Q2 2022 Ardagh Metal Packaging SA Earnings Call
Okay.
[music].
Welcome to the metal packaging second quarter 2022 update call today's conference is being recorded.
At this time I'd like to turn the conference over to Mr. Oliver Graham CEO of Argos and medical metal packaging. Please go ahead.
Thank you Anna.
Welcome everybody and thank you for joining today, but.
Metal packaging second quarter 2022 earnings call.
As far as the earlier publication of A&P zoning released for the second quarter.
We have also added an earnings presentation onto our Investor Web site for your reference.
I'm joined today by David Bourn, <unk>, Chief Financial Officer, and by Steven lines, <unk> Investor Relations Officer.
Before moving to your questions I'll first provide some introductory remarks around imtt's performance and outlook.
Remarks today will include certain forward looking statements.
These reflect circumstances at the time now made and the company expressly disclaims any obligation to update or revise any forward looking statements.
Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in <unk>. Most recently filed form 20-F with the SEC.
And any other public filings.
A&P as earnings release and related materials for the second quarter can be found on <unk> website at other metro packaging Dot com.
Information regarding the use of non <unk> financial measures May also be found in the notes section of the earnings release, which also includes a reconciliation to the most comparable measures of adjusted EBITDA adjusted operating cash flow and adjusted free cash flow.
Details of A&P as forward looking statements disclaimer can be found in A&P its earnings release.
If it tends to opening remarks for the second quarter of 2022. We are pleased to have delivered a result in line with our guidance, despite currency headwinds and unprecedented inflationary and supply chain pressures.
Global demand remains robust and while the near term macroeconomic outlook is more challenging and less predictable. The beverage can industry has historically proven resilient through economic cycles.
We remain confident in the long term secular growth of the beverage can home, which we're well placed to capitalize.
That growth continues to be underpinned by category growth and expansion with 75% of beverage innovation in North America weighted towards the beverage can.
<unk> pack mix advantages in terms of efficiency quality and branding potential and strong backing by favorable sustainability characteristics and associated regulatory drivers.
Our expansion plans a customer led but the plans do you have flexibility as we have recently demonstrated with our announced three phasing.
Yeah.
To adjust to changes in demand patterns.
Based on strict return criteria.
Our capacity is highly contracted and underpinned by volume clauses.
We remain focused on the factors within our control, including phasing of investments taking action to address our energy requirements recovering exceptional inflationary costs ramping up our growth investments and progressing our sustainability agenda.
We recently published our first Green bond allocation report, highlighting our sustainability achievements and the numerous eligible green projects advance as part of our sustainability strategy.
We acknowledged concerns over gas availability in Europe , but our operations are spread across the continent, and we have not experienced any operational disruption.
It's historically been cited as an essential industry by governments most recently during COVID-19.
And as a reminder, would also I'd like to highlight that we have no operations in either Ukraine, or Russia, nor do we saw any supply directly from the region.
The global supply of can sheet has also been in focus and conditions remain tight, but we are well supplied over the medium term as we benefited from our actions in recent years to diversify our mostly local supply base.
In this regard we also welcome the recent can sheet capacity announcements in North America, which will help protect the domestic supply demand balance.
We've also elected to prudently carry high levels of inventory in the current environment.
Turning to A&P second quarter results, we recorded revenue of $1 3 billion, which represented growth of 38% on a constant currency basis predominantly reflecting the posture of increased input costs <unk>.
Adjusted EBITDA of $181 million with 10% higher than the prior year on a constant currency basis.
This reflects favorable volume mix effects, which includes an impact from the group's growth investment program and recovery of input cost inflation, partly offset by increased operating costs.
Total beverage can shipments in the quarter were 8% higher than the prior year.
Growth was driven by our new investments across our global footprint, including from the ramp up with our more recently installed capacity in North America, and Europe and improved momentum in Brazil.
Specialty cans represented 48% of shipments in the quarter.
From 46% in the prior year.
Our specialty mix with higher still at 62% in the second quarter inclusive of 50 cents of each cans in Europe , which some of our competitors include in that definition of specialty catalysts.
Looking at Anp's results by segment and at constant exchange rates revenue in the Americas increased 46% to $770 million, mainly due to the pass through of higher input costs <unk>.
Shipments were 11% higher than the second quarter of 2021 with increases in both markets driven by growth investments and improved momentum in Brazil.
In North America shipments grew by mid single digit percentage for the quarter.
Growth was spread across a broad mix of categories, including energy and fitness drinks spirits space drinks ready to drink coffees in CSD.
New capacity additions continue to support category.
And the substitution is expensive.
Which continued to reduce.
The growth outlook in North America remains robust, albeit recent weeks have seen some softer demand than anticipated at the beginning of the year.
