Q2 2023 Ardagh Metal Packaging SA Earnings Call
Good day, everyone and welcome to the art of metal packaging S. A second quarter of 2023 results call. As a reminder, today's conference is being recorded and all phone participants are in a listen only mode. But later you will have the opportunity to ask questions and how to get US started with opening remarks and introductions I am pleased to.
Turn the floor over to Mr. Stephen Lyons with Investor Relations. Please go ahead Sir.
Thank you operator and welcome everybody.
For joining us today for our metal packaging second quarter 2023 earnings call, which follows the earlier publication of a M. P's earnings release for the second quarter.
We've also added an earnings presentation onto our Investor Web site for your reference I'm joined today by Oliver Graham a M P's, Chief Executive Officer and.
And David Borde, a M P's Chief Financial Officer.
Before moving to your questions. We will first provide some introductory remarks right A&P is performance and outlook.
A&P the earnings release and related materials for the second quarter. It can be found on a M P's website.
Www Dot alright, Dan 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 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 Graham.
Thanks Steven.
We experienced a challenging quarter against the global backdrop of sustained inflationary and household financial pressures.
Which was impacting on consumer demand.
While we recorded global shipments growth of 5%.
This included strong growth of 18% and North America, and a solid 2% growth in Europe .
We faced difficult conditions in the Brazil market, where shipments declined by double digit percentage relative to a strong prior year comparative impacting profitability.
Our performance in Europe proved resilient and was modestly ahead of expectations supported by the anticipated stronger recovery of pass throughs on energy costs. Following the contractual actions taken last year.
Shipments growth reflected a broad European presence and diverse customer mix.
In North America, we recorded strong shipments growth driven by a favorable customer mix on the ramp up of our contracted new capacity.
Our short term profitability was impacted by timing issues on <unk> sales and actions taken to rightsize inventory, which did drive strong cash generation.
Adjusted EBITDA for the company declined by 17% versus the prior year quarter, but.
It is anticipated to improve through the remainder of the year.
Further volume growth Europes improved input cost recovery and more favorable prior period comparisons in the second half.
Nevertheless, we have reduced our full year guidance due to anticipated further weakness in the Brazilian market.
A delay related to the financial recovery of customer volume commitments in North America.
We continue to project.
Positive adjusted free cash flow in 2023.
With further improvement into next year.
And are committed to our quarterly 10 cents dividend.
Global demand remains a strength by sustained retail price inflation.
Commercial activity continues to improve albeit modestly and ahead of our broader demand recovery, we continue to manage our capacity in a disciplined manner.
This includes a mix of curtailment actions to balance our footprint ahead of growth in demand as well as more permanent action when necessary such as our intention to close our remaining steel lines in Germany. This year.
As previously outlined we target utilization in the low to mid nineties.
The A&P management team has deep experience across industry cycles, and our discipline reflects our belief that secular tailwind favoring the beverage can remain intact without growth investment program completing in 2023, we are strongly positioned to capture our share of this future growth.
We also published our second Green bond nipple, providing an update on the allocation of the proceeds of a green bond issued last year towards various eligible green projects.
Turning our attention to A&P second quarter results.
We recorded revenue of $1 3 billion.
Which represented a decline of 4% on a constant currency basis as the pass through of lower metal prices offset the contribution from higher volume mix and non metal input cost recovery.
Adjusted EBITDA of $151 million it was down 17% on the prior year on both a reported and on a constant currency basis.
The impact from higher shipments was more than offset by a less favorable mix of cans and ends in the Americas.
Actions to accelerate the right sizing of our inventory in North America, and higher operating costs due to fixed cost under absorption.
So two beverage can shipments in the quarter were 5% higher than the prior year with 18% growth in North America, 2% growth in Europe , offsetting a double digit percentage decline and a softer Brazil market.
The working capital inflow net employer with $171 million compares favorably with a net outflow of $17 million in the prior year quarter and drove a strong overall cash performance.
Looking at <unk> results by segment and at constant exchange rates revenue in the Americas in the second quarter declined by 9% to $700 million, despite higher shipments growth, mainly due to the posture of lower metal pricing and a less favorable mix of cans and ends in the quarter.
In North America shipments grew by 18% for the quarter supported by a growth investment program, which positions us favorably for future growth.
<unk> remains restrained by sustained higher retail pricing, but with greater resilience experience in nonalcoholic categories, which represent the majority of our North American business.
There are also pockets of strong growth from which we benefited in segments, such as energy functional energy spirits based drinks and other cross save of varieties.
We have experienced the broadening of promotional activity, though the depth of this activity, especially given the scale of retail price rises remains below what we would consider normal.
We are encouraged by the increased annual growth in shipments the sequential quarterly growth as well as our strong momentum into the summer months.
