Q3 2020 Ardagh Group SA Earnings Call
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Welcome everybody, we hope that you remain safe and well and thank you for joining us today for our third quarter earnings call, which follows the publication earlier today about our results for the quarter.
With me today are David Matthews, our CFO, Shaun Murphy, our COO John Sheehan.
Our corporate <unk> or development.
Development and Investor Relations director.
Our remarks today will include certain forward looking statements.
These reflect circumstances at the time there may some of 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 here.
Due to a wide range of factors, including those set out in our SEC filings and news releases.
Our earnings release financial reports and related materials for the quarter can be found on our website at <unk> Dot com.
Information regarding use of non-GAAP financial measures May also be found the notes section of the release, which also includes the reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share.
Details of our statutory forward looking statements disclaimer can be found in our.
FCC project.
Before I move on to discuss our results for the quarter.
I I'd like to acknowledge the continued dedication of our 16000 colleagues worldwide and our business partners across Europe, and the Americas in recent months.
This has been an exceptionally difficult [laughter].
Oh set of circumstances for the communities in which we operate.
So if I turn to the results for the quarter and I'll focus here on constant currency performance group revenue for the quarter was $1.8 billion, 2% ahead of the prior year with volume mix growth of 3%, which was partially offset by pass through lower aluminum input costs.
Adjusted EBITDA of $330 million.
Increased by 1% in constant currency, driven by a 9% advance in beverage packaging and its stated after a cold winter days it cost some $80 million.
No performance for the third quarter with strong beverage can business has enjoyed continued broad based demand growth well glop Europe benefited from a continuation of the recovery, which we saw in June.
On premise channels reopened.
Demand for our products again demonstrated the appeal most sustainable packaging drew.
During the quarter, we took further important step on this agenda with our commitment to adopt sustainability targets promotions by the independent science based targets in structure.
So if I turn to the segmental performance for the quarter.
In Mexico beverage packaging, which represented 50% of the revenue for the quarter.
Mix increased by 7% compared to the same period in 2019 growth was recorded across all regions and major end use categories, especially.
Especially if he can shipments increased by 20% in the quarter and by 11% to New York State.
If I look in more detail at the segments in metal beverage packaging in Europe revenue for $21 million reflected volume mix growth of 1% for the quarter.
Offset by the pass through of [noise].
At lower metal costs shipments for the quarter rose, 10% with growth.
With growth in demand in all major categories adjusted EBITDA for the quarter increased by 3% to 73 million compared to the same period last year as a result of increased demand and a strong operating performance.
In metal beverage packaging in the Americas revenue growth, 3% to 478 million reflected a volume mix increased 6%.
Partly offset by the pass through of lower aluminum input costs ship until the quarter increased by 4% compared to the prior year with strong demand from all end markets in North America, including heart, so sort of sparking waters energy drinks and carbonated soft drinks.
In Brazil, where we are primarily focused on the beer market.
The market grew strongly in the quarter, having recovered pretty rapidly from the brief covert related interruption seen in March and April this year.
Adjusted EBITDA in our metal beverage Americas business grew strongly increasing by 16% over last year to 78 million in the quarter.
The backdrop for metal beverage Americas remains very positive with strong demand from long established brands as well as for new and emerging beverage categories predominantly packaged beverage cans in North America.
A structural shift from returnable glass packaging to metal packaging continues in Brazil.
Sustainability provides a further tailwind and one which we expect to gain increasing momentum in the years ahead as brand owners respond to changing consumer preferences.
Our capacity in the Americas in beverage cans is fully sold for the remainder of the.
Oh, Dear and for Twentytwenty warm as well we.
We have been investing in support of our customers growth in recent years and as I will outline later in these remarks, we intend to increase the level of investment and speed up the pace as customer growth et cetera. Thanks.
Turning to glass packaging total shipments increased by 3% for the third quarter compared to the same period last year in glass packaging York revenue for the quarter for $72 million, representing an increase of 10% from the same period.
Last year volume mix increased by 8% as on premise channels across Europe reopened during the quarter. This drove growth in beer nonalcoholic beverages food sector demand was also strong third.
Third quarter <unk>.
<unk> million was in line with the same quarter last year as increased volumes were offset by lower production as we proactively managed our capacity.
In glass packaging North America revenue for $29 was 2% lower than the same period last year due to lower volume mix of 2% strength in wind and other beverages was offset by lower spirits and beer volumes adjusted EBITDA of $67 million for the quarter reflected.