This is partly due to the significant price increase as consumers are facing at retail and partly a result of the well documented declines in the hard seltzer category, while the category overall remains very significant 10% share of the third largest category over the July 4th weekend and that we are purposely added increased swing flexibility to our network.
To respond to variations in category demands and we will now also faith in some of our planned capacity more slowly.
In Brazil second quarter shipments grew by strong double digit percentage significantly outperforming the market, which returned to very modest growth and encouraging turnaround G to increased consumer mobility and spending as social restrictions ease.
Our outperformance reflected strong execution and customer mix effects and as our customers seek to diversify their supply through us.
Good volume growth in both North America, and Brazil drove our second quarter adjusted EBITDA advanced in the Americas of 36% to $120 million.
Growth reflected higher volumes and strong recovery of input cost inflation, partly offset by increased operating costs.
Looking forward, we expect further improvements in shipment growth in the Americas as.
As contracted new capacity additions continue that ramp up in North America and market growth continues to normalize in Brazil.
Especially in unrestricted Q4 summer period, which also includes for the first time.
World Cup.
In Europe second quarter revenue increased by 28% to $533 million.
Paired with the same period in 2021 shipments for the quarter grew by 5% on the prior year.
Supported by recent installed new capacity in the UK and Germany.
Across the categories energy drinks in soft drinks grew well.
While software alcoholic beverage demand, particularly in the U K reflected increased on trade activity.
In addition, we have seen some transitory weakness in the export market for pellets drinks from Europe as a result of the elevated cost of ocean freight.
Inflationary pressures remain strong.
Second quarter adjusted EBITDA in Europe fell by 20% to $61 million as input cost headwinds will not fully offset by higher volumes.
We have now covered our outstanding 2022 energy requirements for Europe . Prior to the recent spike of cost in June and July and we are well progressed on building out our hedging requirements on a rolling basis for 2023.
We continue to actively pursue cost recovery initiatives with our customers and in some cases are working to a more permanent and separate posture arrangement LNG charter costs going forward.
We are not changing our prior assumption of full year 2022, net impact from European energy cost inflation of $25 million.
Looking to the remainder of 2022 in Europe . The continued ramp up of recently installed capacity in Germany, and the U K will contribute to shipment growth.
Yeah.
Turning to A&P as growth initiatives.
During the second quarter A&P made additional growth investments of $192 million supporting the pickup in shipments during the quarter and anticipated growth in the future.
Our project teams continue to perform an exceptional job despite the inflationary and supply chain challenges to deliver our investments largely to budget and with minimal delays.
To recap on some of the larger growth investment projects, all of which about a multiyear customer agreements.
In North America, the second of our two high speed lines in Winston Salem, North Carolina started production during the quarter. Following the commencement of the first line earlier this year.
In Huron, Ohio can production recently commenced with additional capacity to be added later in the year.
As a reminder, we acquired the Huron Brownfield site in late 2020 and commenced and production in late 2021.
In Europe , new capacity in the UK and Germany continues to ramp up as does the new line and <unk> in Brazil that was added at the end of last year.
We also provided an important update on our investment plans alongside our financing and capital allocation update at the start of gene that set a new shareholder returns policy.
In that update we detailed how our cash outlay for growth investments in 2022 has been lowered by approximately $300 million.
And includes a re phasing in certain projects.
Overall plant footprint remains unchanged for the medium term and the timing of its build will be driven by demand.
A&P is well placed to capitalize on the long term secular growth drivers supporting the beverage can throw a global scale longstanding customer relationships and our strategic relevance to key customers.
Okay.
Moving now to our financial position.
During the quarter, we raised $600 million.
Senior secured green notes and ended the quarter with strong liquidity of $761 million of which $436 million was held in cash and $325 million by way of an Undrawn ABL facility.
We have announced our intention to upsize that facility to approximately $400 million.
We further supplemented our liquidity with the issuance of 250 million euros.
In July a perpetual redeemable non convertible preference shares our funding needs are fully covered into next year.
Net leverage ended the quarter at four five times LTM, adjusted EBITDA and pro forma for the issuance of the preference shares with four one times as a reminder, currency effects are broadly neutral from a leverage perspective, given the currency makes it all that the majority of our debt has also been issued on fixed rate terms and we have no problem.
That's maturing before 2027.
Adjusted EBITDA minus maintenance capital expenditure was $152 million for the quarter or 84% of adjusted EBITDA, which illustrates the strong underlying cash generation of the business.
We declared and paid a second quarter dividend of <unk> 10 in June and also launched our buyback program for which we have authorization to repurchase up to $200 million.
Ordinary shares through to the end of 2023.