This supports our forecast for shipments in North America business to grow by approximately a high single digit percentage this year.
In Brazil second quarter shipments declined by double digit percentage underperforming the high single digit decline in the market.
The market declined against a strong 2022 comparison when the country emerge from the COVID-19 Lockdown.
Market demand remains challenged by consumer inflationary pressures and a challenging macroeconomic backdrop pressurizing consumption.
Our underperformance in the period reflected customer mix effects, there's one of our customers volumes was impacted by Destocking.
The customer trades through its reorganization process.
Performance was also affected by the pack mix shift towards returnable glass bottles, which we now expect to last for at least the remainder of the year.
The visits he was also impacted by a lower ratio of events can sales in the quarter, which we view as a one off impact.
We now forecast flat shipments grow throughout Brazil business in 2023.
We will take additional curtailment to balance our network, including the slower ramp up of volume in Olive Garden us.
We reiterate our confidence in the medium term growth characteristics of the Brazil market, which has historically been a highly attractive market.
Adjusted EBITDA in the Americas decreased by 28% to $87 million in the second quarter, primarily reflecting more challenging conditions in Brazil.
Despite overall shipments growth our performance.
Was negatively impacted by increased fixed cost under absorption and some timing related issues in North America, including our decision to accelerate the right sizing of our inventory position through additional Q2 production cost cuts.
This decision on inventory, resulting in a short term impact to our adjusted EBITDA helps improve our working capital position and drive strong cash flow in the period.
In 2023, we expect shipments growth in the Americas of a mid to high single digit percentage underpinned by continued strong shipments growth in North America.
Fixed cost under absorption net about mitigating curtailment actions remain a headwind to our performance and we will continue to take the necessary action to balance our capacity in line with demand.
We anticipate an uplift in EBIT generation into the second half of the year supported by a momentum on shipments growth in North America, and the seasonally strongest summer selling period in Brazil.
But reflecting our challenges in the Brazilian market and a delay related to the financial recovery of customer volume commitments in North America. We now expect a decline in EBITDA for the Americas for the year overall.
In Europe second quarter revenue increased by 4% on a constant currency basis to $555 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, which we believe is broadly in line with our resilient market.
Consumer demand strengthened across the quarter supported by improved weather and this positive trend has continued into the summer.
The nonalcoholic beverages market has proved more resilient and particularly strong growth in the energy drink segment.
By contrast bay consumption in Europe has been more pressured, but we have performed well due to our broad based portfolio of customers in the sector, whether it being significant winners and losers, depending on the pricing strategy being perceived.
Second quarter adjusted EBITDA in Europe rose by 5% on a constant currency basis to $64 million as.
As the contribution from higher shipments and improved cost pass throughs offset higher costs.
<unk> was modestly ahead of our expectations.
For 2023, we continue to expect shipments growth in the order of a low single digit percentage and for a significant step change in EBITDA in H two relative to the prior year through stronger input cost recovery.
During the second quarter, we commenced production at our new line in our <unk> plant in southern France, which is slowly ramping up this year.
As mentioned in my opening remarks, our intention is to close our remaining steel lines advice in term in Germany by the end of the year. This.
This follows the installation of the two new efficient element in lines, the second of which will become operational from early next year as we might have great fully from a steel lines, which concludes our growth investment program in Europe .
Earlier closure of the steel lines will help improve our 2024 financial performance through a reduction in our fixed cost under absorption.
I will now briefly hand over to David to talk through our financial position before finishing with some concluding remarks.
Thanks, <unk> and Hello, everyone.
We ended the quarter with a liquidity position of just over half a billion.
Our adjusted operating cash flow in the period was strong each of the success of our working capital initiatives.
Our decision to accelerate the right sizing of our North American inventory and regional mix.
We will continue to focus on working capital efficiencies and our early visibility on this success allows us to increase our guidance for full year working capital benefit of $150 million up from our prior guide of circa $100 million.
In the quarter A&P incurred additional growth capex of $70 million and maintenance capex of $26 million.
As previously indicated.
<unk> gross investment plans are well advanced on cash outflows comprised the finishing of projects already underway.
Our expectation for the current year is unchanged.
This includes growth investments of just under $4 billion with the cash flow element under note point $3 billion.
We anticipate that gross Capex will fall to suck up north of $1 billion in 2024.
Our net debt was relatively unchanged on the quarter, which was ahead of expectations.
Our leverage metric ended the quarter at six two times last 12 months adjusted EBITDA.
Lower EBIT in the denominator.
We expect Mister represents a peak in the leverage metric with a reduction over the remainder of the year earnings correct.
Our projected 2023 yearend metric has increased to five five times last 12 months adjusted EBIDTA following our revised full year earnings guidance.
A meaningful reduction in leverage is anticipated in 2024.