Lower volume mix and increased overheads.
If I turn to our view of the markets to the end of the year. Obviously, there remains considerable uncertainty in the countries. We operate in regarding the progression of Cobot night gene and the impact of responses there too.
What we currently see a strong demand in all our beverage can businesses backed by consumer shifts custom renovation and sustainability.
Glass Europe's markets improved in Q3 with national and regional restrictions are increasingly evident in the past week or so.
And we will also have some increased furnace rebuild activity in Q4.
The North American glass for markets remain somewhat challenging and our focus remains there on cost reduction and efficiency improvement.
Overall, the group performed very well in the third quarter and despite the uncertain environment. We are pleased to reiterate our expectation of a mid single digit reduction.
In constant currency adjusted EBITDA for the full year compared to last year.
So no change from what we said last time round.
If I now turn to our business growth investment plan.
Earlier this year, we outlined plans to invest $250 million group wide and business growth investments during the current year 2020.
These initiatives represent attractive growth opportunities and are backed by multiyear customer contracts.
Despite the operational challenges posed by cobot and thanks to the commitment of our operating mentioned guaranteed and supported by our suppliers. These investments remain on track with the cumulative outlay of $133 million by the end of Q3 with further expenditure of around 120 million expected in the final call.
Later this year.
The largest element of this 222020 program involves the addition of two new high speed specialty line at all.
At our Olive branch, Mississippi beverage can plants.
The first of these two new lines will commence production in late November 2020, and the second will come on stream around the end of this year.
And following this expansion the olive branch plants will run five production lines and we will be the largest facility in our north American beverage can network.
In Brazil in 2020, we are competing investments in both of our comp plan that will add capacity of over a billion cans with full ramp up occurring in the first quarter Twentytwenty one.
In addition metal beverage Americas will this year complete range of capacity investments and enhancements, including speed up and de bottle necking investments. This will occur in both North America and in Brazil.
Outside of metal beverage Americas, we have made incremental capacity investments in glass Europe and in metal beverage Europe to increase our capacity and especially to expand our specialty footprint.
All of these investments that I've mentioned are supported by contracted business.
I'd like to turn now to the if I may to future business growth investment and we've recently finalized a detailed business growth investment program for the years 2021 to 2024.
This program will see us investing in excess of $1.8 billion over the next four years, principally to expand capacity across all of our metal beverage businesses as well as investing in some growth prospect projects in our European glass business and investing in cost reduction and efficiency enhancing projects.
In glass North America.
New capacity that we bring on stream will be supported by new long term customer contracts in bed.
The investment program is expected to provide attractive de leveraging returns to our data and will be funded from our existing cash resources future cash flow and where needed incremental dash.
The investment program is underpinned by the very favorable market backdrop for our metal and glass products demand for metal beverage packaging is growing very strongly on our outperformance will be sold in all our markets.
We also see good opportunities for our glass business, especially in Europe.
And while Covance has caused some short term changes in demand patterns. We believe the positive outlook for our substrates is underpinned by long term consumer trends and preferences as well as structural factors most of which we expect to endure.
And given the attractive returns available to us from organic investments in our businesses, especially where we're expanding our existing plants, we see greater valuation baker value creation, rather proud.
This new investment program than from acquiring any new businesses, where in any event the asset valuations of any potential acquisitions remain relatively high.
In Twentytwenty, one we will undertake a too.
And expansion of our Winston Salem plant in North Carolina with the two high speed.
Hi speed specialty can line expansion.
Both these lines will commence production in late 2021.
And with deep combined with the Olive branch and Winston Salem.
Winston Salem investment.
Similar to earlier projects that they're focused on expanding existing facilities, where we have the advantages of speed of execution, that's permitting issues eggs as existing infrastructure support and the availability of skilled labor.
However, we have also entered into an agreement to purchase a brownfield site in the <unk>.
Let's say mid West do you guys Midwest other location close to one of our existing facilities.
We will convert the existing buildings into a new common stock, which will commence production in late Twentytwenty, one wrapping up during 2020 two the new.
The new plant will have three timelines.
Spread across standard and specialty sizes with the company and its capacity.
These investments in Olive branch, Winston Salem, and the new wet Midwest cloud are all backed by long term agreements and.
You'll see us increase our annual capacity in North America beverage can business by over 8 billion cans by the end of Twentytwenty one.
