Full Year 2022 Ardagh Metal Packaging SA Earnings Call
Please standby.
Welcome to the Argos metal packaging S. A fourth quarter 2022 update call today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Stephen Lyons Investor Relations. Please go ahead.
Yeah.
Thank you operator and welcome everybody. Thank you for joining us today for argon metal packaging <unk> fourth quarter 2022 earnings call, which follows the earlier publication of a M. P's earnings release for the fourth quarter.
We have also added an earnings presentation onto our Investor Web site for your reference.
I'm joined today by Oliver Graham Anp's, Chief Executive Officer, and David Borde, Anp's, Chief Financial Officer.
Before moving to your questions. We will first provide some introductory remarks around anp's performance and outlook.
A&P as our earnings release and related materials for the fourth quarter can be found on A&P website at www dot <unk> metal packaging dot com.
Remarks today will include certain forward looking statements.
And include use of non <unk> financial measures.
Actual results could vary materially from such statements.
Please review the details of A&P as forward looking statements disclaimer and reconciliation of non <unk> financial measures to <unk> financial measures and Amg's earnings release.
With that I'll now turn the call over to Oliver.
Okay.
Thanks Steven.
Our performance in the fourth quarter proved resilient as we navigate the challenging market conditions.
Despite softer than expected consumer demand in the Americas.
Delivered global shipment growth of 1% and equivalent growth in adjusted EBITDA on a constant currency basis.
For the full year, we delivered shipment growth of 5%, including 3% growth in North America supported by well advanced investment program.
The contribution from high volume was however, broadly offset by input cost pressures, particularly in Europe as well as fixed cost under absorption and resulted in a 1% decline in adjusted EBITDA for the year on a constant currency basis.
We believe that we have whether it's the multiple challenges of 2022 and taken appropriate corrective actions to stabilize and enhance performance.
Look forward with increased confidence to delivering significant growth in earnings and cash flow and generating value for our shareholders in 2023.
We anticipate growth in global industry beverage can volumes across each of our markets in 2023 supported by secular trends that we've previously outlined such as sustainability driven impact mix shifts and innovation continuing to pay for the beverage can.
We expect industry growth rates of a low to mid single digit percentage in Europe .
Low single digit percentage in North America and Brazil.
Without growth investment plan, well advanced we expect to grow ahead of the market globally.
Adjusted EBITDA is anticipated to accelerate through the year due to increasing inflation recovery in volume acceleration.
We are encouraged by the strength of the European beverage can market and anticipate more normalized levels of activity returning to the North America, and Brazil markets, including promotional activity in the second half of the year.
We are being disciplined and reactive to changes in market conditions and as mentioned, we have taken corrective actions to substantially improve our performance in 2023 and beyond.
These include a reduction of our growth investments the balance our supply with demand.
A rebalancing of our network to address fixed cost absorption challenges.
The agreements with our European customers related to the treatment of direct entity costs.
And an increased focus on adjusted free cash flow generation.
On our sustainability agenda, we were delighted to recently received a first time standalone rating from CDP, achieving a leadership a minus rating towards management at a b rating for climate change.
This follows our first Standalone prime ESG rating from ISS.
<unk> also achieved ASI certification across certain of our European operation and joined other key aluminum industry leaders and signing up to the mission possible partnership.
And leading the effort to target the industry net zero emission transformation.
Turning our attention to A&P fourth quarter results.
We recorded revenue of $1 1 billion.
Which represented growth of 5% on a constant currency basis, predominantly reflecting the pass through to customers of higher input costs.
Adjusted EBITDA of $159 million.
Was modestly up from the prior year on a constant currency basis.
The contribution from volume mix, including from our growth investments was offset by the under absorption of higher operating costs and inflationary pressures.
Total beverage can shipments in the quarter were 1% higher than the prior year with growth in Europe , and North America offsetting a decline in the softer Brazil market.
Specialty cans represented 48% of global shipments in the quarter up from 46% in the third quarter.
The 2022, the whole specialty cans represented 48% of our shipments up from 45% in the prior year.
Looking at <unk> results by segment and at constant exchange rates.
Revenue in the Americas in the fourth quarter increased by 1% to $638 million.
Mainly due to the posture of higher input costs shipments were relatively flat versus the fourth quarter of 2021 with an increase in North America offset by softer conditions in the Brazil market.
In North America shipments grew by 3% for the quarter by 5% for the year.