As a reminder, in addition to our strong liquidity position, we have no near term bond maturities with no bonds maturing ahead of 2027 and nine maintenance covenants on our bonds.
We have today announced a quarterly ordinary dividend 10 cents per share to be paid later in September .
In line with our guidance and supported by the cash generation outlook of our business.
Our capital allocation strategy will continue to prioritize dividend sustainability and deleveraging in the near and medium term.
With that I'll hand back to Wally thanks.
David.
Just before taking questions I'll just recap on the main messages. So firstly a global shipments grew by 5% that was led by strong growth of 18% in North America, and a solid 2% in Europe .
But with the shipment declines we had in Europe , and Brazil higher fixed cost under absorption in some of the timing related issues in North America, we did and with adjusted EBITDA below expectations in the quarter.
The cash flow generation was very strong.
We anticipate adjusted EBITDA to return to growth in the second half as shipment growth continues.
And as demand normalized we're focused on the disciplined management of our capacity such as our actions in Europe .
And on improving our business through actions in operations and procurement supply chain, where we have very strong teams in place.
These actions underpin our expected earnings growth in the years ahead.
And with our investment program now well advanced we anticipate improved adjusted free cash flow generation in the remainder of 2023 and beyond and this in turn supports our dividend policy and balance sheet deleveraging.
We're lowering our guidance for 2023 to include global shipments growth of a mid single digit percentage and adjusted EBITDA of between $630 million and $640 million.
Oh God you free cash flow remains neutral thanks to increased working capital in place in terms of guidance for the third quarter. Adjusted EBITDA is anticipated to be between $117 million to $175 million, which compares with the prior year adjusted EBITDA of $143 million on a constant currency basis.
Having made these opening remarks, we'll now proceed to take your questions.
Gentlemen, thank you and to our audience joining over the phone if you would like to ask a question you may signal by pressing star and one on your telephone keypad, if youre using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star and one to ask a question and we'll pause for just a moment.
Allow everyone the option to signal.
We will take our first question today from the line of George Staphos with Bank of America.
Hi, everyone. Good day, thanks for the details Holly David a couple of questions for you.
First of all you said that Americas, EBITDA should be down this year and.
We would imagine obviously, Brazil is the bigger factor there but.
You aren't implying that North America will be down or you just.
Just wanted to get some confirmation there and then more importantly can you go a little bit further into what was the comment what was behind the comment on the delay of the financial recovery of customer commitments in North America, what does that actually mean in terms of your results and the outlook.
Sure.
Youre, absolutely right, George we're not saying that north American profitability will be down in the in the year, we're not saying that so as you say in the Americas overall, Brazil is definitely the the major factor.
It's in the public domain.
We had a set of volume commitment clauses in our customer contracts in North America that was supportive of our investment program, which is something we've talked about on these calls.
You know we were expecting to receive compensation around one of those this year and you know we had outside advisers that that was pretty secure.
We attempted to resolve that in a in a.
Collaborative fashion again with outside support and that Hasnt been successful at this point so.
We still remain confident in some in the recovery, but we can see that coming in 2023 at this point.
Okay.
And that's fine but that is.
You would have expected to have been able to resolve that this year because of what had been in your contracts is that would that be fair.
And the external advisory had received in the process, we went and yeah that's right.
Okay, and and just poking at that one last time and I'll and I'll, let it go.
Is that a function of.
Other market participants are.
Perhaps interfering in your ability to.
Gain on your contractual commitments as they were a competitive factor that we should be mindful of or now and then last and I'll turn it over the timing the basically the lower then.
Prior year shipments on and can you go through what was behind that and the effect on mix. Thank you.
Sure.
No. It's it's nothing to do with competitive dynamics is just different interpretations of the contract. So yes.
Competitive angle to that.
Yeah, we had a couple of Ns effects in the quarter. We had one just a natural one that can happen in North America, whereas the mens sales got out of line with Cambodia.
They are on different ordering cycles.
Will resolve very rapidly through Q3 Q4 is a few million dollars.
So.
It's relatively minor in the context of the overall year, but it did impact the quarter and then a more material one was in Brazil.
Where we had anticipated some degree of imbalance just because we'd had some buildup on the positive side and but we got a much more sharp reversal and that was linked partly to the some specific factors around the judicial reorganization and in a way that that customer is now ordering.
Which is obviously different than the previously you said that was more material because more of the profit is in the end in Brazil for various reasons.
So that did have a bigger impact on our on our results.
Thank you very much.
Thanks George.
Next we'll hear from the line of Anthony Pettinari with Citi.
Good morning, this is actually Brian Maguire sitting in for Anthony.
Maybe just following up on George's question, a little bit I'm wondering if you could provide a little bit more detail on Brazil. It feels like a lot of moving pieces with some customer restructuring and Destocking, which are also forecasting a stronger end to the season.
