Ardagh Metal Packaging S.A. Q1 2023 Earnings Call
Okay.
Welcome to the art of metal packaging S. A first quarter of 2023 results call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Steven lines I talked about food packaging Investor Relations. Please go ahead.
Thank you operator and welcome everybody. Thank you for joining us today for our metal packaging first quarter 2023 earnings call, which follows the earlier publication of a M. P's earnings release for the first quarter.
We've also added earnings presentation onto our Investor Web site for your reference I'm joined today by Oliver Graham M. P as Chief Executive Officer, and David Borde, A&P as Chief Financial Officer.
Before moving to your questions. We will first provide some introductory remarks around A&P performance outlook.
<unk> earnings release and related materials for the first quarter can be found on <unk> website at www Dot alright, Dan metal packaging Dot com.
Remarks today will include certain forward looking statements include use of non <unk> financial measures.
<unk> results could vary materially from such statements. Please review the detail of A&P as forward looking statements disclaimer and a reconciliation of non <unk> financial measures to <unk> financial measures and a M P's earnings release.
I will now turn the call over to Oliver great.
Thanks Steven.
We delivered a solid performance in the first quarter and met our market guidance due to disciplined costs do chip actions to improve manufacturing efficiency and stronger input cost recovery.
In lights of our resilient start to the year, we are reaffirming our full year guidance.
We delivered global shipment growth of 3%, including 5% growth in North America, and 2% in Europe , and adjusted EBITDA of $130 million in line with our guidance.
Adjusted EBITDA result represented an 8% decline on a constant currency basis versus the prior year quarter.
The contribution from shipment growth was more than offset by higher operating costs.
Looking into Q2 and beyond we see inflation recovery in Europe that will drop through to adjusted EBITDA as we set out in our forecast.
Global demand remains restrained by sustained retail price inflation, but we are encouraged by the early signs of a pick up in promotional activity in North America, especially in non alcoholic beverages, and a broader moderating outlook for consumer pricing supported by an easing of input cost inflation.
Input cost recovery in Europe through the annual resets in our PPI mechanisms and a more effective pass through of direct energy costs and good volume growth in North America drove an adjusted EBITDA performance in both regions that was ahead of expectation and offset a softer performance in Brazil, where industry demand is slowly recovering.
We continue to manage our capacity in a disciplined manner through curtailment actions that motivates us footprint ahead of growth in demand.
That position the business for a period of investment pretty growth.
Adjusted EBITDA is anticipated to accelerate through the year due to inflation recovery and volume improvement.
Our expectation for industry growth in 2023.
Boosted by positive secular tailwind is very low single digit percentage growth in the Americas in the low to mid single digit percentage growth in Europe .
We continue to project significantly increased adjusted EBITDA and positive adjusted free cash flow in 2023 with further improvement into next year.
And we are committed to our quarterly Tencent its dividend.
We are proud to committed to the international aluminum Institute aluminum for 2030 initiative, bringing together global leaders across the aluminum supply chain with the aim to celebrate accelerate progress towards net zero emissions.
As part of the mission possible partnership we are in dose the industry back net zero transition strategy and we continue to progress our sustainability targets and are delighted to just sign the PPA agreement solar electricity in Germany, which will provide approximately 20% of our electricity needs.
Turning our attention to A&P first quarter results, we recorded revenue of $1 1 billion, which represented growth of 2% on a constant currency basis predominantly reflecting higher volumes.
<unk> EBITDA of $130 million.
This was down 8% from the prior year on a constant currency basis, the contribution from higher volumes and stronger input cost recovery was offset by the under absorption of higher operating costs and the expected impact relating to the timing of recognition of inflation recovery in EBITDA.
Total beverage can shipments in the quarter were 3% higher than the prior year with 5% growth in North America, and 2% growth in Europe , offsetting a 1% decline in Brazil.
Looking at <unk> results by segment and at constant exchange rates revenue in the Americas in the first quarter increased by 1% to $645 million, mainly due to higher volumes, partly offset by the pass through lower metal and freight costs.
Sustained higher retail pricing, but with greater resilience experience in nonalcoholic categories, which represent the majority of our North American business.
The hard Seltzer category accounted for 8% of North America shipments in the quarter with the segment remaining under pressure.
The impact to our business is offset by growth across other categories, including carbonated soft drinks energy and wellness and in spirit based ready to drinks.