Given the proximity to quarter end, there was only a minor impact in quarter, two with $3 million of stock repurchased but repurchases since continued.
And as of yesterday's close our total repurchases are approaching $15 million of stock.
We believe the A&P approach to shareholder returns represents an attractive investment proposition through first.
Firstly, an attractive recurring 10 quarterly ordinary dividend currently representing a dividend yield of over 6%.
Secondly share buybacks to effectively return capital to shareholders amplified in scale by the fact that auto group does not intend to participate in.
And thirdly growth investments to support global demand with attractive payback terms backed by customers.
Before leaving to take your questions I'd like to recap on A&P is performance and key messages.
A&P reported second quarter EBITDA that was in line with our guidance despite challenging conditions.
Although near term demand outlook has some uncertainty global demand remains robust and beverage can industry performance has historically proven resilient through economic cycles.
Secular long term growth trends supporting the beverage can remain intact and A&P is very well placed to capitalize on these.
There are some specific areas of demand weakness in particular in hard Seltzer is in North America around which we will continue to adjust our capacity ramp up as required to match demand.
We are taking action to reduce near term energy risk, while remaining focused on improving cost recovery and pass through mechanisms in Europe .
Our current view of the market leads us to project global shipment growth for 2022 with high single digit percentage.
Full year 2022, adjusted EBITDA is projected to be at the order of $710 million, assuming a euro USD U S dollar parity exchange rate to year end.
This compares with the prior year reported adjusted EBITDA of $662 million or $629 million on a constant currency basis.
As a proxy everyone movements in the euro dollar rate represents circa $2 million.
On an annual basis.
Our estimate compares with our previous full year 2020 guidance of $750 million.
Of the $40 million reduction approximately $20 million is attributable to currency impacts and the balance reflects lower volume assumptions.
In terms of guidance for the third quarter adjusted EBITDA is anticipated to be in the order of $175 million, which compares with prior year, adjusted EBITDA of $176 million or $167 million on a constant currency basis.
Having made these opening remarks, we will now proceed to take any questions that you may have.
I would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure your mute function is turned off to allow yourself.
Quinn.
Once again that is star.
One of you would like to ask a question.
And we'll take our first question from.
<unk> with Deutsche Bank.
Hey, good morning, Thanks for taking the question I just wanted to focus on the revised growth outlook now pointing to high volume growth.
<unk> potentially coming into the year can you just walk us through some of the details of why that lower lowered outlook for your initial award how much of it related to maybe a slower first half in Brazil, how much is related to underlying consumer demand part delta or however, you would characterize it would be helpful.
Sure Heiko.
And so I think if we take it region by region.
Obviously, we're still projecting significant growth in <unk>.
All three regions, but the change in the guidance links to a number of specific.
Factors, So North America, obviously is well documented decline in hard seltzer in the last quarter, which we are therefore, taking a more cautious approach through to the end of the year and that's obviously aligns with the two major customers in the category one of which.
<unk> announced recently.
There is some volume weakness in North America due to lower promotional activity.
In the core categories. So it's slightly higher price point as customers pass through significant input cost inflation.
So those are the two factors really that led us to more caution in North America.
Europe , we talked about a couple of factors. The on trade has reopened more quickly than anticipated this year and so theres been a shift to <unk> in particular, and some one way glass by our customers and then we're also seeing.
On the export volumes that we talked about down because of the ocean freight issues.
So the exports of beer and sparkling waters into North America declined.
And then we also see our customers now increasingly facing their own supply chain issues in terms of raw material inputs logistics and so they are also struggling sometimes to get their product out of the door and into retail. So there's certainly some operational disruption in Europe as opposed to any market weakness, we still see good market growth in a number.
There are categories.
And then Brazil actually we're looking at a very strong growth through to the end of the year. We anticipate a good Q4 on the back as I said at the football World Cup, we see in Carnival, hopefully will be fully open this year and hopefully we have better weather as well.
And so I think our customers and we are the same or anticipating a strong Q4 in Brazil, So it's pretty much Europe .
North America, where we're being more cautious on the outlook.
Got it that's very helpful. And then on the re phasing of some of the capital projects can you just talk about that what exactly.
Eight days or delayed any thoughts about potentially canceling the project or maybe canceling an additional line that youre planning on initially.
Yes.
We're not canceling any projects.
Footprint plans remain intact, but we're certainly going to be very.
Careful and disciplined about bringing up capacity in line with in line with demand.
We signaled that the debt raise that we were pushing out pgi by on average a quarter or two.
It took 300 million out of this year and.
More out of next year and some out of next year.
What we're looking at now very carefully as the timing of the Greenfields.
How much we bring up you know what.