Do you view Destocking is kind of largely complete it now and I know there was a customer that you were sort of over index to you needed to pull back from is that resolved now.
Any more detail you can add there would be great.
Yeah. So look I think in Brazil is obviously still going through difficult economic times overall and much more impacted by the inflationary environment across the world with the devaluation of the Reais.
And the inflation and therefore, much more impactful on cans in Brazil, because of the price of the Ela me the Midwest premium in the pricing of cans being heavily in dollars. So that is the general macro context, where although inflation has impacted us in newer markets I think it's particularly being severe and in Brazil and then.
The piece that we've talked about and others have talked about is the the 180 degree change in strategy by the major burden from a what had been a strong pivot into cans.
To go back more into returnable bottles.
For short term reasons and I think at the beginning of the year, we have the sense that that would unwind more in the second half with the inflationary pressures.
Reducing on Mccann.
Our sense now is that it's not clear that there's a significant recovery in that in the second half and.
Possibly could even persist somewhat into 2024, so I think thats why we called out.
Guidance plus.
See we were down further than we anticipated in the in the quarter. So that's a significant piece because that's why we saw some growth coming and then the second piece was with a major customer that went into a judicial reorganization, we think that with the change in order patterns that that necessitated.
You know that they did some destocking in April and May they seem to be back trading well in June and July and Theyre doing well in the market. So we're not worried about that but.
But it did impact their ordering patterns onto us as I said in my reply to George both on Cambodia, but also particularly on an ends and so that was a very unexpected one off impact in the quarter that we think is washed through and I'd say overall, yeah. We don't think there's a major customer stock issue I mean, maybe a <unk>.
But in the market from being slightly slower than realized but definitely the overall market is down and it looks like it will stay down for a little bit longer so that's.
As I say why we call Dan.
For the year, we're very rate well balanced so in terms of the question about our portfolio I think we're very happy with our portfolio and in Brazil were well balanced across the major customers. So so we don't have any concerns that I think it's just a you know most of the market and then as I say, some very specific one off issues that arose in the quarter unexpectedly.
Got it got it thanks for all that detail.
And then last question for me Europe , I think with a little bit ahead of our forecast and <unk> <unk>.
Maybe remind us is there.
Like a key trigger date for your PPI cost pass throughs did that take the fact that <unk> and then relative to your expectations to start the year as cost inflation in Europe , maybe coming down a little bit faster than you might have forecasted. Thanks, I'll turn it over.
Thanks Brent.
So I guess the second one first is cost inflation is pretty much where we thought it would be because we were prudent around hedging out and contracting most of our big cost inputs for the year.
But for our customers they should be seeing some benefit from enemy hedges coming off.
Through the year, and so that should be some input cost moderation for them and possibly in other input costs as well, but for us we in particularly the big one we had hedged out.
<unk> in 2023 and 2022 for this year to make sure that we were prudent around what was still a very unclear situation geopolitically.
So I think that that is what we see on the input cost piece. The PPI recovery as we said at the Q1 it does accelerate through the year. So we see in Q2 more than Q1, mainly for accounting reasons on the recognition that the of the inflation recovery, but that does mean that we have.
Higher input costs recovery in our numbers in H two relative to each one of them, which is one of the reasons, we see H two EBITDA higher than the <unk> one.
And once again to our phone audience that is star one if you would like to ask a question. We'll hear next from Arun Viswanathan RBC capital markets.
Great. Thanks for taking my question.
I guess I just wanted to ask so it sounds like in North America, how would you kind of assess the overall market.
You know one of your peers is is thinking about down 3% to 5% obviously.
You're well above that and.
Given your strong performance I guess this year from a volume standpoint will you be facing tough comps next year and.
Does that mean that you know in North America.
The decline in volumes next year.
No absolutely not.
So that we see the market probably slightly more favorable I mean, it's hard right because we don't have great data for it at the moment, so you're sort of picking up a mix of different data sources, but we'd still be more sort of flat maybe slightly negative maybe slightly positive.
And obviously, we you know we're positive about.
And semi positive out of outperformance to the year end and then I think we're also very positive about our 2024 outlook I think one thing thats happening for us at the moment is in Europe , and North America, we're getting a much better stabilization and visibility on our customer forecast, our forecast and the realization that volumes against those forecasts and that.
Really strengthened I'd say from sort of mid may.
We really saw that come through and so you know we have good visibility into 2024, we have contractual positions that were confident will come through and so we definitely expect further growth in 2024 in North America.
Okay, great Thanks, and just.
Just on the Brazil situation.
You know.
Assuming that the.
The challenges from the inflation I guess persistent potentially into 'twenty four.
Are there further actions that you would contemplate and maybe seven rigs.
The reductions in capacity or anything that would.
Reduce the.
Decremental margins and fixed cost absorption.