We have completed our planned capacity additions in North America with a third line in here on Ohio, now ramping up along with the other two lines added in the final quarter of last year.
Our investments in Huron, Hi, Winston Salem, North Carolina in Olive branch, Mississippi position us favorably for future growth.
We are encouraged by the early signs of an improvement in demand with a small increase in promotional activity, which we expect to strengthen over the coming months through the peak summer season.
We will show continued discipline with our capacity planning in the interim.
In Brazil first quarter shipments declined modestly underperforming the high single digit growth in the market due to customer mix effects as well as some customer destocking.
The market recorded a high single digit growth rate against the weak 2022 comparator.
Softer than anticipated.
First whether a more challenging macroeconomic backdrop pressured consumption.
We are forecasting volume to grow at a high single digit percentage in 2023, and Brazil, which is underpinned by the recent startup of new capacity and outgrowing us customer mix in a market recovery strengthening into the second half of the year supported by an easing of customers' input cost pressures.
One of our customers in Brazil and to the judicial reorganization process in the period, our exposure to the customer was at a historic low position and due to our security coverage, we do not foresee a material credit risk at this point in time, we remain in close dialogue with the customer who continues to trade through the process.
We are very well diversified in our customer base in Brazil, and we do not expect that the reorganization process will negatively impact on overall beer consumption in the country.
Adjusted EBITDA in the Americas decreased by 9% to $81 million in the first quarter. The contribution from volume mix was more than offset by unexpected fixed cost absorption drag and unfavorable input costs recovery relative to some over recovery in the prior year period.
Overall, the decline on the year reflected softer conditions in the Brazil market with our performance in North America ahead of the prior year and our expectations due to good volume growth and improved manufacturing efficiency.
<unk> by improving market conditions, and the ramp up of our investments.
<unk> cost under absorption that's about mitigating curtailment actions remains a headwind to our performance.
In line with our previous guidance, we anticipate an uplift in EBITDA generation into the second half of the year as demand begins to normalize in both markets.
In Europe first quarter revenue increased by 3% on a constant currency basis to $486 million.
Compared with the same period in 2022, mainly due to more favorable input cost recovery shipments for the quarter grew by 2% on the prior year.
Consumer demand remained resilient in the quarter led by carbonated soft drinks the beer market. So an overall softer performance in the off trade, but with notable exceptions in the economy segment at both brands and are enabled.
First quarter adjusted EBITDA in Europe fell by 8% on a constant currency basis to $49 million as the contribution from higher shipments and input cost recovery was offset by higher overhead costs and the known impact from the timing of inflation recovery recognition in EBITDA.
This was however ahead of expectations, reflecting our overall strong input cost recovery.
For 2023, we continue to expect shipment growth in the order of a low single digit percentage with a more significant increase in adjusted EBITDA arising as the year progresses.
The European energy market continues to prove its resilience supported by public policy actions, we are fully hedged for the current year.
A significantly progressed, our energy purchases for future years as prices have fallen.
In the second quarter, we will complete. The addition of further capacity now, let's see let's serotype plant in southern France, and our intention remains to close one of the legacy steel lines and license them, Germany during the year.
This concludes the brownfield investments under our initial growth investment program.
I'll now briefly hand over to David to talk through our financial position before finishing with some concluding remarks.
Thanks, Ali and Hello, everyone.
Now to our financial position.
We ended the quarter with a liquidity position of approximately half a billion cash.
Cash outflow in the period piece, how expectation, but reflected the usual seasonality in working capital with a working capital outflow in the quarter of $346 million.
We will continue to focus on working capital efficiencies and our guidance for full year working capital benefit of approximately 100 million remains unchanged.
In the quarter and incurred additional growth capex of 90 million and maintenance capex of $36 million.
As previously indicated.
<unk>, great investment plans are well advanced and cash outflows comprised the finishing of projects already underway.
Our expectation of the current yeah is arden changed which encourage greater investment of just under 400 million with cash flow element under 300 million.
Net leverage at the end of the quarter at five eight times LTM adjusted EBITA.
Was modestly better than our expectation and was despite the strengthening in the euro dollar rate into the end of the quarter.
As a reminder, currency effects support he neutral from a leverage perspective in the medium term.
Our bonds have been issued on fixed rate terms of number of chair before 2027.
As mentioned a great investment plan is well advanced with strongly supports the earnings and cash flow growth.
