Q2 2019 Earnings Call

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Sounds like fishing, you and welcome to the other second quarter 2019 results call.

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This reflects positive mix strong operating performance and good cost control as well as IRS 16 effects.

We continue to engage with customers and see strong demand for committed long term capacity from these customers as the purity premium association ability to differentiate with glass packaging and containers continues to appeal to brand owners.

In North America in lost revenue decreased by 5% to 433 million in the second quarter. This reflected lower demand our cost reduction initiatives, including creation logistics as well as capacity adjustments.

Already made.

Limited the they're the ones that we've already made have limited the impact of reduced volumes on adjusted EBITDA for the quarter and this increased by 4% to 73 million.

And as we previously set out the closure of our Lincoln, Illinois facility took place in April .

Overall, the North American glass market continues to see significant levels of imports, though there's been some moderation noted in certain end markets. As a result of the increase in tariffs on Chinese imports.

Whilst our focus on our dollar domains on targeted investment in our footprint and the pursuit of cost optimization initiatives. We continue to believe that the industry as a whole must adapt to lower demand.

If I could then turn into the TREVYENT transaction, which we announced last week.

As you know we've agreed to combine our food and specialty metal packaging business with exile Corporation, which is the leading producer of aluminum containers in the Americas and the combined company will be known as trivial packaging.

And this company this new combination.

With excellent which is currently controlled by Ontario, Teachers' pension plan will create one of the largest metal packaging companies in the world with leading number one or number two positions in substantially all of the markets in which will serve.

To be headquartered in the Netherlands, Caribbean will operate 57 production facilities, principally across Europe , and the Americas and will employ approximately 7800 people.

Annual pro forma revenues were 2.7 billion.

And adjusted EBITDA of 469 million in the year 31 March 2019.

TREVYENT will serve a diverse range of leading customers in a wide array of end markets, including food seafood pet food nutrition beauty and personal care household care and premium beverages.

This combination brings together, our das stable, Europe , and North America businesses, which offer attractive growth opportunities in areas, such as nutrition and two piece food cans.

Mainly focused in these businesses, mainly focused on Tinplate steel packaging with exiles leadership in the faster growing Americas aluminum aerosol packaging sector.

Caribbean will produce an extensive and sustainable product range backed by dedicated research and development resources.

I will become chairman of Tribune, and Michael made to makes who is currently the CEO of exiled will become CEO TREVYENT and he will lead a highly experienced team drawn from across textile and BARDA.

We will hold in our to our 43% say contributing with the balance of 57% being controlled by Ontario teachers.

Our data will also receive approximately $2.5 billion in cash proceeds from the transaction, which we will use to reduce debt at our dock.

And we outlined how we plan to do that debt reduction.

Last week and also in our call materials today.

This transaction is important strategic move for us in several respects firstly it gives us a large stake in a faster growing global metal packaging business than food and specialty also secondly enables us to focus in our job on our glass packaging and beverage can businesses and keep 100% ownership of both these businesses underpinning our relationships with major customers in the beverage end markets.

And thirdly is innate it results in a major de leveraging of about half a turn of adjusted EBITDA with the receipt of the two and a half billion dollars.

Our data and our partners in Ontario, teachers, with whom we've been working on this transaction for several months share a common vision for medium to long term value creation attributing.

And as a producer of infinitely recyclable and sustainable method packaging, we believe that trillium as well placed to benefit from secular tailwinds.

Over the course of the past year, we've had several approach approaches for our food and specialty business, but we wanted to retain a significant stake given the attractive outlook as the wider consumer focus increasingly turn to sustainability.

This is a business that we wanted to remain involved in.

On Friday last premium priced debt offering of $2.85 billion in seven and eight year bonds at a post swap blended interest rate of approximately 4.8%.

The offering was over seven times subscribed and we're now focused on completing the trivial transaction and we expect completion to take place in the fourth quarter of this year.

We look forward to working with our new partners in Ontario, teachers, and with Michael mates and his team in delivering value from trivia game over the medium and long term.

You will also seen today that as part of our long term succession planning.

We've announced that Shaun Murphy will join our Das Chief operating officer in September .

Sean will report to me and he will also join the board of our dock.