Yeah, absolutely I think with what we're looking at it in front of US, we're clearly not going to run all of our capacity in 2024 in Brazil.
And we will take the necessary actions to make sure.
<unk> then as you say that we limit the impact of fixed cost under absorption I mean, we are ramping up aligarh and us a bit less quickly now which is the new line three.
And then as I say, we will definitely be taking action next year on the current forecast to protect our position.
And just lastly, this shift back for our returnable glass.
Do you think that that is that broader.
And that could continue and potentially spread to other markets in Asia.
What's really prompting that I mean is there.
Change in consumption habits as well.
Many people potentially sharing a glass bottle beverage.
Or is it.
Increased consumption.
On premise.
How does this I.
I guess, what do you feel as far as this being a structural event and the possible potential purchase to spread to other regions.
I mean, we definitely don't see this as a structural event I think the structural event that occurs in every market over time as the decline of returnable into one way packaging.
And there's some good reasons for that structural event around consumer preferences around the economics of off trade consumption versus untried consumption. So this is a very much one off short term impact in our view linked to some extreme inflation sitting in the Cannes relative to returnable bottles and also you know the particular needs of.
Customers at a time when they need to generate short term cash versus necessarily think about that long term market position. So I think the same dynamics that occurred in 2016 to 2019 will occur again, which is off trade volumes will start to grow and at that point people will move back into the off trade to defend share in defense.
Brand equity so yeah for us this is a clear short term impact.
We're not in Africa, and Asia, but I wouldn't expect anything different to be happening except for as GDP per capita grows you get a shift out of returnable packaging into one way as the consumer moves and organized retail.
You know it takes advantage of one way packaging, particularly in beer and soft drinks to drive traffic. So yeah. We're very confident that this will reverse we're very confident in the Brazil market has got significant growth in the years ahead. So I think we're looking at a speed bump and we had a particular speed bump in Q2 for some unique and unexpected reasons.
Specific to ourselves.
Thanks.
Next we'll hear from Kyle White at Deutsche Bank.
Hey, good morning, Thanks for taking my question in North America, just kind of curious how the quarter progressed for you guys and how I think you talked about momentum carrying into July how is July looking.
And then what do you think the market growth rate was during the quarter in North America.
Yes, Hi, Kyle So we had a very similar shape to the one outlined earlier. This week. So April was a bit weak may and June strengthened in July still looks good.
So we're confident going into the summer.
We as I say, we're sort of picking the market is sort of flat to slightly negative maybe if there's some players that you're just we're not going to site of some of the newer players who could be getting quite a bit of growth, but we don't see so you could imagine there is a tick up but it's probably flat to slightly negative in our in our perspective.
And so I think you know as I say, we feel very confident about the.
The pathway through to the year end and we feel very good about 'twenty four as well.
Got it and I know you touched on this quite a bit but in America. I was just is there a way to put a finer point on the profitability from a year over year perspective in America is stinker down $33 million, how much of that was driven by the ends in Brazil, how much of it was driven by the right sizing of inventory that the actions you took there any way to actually put.
Dollar amounts to some of these line items.
So the year on year change resort, Brazil, and then so what you've got in a year on year changes some volume.
Some ends and you know, maybe David who will comment on that in a second.
So I think those.
The specifics of that I think versus our guidance. There was some in North America and that was the two effects.
About one was again and sales slightly lag can sales, but the other thing is that because April was a bit weaker than we went into the first part of may still not on the strongest side.
We took more aggressive action around curtailment to control inventory and then when the core to strengthen strongly through the second part of May and into June what that meant was we drove significant additional cash off.
The back of that improved inventory position, but it did impact our EBITDA because of the increased under absorption on those assets when we didn't run the lines the.
The good news is we ended up as I say with a really strong cash generation in the quarter in North America, and the combination of that and other working capital measures means that we can as I said in the remarks.
Full cost of working capital inflow by $50 million for the year and that offsets entirely to the drop in our EBITDA guidance. So free cash flow wise, we're in exactly the same place for the year and as we expected.
And just just to build on all these point column, Brazil, if you take the delta to try it you could almost call out three factors you've got the you've got the post COVID-19, we have seen coming into the prior year quarter, which was a positive double digit effect <unk> got the.
Volume down in this quarter for us relative to our expectations and you've got the <unk> rebalancing pace. So I would attribute a fair to say that a fair to Egypt as I also we are low double digits.
Got it that's helpful. Thank you I'll turn it over.
Thanks Scott.
Yeah.
Our next question comes from the line of Gabe I hate at Wells Fargo Securities.
I'll, let David good morning.
Hi, guys good morning.
I was curious if you can.
Just speak a little bit about.
PPI escalators D escalators.
I recognize that there's a decent amount of contract resets at our April one.
Got visibility into this year, but.
I guess.