Stripping out the more sequence and and what timing and we don't have exact data on that now because I think we want to make sure. We're absolutely clear on the growth and the support that we're getting a gap because it will be very focused on the overall utilization of our network and we werent ramp up lines until we need them.
Sounds good I'll turn it over.
Thanks Scott.
We will now take our next question from George Staphos with Bank of America.
Hi, everyone. Good day Ali Thanks for the detail.
I was hoping you could perhaps give a bit more granularity on that.
The five or so things that you mentioned in answering <unk> question in terms of how they contributed to the call down more.
Typically or should we just take whatever it would be kind of call it 7% to 10% sequential drop or drop from where you were to where you are now at high single digits.
And sort of applied evenly to each of those into the North American decline hard seltzer the promotional activity and then I had a couple of follow ons.
Okay, Yeah, Hi, George nothing.
No I think we can give you a bit more around that so sort of broadly was 60 40 percentages across North America and Europe in terms of the change.
<unk>.
The majority of the North America is around the Seltzer market, where we had anticipated growth this year.
And obviously, we haven't got growth. This year. There is some as I said around the increased pricing at retail.
The majority of that is the <unk> side, and then on the European side I mean, you broadly.
A 50 50 split around this.
Exports and other supply chain issues and the more rapid opening at the on trade, particularly in the U K. So I think that's that's broadly how those split out okay I appreciate.
That and then.
I didn't detect anything and what you are saying as a change in your view the secular growth of the beverage can.
Yet on the other hand.
We're all charged here in terms of trying to be respectfully skeptical you called out and Youre not alone here. So we're not.
Picking on art.
You mentioned promotional activity for a couple of years the industry didn't need promotional activity to sell more cans and it could produce.
You are being a bit more as you said careful about how you are bringing on capacity rightly so to make sure that you fully utilize it.
But if the secular outlook Hasnt changed why would your long term capital plans change and so just trying to parse where get at what maybe youre seeing on the customer side that may be giving you a bit more uncertainty or maybe I'm over thinking it and overlooking into the details here. So any thoughts on that would be helpful.
Sure look I think that Ken has always had significant promotional activity as you know and particularly in North America.
So I think what we're seeing at the moment on that side is just a very unprecedented in the last 30 40 years level of inflation, which is leading.
Price rises that we've not seen so I'd expect that to normalize obviously this mean more positive economic.
Sentiment in the last few days with what the fed has been doing so I would expect that to normalize and you to see our customers to return to their normal promotional patents, which will be very accretive for the beverage can and one of the very encouraging data points in the market data at the moment is the growth in share in beverage cans.
In the soft drinks category in North America through this whole period, which I think shows that it's winning in the in the pack mix, particularly versus plastic and that is the thing that's really shifted the long term growth outlook for the can almost globally by removing the drag that used to be in North America, and we definitely anticipate that to continue with.
Sustainability tailwind regulators challenges for our customers to get hold of recycled P. T.
The permanent nature of the beverage can so I think that fundamental sustainability story is fully intact and is what has reversed.
Particularly the North America situation the rest of the World as you know George has always grown and always growing very healthily and that's <unk>.
Then about the patent takes advantages of the can.
Patiency, if they can through the whole supply chain.
The way it works for the quality of the training that branding and Thats why we see so much innovation going into the can.
Things, we laid out and when we came to market the category growth in beer in Brazil, the growth of Germany. All of those things. We believe are completely intact, but it's certainly true that the last 12 months with the.
Inflation in the supply chain challenges and some weakness in hard Seltzer has been that's been a more difficult environment than we anticipated.
Thank you.
We take the position that the rest of the industry that the secular growth drivers that really came to play in the last few years is still fully intact.
We appreciate that and actually I mean from our data we agree with your comment on share.
Just in CST from what we've seen of cans versus other materials, but we will see how that plays out to the last one and I'll turn it over.
One can you talk about how the surcharge efforts went for you what were the learnings what can you continue.
Again. Thank you. So that you can comment on a live Mic conference call and then any thoughts on the California legislation SB 54, the positives or negatives as you see them for the industry and for Canada particular, thank you.
Understood Yes.
I think as you said I can't say too much on the main on them on a live mic call about the customer contracts, but I think we've got very.
Positive engagement with customers around the energy surcharge I think that they fully recognize that this is an unprecedented situation for which the whole supply chain has to come together I think they are and you can see that in ordinary results announcements. They are successfully achieving price rises of retail and that makes it obviously fed.
We're not holding the costs that are part of the supply chain. So I think that's been a very constructive set of conversations I think that some go quicker than others, just the nature of the organization and smaller customers versus bigger. So we will see an accelerated recovery in our numbers towards the second half of the year and then we are as I said in our prepared remark.