Demand continues to be impacted by inflationary pressures and the lack of promotional activity, but with greater resilience experiencing nonalcoholic categories.
We experienced continued weakness in the hard seltzer category, which represented 90% of North American shipments.
We will conclude our near term capacity investment activity in North America in the first half of this year as the final new line of Huron, Ohio becomes operational.
Capacity additions at Heron, Winston Salem, North Carolina, and other branch, Mississippi position us favorably for a normalization of demand activity as inflationary pressures subside and promotional activity returns.
We anticipate some increased level of promotional activity into the second half of the year supporting our second half volume growth waiting an overall full year shipment growth at a high single digit percentage.
We will engage closely with our customers and manage our capacity in a disciplined manner as reflected in the near term curtailment of capacity within our network.
In Brazil fourth quarter shipments declined by high single digit percentage underperforming the market, which recorded us low single digit growth rate.
A market overall was softer than anticipated despite the world Cup staging during Brazil summer period.
The weaker macroeconomic backdrop pressured consumption.
Our performance for the quarter was negatively impacted by some supply rebalancing in the period by our customers, but we should be viewed in the context of our outperformance for the year as a whole where we grew by 8% against an industry decline of over 4%.
Market conditions remain soft, but we expect to grow in 2010 straight at a high single digit percentage supported by the startup of new capacity at <unk> in the second quarter.
We remain confident in the longer term attractive growth profile of the Brazil market and our planned Greenfield investment administer EIS will be phased in only when demand conditions allow.
Adjusted EBITDA in the Americas increased by 3% to $114 million in the fourth quarter we.
We benefited from an increased contribution from volume mix.
Learning from our growth investments with a contribution from unprofitable customer contractual volume commitments.
This was partly offset by higher operating costs due to fixed cost under absorption as we align production with demand as well as inflation pressures.
In 2023, we expect strong strict shipment growth in the Americas in the order of the high single digit percentage supported by the ramp up of our new capacity.
In the near term EBITDA growth will be constrained by fixed cost under absorption, partly mitigated by our curtailment actions and lapping a tougher first half comparison.
This demands against normalizing both markets, we anticipate a significant step up in EBITDA generation in the second half.
In Europe fourth quarter revenue increased by 12% on a constant currency basis to $438 million compared with the same period in 2021.
Mainly due to higher input costs shipments for the quarter grew by 1% on the prior year. Despite the strong prior year comparable and by nearly 4% for the year.
Consumer demand proved resilient in the quarter and was ahead of our expectations led by carbonated soft drinks and despite some softness in the beer market.
Shipments related to the export market for sales rates were down on the prior year, but the reduction in ocean freight rates as opposed to the improved outlook for this segment in 2023.
Fourth quarter adjusted EBITDA in Europe fell by 2% on a constant currency basis to $45 million as.
As the contribution from higher shipments was offset by higher overhead costs and input cost headwinds, including a short term posture cost headwinds created by the sharp fall in metal premiums in the quarter, while holding elevated inventory levels.
For 2023, we expect shipment growth in the order of low single digit percentage with the most significant increase in adjusted EBITDA arising from Q2 onwards, as a result of a more effective posture of our energy costs inflationary input cost recovery through our PPI mechanisms and a nonrecurring and some macro valuation.
<unk> issues.
Furthermore, the near term energy outlook in Europe has markedly improved since our last update we remain vigilant as the European market continued its long term journey to diversify its energy sources and we are almost fully hedged for our energy requirements for the current year.
In the first half of this year, we will complete. The addition of plan further capacity in our last year tough plans in southern front as well as finalizing additional capacity in Germany.
This concludes our brownfield investments under our initial growth investments.
Previously indicated as part of our disciplined capacity management, we will close the legacy <unk> line in Germany, the balance on network needs.
I'll now briefly hand over to David to talk you through our financial position before finishing with some concluding remarks.
Thanks, Ali and Hello, everyone.
We ended the quarter with a healthy liquidity position approaching $1 billion of which $555 million in cash.
This was supported by a net inflow of working capital in the quarter approaching $250 million.
Reflecting both seasonality and our concerted efforts to right size working capital.
We anticipate a third benefit from working capital for 2023 in the order of $100 million through our continued efforts.
In the quarter A&P made additional growth investments of $225 million of which plus to $150 million was growth capex and the remainder three leasing.
Our growth investments for the year totaled just state of $600 million with the cash element being under $500 million.
Which was in line with our Q3 guidance and a reduction of approximately $500 million from our original plan in response to changing market conditions.