We have a little bit of carryover into Q1 of next year.
Don't know if I look at the right indicator, but it looks like PPI is down this year.
Thus far through the first seven months so.
How would you think about or had lot to think about.
On pricing in North America for next year.
And then relatedly.
You guys had talked about kind of.
Unspoken for on contracted business being a pretty pretty small portion of it.
What you do here in North America.
Can you talk about that market at all.
If it's if it's sufficient supply or.
More customers coming to you that are sort of out of pattern on the contract.
Sure Yeah look at that.
Went over complicate the PPI discussion too much but the truth is most of our recent sojourn first but in Europe in particular and to some degree in North America, the accounting impact of that.
<unk> place much more Q2 onwards, and that's why we talked about the acceleration of input costs input costs recovery through the year rather than a.
Fully coming in in Q1.
In terms of next year I mean in North America, we also have some slightly different.
Indices, where we use a mix of labor costs indexes as well as PPI indexes. So as we look into next year, although that might be negative PPI index is we're very comfortable.
With the way the inflation recovery should occur and that those resets occurred as we took over the business in 2016, 3% to 2020.
Where we've got a much more secure inflation recovery into our north American contract. So looking forward into 2024 and as we've seen in the last three or four years.
We feel very secure about inflation recovery and in North America, and then in Europe .
<unk> talked about it we got him the energy piece pass through separately.
You know we're not currently forecasting a great deal of over recovery into next year in Europe at one point, we thought there might be some over recovery, but there clearly is a bit of capacity in the market. So we're being cautious around that number and then the other thing we've been doing in the last few years is matching between our supply contracts post season.
Customer contract pass through so we also feel pretty robust around around that.
On your question on Unconstructed, there isn't a huge amount of unconstructed volume and the market is our belief and we are you know.
90% plus contracted through 'twenty into 2025.
So and we think you know the major players in the market or in a similar position. So there's a relatively small amount that's washing around any one time clearly there is now some capacity to meet that demand, but we still see the environment is fully rational.
And so yeah, my pricing slipped a bit from what was some very extreme levels for that smaller customer volume, but it's still in very healthy territory.
Okay. Thank you for that and then I guess a little bit.
Okay, what kind of probe on it.
Terms of July trends and sort of the acceleration that we've seen in <unk>.
The commentary between yourselves and up here, it's pretty consistent in terms of promotional activity, maybe not being better, but maybe not what you'd like to.
You're going to see it and again I recognize that it's not perfect data, but it is what we have when we look at sell through it's still tracking negative yet you guys are kind of talking about positive shipments.
Kind of sell in so can you help us reconcile that and then we're kind of past the two big promotional holidays, we've got labor day out there I guess in September but is it possible that we we kind of get to September timeframe and there has to be.
Inventory correction on behalf of your customers and I'm just asking because.
This is the first time that I think I've heard.
The timing difference in terms of cans being sold in versus and I thought that stuff kind of happen real time with fillers.
Yes, it's just because when you order a consignment events, they're much smaller right. So you order a big truckload events and you get a little more ends like that than cans. So you can get some imbalances just because of some older patents.
We wouldn't normally call it out, but one of them got a little bit bigger than normal in this quarter in North America. So I wouldn't focus too much on that side of things I mean in North America, and Europe , we get some movement through the year, but by the end of the year they used to reconcile and the only reason to call. It out in Brazil is again because of the additional profitability sitting in there and then also the very.
Specific event occurred in AR in the quarter look I think we need to see the whole market report, we won't see everybody of course, but there clearly are some quite big differences in the market alcohol non alcohol and not being exposed to mass beer has been a benefit to us in this quarter in this half year and this is what we see right here.
<unk> customer mix plays through in our results, sometimes are up sometimes we're down and being on the non outside of the market I think in this half has been has been helpful. We also had some very specific situations as I say with functional energy players and some of the innovation that's in the market where again, we happened to I think at this point.
A favorable customer mix, we think we have a pretty favorable mix on the CSD side in terms of bottlers in locations. In this half again you know these things can go up and down so I think the belief and I'm pretty confident in is there's not a lot of inventory sitting in the supply chain that needs to destock I think we're just seeing.
Across these different results and these different numbers to different pockets of the market and different pieces of growth or decline. So I think we need to see the whole picture.
Understood. Thank you guys.
Thanks.
Well hear next from Mike <unk> at Truest Securities.
Thank you Ali David and Steve Thanks for taking my questions.
First question.
In terms of the market you just make a comment.
Ali respond to your question about not being <unk>.
Exposed to mass beer, which has been a benefit but given some of the moving pieces in mass beer in the beer market over the last couple of quarters can you talk about possibly any share gains you may have experienced whether it's speed through CSD or maybe some of the other peers, where you have more craft beers.