Exploring specific mechanisms to deal with the <unk>.
Complete dislocation at the energy category in Europe , which has never been seen before and the fact that and offer you need special treatment relative to normal inflationary pass through mechanisms. So again I think we're having a very constructive set of customer conversations with our customers about that because they also are suffering this and they fully understand what's.
Going on.
Sorry, George I think in.
California.
Yes.
Yes, clearly positive.
Thats been rumored for a number of years.
Pretty dramatic.
Legislation could come on on.
Single use plastic in California.
Stephanie part of the underpinning for why we want to be in the southwest and why we will be in the southwest.
So yes, we remain very positive about that.
Thank you Ali.
Thanks George.
We will take our next question from Mark Wilde with bank of Montreal.
Hi, Good morning Ali how are you.
Hi, Mark very good thank you.
Okay.
Just curious if you're seeing any shifts.
Tumor behavior in any of your regions just in reaction to higher inflation.
Slower economic climate.
I'm thinking like <unk>.
So you're seeing a kind of a toggle back maybe returnable glass bottles things like that.
Yes, I think that that was definitely a factor in Brazil in the last 12 months, So I think that.
There was much less protection on the consumer through Covid much lower savings rates. So when the <unk> devalued and the economic conditions became more difficult and when lemme increased significantly which is priced in dollars. The candidate become less competitive for a short period of time in the pack mix.
I think that did have an impact and you did see a return to renewable to weight loss temporarily is custom.
Customers took some margin there.
And that did impact the Ken, but I think that what <unk> seen in the last few months is the stabilization of those trends.
I think April the market actually grew that May and June were still a bit weak, but not as weak as Q1 or Q4.
And I think Thats again, because the economy is stabilizing and SME is falling in the reais strengthened somewhat though obviously recently the dollar strengthening again, so that will continue to be a slight headwind in <unk>.
Then I think we did have a set of market factors that we talked about carnival poor weather that also played in as in the carnival being canceled I think Brazil is the only region, where we can identify an economic issue in our numbers unless you think.
This has been cited that one of the reasons for hard Seltzer weakness is that price gap to premium light, which I think is cited at around 7% and that does seem plausible to me that there is some trading down on price.
But otherwise I think North America oversee consumer savings rates have been high European.
At the same and R&D issue I think is to look carefully into the winter and in Europe in particular with the energy inflation and just keep a weather eye on whether the consumer spending is impacting us but.
What we do know and what our customers have reinforced to us.
The last thing to get cut back as the grocery shop and it will be the holiday, which currently people are not canceling because we're in that post COVID-19 period, but it will be the holiday to day out the restaurant, the discretionary spending and it won't be the at home consumption that gets cut when when times get tight.
Yeah, Okay. That's helpful.
Glad to see the.
Okay.
Pull back in the market based approach to kind of how and when you add.
Capacity I just wonder is it too early to talk about adjusting some of those medium term financial targets that you laid out around the stack.
I mean, I think we already signaled at the time the debt raise that this delay to those targets.
And I think we have to recognize that if we push out some of the.
The business growth investment inevitably pushing out the timing of the achievement of those targets, but we still remain very confident in the overall business plan and the goals we set.
With what's happened in the last 12 months, which has been a pretty extraordinary.
Unanticipated set of events, we have to be realistic about the timing over which that can be achieved. So we haven't obviously will go into our business planning cycle in the autumn and have a better view of that timing and what we're looking at the 23% and 24. So we won't give any specific guidance in this quarter, but clearly there are some some delay.
As to that as I say, we remain very confident in the overall trends for the category and for the product and therefore, we remain.
Absolutely <unk>.
<unk> to the business plan that we laid out it's simply a question of timing and phasing.
Yes, okay.
Yes.
Perfect.
Hi, Brian .
Energy.
Great.
Yes, we expect a material step up in profitability for Europe in 2023 off the back of as I said extremely constructive set of conversations with customers around the input cost inflation, where I think it's fully understood that it can be held in the supply chain and needs to go through to the.
<unk>. So so yes, I think we'd be anticipating recovering and not exact numbers yet will go through the process again in the autumn months, we've finalized all these conversations but we expect materials.
Increases in the profitability of our European business in 2023.
Okay sounds good I'll turn it over.
Well take our next question from.
Yes.
With RBC capital markets.
Okay.
Great. Thanks for taking my question.
So I just wanted to I guess first off go back to the growth question. So you know.
Obviously, there are there I guess, what youre kind of indicating as there is a little bit of a elasticity relative to the beverage can.
And is that is that is that what you're observing I guess.
Certain categories.
As it relates to hard seltzer and potentially.
The Brazil customer and so on so maybe you can just kind of give us your thoughts on that and then also similarly, you cited high energy costs and higher retail costs.
