promotional activity. Could we talk a little bit about maybe the buying patterns, the destocking trends that you've seen? So maybe What are you hearing in terms of their level of inventories?

Speaker 6

And I think one of your peers talked about potential buying patterns in Europe where Customers are maybe delaying a little bit of buying, maybe estimate until we get a little bit closer into

Speaker 7

the summer season. So what

Speaker 6

are you seeing across the regions in terms of The buying patterns as well.

Speaker 2

Sure. Hi, Andrew. So, yes, let's go region by region. I think in Europe, we see that the consumer It's still resilient, but I but they're clearly under pressure. So energy costs have risen very significantly as a proportion of household income.

Speaker 2

And so I think what that means is a volatility in demand patterns customer by customer. So soft drinks definitely a bit stronger than beer. But even within beer, We have some very high performers, typically companies focused on the economy segment. So either branded economy segment or own label Performing extremely strongly. So I don't think you've got a single picture for the market.

Speaker 2

You've got different players performing differently. And therefore, you'll see in Our results and our peers' results, probably some different results linked to customer mix and which customers you're in by region. So as I say, we definitely have some strength in beer, but we also have some weakness at the higher end. And then we also just have some one off effects in our results. We've got some filling that moved to the Nordics where we don't have capacity.

Speaker 2

We've got some still water filling that's moved back to the U. S. So there's also some one off FX in Europe. So that's why we still think it's a low single to mid market this year. And I think it just will depend a lot on which customers and which segments you're in.

Speaker 2

If we turn to North America, there's clearly strength in the soft drink side, CSD and especially the energy space, which is very hot, still a lot of innovation in that space, exciting new companies. And we can see the beginnings of that coming across into the sports drink space. We believe that's a very strong Space for the can to grow share, currently very underpenetrated and lots of room for healthier options there as well. So I think North America, this 83% innovation number, is really playing through into the market, and we're seeing that in the results. Obviously, there's still softness In key areas, so seltzers for us, we had softness in particular with one customer there.

Speaker 2

We also had softness with a beer customer And that's linked to their overall market weakness. So I think that's where there is some softness. Again, clearly, with the events of the last few weeks, there's going to be very different outcomes The different players in the market depending which customer they've got on the beer side. So I think we'll again see some volatility in results across the can makers. And then we in North America, we had a couple of contract gains.

Speaker 2

Those are linked to when the market was very tight and customers were diversifying a bit. And we can see those in our results, which is why we think we're a little bit ahead of the market. The market we'd put at probably a low single digit for the quarter, Mainly on the back of the strength, but there's still growth in some of the newer players in the market. I think that the existing players in the market is probably around flat. And then South America, it did grow the market high single digits, but against a very weak comparator of Q1 'twenty two.

Speaker 2

So look, overall, it is soft. We definitely had some brighter spots with some customers recovering, but we also had some weaker spots, especially as we had a very Strong first half with a couple of customers last year, and so that's a tough comparator for us. And as David just mentioned, we've got a very tough Compared to coming in Q2 where post COVID, the market opened up very fast and very strong, and we don't see that happening this year. We see the growth coming much more In the second half, when the LME hedges roll off, some of the input other input cost inflation moderates and we'll see the big customers going back into retail Away from returnables and discounting much more. So that's how we see the 3 markets at the moment.

Speaker 6

That's very helpful. Thank you. And maybe just to clarify on a couple of those points, I think you said Europe was in religious to mid single digit. Think if I recall correctly, last quarter, the thought process was maybe industry does mid single digits and hard togg maybe is closer to low single digits. Is it fair to assume now that given what you're seeing, maybe there's a little bit of optimism that, RDAC can also kind of start to approach into the mid single digits?

Speaker 6

So just to

Speaker 2

clarify that, whether it's kind of No, I wouldn't say that. Yes, no, I wouldn't say that. I mean, we're 2% Q1 and we could tick up a little bit from there. But I think we still There are other categories and other customers where there's a bit more strength that we don't play in, particularly on the energy drink side. So I think we're still guiding to low in the market, low to mid.