He recently completed a highly successful six year term as managing partner of KPMG in Ireland KPMG, Ireland is the country's largest professional services firm employs over 3000 people serving a wide range of domestic and multinational clients with a broad range of advisory services.

Shawn has been a partner KPMG for almost 20 years.

And has served as the lead director on KPMG is global Board from 2015 until earlier this year.

And separately Johan Veritor has decided to retire as CEO , our glass business by the end of this year.

And also following the recent agreement to combine our food and specialty business with exiles perform Caribbean, David Wall has decided to step down as CEO of our medicine Division by also by the end of this year.

And following these changes the heads of our metal and glass business units will report directly to Shaun Murphy.

So as we look to the remainder of the year, our full out our full year outlook is unchanged. Despite additional currency headwind since our first quarter results and just to confirm is as follows its at least 1.5 billion.

In adjusted EBITDA, adjusted free cash flow of approximately 450 million before our spending on short payback projects.

And adjusted earnings per share of <unk> in the range of 160 to 175.

This outlook does not however reflect the impact of the Cavium transaction announced last week.

As I said earlier, we expect to close that in the fourth quarter pro forma for the divestments of our food and specialty full year 2019 pro forma adjusted EBITDA is expected to be at least $1.15 billion.

So having made these opening remarks, we would now be pleased to take any questions that you may have thank you.

Thank you, ladies and gentlemen, if you wish to ask an audio question. Please press as zero one on your telephone keypad.

I wish to withdraw your question you May proceed.

Sure Council. So once again, please casino one to register for a question and there will be a big pull us with any questions being registered.

And our first question comes from the line of Tyler Langton from JP Morgan. Please go ahead. Your line is now open.

Hi, good morning, Thanks for taking my question.

Just regarding the the tritium transaction I know you kind of provided I provide what the pro forma EBITDA would look like I guess do you have a sense on how that impact free cash I guess since you know the food can business I think is probably relatively lower capex levels.

Yeah, I think the free cash flow for the business as the days is around 15 on a pro forma basis, it will come down to about 350.

Okay No that's helpful and then.

For European metal.

Just the decline in EBITDA I think Paul you mentioned in your opening remarks that it was.

More from higher costs in beverage can I. Just also wondering what you're seeing in food can I think some of your peers have talked about some some pricing pressure in the European food can market.

I think on the on the food kind of decide where to go it's pretty much steady as she goes we've been we've been happy with the performance there in Q2 and a you know we are we know what those been saying we had a reasonable quarter, we haven't judgment some pressures, but the performance is very good also a lot of our business is you know we have a very strong business in nutrition and a very strong business in pet food.

Got it Okay and then just final question I guess, you know with the sale of the food can business I guess, but anything change in terms of how you view.

I guess the beverage can business in terms of maybe looking to grow more in emerging markets or you know sort of adding capacity sort of in a market that you're in kind of growing with your customers just any thoughts there would be helpful.

I think yes, you know tied our our attitude to a growth in emerging markets. This has been one that's been a negative one we see our future in the markets. We're in Brazil, The U.S. and Europe , you know, we're not sure that the experience of others in emerging markets has been that has always been that great.

And in terms of I think what you will see US do is look at some interesting opportunities to you know to invest in our business and our best can business in those three jurisdictions not in any new plants, but more in the way of line conversions that we've done to specialty for example, or indeed, adding selectively on the back of customer demand and customer contracts. Some additional capacity, but no new plants or anything like that and I don't see any geographic diversification.

Okay, great. Thanks, so much.

Thank you.

Thank you. Our next question comes from the line of Paul White from Deutsche Bank. Please go ahead. Your line is open.

Good morning, everyone. Thanks for taking my question I'm curious you called out the the adverse weather I'm just kind of curious what kind of impact you think that had on your business Oh on food and beverage that throughout the quarter.

Yes, I think Kyle and it was a limited enough impact in the first couple of months on the beverage side up the quarter I think it was quite cold and wet on just the you know the heat wave is slow to arrive to June was better. It looked at first of the month were difficult in that respect and that part of the beverage business.

On the food side as we said you know, we're very well diversified of our food business.