In Brazil, our 2020 expansion will be followed in Twentytwenty. One by the addition of capacity equivalent to a further line in an existing plant with production expected to commence in late 2021.
Looking beyond Twentytwenty, one in Brazil positive structural growth drivers remain in place in the Bev can market there.
Including the migration of beer from returnable glass to cans and we're reviewing and.
And attractive pipeline of opportunities there involving further organic expansion.
Our two existing confidence our money and our and our Manal offense badge and also a compelling greenfield development.
Over the next four years, we envisage almost doubling our capacity in Brazil again with all the investments, we make being backed by long term customer contracts.
In Europe backed by our ongoing efficiency initiatives, we will invest further in beverage can capacity of the number of existing our existing plan string Twentytwenty walk we play.
We plan to new high speed line in northern Europe with production commencing in the first half Twentytwenty two by UK capacity will also be expanded during 2021 to support further growth in 2022.
We are also currently evaluating a very efficient project to add a new lighting space.
And we invented it's not in the 21 2021 to 24 period, our annual can making capacity in Europe will rise by over 4 billion cars.
At the same time, we will invest to increase our flexibility to produce sleek cans on existing lines.
In aggregate, we plan to grow our beverage business, our beverage can capacity from 36 billion cans at the time of our acquiring the business in 2016 to 55 million can by the end of Twentytwenty four.
In glass, we will invest in incremental capacity and 2020, one to support newly contracted business principally in premium beer.
As we were as we reported today glass Europe has successfully managed the challenges of COVID-19, and we see the business is well placed to continue to develop organically as a supplier of choice to its market leading customers.
In glass North America, our investment plans are principally focused on cost reduction and efficiency initiatives to enhance productivity and improved quality.
So as you can see we're making very significant investments to grow our beverage time glass businesses and take.
And taking into our account our 2020 investment program with some $250 million, we plan to have invested over $2 billion in growth projects during the five years to Twentytwenty four.
Some 85% of this investment will be in beverage cans around.
Around 800 million is expected to be spent 2021.
Most of the EBITDA impact from this coming and Twentytwenty, two and onwards with an additional 500 million to be spent 2022 and the remaining 500 million to be spent during 23 and 24.
So that gives you some color in relation to our investment plans.
If I turn to our liquidity and capital structure cash on hand at September 30 was over $1.2 billion.
After the repayment in full in September of our drawings under our ABL.
Facility cost.
Cash and available liquidity of 9 billion leaves us well placed to fund the growth investments that I've outlined earlier in these remarks.
Net leverage at the end of September was 4.9 times adjusted EBITDA and we anticipate a similar level of leverage at the end of the year and Twentytwenty one.
Twentytwenty one.
We expect net leverage to stay around five times, the EBITDA on a reported basis, but with pro forma net leverage.
Which reflects the full annual run rate EBITDA of the investments were making a 21 with jet to ramp up to come.
To contribute for a full year on a pro forma basis leverage at the end of next year should be around four and a half times EBITDA.
And following our significant refinancing activity in the second quarter of this year, our weighted average debt maturity is almost six years and we have no bond maturities are rising.
Before 2025.
So to wrap up these remarks group performed very well in the third quarter and our expectation for the full year as reiterated as a mid single digit decline in constant currency adjusted EBITDA from last year.
This year has presented a unique operating environment.
But our teams have successfully met the challenges and seize the opportunities that have arisen.
The medium term outlook for our substrates is more positive and exciting than in many years and gives us the confidence to make very significant investment in our.
Our teams and assets to take advantage of attractive growth opportunities, which will materially increase long term stakeholder value.
So having made these opening remarks, we'll now be delighted to take any questions that you may have thank you.
Thank you, ladies and gentlemen, if you wish to ask an audio question. Please press zero one on your telephone keypad. He responds to your question you. Many so by pressing the high teens. So once again, it's it's never one to that Mr for any questions.
Polling for questions can you guys.
And our first question comes from the line of Anthony Pettinari from Citi. Please go ahead. Your line is now open.
Hi, good morning.
Good morning, Paul Paul in the beverage can business you indicated you'll be sold out in the Americas in 2020, and 2021 I'm just wondering given the tightness in the market. We've been hearing about offshore imports of cans are you shipping cans in from any other regions or or buying cans from competitors.
And then on the Europe side of the business or are you sold out there or can you talk about can you talk about operating rates in Europe as well.
In the U.S., we're not buying very virtually nothing now.