Speaker 6

Got it. Okay. And then lastly, just I guess on the curtailments, What's that point should we kind of look out for in terms of when Cartagena might consider kind of restarting that or are we operating at a high level?

Speaker 2

Well, we said at the full year, I would curtailing over $1,000,000,000 in Europe this year and over $2,000,000,000 in North America. We continue to monitor that obviously on a month

Operator

We'll now move to Arun Viswanathan from RBC. Please go ahead.

Speaker 7

Great. Thanks for taking my question. I guess first question is on Europe. There's been a lot of inflation there over the last couple of years. Some of your peers have commented on restructuring their contracts to recover some of that through pricing.

Speaker 7

Is that part of your European outlook as well? And What's the update on progress if those initiatives have been part of your strategy? Thanks.

Speaker 2

Yes, sure. Hi, Aaron. So look, I think it's unchanged from the full year. So we completed all that activity last year In terms of getting to more direct energy pass through mechanisms with customers, particularly large customers, we hedged out all our risk For this year, last year and confirm with customers that they were comfortable with that position, which is higher than spot because of the unexpected drop in the energy market, but as I say, all of those activities were completed last year. And so the guide we gave at the full year, which is we are expecting Over recover on inflation over the course of the year relative to our cost inflation in 'twenty two into 'twenty three, that guide remains intact.

Speaker 2

We will have an over recovery this year, and that gets us probably 75%, 80% back to 2021 margin levels in Europe. And we're hoping to retain regain the rest into 2024.

Speaker 7

Okay. Thanks. And just so on that Note then, does your European business take a step down from here? And maybe you can just characterize what you're seeing in Europe From a demand perspective, we're seeing some crosscurrents, some categories are weaker, but And maybe related to the consumer, is that what you're seeing as well? Or maybe just comment overall on the outlook there?

Speaker 2

No. Our European business takes a step up from here because we lose the drag from the accounting treatment on Some of the inflation pass throughs. So the European business takes a step up from here. And yes, back to my previous comments, what I think you're seeing in Europe is a lot of volatility In demand across different players because they're operating in different parts of the market. And right now, you need to be operating in economy Or price competitive parts of the market or you need to be discounting into those parts of the market because the consumer is under pressure.

Speaker 2

So what we see is a lot of variation between Depending on their pricing strategies, we definitely see soft drinks a bit stronger than beer overall. We suspect that energy drinks is also a bit stronger, Again, we don't have the big share of that market. We have good share, but not the big share. And overall, we think the European market is pretty resilient on the can side, very strong

Speaker 7

And just a question on North America. You mentioned increasing promotional activity in nonalcoholics. Could you comment on that in the context of capacity? It appears that a couple of years ago when the market was really tight, pricing was achievable. Now potentially the market is a little bit more balanced.

Speaker 7

So if the beverage companies do increase their promotional activity, does that result in Maybe some give back of price or especially considering the deflation, how would you kind of characterize

Speaker 2

We're highly contracted and so are our major peers through the middle of the decade. So we're not seeing any significant price activity. There's a little bit at the margins on the spot market, the small volumes Typically, it's a smaller players, but we don't see anything significant. And If you look into the can size that are selling well at the moment, we don't see room for lots of movement there. So yes, nothing to report there.

Speaker 7

So if you put all that together, would you characterize if you can just help us understand the Why demand balance in each of these markets? So the U. S, again, we've gone through a period of capacity build out on an oversold market And there's been some rationalization. So are we balanced in the U. S?

Speaker 7

I guess, maybe if it's more helpful to talk by categories, That's fine. And then and you could do that. And then also similarly in Europe and Brazil, how would you characterize the supply and demand? Thanks.