Allowing that leverage back to 2022 levels by the end of the year and with a meaningful reduction anticipated in 2024.
We have today announced a quarterly ordinary dividend of <unk> 10 per share to be paid later inching.
In line with our guidance and supported by our improving cash generation outlook.
Our capital allocation strategy will continue to prioritize dividends sustainability anti leveraging in the near and medium term.
With that I'll hand back to Ali.
Thanks, David.
Before moving to take your questions I'd, just like to recap on A&P is performance and key messages.
Global shipments grew by 3% led by growth of 5% in North America, and with the solid performance of 2% in Europe .
Both businesses performed ahead of our expectations offsetting a softer performance in Brazil, and supporting the delivery of our adjusted EBITDA guidance.
We're encouraged by the early signs of a return to promotional activity and the easing of customer input cost inflation, which supports our expectations of improved Ht volumes. We will continue to closely monitor demand conditions and balance our capacity in a disciplined manner.
Our actions taken on cost recovery and.
Well advanced investment program will drive adjusted EBITDA growth and significantly improved adjusted free cash flow generation in 2023 and beyond.
This in turn supports our dividend policy and balance sheet deleveraging.
We reaffirm our guidance for 2023, which assumes global shipment growth of a mid to high single digit percentage and adjusted EBITDA growth in the order of 10% weighted to the second half due to more favorable prior year comparisons and improving volumes in terms of guidance for the second quarter. Adjusted EBITDA is anticipated to be in the order of 100.
$70 million, which compares with the prior year adjusted EBITDA of $180 million on a constant currency basis.
Having made these opening remarks, we'll now proceed to take any questions that you may have.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
Well pause for just a moment to allow everyone an opportunity to signal for questions.
We will take our first question from Anthony Pettinari from CLSA. Please go ahead.
Good morning.
I'll answer.
The full year guidance I think implies a pretty strong second half earnings inflection and I'm. Just wondering if you can speak to that.
Is that driven primarily by.
Volume recovery or maybe cost.
And then if theres any sort of trigger date for <unk>.
Contract resets for PPI or any kind of mechanism like that that we should keep in mind as we kind of think about that.
The rest of the year.
Sure Yes.
So look I think there's a couple of things in the full year guide there is some acceleration in volume.
And our guidance in.
In the second half and we can talk more about the markets and why we got that assume but then there is also an acceleration of our inflation recovery.
I referred to it in the remarks, but there is some drag in Q1 from the timing of the recognition of those PPI mechanisms into EBITDA.
<unk> drag.
It's gone up to Q1, so we also get some enhanced inflation recovery in the subsequent quarters.
Okay. Okay.
That's helpful and then.
I guess, you'll talk about the regional trends maybe in some of the other questions but.
Just switching to the dividend I think you referenced the sustainability of the dividend.
Wondering if you could kind of.
You know kind of the puts and takes on cash and maybe cash step up next year and the sustainability of the dividend.
Trading at a double digit yield currently.
Yes.
Given overview and then I'll, let David cover anything further, but obviously the main.
Thing that's going on for our business at the moment is that the capital expenditure. We have this year is just to wrap up the projects that we've essentially more or less completely finished so we had some payments. This year. So the cash capex I think of the order of $300 million some leasing activity on top of that and therefore, there is a very meaningful step down into 2024 and we haven't.
Guidance on it but I think that some of the market numbers. We've seen are in the right order. So that that big step down is what that allows us to grow as we say investment free into into our capacity then that gets us into a very sustainable position for funding the dividend I don't know David if you want to add anything to that I think that's right I think it will be adjusted.
Free cash flow positive for this year you can assume some EBITDA growth into next year, and then that Pgi Tau and let's say you put those three components together.
You asked so very close to covering the dividend next year.
Okay. That's very helpful I'll turn it over.
Thanks, Anthony will take.
Our next question from George Staphos from Bank of America. Please go ahead.
Hi, everyone. Good morning, good afternoon.
Thanks for the detail.
Maybe just because Anthony set it up.
Cover the dividend I was going to hit it later, but.
Taking a different perspective right the market is putting a yield on the on the dividend of around 11%, which suggests investors put a high risk factor on that dividend. So if you agree with that premise and the numbers are the numbers.
Why have a dividend that that does that does that tie in at that level relative to your equity and relative to your cash flow now.