Have you seen a shift away from mass beer into product categories, where you benefited from what's happening back here.
Yeah look seltzer is remain globally under quite a lot of pressure, but we actually had a decent quarter on so I don't know if if there was some shift back into seltzer as the spirit space ready to drinks.
Doing well.
So again, maybe there was some shift into those spaces, but again.
Generally we think it was down a bit so.
And I doubt that there was a big shift into CSD that wouldn't be a normal.
Normal shift that I think.
So I think most of those effects were going on within there.
And we didn't specifically benefit from the situation going on in the North American beer market at the moment.
So.
That wasn't something where we have the right side of that situation of tool.
It has impacted if you like any potential growth that we had or had planned in that space.
In the year.
But it's not that we've got any particular positives there are some share shifts going on in mass beer cans in North America, but they're not linked to.
So that situation is just some what I would call natural diversification of supply going on.
So yes.
<unk>, particularly to report on from our perspective from that whole controversy.
Got it.
The color just one last question is in terms of the the right sizing inventory North America is there anything left to do and three Q4 Q has that largely been worked through in Q2.
No no its more than being worked through to the point, where we actually appropriately have to rebuild a little bit so yeah. We.
By taking.
Decisive action.
In a relatively early in the quarter, we definitely got into a good place because of the strengthening of the sales line during the quarter.
Got it thank you very much.
Thank you.
And again to our phone audience today that is star one if you would like to ask a question.
Jupiter asset management in the line of Ning Young. Please go ahead. Your line is open.
Hello caller. Your line is open you may have us on mute from your end.
Hello, Hi, sorry, I was on mute, Yes go ahead welcome.
Great.
I have several questions first on the topline in terms of the contract visibility and I said that you were talking about 90% of all down double digit.
<unk> contracted into 2025.
Just wonder.
So.
Yes.
Tom Turkey, Mckenley think do you have some kind of certainty in terms of the pricing.
And.
Good morning.
Those contracts.
And.
Secondly on the cost side. So if we were to think about.
Dominion energy costs hygiene.
Usually how well he had the wrong.
How much deposit.
And.
Just to SaaS.
Thinking about your <unk>.
Plenty of three.
Cool.
Cars Com total to around 200 to Navajo.
What would it be done that magnitude of shift.
Sure.
So yes so.
Yeah, so the customer contracts at pricing agreed with with the relevant inflation clauses. So that's all set in those contracts and then volumes are also agreed in those contracts we have taken a more cautious perspective.
The volume's listed in those contracts on the basis of the last few years, So and I think as I said in earlier remarks, I think one thing that's been very encouraging in the last six months is the stabilization between our customer forecast our forecast and the outcomes, we're seeing in Europe , and North America, clearly, we cannot say the same yet for Brazil.
So we need the same stabilization to happen in Brazil, but in two major markets I think we've got a much more visible picture on volumes and much more security around that volume growth and volume outlook in terms of costs. So we have rolling.
Hedging on <unk>, where we do it sometimes a big customers do it for themselves. So you won't see any impact of that in our EBITDA line, you'll only see it in the revenue line.
And then energy costs in Europe , which is where I mean everywhere, we hedge on a multiyear basis. So we're rolling forward on a multiyear basis.
Sitting above 50%, 60% for 2024 at this point and we'll have some twenty-five taken already.
And so with the way the energy market has now developed in this year, but we don't see any any concerns on those costs.
Over the next few years.
And then.
Thank you very much.
Approximately how much in terms of percentage of pass through.
On pricing.
Richard.
Yes.
Can you give color for Ross kind of eyeball.
More or less.
Almost entirely hospital groups or.
Mike.
80%, 90% possible.
Yeah.
So the yeah, let me in premium parts of the element in price a robust three directly and then the only piece in some markets.
No not in a good part in North America, but in the part of North America, and in Europe and Brazil.
It is what we call the conversion costs, so the cost of buying the coil.
So call that 30, 40% of aluminium gets passed through on the PPI mechanisms as opposed to on a direct pass through with the with the enemy of the premiums.
Understood.
And my second question related to cash flow and so.
In 2024 that we expect the Capex to go no go Donaldson can need to conclude one do you expect to the Nextgen investment cycle to pay top if we were to look at our forecast over the next.
So not two or three years I think we've been clear that we're curtailing this year and now with the additional action we took in.
In the quarter were over 3 billion of curtailment in North America over a billion in Europe , and now we're trending that way in Brazil as well so we've got plenty of capacity to grow into.
You know we've got a cash free period, if you like of growth. So I don't think you need to mud lending for the next two or three years.
Well Steve.
And then so what.
Working capital professional.
If we were to thinking about working capital.
Bill.
Do you expect that to normalize.
End of this year.
24, <unk> kind of guidance on <unk>.
Yes.