Speaker 6

So I

Speaker 2

think the way we'd characterize that is the major players are taking action to keep ourselves balanced and to keep utilization in the 90s. And we're doing that either through some closures as we've signaled in our Europe business with the steel line All we're doing is through curtailment actions, so taking down capacity and reducing costs as far as possible through that, Because we intend to run-in the 90s and that's the situation we're going to monitor. We're confident our peers will monitor that in the same way. And so I think that although there is capacity in the market, I think it's being managed in a good way. And I think that's true also in Europe where there's a bit less capacity being built out in the last few years and similarly in Brazil, where the market is a bit softer.

Speaker 2

So there clearly is capacity available In all three markets, but I think everybody is making sure to take the actions to run at a good utilization level.

Speaker 7

All right. And just one last one. So when you think about the IPO trajectory, Obviously, there's been some changes there. So how are you thinking about achieving maybe the 21 sorry, the 24 Numbers around $1,100,000,000 of EBITDA, when are we on path to maybe see that?

Speaker 2

So look, clearly not in 2024, and we'll guide each year as we go. I think we've said at the full year, and so we can repeat, there are 3 Elements that mean that we won't get to 1.1 without further action, those three elements are foreign exchange, so that can obviously move. The second element is we've not built out all the investment in the original program, so particularly the Brazil greenfield. And the third element is that our program included a significant proportion Seltzer's, which had a very strong mix impact in our numbers, so that's also a drag. And we're not giving exact numbers on any of this, but it means that it won't be 24, and it won't be at that level.

Speaker 2

But that said, I think we're sitting nicely now with a period of growth in the industry about which we're very confident And with no need to do further investment and with a good set of new and efficient assets. So I think we're well placed for the growth that's about to come.

Speaker 7

Thanks.

Speaker 2

Thank you.

Operator

Our next question comes from Kyle White from Deutsche Bank. Please go ahead.

Speaker 8

Hey, good morning. Thanks for taking the question. I wanted to go back a little bit to the curtailment actions, but also to I think you mentioned Some still water over in Europe moving to the U. S. And I believe you have a key customer there that is relatively small, but it seemed pretty strong growth rates.

Speaker 8

As that moves to the U. S, are you going to get that business? Do you need to make any investments for it? And then also, what does that mean for your European footprint In terms of now potentially having some excess slack over in the Austrian region?

Speaker 2

Yes. I mean, it's not the biggest situation. So I was just mentioning it as Hi, Kyle. It's more kind of a one off example of some things happening in the Q1, but it's not we're not picking up in the U. S.

Speaker 2

Because of the geographical Footprint, but it is actually then planning they're planning to launch in Europe. So we'd hope to backfill it that way. So it's got no meaningful impact really on our Capacity position. And overall in Europe, I think with the actions we're taking, we're pretty balanced there. I mean that category though overall, I think it's beginning to move.

Speaker 2

And we always said for us it was a sort of mid decade opportunity. There clearly is now action there, new brands, new activity And people are very interested in it. So we're still excited about it. We're not betting any of the bank on it, but we're still excited about the Stillwater category. And As I said in my other remarks, I think there's a few other categories very ripe for the can, including the sports drink as well.

Speaker 2

So there's some good space for additional innovation Still to come.

Speaker 8

Appreciate that. And then I know you've given a lot of color regarding the categories in some of the regions, but I was wondering if you could us a little bit more details on particularly North America just how the quarter progressed from a shipment standpoint and then maybe what you're seeing in shipments here in April?

Speaker 2

Yes, we had a decent start. I think March was slightly weaker than expectations and April Similarly, but we're looking into May June where we see some good demand. So yes, no particular Trend, I think, in there. There's just some ups and downs. And I think that goes back to the fact that the market remains a little bit volatile.

Speaker 2

I mean, clearly nothing like last year, It's a little bit volatile due to the pressures on the consumer, some of the pricing actions that are being taken that are very different across our customer base. So mix is important and it can vary quite a bit month to month.