In from a from our competitors or peers doubles, rather cook the of the deal with all in 2016.
We had a small amount of imports of cans into the U.S. from Europe, and even smaller amount from Brazil R&D on but.
Brazil, and Europe are not very tight we're fully everything everything we're selling everything we make them are making as much as we can in Europe. So we're sold out there.
Okay. That's helpful and then in North America Glass, you talked about continued challenges in that business.
For our Big picture perspective is the root cause this year is on premise weakness with co that or is it substitution into cans, which I guess helps the other part of the business or is it China.
Chinese in Mexican imports like what is sort of the the the root cause of the weakness in North American glass and is it possible to quantify how much excess capacity you think could be in the market.
Well I mean demand actually has been pretty good actually this year and I think the markets reasonably good.
We are.
Were at full capacity or adult envisage any further reductions in capacity.
You know some of the issues we've had have been.
A less favorable mix as I mentioned in my earlier remarks.
And obviously, we continue to work on improving the operating performance of the business, which is below it some.
It's federal business in Europe, but yes and in fact.
And in fact, the shortage of candidates in the U.S. has actually strengthened demand for beer bottles in the U.S. So it's not actually so much a demand issue in the market I think it's more of a mix issue.
That mix issue and more of that you know and operating performance and cost efficiency.
Hitting margins, but.
We have a very concrete set of clients, we're working our way through and.
And you know, we we see decent future for that business.
Okay. That's helpful I'll turn it over.
Thank you our next.
Question comes from the line of call White from Deutsche Bank. Please go ahead. Your line is now open.
Hey, good morning, Thanks for taking my question so.
Trying to keep up with your in terms of the the business growth that you announced with a lot of detailed there. So just to make sure I had stuff right just focused on the U.S. and primarily in the near term here in next year. The two new lines of Mississippi, two new lines in Winston Salem, and then the brownfield and men in the Midwest with three lines. This equates to an additional 8 billion and capacity.
Did I have that correct and then additionally, all this is tied to the latter correct long term, okay cool all tied to long term contracts I'm curious what kind of customers are underpinning. These contracts is that some.
Some of the new product offerings, despite south there's energy drinks just any details there any any shifts away from maybe a different substrate as well.
No I don't think I think its a.
Sure it's right across the spares.
New products sold products, the EPS, the new energy drinks et cetera, et cetera, et cetera, it's right across the piece so and.
And I don't think we've seen it's very hard to measure where increased demand comes from I don't think we're seeing it come from.
Necessarily crow from from glass or plastic I mean that that's a very difficult thing to to identify but adds have since been plagued by others and as evidenced from the market.
Tomorrow.
In the U.S. and I think this was not just is not just a cold that phenomenon. I think this is development was taking place before cobot arrived cope with this probably et cetera that are accentuated. This.
And then when I first want to turn to kind of the Holdco structure do you have.
With all these organic growth investments in the pipeline that you have been mounted capital that's going to take what does that mean in terms of your holdco structure or the potential to possibly increase your sort of your stock but thats.
Is that something that wont, even really be considered until you get past that growth phase.
Well I think the growth and the growth will be funded the growth is the returns are very good et cetera.
Because we are in particular, focusing on investment where.
Where possible within the existing walls of our plants, which gives you better returns and also the new plant where the plan to build the brownfield in the mid west will be near an existing client of ours. So that gives us advantages as well and gives us good returns.
I think in terms of the that will be funded from our existing cash resources, which are quite substantial.
And from free cash flow as they come on stream and a lot of the plan in terms of the U.S. in particular in beverage cans. It's front ended the Mississippi, one is virtually complete and the other two developments will be fully in operation.
Operation pretty much fully by the end of next year. So that comes on stream pretty quickly and starts earning money and providing cash in terms of the all the holdco.
I don't think Thats really an impact summer our policy of the Holdco overtime dividends will flow there, which.
Which will be used some to ourselves and some to reduce.
Reduced EPS in the Holdco, but we do not plan.
Coming off at current share levels share price levels to to place any stock from any holdco stock into the market.
Okay. That's helpful I'll turn it over.
Our next question comes from the line of Tavis upwards from Goldman Sachs. Please go ahead. Your line is now open.
Hi, Good morning, Travis Thanks for the time, just a quick follow up question on some of the funding of the new investment projects you talked about existing cash resources, obviously you have.