Maintenance Capex of $109 million also finished the year in our guidance range.
For the current year, we expect great investments of just under $400 million with the cash flow element under $300 million.
As we complete projects currently underway.
This includes the recent small investment in a digital camera printing business in Europe could nomarch in support of early growth customers and follows on from a similar 2021 investments in North America and hot trends.
Net leverage ended the quarter at four nine times LTM adjusted EBITDA.
As a reminder, currency effect supporting neutral from a leverage perspective, given the currency mix of our earnings.
The uptick of the year like just parts of the year and led to a small loss official headwind.
Our bonds have been issued on fixed rate terms and non mature before 2027.
As mentioned.
<unk> investment plan is well advanced which strongly supports earnings and cash flow quite setting a pathway, but deleveraging in 2023 and a more meaningful step lower in 2024.
We have today announced our first quarter dividend of <unk> 10 per share to be paid later in March in line with our guidance.
Which we view as sustainable and a supported by stronger near term cash generation quite fall.
We anticipate the business will generate positive adjusted free cash flow this year and.
And we'll be even stronger again into 2024 as we expect a further significant reduction in <unk> investments.
Our capital allocation strategy will prioritize dividend sustainability and deleveraging in the near and medium term.
With that I'll hand back Tony.
Thanks, David as I, just before moving to questions just to recap on A&P performance and key messages. So our global shipments grew by 1% in the quarter and 5% for the year supported by our growth investments, which will drive future shipments and earnings growth.
Softer than expected demand conditions in the American Americas in the quarter resulted in an earnings performance below our expectations, the lower volume through lower volume contribution of fixed cost under absorption.
Our growth investment plans are well advanced and we expect a significant reduction in investment activity in 2023 and again in 2024, as we remain disciplined and the balancing of our capacity with demand conditions.
Secular demand trends continue to support the sustainable beverage Kevin for which we are very well placed to capitalize as demand normalizes.
And our actions taken to improve energy posture realigning capacity rebalanced inventory as well as volume growth all support increased positive adjusted free cash flow generation and adjusted EBITDA growth in 2023 and beyond.
Our current view of the market leads us to project A&P global shipment growth of 2023 of between mid and high single digit percentage.
Our full year 2023, adjusted EBITDA growth is projected to be to grow in the order of 10% weighted to the second half of the year.
Our EBITDA guidance reflects the contribution from increased volumes supported by our growth investments as well as an improved margin on our European business through a more effective recovery of.
Energy and other raw material inflation.
A return to demand normalization, we continued to efficiently manage our cost base through the balancing of our network.
In terms of guidance for the first quarter adjusted EBITDA is anticipated to be in the order of $130 million.
Which compared to the prior year adjusted EBITDA of $142 million on a constant currency basis in.
In addition to the seasonality of our business. We would note that the first quarter performance and 2023 reflects inflationary pressures that will subside as we move through the year as well as inventory rebalancing.
Having made these opening remarks, we will now proceed to take any questions that you may have.
Thank you if you would like to ask a question. Please take another pressing star one on your telephone keypad.
We are using a speaker phone. Please make sure your mute function is turned off to that youre signals from sorry equipment.
Please press star one to ask a question.
Well pause for just a moment.
Yeah.
Well go first to George Staphos with Bank of America.
Thanks, very much hi, everyone. Good day.
Thanks for the details.
I wanted to.
Spend the first couple of questions.
On the Americas.
And Ali and David You mentioned, the Americas volumes were not where we would expected customers.
Customers rebalanced their suppliers it sounded like can you give us a bit more detail in terms of what might have changed and what might have surprised you relative to the guidance that you gave.
Coming out of three Q.
And then if you would can you give us a bit more detail and I appreciate that the overarching comments about the cadence in the Americas for 'twenty three in terms of EBITDA. It sounds like it's quite a second half weighted can you review the housing wise a bit more in detail.
And one quick follow I'll turn it over after that.
Sure.
Joe action either.
So look I think that.
The main elements in this we're in Brazil.
I will touch on North America as well so in Brazil in Q4, the market was softer.
Softer than we anticipated we'd hope for more of a.
Well balance.
And a better summer I think we've had another very poor weather season down there and in the softer market conditions.
Some of us customers rebalance their portfolio towards other suppliers and that was because we had quite strong performance with them.
Earlier in the year and that met their contractual commitments with us to a large extent and that meant they were able to rebalance that.
Supply so that's what happened and.