Speaker 8

Got it. And this is the last one here on CapEx. I believe all your growth investments will be largely completed here in terms of the one that we expect to do. And I don't have any further kind of Capacity expansions in 2024. So if that's the case, how much lower can your CapEx go?

Speaker 8

And what's kind of the good normalized CapEx range for you?

Speaker 2

Yes. Look, it's going to go very meaningfully lower. So in the 300, it will drop by a lot. I think the market's got a couple of 100 down from there. We're not disagreeing with that.

Speaker 2

We haven't guided to it. And then our maintenance runs in the sort of $120,000,000 $130,000,000 level. So that's typically what we're looking at there. And as you put those numbers together with some EBITDA growth, that's why you can see we're very confident in the sustainability of the dividend.

Operator

From Wells Fargo Securities, we will take our next question from Gaby Hajde. Please go ahead.

Speaker 9

Good morning, David, Steven, good morning.

Speaker 4

Good morning. Thank you.

Speaker 9

I had a question too actually on Brazil And I appreciate that you can't speak for kind of your sister organization. They've chosen to kind of accelerate their glass investment and then you guys I've sort of delayed the greenfield investment that you're going to make in cans down in Brazil. And so I'm curious if you can explain to us Just from a, I guess, short termlong term perspective, in the short term here, it feels like there's Sufficient capacity, by our estimates kind of mid-70s utilization and as well as pressure on the consumer. On a long term basis, to the extent that there is a transition from returnable glass to one way packaging, kind of both substrates can win in that environment from a Number of units perspective. So just anything that you can speak to in terms of 1 substrate winning or not In the beer category down there and then what we should be looking for in the outside world, that could kind of reaccelerate That transition to one way versus returnable?

Speaker 2

Yes. Look, I think in one returnable transitions to one way, it transitions to one way Glass because the customers want to use the shelf, some premium positioning around glass and then some mass volume driving around cans. And actually what's happened in Brazil historically is that was held back by a lack of one way glass capacity. And so the can took all the growth As the return was declined. And so I think customers in Brazil are still short and importing the one way and that explains why You might see investments there.

Speaker 2

Whereas as you say, I think there's sufficient capacity on the Can side at the moment to carry us through a couple of years of good growth now, Particularly with the investments we've done and the one we're completing this year. And then I think that what drove the shift out of returnable and has driven In all markets, as GDP per capita rises, is that as consumers get richer, they don't like returnable. And retailers and mass retailers, that grow with economic development also particularly don't like returnable. And so you get this shift into on way packaging and That's a fundamental shift, and we expect that to continue once the normalization occurs around The very high inflation that's occurred on the can in the last 6, 12 months in Brazil, which we talked about and others have talked about, that's about the LME and Where our customers have to hedge LME and it's also about the fact that we dollar price elements of the can, which in a devaluing Currency environment obviously increases inflation. So those are a set of one offs that will unwind during this year.

Speaker 2

And then I think you'll see the Competition will return to the off trade into the cans and to the extent they can source it one way glass because that's where market share And that's what led to the shift out of returnable over the last few years was the fact that players didn't like losing market share. So as I say, we think that's a fundamental shift. We think you can track off trade penetration in cans and that, that will return to its growth pattern like it has for every other Developing market over the years and returnable systems then eventually do collapse because they lose scale. So yes, Keep an eye out on off trade penetration of cans is the number to look for.

Speaker 9

Okay, perfect. Thank you. And then, I don't know exactly, I know it varies jurisdiction and jurisdiction in terms of bankruptcy protection rights, but Would this enable sort of that customer to come back and renegotiate contracts with yourselves and presumably those Others in the market and could that possibly trigger just sort of a repricing event across the space or is that Just a tail risk or something I'm kind of making up in my head.

Speaker 2

No. Look, I think we've also evaluated that risk, and we regard it as Very low. So I think that this obviously mainly allows them to trade effectively and come Some sort of plan with creditors, and we as I say, we've done our assessment on that with our security position, and we're comfortable with our position.