The least amount of liquidity plus cash on the balance sheet, but just wondering if you could elaborate on maybe some of the scenarios, where you anticipate potentially issuing debt to finance some of these projects.
I think it'll be later Odyssey move our way through the program. If we if we do that.
We raise debt I mean in the first in the first instance, sell or use cash and we'll use.
Cash flow, which is the returns we get on these investments to fund this embedded if needs be as we said as I said earlier in my remarks.
Well, we will look at some debt, but John you know the matrix of investing organically.
The returns to matrices.
Returns using got our our de leveraging.
Pretty efficient some loss, it's more likely to be at the backend of the investments on the Frontend.
Okay got it. Thanks Thats helpful. And then just sort of clarify question on free.
Free cash flow trajectory, our expectation I guess would be that in addition to the.
The 800 million to 500 million in the 500 million of cash going out the door for these projects.
You have.
Still consistently your 330 to 350 million of maintenance Capex is that accurate on top of the the growth investments just want to clarify that to be sure that.
Just as we're kind of modeling cash flow and maybe as a quick add on yet yeah with all these tax yet.
Cash investments is there okay. So that's okay clarify there and then I mean really any animal guide that you got three good three 333 50 right. So the number 350 it will guide.
Give guidance on Capex for next year, when we when we issue our results that.
Early next year for this year.
Got it maybe one more quick one what is there any risk that or any attention to.
Take the Holdco notes with the additional cash going out the doors. So.
Okay Apis, absolutely not absolutely not we we plan to make sure that we will keep the current.
Great. Thanks, I appreciate it good luck.
Thanks.
Thank you. Our next question comes from the line of Michael recall from Barclays. Please go ahead. Your line is open.
Great. Thanks, and good morning, guys I guess first one question on Europe and I. Appreciate its early days in the second wave of walk down the restrictions in Europe, but can you give us a sense of your outlook in your European business or what you're seeing your order books, maybe over the past couple of weeks.
Just given some of the.
The recent dynamics there.
You're talking in glass second Michael.
Yes, I guess, if there's any more glass, but if theres any changes and beverage can that's also would be helpful. No got beverage food and beverage and it's completely sold out very strong demand demand in Europe in Boston is good.
It's been strong in recent times I mean, I think we just you know we just made some caution I made some cautionary remarks that you know you have seen.
Some restrictions reimposed et cetera in various countries in Europe.
That also we have some scheduled rebuilds anyway in Q4, EPS no to caution there, but so far no we've seen.
And the demand recovered it's been good.
Got it and then just on your capital investment program next couple years, obviously very big numbers can you maybe just talk through how much of that volume is committed or how you get comfortable with.
The return over the next couple of years, just given there is a lot of new capacity coming on.
In the next few years.
Well as I said earlier, it's all backed by by new customer contracts. So it's both attractive and second me.
You know the a lot of the investment is being made.
Listing, perhaps or in the case of the U.S., one brownfield plant, which as I said earlier is near like located quite close to one of our existing plants.
And that's much easier to execute in terms of speed, bringing in downstream to meet the demand. That's there and also in terms of the returns that can be had because so.
The cost factors in investing within one's existing plants, where you've got a lot of the infrastructure there.
So we're not we're not concerned about demand remained command in the lessons very very strong and southers offset.
Okay, great. Thank you.
Thanks.
Thank you. Our next question comes from the line of Brian Maguire from Goldman Sachs. Please go ahead. Your line is open.
Hey, good morning.
Good morning, or good afternoon for you guys I just wanted to circle back again on the gross investment program and I think earlier, you kind of clarified around the U.S. addition, something about 8 million.
Units with maybe two of those coming on at the end of this year and.
So that coming on late next year just for the other regions, Brazil, I think I write down you're expecting to double capacity I have you down for 4 billion to start with is that does that imply about $4 billion more cans and I don't know if I caught the timing on that and then Europe is to confirm its about about 4 billion cans.
Additional capacity, that's right and just and the timing on that is.
Only 21 as well.
And not all of them. They 21, it's a little bit you're a little bit later I mean, the the Brazilian one start the U.S. ones are more front ended of the Brazilian and European ones, a little you know its a mixture frontend backend there.
Okay got it.
And others have talked about the European market, maybe not be nearly as tight as the U.S.
I'm curious if you think thats changed in the last.
Six nine months and related to that others have talked about not wanting to add capacity in that region until they're able to get some better price.
Better pricing better commercial terms.