I think we guided that they've got an inflow. This year and then I don't know David if there's anything else.
I think we'll guide on next year, when we get into the spring, but clearly we wouldn't expect any adverse excellent pattern next TV.
Yeah. Thank you.
Thank you.
Thank you very much thank you.
Yeah.
And to our audience that is star one if you would like to ask a question, we'll take a follow up from George Staphos with Bank of America.
Hi, guys. Thanks for taking my follow on and I'll try to make them quick just.
For posterity could you give us your view recognizing it's imperfect data.
Because we don't have one industry source, what you think North America, and what you think Brazil.
Markets did in <unk> in terms of volumes.
And similarly, what your expectation would be for both regions for 'twenty three second one of the other analysts have raised this is initially it was of rone can you tell us given your perspective.
What you're finding in terms of consumer perceptions on glass fresher versus aluminum I mean again, we've covered the cycles in the past sure you go into a downturn you Gotta returnable glass and then it comes back.
One way in aluminum overtime, but are you seeing any change in consumers' perception such that the recovery won't happen this time around.
And last Ali I think you touched a little bit on capacity in South America for next year.
I just wanted to probe what you were perhaps indicating there. Thank you guys. Good luck in the quarter.
Thanks George.
So I think taking that has in turn I mean, our view as I said on North America. It was.
Flat to slightly negative.
Ken is our best guess.
I think that we've got some people not reporting and not visible at this point where that could be significant growth linked to the.
Situation in North America, So that's the uncertainty in our minds.
And therefore, that's why we are we think obviously, there's negative drag from input reduction in domestic is probably in that flat sort of.
So that's the domestic you know excluding the people that we can't see.
Then I think expectations for the North American market I remain in a low single digit place I think.
Once retail pricing normalizes, I think we're going to see.
The impacts of the tailwind instead of sitting in the business, which is that there continues to be a strong sustainability tailwind for Ken's worldwide. We continued to see pressure on single use plastic we continue to see the benefits that can be driven for our customers from the decarbonization of cans, which is something that is recycling rates pick up and as a.
Supply chain Decarbonize, the electricity base, we will see and Mccann and therefore, we can really support our customers on the sustainability agenda and then the other piece that we've seen really play out in this quarter as the innovation.
Going into cans, particularly in North America, but also in Europe .
While we see people pulp and one of the reasons, we've had a great quarter is because one or two of those players really pumped and that is about the portfolio, we're sitting with and others that will you know, we'll see our peers have that benefit two in North America win one of net portfolio of pulp. So I believe those two trends the sustainability and innovation.
That low single digit is a very competent forecast for the North American Cat market, you know next year and beyond.
In Brazil, we know was down.
High singles in the quarter, it's minus roughly minus 1% year to date.
And we expect it to sort of recover to a flattish position.
For the year, possibly could be if you were optimistic a bit better than that and as I say, we've we predicted ourselves and in a recovering somewhat from where we were.
And I think Brazil, we still very comfortable in this mid single digit.
Very honestly don't have a lot of consumer data I mean, it's a very interesting question, which is you know.
Consumer perceptions be changing around returnable versus one way packaging, but I didn't see it in our customers also want to move into one way over time, because they've got many more strategies. They can play around that premium amortization with.
Single use glass bottles cans driving the Midland in the mass and I think they will lose brand equity and market share if they don't play significantly in the off trade. So.
I don't have any data that would prove that those perceptions of haven't changed though have changed in the consumer but I think the.
The overall trends have been so strong worldwide in this space that I'm I'd be very confident that we will see that return to one way to one way glass and one way cans in Brazil.
And then on capacity I mean, what we're really talking about is about 1 billion cans and in Brazil, potentially not having to be taken down next year.
With our current forecast.
And ladies and gentlemen, I would like to offer a final opportunity to our audience to press star and zero. If you have a follow up or would like to ask a question on today's call will take just a few moments to make sure that everyone has had the chance to signal.
And we have no signals from our audience Mr. Graeme I'll turn it back to you Sir for any additional or closing remarks that you have.
Thanks, Jim and thanks, everybody on the call. So I think we covered the the big points about what impacted our Q2 performance and but how we see the second half improving significantly in terms of profit growth. How do we see this really as an inflection point for the business as we grow into the second half and into 2020.
Well, we also see significant profit growth next year, we will continue to manage our network in a disciplined manner.
Balanced with demand, but I think you know with our investment program largely complete.
Business growth investment dropping significantly into 2024 with the additional cash generation that we've achieved in this quarter and we expect to achieve towards at the end of the year.
We're feeling very good about our dividend and our overall balance sheet deleveraging. So we look forward to talking to everyone again at our quarter three results. Thank you very much.
This does conclude today's call and thank you for your participation you may now disconnect.
Okay.
[music].
Yes.
[music].
Okay.
[music].