Hi, George yet look I think we've signaled all along that the dividend is is demonstrating the cash generative nature of the business and as we pivot from a strong investment period into a period, where we're running to fill the capacity and drive cash generation and we think the dividend becomes completely sustainable and is it.
Very good fit for our.
Proposition. So I think we're committed to it we see as we drop off the capital expenditure into the back half of this year and into next year.
That fits very well with our proposition.
Yes.
Ali I'll take that at surface level and Thats, great I, just the point I'd make is the market is putting a very high return on that so.
In theory, you might get a yes.
Lower cost on other cash utilization relative to the dividend with the market is putting an 11% yield on but in any event.
Perhaps you want to solve that on this call, but that's the only thing I'd point out there.
On the promotional activity.
What gives you the confidence that and you mentioned I think in nonalcoholic <unk>.
You're starting to see some activity and some improvement.
Why should we expect that that's going to continue going forward.
Have your customers told you specifically in terms of why you think promotional activity is going to pick up.
Particularly in non <unk> or the rest of the year.
No absolutely.
I think on this promotional question. There's a couple of fundamentals that we should touch on and then we should talk about the timing of it returning.
The fundamentals are that these are very promotional categories that very elastic categories and demand does expand with promotional and we'd probably so it's always they've always been very promotional and there is no reason nothing to believe that that one.
Reassert itself at some point, we've seen a very unusual period.
Oil prices rising and volumes are dropping less than historically, but we are clearly reaching the limits of that now so.
So I think that Theres no reason to believe although.
Customers are clearly using more advanced analytics to target promotions and that clearly will have learned something from the last 12 months. There's no reason to believe we don't revert to a more normal promotional activity for these categories and then the second fundamental is that inflation is moderating and so you'd expect to see overall leverage pricing moderating relative to wage growth and other other factor.
And then in terms of why we're confident in timing through the rest of the year I think that we've had signals from customers that they are looking into additional promotions for Q2 and beyond.
They've got some firepower.
Particularly as the item he comes off and they can actually do some promotional activity without actually damaging margin.
As I say I think they have reached the limit of sales growth without driving some volume I think the price lever is that that limit and then finally, they're not just saying to us right, they're saying it publicly and I think the major CSD player in the last week or so is absolutely signal that they want to both carry on hitting the higher end of the market but deaths.
Hitting the lower end and the more economically challenged consumers because we don't they don't want to lose those consumers to that Bryan. So I think when you add it all together it makes all sorts of sense that you'd see some increased promotional activity as we go through the year and Thats, what we thought when we gave our full year guidance are.
Our opinion on that Hasnt changed.
Thanks for that Ali My my last one I'll turn it over.
So we have volumes youre getting the pick up you have accelerated.
<unk> and PPI.
Recapture where mechanisms.
Were down year on year, and EBITDA <unk> versus <unk> last year can you give us a rough bridge David in terms of how we go from the roughly 180 to the $1 72 versus <unk>. Thank you guys.
It's more than the minus 10 its name of minus 20, and then you've got the other place components pushing back up.
Thanks Jody.
From Morgan Stanley .
We'll now go to Angel Castillo. Please go ahead.
Customers are maybe delaying a little bit of buying maybe.
Until we get little bit closer into the summer season. So what are you seeing across the regions in terms of the buying patterns as well.
Sure Hi, Inger.
So yes, let's go region by region I think in Europe , we see that the consumer is still resilient, but but that clearly under pressure. So energy costs have risen very significantly as a proportion of household income and so I think what that means is the volatility in demand patterns customer by customer so soft drink, Stephanie a bit stronger than <unk>.
But even within beer, we have some very high performers typically companies focused on the economy segment. So you either brand.
Randy the economy segment or unable performing extremely strongly so I don't know.
You've got a single picture for the market you've got different players performing differently and therefore youll see in our results and our peers results, probably some different results linked to customer mix and which customers you're in by region.
So as I say, we have we definitely have some strength in beer, but we also have some weakness at the higher end.
And then we also just have some one off effects.
In our results we've got some filling that moved to the Nordics, where we don't have capacity. We've got some some still water filling that's me back to the U S.
Market this year.
And I think it just will depend a lot on which customers and which segments you're in.
If we turn to North America is clearly strength in soft drink side, CSD, and especially the energy space, which is very hot still a lot of innovation in that space.
Is there ability for some some shifts there are they going to have a hard time kind of breaking in with the amount of contract revenue that you feel like the industry has right now any thoughts there would be a it would be appreciated.