Inflation for the customer or for the consumer.
So is it really kind of do you expect demand to kind of accelerate if inflation moderates or how should we think about.
That dynamic thanks.
Sure Yes.
No I mean look I think every consumer category has a degree of elasticity and if you push the consumer.
A certain point, they will inevitably by a bit less.
And I think the scale of inflation, that's going through at the moment is having an impact.
I said to George's question I mean, the beverage can has always been a heavily promoted.
And thats, because its a super efficient way to packaged beverage so.
Our customers and their customers can make good margins promoting beverage cans. So we'll always see a high percentage of promotional activity and what's going on at the moment is the.
Our customers are raising and the retailers are raging raising average retail price with fewer promotions and so more is being bought off the shelf. So I think we shouldnt be surprised and in fact, the unusual period was really the back end of last year. When there were significant price rises going through in North America and volumes continue to grow that's quite unusual I think.
Therefore, you are right to say that the reverse does apply which is as the inflation comes off which are much more hopeful in North America and Europe .
You would expect to see back to full scale promotional activity and therefore, you would expect to see a growth in beverage cans, which would then be additive to the growth that we're seeing because of sustainability because of innovation. So yes, we'd be very hopeful around that trend.
Okay. Thanks, and then.
You have weathered quite a bit of FX and energy inflation you noted that.
Your energy outlook is similar.
As in the past.
But maybe you can just kind of give us your thoughts on kind of the longer term targets that you laid out.
Either at the time of this back or.
More recently.
Some of your comments around.
Kind of making sure that the growth is there.
Before you add lines kind of relate to that so are there any capital projects that you are pausing on that would change your kind of 'twenty four 'twenty five EBITDA build out or how should we think about that thanks.
Yes, so as I said.
We said that the debt rates, we are we did already re phase.
Some of our business growth investment by I think we said an average of a quarter or two at a time. So that remains true and then as I mentioned earlier that we will be keeping a close eye on the Greenfield investments, which are obviously, our biggest investments and we will be making sure. We phase those both in terms of the amount of capacity, we bring up how many lines and the <unk>.
<unk> of that capacity appropriately with demand so that will affect some of the capital that was in the original plan, but also some of the what we call. The second generation, it's mostly focused on that second generation capital that we've also discussed with you. So yes as I said earlier, there's definitely some impact of timings.
The EBITDA ramp.
We'll be giving any specifics on that today, and we will be going through our business planning cycle through the autumn.
There will be some impact on timing as I say, we remain very committed to the overall goal.
Thanks, and then I just I wanted to ask just one quick question on Brazil. So.
You noted oh, well above market growth.
Do you think that market now has kind of resumed its recovery are passed its headwinds that you've experienced the last couple of quarters.
Or are there some that are still lingering how did you kind of characterize the Brazilian market at this point.
Yes.
We're hopeful it will grow.
Hair out sometime.
Sometime in Q3, we think.
Get into a consistent growth pattern in Q4, we expect to be strong, but then obviously, we'll be lapping some some weaker comps as well.
You could say that semi economic uncertainty into 'twenty, three but again, we remain very confident in the fundamentals of that market because they are driven by the long term economics of the switch from entre to off trade, which you can see in markets all over the world as they develop so.
Yes, we're very comfortable overall for the market and we think that Q3 through Q2 of next year should be good levels of growth and we also are very confident in our own growth.
At this point.
Okay. Thanks.
We will now take our next question is from Angel Castillo.
Stanley.
Hi, gentlemen, thanks for taking my question just wanted to touch based on inventories so you've talked in the past.
Heartfelt for end market.
Clear.
Inventory issue, there, but just wondering across the other categories that anywhere else do you think.
But there may have been some inventory build maybe because of yes.
All of this supply chain concerns that maybe customers.
Stocked up a little bit more than normal.
Yes, just what youre seeing across all the categories in that respect.
Yeah, I'll kick off and I'll pass it to David So I think that we did see some inventory build we deliberately have some inventory build in our system because of supply chain concerns, particularly on metal.
So we had some deliberate prudence in the quarter to make sure we cover that and then particularly in Europe . We're also.
Working on and working with customers to get appropriate inventory positions in case of any disruption, particularly in the German market, but that's the high level picture I'll pass it to David.
Or more of the detail.
Thanks, I would say, yes, I think working capital has two factors as you get elevated input costs, even ask your days inventory outstanding and Safeco stays the same.
You get a dollar payout in the working capital balance.
But as already said, we very deliberately took the opportunity we had in quarter two.
Chip pushed up our inventory levels are lesser really as a contingency against potential future supply.
<unk> destruction.