Like the industry seem to do in the last two years ago or so are you are you seeing that take place now with these new expansions or or maybe you just have a different philosophy when it when it comes that app, putting capital into that market.
No I think has been improvements this year the market strengthens been improvement in market conditions overall, the remarks that others have made about returns in the market our crew.
We need to be we need to see proper pricing and we're confident that the investments we are going to make in Europe will be backed up by proper pricing.
Where we can make prep proper returns.
So I think you'll find that it's it depends on where everybody is in their investment cycle. Some of our peers have invested more earlier than we did in Europe.
And that's that gives you know do perhaps a different outlook for some of them on the European market, we're very comfortable where we sit with demand supply and demand in Europe and the investment program. We have for Europe is entirely proportion mission and relationships to customer demand there.
Okay. Just last one for me just on the.
The EBITDA guidance.
And currencies remaining at kind of down mid single digits.
The third quarter EBITDA in line with your expectations or was it not better than you expected and if so.
Is it just conservatism that keeping the.
And maybe just semantics, keeping the guidance from from improving a little bit.
Yeah, I mean, we you know we withdrew guidance as you know Brian earlier in the year and I mean this is in formal guidance.
That's the that we gave last time round and I think its an element of conservatism, yet we hope to get better.
Yep Okay.
Appreciate it I appreciate the time good luck guys.
Thank you.
Thank you. Our next question comes from the line up for <unk>.
From Bank of America. Please go ahead your line is open.
Thank you.
Good afternoon, so indeed.
And then Roger.
Sorry about that can.
Purge said from other is that.
Maybe the the new EPS is currently short 10 billion cans on.
On we've had announcements from fall Crowne Plaza.
Sum up a bunch of Greenfield some expansions.
And then you hear.
Here are are announcing another eight 8 billion cans.
Just from me quoting plans no doubt between now and 2024, but how do you think are and twice.
And 2024 or whenever you finish your your brownfield plant.
That supply demand balance will look do you think will be.
Basically balanced sand or is there some risk that.
With all these announcements.
We could be no longer balance and there are no longer short.
Well first of all Roger.
Our investment program with US finished at the end of next year. So all are on our capacity changes will take place then on they're all backed by long term contracts. So.
I mean, you know looking forward 345 years.
I don't expect there to be overcapacity I expect that.
The investments being made by the existing players on compact car, our proportionate to what we're seeing in the marketplace and demand.
What we're seeing you know now.
Nowadays, we're seeing you know some 70% of new products get launched in pad. So there has been a big change there. That's that's way up from one of us before in previous years. So our previous earlier earlier periods. So I think.
I think the investments that we've announced and the investments that our peers have announced our proportionate.
And and.
As best way, one can read the demanded future demand.
We are seeing.
You know because we just didnt roll up and say well, we're going to we're going to increase capacity by by 8 billion cans. Willy Nilly. This was on the back of of approaches from customers and demand Thats correct and you are seeing any hands in the last.
Very very substantial growth right across the piece.
And not just in new type products like sensors, but.
In the more traditional Csds and also in a and b shares as well so.
Where we believe that what we're doing is entirely proportionate to what we see the market demand.
And do you have.
A view of where us industry can that can demand will be in units, saying every year, but 2024.
I don't I don't create I think that I mean.
I mean, that's very hard Roger I I get it I don't I don't know, where you know I don't agree to be that's four years away I read all this I can tell you is that there's very strong demand strong demand from customers, who are entering long term contracts with us.
Yeah.
Margins would give us proper returns.
Got it all right. Thank you very much.
Thank you Roger.
Thank you. Our next question comes from the line of Mccarthy from Bank of Montreal. Please go ahead. Your line is open.
Alright, good morning, Paul.
Good morning, Mark how are you.
Good how are you.
I wonder just to kind of come back on the.
The new capacity can you just help us in general terms with kind of these long term contracts. So they literally take or pay for all the volume off the lines.
No no but are there you know the conditions of our contract of improved too much.
Much for the for the manufacturers and suppliers they didnt.
Some cases take or pay but it falls short of that but it's a much improved in terms of the structure of the the contracts the industry as a whole enters into now.
Okay. All right. That's fair and then just when we think about like a like a multi year program like you've laid out and in some of your peers have laid out.
Can you give us some sense of you know.
Whether the back half of the program is fixed or whether really only that like the next you know 18 to 24 months are really fixed with commitments to buy equipment.