But in the end the core reason for that was the market was a little bit softer than anticipated and that also goes to the commentary about the Americas in 2023, we do see the Brazil market, starting again, a little softer than we had anticipated the weather continues to be poor, but I think the.
The macroeconomic situation there.
Denise to be challenging inflation pressures are still resting on the consumer and our customers because of the high level of hedging they took last year.
Anatomy and premium because of the inflation sitting in the macro conversion put through significant price rises on cans retail and we're seeing that impact in volumes and I think you'll have heard commentary to this effect, but it looks like the market for the first half will prioritize more returnable glass and.
In the short term, while that inflation washes through the can price and the LMA in premium hedges come down, which we anticipate in the second half. So that's why we're pointing towards more of a second half recovery, particularly in.
In Brazil, there is some effect to that in north Americas volumes were a bit weaker.
In Q4 in North America demand anticipated that was.
Ongoing price rises retail I think we all thought at some point, we would see the limited that but are customers still so.
Limited volume loss, but significant price gains, which was an economic equation.
For them and so we still saw that pretty significantly in Q4 with the overall volume loss, that's being referenced elsewhere, and we think thats still persisting to some extent in Q1, particularly on the soft drink side, but we do anticipate that will start to unwind in Q2 and beyond because the inflation will lap.
And I think that we're hitting the limits of those price rises we're particularly seeing some of the retailers start to resist though so the we're confident that we will see a more normal promotional environment in North America as we go through the year.
And just.
If you've mentioned it and I missed it I apologize so what are your expectations for Brazil, both in terms of volume and EBITDA growth and I know, maybe you don't want to do it to the basis point, but if you could give us some directional commentary.
Given the sort of the laundry list of things that are going against you and perhaps the industry in 'twenty three and Brazil.
Sure Yeah. So look we although we see the market, we pulled that down a bit from mid single digits to low single digits, we still see some.
Some growth ahead of that so we pointed in the remarks to high single digit growth in Brazil across the full year.
With some second half weighting on the EBITDA I mean, as you know George we got that at the Americas level.
I'll take the overall.
EBITDA and about half of that growth is Europe half as Americas, but it is true that EBITDA growth in the Americas is weighted much more to North America and Brazil.
Okay, but you feel comfortable about your Brazilian forecast, even with everything that we just went through in terms of whether being poor the macro the consumer being weighed down et cetera et cetera.
Yes, because I think this is really about.
For the first half and we see it as a very problem.
You saw that the market for a long time.
This return to switch back to returnable, we see it as temporary I think the same trends that was pre.
Pre COVID-19.
Switching to one way packaging those will return and they may even return somewhat in the first half of the returnable switch goes too far, but I think that the inflation in the package will come out in the second half and then we will see a more normal balance between returnable and one way packaging, which will favor the beverage can.
Okay.
I've Overstayed my welcome I'll turn it over I'll come back in queue. Thanks.
Thanks, Joe.
Okay.
Anthony Pettinari.
Hi, This is actually Brian birchmeier sitting in for Anthony Thanks for taking the question.
Can you provide some <unk>.
Items, where the year over year free cash flow bridge, we have the 10% EBIT growth.
Brian has some detail on capex, but my apologies if I missed some color.
Interest taxes, working capital or comparable depreciation.
Sure Dave.
David.
Yeah sure Hi, Brian . Thanks for the question say working capital. We think we'll have an influx of the order of $100 million.
Business growth investment under 300 million for the full year.
<unk>.
Small acquisition activity and as I referenced in the remarks maintenance capex around the 131 40, Mark lease repayments 80 to 90 ish.
Cash interest paid $1 75.
If you're modeling EPS of course, we have norm.
Phoenix of around about 25. In addition to that and then cash taxes of the order of 45 million I would suspect.
Got it. Thank you for that and just one quick follow up for me looking at some beverage companies demand forecast. It seems like hard Seltzer, maybe challenged again this year I'm just curious what your guidance is assuming for hard Seltzer and soldier remains.
Continue to see negative growth rates, you think you could say.
At the high end of your guidance still do you have other levers that you can pull.
Yes. So look we were assuming some very small level of growth in hard seltzer.
Prior to the coming into the year and we've downgraded that slightly in this guidance.
Because the category does still seem to be weak there are some.
Company is doing better some doing slightly worse. So we are seeing.
The shakeout that you would anticipate in a category like that.
But yes, we're basically looking at it being flat to slightly negative in this guidance.