<unk> come from a number of sources that are fairly obvious from what's out there in the market.
And also we are actively diversifying our supply mix.
Our nano minions to make it a more playful.
Yes.
As good opportunity to protect.
We're in that transition process.
And have you seen your customers. Additionally, some of our other parks shelters.
Not that I'm aware of to be honest, but again I think we are looking into the European situation and we have a team obviously.
Contingency planning for.
For the situations that may emerge in the autumn and part of that will be and already is dialogue with customers about what inventory positions they want to hold on our side and their side.
Got it that's helpful. And then I wanted to just clarify on the high single digits.
Growth for the year I think you talked about where the sources of maybe some of that incremental weakness came from but as we think about those regions. How would you characterize the growth in each region.
In terms of the makeup of that high single digit.
Sure Yes.
So I think the fact as I mentioned the other.
Main factors going through to the end of the year, So we see Europe and.
In the mid single digit.
We see Americas low to mid teens.
And that splits between.
In America lower in Brazil, higher so that's pretty much how we see and we see the full year.
Okay. Thank you.
We will now take our next question from Jay Meyers with Goldman Sachs.
Great. Good morning, everybody and thank you for taking my questions I wanted to follow up on the.
Kind of guidance you just gave us thinking about Americas shipment volumes can you help us think about.
How much of the volume growth for the rest of the year in North America is going to come from outright kind of consumer driven demand versus replacing some of the imports that you've talked about.
Yes.
I think hard to put.
Barry.
<unk> definitive numbers on it but <unk> got a few points I think of growth come out of imports this year.
There has been a significant reduction from the $14 billion.
But there are still inputs coming into North America, and so it's not that they all go away.
And then I think.
The other key point to growth with a sitting in the actual consumer demand.
And you can see some of that in the published data.
Got it thank you and then.
Just kind of can you can you help us think about your ability to actually offset the imports. So you know you have some kind of competitors, who have a large number of the imports coming into North America are those kind of contracted volume agreements or are those kind of more <unk>.
Apart market type contracts that you can go in and offset with a lower priced cans or kind of a better better contracts for those customers.
Most of those I think we are contractual.
Situations, if they were being brought in.
By by our competitors is my understanding so I think it's not that they then suddenly appear in the market I think there were some spot situations where customers obviously got quite desperate.
At points over the last few years and so those opportunities are available to us.
I believe a significant number of our contracted.
That's helpful. Thank you and then just a final one from me.
On Brazil, I Wonder you know we've spent a lot of time talking about the kind of demand situation, but had a.
A competitor announce a new capacity addition, there. This week can you just talk about a little bit habits supply situation shaping up there and kind of how you feel about the kind of supply outlook versus what youre seeing on the demand front.
Yes.
Clearly some short term weakness and you can see that in the data, but our customers and we share that view, a very confident about the future of cans in Brazil.
The long term guidance, we gave the 6% to 10% growth.
When we came to market with standby that so we think this is a short term blip and I think that it's not surprising that our competitors are being asked by.
Customers and other customers.
The planned projects and bring additional capacity to that market, we see ourselves being short tonnes through the back half of this year.
It doesn't take much and we've seen it many times in Brazil, It doesn't take much for it to turn when it turns.
Turns very fast and the growth is very strong so I wasn't surprised to see an announcement of additional capacity in Brazil, I think the market is one of the strongest with beverage cans in the world.
That's it for me thank you very much.
Thank you.
And once again that is star one if you would like to ask a question.
Well now take our next question from Ed Brucker with Barclays.
Hey, Thanks for taking my question.
Good morning.
My first one I wanted to get the ultimate reason.
For doing the share buybacks versus paying a larger dividend that you had telegraphed before.
That uncertainty with free cash flow or earnings going forward or was it more cautious outlook on the beverage can market.
No I think we were being very responsive to our shareholders.
There were a number of ways.
We could support them and this is one of the ways that we have feedback around and I think we ended with a very good mix of the dividend the share buyback and then the growth investment program. So we certainly haven't lost confidence in our program talked about the fact that the timing obviously isn't exactly what we'd originally planned but we haven't lost any any confidence in it but I.
<unk>.
We had a lot of feedback we spend a lot of time listening to our shareholders. So we took that advice seriously.
Got it and then my next question.
There is some pullback of the business growth investments or I guess the <unk>.
<unk> has pushed back.
What would you do with the cash that you've built club to spend on that and then.
Free cash flow that you get over the next couple of years would you look to reduce debt.
Maybe do our dividends or buybacks.
Yes, I think we haven't worked through.
We've set some leverage targets that we're comfortable with the $3 74 times forward EBITDA.
That's where we expect to be obviously, we have a dividend policy. We can adjust that over time. So I think we haven't fixed on any of that but wed obviously.