Put up new structures things like that I'm, just trying to get a sense of what your ability is to kind of either cadence up or cadence down there.
Depending on how the market evolves because the market clearly today is a heck of a lot different than any of us would have predicted two or three years ago.
Yes, although there were signs as I said earlier pretty cobot market things, where we're shifting to.
Yes, good favorite for sure.
Yeah, Yeah in answering your question I would say the following I think we have quite a lot.
Quite a lot of our planned 75% of this will have the five year plan take again the current share.
<unk> will be spent by.
The end of 2022 so.
And a lot of us.
A lot of it the best can stuffing, new EPS will be dealt with and 21.
Obviously in terms of you know, we we will of course, we haven't ordered equipment or committed space commitments in terms of stuff that we expect to bring online at 24.
You know and the lead times differ depending whether its class or or about kind of what type of investment is whether it's greenfield, whether it's within an existing plants et cetera, but.
But obviously if there was to be a collapse in demanded in certain sectors. We we up utility to be able to reduce the investment proportionately again.
But they are the first part of the plan is to.
Is being executed upon and.
The self disorder done, but you know, it's it's going to be ready to go I mean, as I said earlier Olive branch will come on stream at the end of this year.
The other two investments, we're making in best kind of North America will be on stream.
In Q4 next year.
Okay, but just a couple of quick questions on glass of it it sounds like in Europe in the third quarter, you sold out of inventory.
Is that trend going to continue in the fourth quarter.
Perhaps let US go ahead, John Sheehan to deal with that one mark.
Okay.
Yes, Hi, Mark and yes in the third quarter after a strong sales.
But we were still.
So managing our production at post cold out in the fourth quarter, there will be an element of that done as we said we had some rebuilds. So our production will be constrained by the added in fourth quarter last year for that reason that that region that will be down in the fourth quarter.
All right, but then I was wondering how this.
On slide was healthy through through the right to the third quarter.
Okay, and then just finally on a north American glass, John I'm, just curious like revenues dropped 9 million, but actually EBIT drop 10 million a year.
You talked about some issues in there.
In the North American business I Wonder if you could just put a little bit more color.
On what went on in North American glass.
In the third quarter that take EBIT down by $10 million.
Yes exactly.
Revenues were up down at <unk> Dot materially there was that we did have some increased costs from that from freight.
No there's a few million of that in the quarter.
The mix was less favorable so that was that account for the proportionate or disproportionate decline EBITDA.
We also had an alternate over fences coke.
Mark Sony Kobo and related expenses, as well which impacted.
Okay. That's helpful. Thank you.
Thank you. Our next question comes from the line of data from Wells Fargo Securities. Please go ahead. Your line is open.
Paul David John Good morning, Hope you guys are all well.
Good. Thank you I had a question about startup costs and what's your incurring this year.
And then kind of bridging forward to next year. It sounds like maybe you've already incurred some of this in Mississippi next year will be in North Carolina, and then obviously ramp up.
The Midwest.
Feels like it could be a little bit more pronounced next year than this year and then the.
Typically what are you doing.
Thank you guys have brought up a new facility on the beverage can side in its entirety, and maybe down mouth, but warm module, but.
Just what you're doing in terms of hiring and planning for that.
To avoid any sort of missteps.
Well, I think where you're absolutely right to focus on execution. Because this is something that we're very focused on.
We have been ramping up.
Senior level to make sure that we execute on our plans and we're also working with outside consultants, whom we've worked with on various projects in the past.
And.
You know in terms of ramp up cost startup costs.
Yes of course, if you increase capacity they will be bigger than what they were up and went to recruitment capacity, though really have color on that jazz in terms of but lot of it is mitigated by the fact that we're we're expanding existing plants and our you know our.
Our history of the thing our experience has been good in the past in that area, where we're doing it in existing plant, but your remarks on execution our key we've been.
We've been very focused on that for a number of months in terms of getting things.
Really well executed, but you know, it's it's a rather as most of the plan is probably eight.
Eight nine projects are the bulk of it so it's not as daunting as it may seem and and you know it's.
You know, it's reasonably apart from the North American signature series spread.
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Okay.
And then I guess I appreciate that.
You confirmed kind of this your EBITDA to be down on a constant currency basis mid single digits.
You're not in the business of giving US a look for even 2021 yet.
So I'm going to ask for 2022, because that's what we do with analysts. This is art were greedy.