We are seeing other categories in good growth, so I think that the spirit sector of the energy sector.
I anticipate carbonated soft drinks and sparkling waters to being growth. So I think the broader soft drink sector a lot of innovation.
We do see growth this year.
But we're not we're not relying on hard seltzer too much in that guidance.
Got it thank you I'll turn it over.
Thank you.
Yeah.
Well go next to Chris.
Great.
From credit Suisse.
Yes, hi, good morning.
Good morning.
Yes, hi.
A couple of questions I think.
One of the things that I think we're we're struggling with a little bit as to unpack.
Some of the variances with respect to.
The EBITDA shortfall this year entering the year.
Roughly $800 million consensus.
And you come in at 625, So I was wondering.
Can you unpack some of the moving pieces between.
Inventory metal premia and fixed cost absorption.
Energy <unk>.
Mix and then within that.
The prior kind of long term target of doubling EBITDA by 2024.
Maybe if we FX adjust that would put you still in the $1 $950 million.
Yes. This year in 2023, we're talking 690 so.
Is there anything structurally that has really changed a lot do you feel like.
Some of these buckets of either Unrecovered inflation or mix are fixable, and just if you could help frame.
What you think maybe the longer term capability of the business says.
Sure. So look I think I mean, we guided 70 75 at the start of last year. I think 800 is on the on the market, but we guided 775, and we had another I don't know.
Say $20 million of FX out of that.
And then I think the two big effects in the year, where the European energy situation.
Some addition from metal mismatches and year and then the volume misses, particularly in North America that are also to be clear volume amount of mix Miss because the hub services.
Some of those innovation categories, where our higher margin for us. So I think if you play that forward into the future in a structurally obviously the FX is different structurally there is some mix degradation in our forward forecast because of that that falloff in certain categories, where.
We're providing better mix, but then after that youre essentially saying, it's about the timing of growth.
We've got two to three years of runway here now with the business not needing a lot of investment.
Where we see us growing into the into the footprint. So.
Not putting any hard numbers on it I think the only two structural factors compared to the original projections are really FX and mix. The rest, we see ourselves growing into as the market returns.
Okay.
And then could you just give us a little bit more color on <unk> volume trends were roughly two thirds of the way through the quarter. So to the degree you can I mean theres been some conflicting information in terms of promotional activity and volume levels.
Could give us maybe a little bit more color on how you see <unk> volumes that would be helpful. Thanks, guys.
Sure So look I.
North America looks pretty healthy we had a good January .
Even though we're less day weighted which is where I think most of the promotional activity has returned and I think the soft drink space is still more mixed in terms of promotional activity, which is why we signaled it is more second half weighted in our view.
Brazil market Wise I think it grew 1% in January is a market we grew above that.
But it is a very soft comp.
Q1 last year in Brazil was really soft with COVID-19 as well as the weather.
And so the market remains softer than anticipated I would say.
We see that persisting through Q1, and Europe has got off to a solid start.
Roughly in line with where we saw the market.
Great. Thank you.
Thank you.
Well go next to Kyle White with Deutsche Bank.
Hey, good morning, Thanks for taking the question.
On the fixed cost under absorption when do you expect to get some more normalized fixed cost absorption and is it possible to give an estimate of what the headwind was.
Here in the past year as well as what you expect in the first half of 2023 from this.
So look I think that we.
We expect that to normalize during 2020 for uncertainty if you will out of the system by 2025, we'd hope for most of it outlets during 2004.
I'm not sure I have the numbers to hand on the sort of the backend of last year with the first half of this year. We're talking one to 2 billion of capacity in Europe that we're needing to curtail in a couple of banana touch over a couple of billion in the U S.
Yes, so it's in the tens of millions to sort of drag that we've got on that both sides of the Atlantic.
Got it and then on the capacity I think I may have missed it in the prepared remarks I was hoping just to get an update on some of the capacity expansion plans.
What's the update on the third line at the Ohio plants that being delayed and then looking at Capex. This year as well as next year expected to be down.
Should we assume the greenfield in Brazil is indefinitely delayed and then maybe what's the update on the Northern Ireland plant as well.
Yes, the third line in Huron is coming up this year, and then Youre right to say that both the greenfields with OLED.
But in in place of the projects will be restarted when demands.
Permits and that's definitely.
Definitely over two years for both of those.
Yes significant delays to those projects, we're going to be very disciplined about making sure that we put those in place when needed and not before and obviously that helps us drive some significant cash flow over the next 24 months.