We would obviously think through all the different options and be very cognizant of what work for all the shareholder base.
Perfect. Thanks for the time.
Thanks very much.
Our next question will come from Michael <unk> with credit Suisse.
Hi, Thanks for taking my question.
Maybe just two follow ups.
On Europe .
I guess first of all just on aluminum sourcing.
How is that looking at the moment are you.
We're diversifying away from perhaps Russian suppliers.
I appreciate some of the European suppliers, or perhaps less upward integrated as well.
So perhaps there's not that many avenues for procurements, maybe a few of the middle East, but just curious to hear your thoughts around aluminum procurement, particularly in Europe .
Sure Yeah, we have no Russian supply.
And so no disruption from our perspective, all for our main.
<unk>.
We have diversified somewhat we have a very local supply base, which is an advantage I think.
We have diversified somewhat to address the growth.
And there are.
Investments coming.
Added in that market on the on the can sheet side. So we're making sure we're covered with an appropriate mix of local and input, but none of it Russian based.
And we've worked very hard.
Particularly on the supply chain to make ourselves secure and that's partly why you see some of the inventory build that you saw.
And our numbers so right now we're feeling very good actually about <unk>.
<unk> supply chain and the security of our position.
So a lot of that inventory is actually just sort of former sheets at the moment.
Correct Okay.
And then maybe just understanding a little bit of the downside scenario with regard to.
Sure some of the ongoing cost challenges in Europe .
You have what is it.
Four facilities or so in Germany I.
I guess, how are we to think about some of your production footprint.
There is a scenario, perhaps where there is some gas rationing.
How flexible is your production there with regard to maybe increasing capacity and some of the other facilities.
I guess any kind of appreciate it it's a complex question and it's sort of an ongoing challenge.
Maybe for us to better understand what you would do in kind of the levers you would pull in and if you can quanta.
Quantify anything at all around that Thats helpful.
Sure.
We've got a team working on contingency planning around the situation there are a number of leaders.
We are confident just to make sure. This preface the comments that we would be treated as a central just as we went through COVID-19 and that would be well positioned in terms of prioritization. We are doing a lot of work on that as well in terms of industry associations and our own personal context.
So we're confident that it should not come to this but if it did.
I think we have one of the most flexible networks of any kind of maker in Europe in terms of the breadth of our network and the different sizes, we have on different lines.
Around Continental Europe , and we do already shipped significant volumes of cans around that network. So to the extend that capacity is available.
Well placed to adjust and usually at the end of the year, we do have a few line stops.
<unk> typically have a seasonal business. So again, we could take some of those out.
Earlier.
Planning for those and then we have some inventory positions that we're addressing in terms of both raw materials and customer inventories and we will be talking to our customers again about what they want to build additional inventory.
Take account of the situation. There of course also have their own contingency planning teams in place. It's a range of things, it's not totally straightforward.
If it came to really full scale shutdown and we would not prioritized it would not be possible to completely replace it all but I think we've got as good a position as anyone in terms of the flexibility of our network and the options we have.
And how much of your European volume.
As chairman.
25%.
To say.
Yes.
So something maybe 2025% because again some of our German plants serve other markets legacy reasons Youll remember the German deposit scheme came in the German market actually went to zero. So.
Some of those facilities to serve customers in other regions.
Oh, sorry.
Alright, so the.
The volume is produced in Germany, I should say.
So that's more than you are in that 20%, 20% yet.
Got it and facility there as well as Cam funds.
Yes.
Perfect. Thank you very much.
Thank you.
Okay.
No that is star one if you would like to ask a question.
I will take a follow up from Mark Wilde with bank of Montreal.
Thanks Ali just a very simple one let me prospects of us getting north American industry data back.
I mean it.
Time, when the market has been pretty volatile the elimination of this CMI quarterly data.
Like a real disservice to your shareholder base.
Yes.
I would say that we weren't responsible for it but I hear what youre, saying and yes. There is ongoing conversation about doing that so I think it is a possibility yes.
Alright, well I think many of us would welcome it.
No I understand I fully understand.
Okay very good I'll turn it over good luck on the rest of the year.
Thanks Mark.
And it appears there are no further telephone questions I'd like to turn the conference back over to our presenters for any additional or closing remarks.
Okay.
So thank you very much everybody for joining the call I think we were pleased to be able to present, a strong quarter in very difficult circumstances, given the foreign exchange the inflation and some of the demand weakness that we saw in certain categories. We're looking forward to good growth for the rest of the year and into 'twenty three of material growth in both earnings.
Volumes into 2023, and we look forward to talking to you at the next quarter.
Thank you.
And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.
Yeah.