Speaker 9

Okay. One last one on Europe. To the extent that you have sort of implemented, what I'll call the pass through model For energy and other inflationary components into your contracts for that geography, should we then think about All else equal, if 'twenty three, there's deflation relative to 'twenty two that you would be passing that on to your customers in 'twenty four. And again, sort of on a, I don't know, maybe 6 to 12 month lag, maybe it's 12 months entirely. Just sort of how to think about that, because I think the Business model now has probably changed.

Speaker 9

Again, I guess, the one thing we need to be mindful of is obviously to the extent you guys have hedged energy for this year, That may not necessarily be the case on a go forward basis.

Speaker 2

Yes. So exactly. So for 2023, there's no impact of the falling energy because we're fully hedged The big customers were comfortable with the decisions we took there and accepted those into the 'twenty three volumes. So yes, look, on the direct energy pass through, as energy falls, that will get Back to customers. On the normal PPI resets, typically, we don't see negative in our costs because of labor And some other cost elements.

Speaker 2

So that typically has a floor. But on the direct energy piece, yes, there will clearly be Some get back with the dropping of the energy price.

Speaker 9

Understood. Okay. Thank you and good luck.

Speaker 5

Thanks Gabe.

Operator

We will now move to Jay Myers from Goldman Sachs. Please go ahead.

Speaker 10

Hey, good morning, Ali and David. Thank you for the time getting me in here. So I guess a quick one and then a higher level question for you. The quick one is just of the curtailment you guys have talked about for this year, the 1,000,000,000 in Europe and 2,000,000,000 cans in North America, Have you started that yet? And if so, how far along are you?

Speaker 10

And then the higher level question, yourself and some of your peers are taking actions To kind of curtail volumes and balance the market out, but there are still some new entrants who are talking about adding some pretty meaningful capacity. Can you just talk about how you think that can impact the market here in the near term? Are you feeling pretty good about your contracted position? Is there ability for some shifts there? Are they going to have a hard time kind of breaking in with the amount of contracted revenue that you feel like the industry has right now?

Speaker 10

Any thoughts there would be appreciated.

Speaker 2

Sure, Jane. So the quick answer to the quick question was yes. We've started those actions and we're well into them, And we'll be monitoring the extent we need to do through the year. In terms of the other players, I think most of them did get some degree of contractual coverage on Their investments, and so we don't see that impacting us because those are known events in the near term. So again, sort of through to the middle of the decade.

Speaker 2

Now whether they're getting the volumes that went with those contractual coverage, we don't know. And so we can't Speak to what impact that's having on them and their position. But at the minute, we don't see that significantly impacting on us, again, Over the next year or 2, because of our overall position on contracts.

Speaker 10

And you mentioned earlier that the kind of the marginal or kind of spot can out there, there has been some pricing pressure. Would you attribute that to the new entrants or just kind of the overall supply demand balance in the North American market right now?

Speaker 2

Probably mostly around the new. And again, we're talking about prices coming off historically very high levels because of The market was so tight. So we're still talking about pricing being in healthy margin territory. But just with that additional availability, clearly, Some of that is coming on to the market. But as I said, I think it's really at the margin relative to the overall volume being shipped in the market.

Speaker 10

Thank you guys very much.

Speaker 1

Thanks, Jeff. Thanks, Jay.

Operator

From Bank of America, we will take our next question from George Staphos. Please go ahead.

Speaker 5

Hi, guys. One longer term question, one sort of short term financial question. The first one, So look, when we've looked at packaging markets over the years, over time, within one way packaging, Cans almost always went out over one way glass because you have distribution efficiencies, you have billboard. There have been some times where we have off trends, but generally that's been the trend. So with that being said, within Brazil, what are your customers telling you in terms of their intention 2 years 3 years from now in terms of can in one way versus glass in one way.