Got it I'll turn it over.
Thank you Joe.
We'll go next to Andrew <unk> with Morgan Stanley .
Hi, Good morning, Thanks for taking my question I wanted to get a little bit more color on slide 10, I think there was a.
Slide where it showed.
2022 into 2025, CAGR for kind of the industry and broadly it seemed to kind of indicate low single digit type growth across the various.
Across the various key regions.
Curious there seems to be a little bit kind of moderated versus prior expectations and even to some degree kind of 2023.
If you could kind of give us more color on your thought.
Process like the secular growth story, and if there has been any kind of change or a step change in how you look at the market kind of over the medium term.
What are the quarter kind of the factors there that you're kind of looking at and maybe what gives you confidence as you think about it.
This medium term growth.
Sure Yeah. So look I think the only real change in the last few months has been some caution around the Brazil market in the near term.
And again I think we absolutely see that as a short term impact driven by this extraordinary inflation.
It was inflation anatomy and premium that has really come off but our customers hedged.
At a time last year when it was very elevated on both dimensions and those hedges roll off until and in some cases the middle of this year. So I think thats a.
One inflationary aspect then obviously the devaluation of the real.
Significant amounts of the can cost structure are priced in dollars and so that creates inflation in the beverage can in Brazil, and that's what we've seen in the last 12 months across those three dimensions, so that will roll off.
The hedges roll off and then also the inflation will lap.
So we anticipate the price rises that our customers have put through on beverage cans of retail will start to moderate in Brazil, and when that happens the margin profile leaves between returnable or one way packaging and beverage cans and therefore, we will see the switch back into into cans and we will see the returns of the sort of growth rates, we had in Brazil.
<unk>, 5%, 10% if not higher in the second half of 2010. So we've put mid single digit on Brazil for the long term and we think Thats a very safe assumption. We are just being much more cautious in these remarks about the first half of this year. If you turn to the North America, We think that is a low single digit market.
Obviously grown a lot in the last few years off a much bigger base now.
But we see the sort of trends around innovation around sustainability, particularly on the software side.
Supporting the beverage can in the past minutes, you can still see in Nielsen data that the beverage count is winning.
Pack mix.
Sure. So we think Thats, a fair assumption and obviously off a 120 billion market low single digits is good is a good amount of growth.
We would be confident in that sort of number through the middle of the decade, possibly with some upside.
Some of the efforts on Stillwater that we see going around.
And some companies starting to make inroads.
That could be some upside as well in the next say two years and then Europe has been a long term growth story.
Long term around 3% more recent years pre COVID-19 more like four or five 6%, we're being cautious with that saying we think it's at low single digits. This year, just as we work through some of the softness in.
The energy sector is growing very well, we still have the under penetration of the German market.
5 billion can market.
The growth being seven or 8 billion equivalent markets like UK and Spain.
The $10 billion. So you can see big upside in Germany, Eastern Europe was growing before the board. So I would hope that that would return and again, you've got the sustainability trend very strong in Europe and the innovation. So we think low single is pretty conservative probably low to mid <unk>.
<unk> long term projection for Europe , so yes.
Overall, we remain very confident in the growth prospects of the count in all of our markets. There's no question that the last 12 to 18 months, we've been hit by some some extraordinary unexpected, particularly inflation related shocks to our growth and we're just being cautious in the short term around them.
That's very helpful. Thank you and then as you think about the curtailments are.
Curtailments of some of your assets as well as some of the.
Paring back of capacity growth can you talk about your capability to grow should should demand reaccelerate in.
We returned maybe back closer to the mid single digit growth that we were seeing.
What's what are the kind of are there any implications from pulling back on capex in terms of your ability to grow and your ability to kind of get those curtailed assets our lines back back up and running to make wells can you just your capabilities on that would be helpful. As we think about 'twenty three 'twenty four.
Yes look I think you can think about 'twenty three 'twenty four and into 25 I mean, we've got some significant capacity that we could tailing.
If the market grows ahead of our expectations will be very well placed to use all that capacity.
So I think we're looking into a period of essentially investing in three growth.
From this point forward, obviously, we've got the overhang this year the projects, we've already done which is in our numbers, but then we expect very significant reductions in growth capital.
To be able to grow into that capacity, there's no real significant cost to that that obviously, some frictional costs, starting the lines back up but essentially those are at the margin.
<unk>.
We have some cost also could savings, though so I think that the story. There is that we've got a very good position here. If the market grows ahead of expectations, we don't need any additional capital to grow into that space.