You gave us a leverage target and what that would look like four and a half times would that imply and I guess the nature of the question or the Genesis of the question is.
Third our shareholders are not buying shares based on what you're going to do today or tomorrow. It's it's really kind of on this.
Return to you're going to get out of the 2 billion and investments so does that sort of imply directionally a a 1.35.
Maybe $1.375 billion EBITDA figure out in 2022, and then kind of grow from there or am I did not doing something right in them in my math.
Well as you say, you're you're being greedy looking for guidance or 2022 by your own efficient so I I think.
I think look clearly, making investing 2 billion, we're expecting significant increases in EBITDA.
And and we would expect you know a sizable ramp up in 20 to us, particularly the Bab North American builds come on stream I don't want to get into exact numbers and obviously that you have the other parts of the plan and delivering that as well and.
You will have.
So we obviously we wouldn't make these investments if we didnt think that that were going to be sizable returns from.
So the obvious rest directionally, yes, theres is versus theirs, we intend to be a significant increase in EBITDA EPS otherwise he would make these investments.
Understood last one is there anything to think about contractually as it relates to the glass business and I'm, specifically thinking about North America too.
2020 was was mostly a deflationary year plus.
I said next year could be a little bit of price cost headwind or is it too early to to make that call.
We have relatively little of our business up for renewal next year actually so I'm not so sure those those get a little bit.
It will be that way, we have some very specific initiatives to reduce costs. There. That's what we're working on there.
Okay. Thank you and good luck.
Thank you.
Thank you. Our next question comes from Ron Maguire from Goldman Sachs. Please go ahead. Your line is open.
Yeah. Thanks.
Thanks for taking my follow up Paul.
Paul earlier, I think you talked about how the returns on these projects much better than the acquisition pipeline could provide and and what you're seeing there just curious on the timing of the decision to put as much capital work.
I mean in the U.S., you're adding about 8 billion cans I know about a year ago. There was some talk that one of the large brewers that self make some might look to sell or spin off there.
Okay, and making business just wondering if that was something that you looked at and maybe decided at this point to kind of move more on the Greenfield organic route or when you're talking about M&A, we really talking about kind of the other substrates or other regions.
No I mean, I can't comment on any anything we might have looked at it.
Cost are subject to confidentiality agreements on things that we look option.
Obviously is it's never to comment anyway, but.
I think.
In the look we've seen changes in our markets. We've seen increased demand for our products, we've seen customers coming to US, saying will you do this would you do that and that's what.
That's what's driven this is a customer and demand driven program, it's not off saying what are we going to do to deploy capital. That's that's the first thing its important to say that that that's why these customer contracts.
My remarks on M&A were not about any other substrates, we have absolutely no intention of going there and other substrates, we're not going to do that it was.
It was within our existing businesses with those remarks were made that if you like I said earlier that.
The returns on the business development program will be de leveraging so by definition you know they're inside five.
Five times EBITDA.
And.
That you compare that to what you'd have to pay for example for a best test business today or even the glass business, so and in any event given our size and scale, we don't feel the need to buy anything else, we're not going to expand.
Geographically and we're not interested in expanding.
And other substrates, so it's a pretty clear decision for us as to what the right thing to do us.
Great. Okay. Thanks again.
Thanks.
Thank you. Our next question comes from call like from Deutsche Bank. Please go ahead. Your line is open.
Hi, Thanks for taking the follow on shifting gears, a little bit a little bit more detail question Im a bit confused on the the trivia.
Contribution to earnings I think it's just 2 million this quarter, what's what should have been a pretty strong seasonal quarter for that business I know that.
I know they don't report till early November just curious as to why maybe I was so off in terms of modeling that figure and what what should we expect some that joint venture on an annualized basis.
Yes, John would you would you do without being Trillium as you say reports on the fiscal November I think if you go to page 12 of the release you will see that TEP.
Premium authorization and.
Yes, the contribution of the $12 million and the quarter pardon.
Hey, Megan so that equates to about five cents.
I share in the quarter.
14 cents.
Here today, so it's in line with the kind of that nature.
Correct on that pace.
Yes.
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All right. Thanks for that John appreciate it.
Okay.
Thank you as we have no more questions registered.
Oh, I see kids for any closing comments.
Good well, thank you very much everyone for joining us today and.
We look forward to talking to you again in the new year. When we report our annual results. Please take care.
Please be careful stay safe. Thank you very much.
This now concludes our conference. Thank you all for attending you may now disconnect.
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