Speaker 5

The second question I had shorter term, Payables look like they were down from 4th quarter and you also mentioned a little bit more use of working capital to start the year. If you mentioned what the cause of that or those factors were, I apologize for missing it, but could you again review what was happening with payables? Why the drag on working capital. Why expect to get it back to the source of $100,000,000 I think you said for the year? Thanks and good luck in the rest of the year.

Speaker 2

Thanks, George. So I'll take the first and hand over to David on the working capital. I think I mean, George, it's true that you get some Share shifts in some markets over time from one way to cans, particularly in North America. But actually, if you look across Broader markets, there's a stabilization that occurs at a certain point where the customers and the retailers have Divided the categories into more premium positioning for the glass bottle one way and then as I said for a more mass Volume driving position for the can. And so you get a typically a stabilization.

Speaker 2

And actually in some markets when they're trying for revenue management, they will push glass for a while. And so our growth has definitely come when we're talking about normal periods, 1%, 2%, 3% Before we had the big sustainability tailwind, a proportion of that was glass substitution, but often also two way. And so we would expect a continued Growth like that, but not necessarily at the level you've always seen in North America. And then in Brazil, our customers are not telling us very much because I think They're very short one way. And so their main problem at the moment is to try and to get that from a position where there is almost no one way.

Speaker 2

And therefore, that growth we see having zero impact on our growth because our growth will be much more significant Given the capacity position, given the consumer adoption of the can and given the significant shift we expect out of 2 way. So overall, yes, I hear the point, but I think that The can growth will be good in Brazil going forward.

Speaker 5

Yes. Ali, I appreciate that. I mean, North America and Europe, You've seen cans grow versus one way glass over the last 20 years or so and over the last 10 years. Brazil, we'll wait to hear what you say, but appreciate the thoughts there. David?

Speaker 3

Yes, George, thank you. So to cover off your second point, working capital, if you Go back to FY 'twenty two, we had approximately $200,000,000 outflow. That's partly as we came down in terms of the demand pattern from our initial Expectations and how the inventory build with that. So we're working very hard this year to get that inventory back aligned through the year and that's our 100,000,000 working capital inflow for the year is our step along that particular journey. One of the first things you do along that journey is to kind of change your raw material buying patterns and recalibrate that where the where your demand profile is and we've been doing that during the quarter.

Speaker 3

As we step through that, of course, you get the benefit to raw materials, but you get the step down in payables. But that means that by Q2, you should see the working capital rightsizing for raw materials relative to payables As we go through that journey. So it's just the transitional process that's causing the payables to go down in Q1.

Speaker 5

Understood. Thank you, guys.

Speaker 1

Thanks,

Operator

We will take our next question from Alex Simon from Tykow. Please go ahead.

Speaker 11

Thanks for the call and congrats for the results. So regarding your CapEx guidance for 2023, you guide It's €200,000,000 and your cash flow generation alleviation depends a lot on CapEx cuts. Given the Q1 CapEx are much above the average targeted quarterly level, what makes you confident in The potential to realize this GBP 300,000,000 CapEx by year end? Thank you.

Speaker 3

Yes. So look, I mean, our investment profile is Front loaded in terms of, as we said in the opening remarks, we are finishing off projects largely that have been crystallized Started last year and are flowing through, so you will see a first half weighting to our business growth investments then start to tail off as we get

Speaker 5

Thank you.

Speaker 3

Thanks, Alex.

Operator

It appears we have no further questions at this time. I would like To turn the call back over to Oliver for any additional or closing remarks.

Speaker 2

Thanks, Elaine, and thank you to everyone on the call. And just to summarize again, we met our Q1 guidance and we reaffirmed our full year As we see a strengthening in the demand environment and improved EBITDA recovery through the year, we look forward to talking to you all at our Q2 results. Thank you.

Operator

That will conclude today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Ardagh Metal Packaging Q1 2023
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