That's helpful. Thank you.
Thank you.
Okay.
Well go next to Jay Harris with Goldman Sachs.
Hey, guys. Good morning. Thank you for the time I gave me in here.
The first question I had was.
Last quarter, you had commented that you think the outlook for 2023.
Yeah.
You didn't need to access any capital markets to finance, either capex or dividend payments.
Given the outlook you provided today does that view still stand you know given that the lower capex, but you know.
Some of the kind of lower earnings.
For the year, so curious out there.
No.
Definitely so yeah yeah.
Sorry go ahead David.
I was just going to say this I can assure you on expenses.
Okay.
Got it and then just kind of a little bit higher level on how you're thinking about balance sheet leverage.
Obviously growth hasn't really kind of materialized.
To the right we had expected coming into the year is four five times still kind of the right.
Longer term leverage for this business or do you think kind of given the lower trajectory coming into 'twenty three 'twenty four that you no longer term, maybe we want to think about a lower number.
Yes, David you want to.
Yes, yes.
So yes, I think we're modestly deleverage this year.
With four nine times this year and.
So I think we're modestly deleverage this year more meaningfully in 2024 hours.
Yes, I think Greg said investment requirement.
Ops away because off near term investments are complete.
And so we see substantial adoption than say so I think you can assume that we're very focused on that purchase.
Pat remarks, we're looking for at least $100 million of working capital inflow this year.
Operating cash flow collections that are round about 80% of EBITDA all in all our modeling.
23 sites, yes, it's a key focus topic for us, but it will take time to get it back.
Thank you.
We'll go next.
Gabe hard Steve.
Wells Fargo Securities.
I'll, let David.
Hum.
I had a question I guess I heard quite a few references to promotional activity and particularly picking up in the back half of the year I'm. Just curious how much of your growth outlook is sort of contingent or dependent on that if you were to pressure test.
We go through 2023, we're having this conversation.
The first part of 2024.
That does not materialize could we be talking about.
Flat performance.
For R&R, maybe the industry is down or how would you instruct us in the outside world to think about that.
Yes, I think it definitely isn't to that extent.
So look it essentially means that we are assuming some degree of growth in carbonated soft drink volume in 2023 in North America, but if you take our EBITDA guidance split between Europe and North America.
And we're not relying on that promotional piece in Europe in the same way because you have some.
Additionally, inflation recovery in Europe , as we've reset our contracts. So I think youre basically talking about a portion of the North America guidance, it's definitely not even all of the North America guidance, which isn't all of the Americas guidance.
So no we wouldn't be looking at that kind of impact on our guidance from promotional activity in North America, you're talking.
Jose a portion of Americas, and we've not assumed.
Significant growth, we just assume that there is some growth in volumes in carbonated soft drinks in North America in 2023.
Okay, and then somewhat of a I guess.
I don't know exercise and just.
Thought process, but.
As we look at a lot of the innovation, that's coming across for Bev cans.
<unk> categories.
Lines are getting blurred and it seems like it implies a lot more label changes.
And.
Smaller launches things like that.
How do you as a supplier.
Paid for that.
Or think about it again from just an operational standpoint.
I got one more question after that thank you.
Yeah look I think.
And the way the North American market has normalized to what we've seen in Europe for years in terms of mix of drink types mix of Skus.
And a lot of experience about therefore in our operations and bringing on experienced in North America. So I don't anticipate that being.
A huge drag and obviously when you have a little bit of extra capacity.
Becomes even less of a drag but typically the way you get paid for that is that the smaller customers.
A bit extra.
So that guidance that reflects the additional complexity in that.
Additional downtime on the line. So we don't see that as a major drag to performance it's.
It's just more to be honest, north American normalizing with the global market.
I think that covers that question, but you said you had another right.
Yes, one last one just in thinking about again kind of how you look at across Europe .
For them in your capacity utilization et cetera.
If growth does not materialize and I guess this is more a comment on Americas, or maybe specifically United States.
If growth does not materialize.
Is there an opportunity for you to tighten up some of your capacity.
Lower cost inefficient I don't know how you guys think about it but.
Or is there a timeframe that we should be thinking about it from the outside world.
When you look at things and say okay.
It doesn't make sense to curtail production anymore. This is more of a permanent adjustment.
Thank you.
Yes.
Okay.
Look we're constantly keeping the network on the review I think it is.
Answer to that we will look at it through this year.
Into 2024, so if there are additional changes needed will be looking at through this year.
But to be honest, we're always having to keep that under review we're very disciplined.
As is the industry I think around ensuring the supply and demand balance we expect to run in the ninety's utilization preferably near the middle of the nineties.
And that's why we're going to try and keep the network over the next few years.
Thank you.
Thanks, Ken.
As a reminder, if you ask a question that is star Wang.
We'll go next to George Staphos with Bank of America.
Yeah.
Thanks very much.
Peggy piggybacking on some of the topics from the last Q&A that Gabe had.
But on the table do you have the ability.
To make discretionary cost reductions that would not require.
Our larger decision around your capacity or are you pretty much limited right now with your existing cost structure until you make us not saying you will but until you make a change on your on your platform how should we think about that.
Obviously individual lines.
We are doing at the moment can be to sales, which does have a.
The impact on cost it doesn't have the same impact.
As major decisions because overhead more overhead stays in place.
Yes, those decisions that we are taking and we have that ability to continue to make those then that most of the cost in beverage cans offsetting in the plants, but we are being very tight on SG&A at this point, it's not the este edit expanded too much in the growth phase, but we are being very attentive to SG&A.
And we will keep that on the strong review over the next year or two have already taken some action there.
To make sure that we rightsize in certain areas.
Pivot from more of a growth focus to more of a filling the capacity we've already got.
So I think the step change is typically do occur on the on the network side, but we will be keeping a close on all aspects of cost in this period.
Thanks Ali and then you mentioned earlier that it's been a more favorable energy.
Environment this year than perhaps we were worrying about or thinking about third quarter last year looking into 'twenty three.
What do you do and what are you doing now if in fact, the energy markets don't behave like you'd like there is some other.
Exogenous effect event that occurs and all of a sudden the industry needs to and this is my wording scramble. What are you doing now with your customers to get ahead of that hopefully doesn't happen.
But nonetheless it could.
Looking at only 3% to 24.
No great question, I mean, given that it's exactly a year ago.
We were faced with the shock that very few people saw coming.
So look I think that the answer to that is with.
We're taking action now.
To de risk the situation so clearly in the north.
Months with.
The the very mild weather, we had in Europe has been a step.
That change in the in the energy market and the outlook for the energy market.
We were already pretty much covered for 2023 as we've described on these calls and elsewhere that we've hedged through the year.
<unk> hedging policy to be pretty much hedged.
Q3.
And we've done that in a way that led to a reasonable outcome given the extreme situation we were in.
That's what we discussed with customers and got some good cooperation with customers on passing that through what we've been doing in the first part of this year is looking into 2024 and even into 2025 to derisk our position because like you we count.
Resting on the idea that this will persist there could be other shocks so materially.
Materially de risking our position going forward at this point, including discussions with suppliers upstream of us about the derisking of that position. So so we're very active around that as we speak.
George.
Thanks Ali I would imagine, it's maybe a better environment to talk about the.
Elements of the commercial terms that need to change when actually might help the customer because energies.
Is declining as opposed to hey, we need to Derisk and Oh by the way that means there is an increased level of cost we had to pass through would you would you agree with that statement or what's wrong with that view.
There's nothing wrong with that but it's obviously much more straightforward when things are on the decline like this in terms of costs and we've set up some very what we consider very acceptable mechanisms with logic customers around the situations. So so we think we're in a good place around all of that in Europe going forward.
Okay.
We appreciate the time good luck in the quarter. Thank you guys. Thanks, Greg Thanks.
Thank you.
Thank you we are nearing the top of the hour to be mindful of everybody's time, I would like to turn the call back over to Mr. Krohn.
Great. Thank you very much everybody. We appreciate your time and as we said on the call I think we have a resilient Q4.
Some difficult conditions, but as we look forward into <unk>, we see a lot to be optimistic about we see our returns.
Promotional activity in the Americas, we see Brazil, I think particularly in the second half, we see returning to more normal levels of growth and with Europe with the energy situation and the way we've addressed the energy situation. We see good recovery down on margins, we're probably three quarters back to where we were prior to the energy crisis in terms of margins this year and we expect to be.
More or less fully that next year, so that we see.
A good situation for the company, we see a.
Great platform now to drive a much more free cash flow generation on the back of the investment program is pretty much complete and we look forward to telling you about that journey on subsequent quarters. So we look forward to talking to you at the Q1 results. Thanks very much.
Thanks, everyone.
Thank you. This does conclude today's call you may now disconnect.
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