About 40% of this pet food ONTAP, and we're well dispersed and diversified in terms of where we operate so yeah. There's a few challenges tell you that the harvest is to play for am over the course of the summer, but Tim the impact. There was there was it was fairly moderate take a bit of delay, but nothing significant in the second quarter.

That's right.

And then on the kind of inflationary costs of the input cost they called out well in metal packaging Europe I'm. Just curious what exactly are these cost and when can we kind of expect them to be passed through.

And I guess why aren't they like being pass are currently through your your normal kind of traditional pass through mechanisms that you have in that business.

Well I think that kind of work their way through the system. These are some legacy contracts that were entered into.

You know at the start of our ownership and even before it ER and ER as we moved to better contract.

You know they will disappear hopefully and also I think you know as we flagged previously some of the pass through mechanisms that we inherited when we when we came into the backend business.

You know are less than perfect and some of them aren't called some of these inflationary costs are not caught by them and we've been working in our as we renew contracts we have been working to change the pass through arrangements. So lets say accurately reflect upon down customers and ourselves are the costs that impact to the business.

Gotcha, and then falling trivia and getting the the two and a half billion of proceeds proceeds in the pro forma deleveraging. There just curious what kind of impact does this have on how you think about the hold co structure and that strategy going forward and also the timeline of that.

I think Kyle we that's unchanged really in terms of will examine our options. Following the receipt when we have the two and a half billion when we close a when it goes the trivial transaction and again as we flagged over in recent quarters I see that as being something we'll look at 2020, I don't see anything happening on on the whole co 2019, but we'll look at our various options and see what the markets are et cetera et cetera.

Thank you and good luck in the quarter.

Thank you.

Thank you. Our next question comes from the line of a new just Shah from BMO capital markets. Please go ahead. Your line is open.

Good morning.

Hi, good morning, it's it it seems like you're getting good cost savings now from a north American class footprint restructuring are you fully are you satisfied with the way things stand now or should we expect further changes.

No I think we're we're we're certainly we don't expect to make any further footprint changes we've made enough changes there I think we're satisfied you know while you're never satisfied until you get the business really homing and you know we have much more work to do there are but I think we're satisfied in the progress. We've made to date Oh, you know in a market where volumes are declining where we've addressed our cost base on our adjusting our cost base to the new environment, we find ourselves and I mean, this is not something new for US you know we years and years ago. We have the same situation in Europe , where there were declining volumes and it's a matter of adjusting our footprint RF, which we've done and adjusting our cost base onto the market conditions. We find so I think so far so good.

Okay, great. Thank you.

And then second question is can we get some perspective I know leadership changes you announced this morning.

Maybe just a bit of background and if what if any changes we should expect.

Well I think the changes are as part of what we've announced this morning, a you know we.

It obviously.

Succession planning is important and.

We have been looking to bring in someone enters the group who would be the leader of the operating businesses overall and Shaun Murphy, who will be joining us in September will fulfill that role he will be reporting to me I will remain the CEO and heavily involved on the executive basis and the group.

In relation to the other changes you have had for some time that indicated that he wanted to retire although he will remain involved with us as a consultant which is great to have his expertise available, but we have over the last couple of years been.

Bringing developing two managers one of the U.S. and one seals, one than the U.S. and one in Europe , who would eventually go reporting up to a COO.

This has been planned for quite some time.

In relation then and the similarity on on on the basketball business, obviously with the Trillium transaction. We don't have direct management of the food can business or won't have any more from later in the year.

And David Wald indicated to me some we expect that as you know that business. The trunk that he was responsible for he would like to step down and pursue some other opportunities outside of BARDA again he.

It will be.

Doing some consulting work from us So we'll have the benefit of his expertise as well so I see this as a natural evolution I plan to stay with the business, but you know like everyone. Nobody goes on forever. So we need to make we need to plan for the future.

Great. Thank you very much.

Thank you and next question comes from the line of Roger Spitz from Bank of America Securities. Please go ahead. Your line is open.

Thank you good afternoon could you say what your off balance sheet securitization was at June 2019.

That might be going with the food, especially metal packaging business to trillium.

That's about 600.

End of June and just on the pipe portion will began with the Tribune business.

I'm sorry did you say your pro forma amount would be gone, which are being appropriate proportion will be cutting off the top business.

Okay.

And would you be willing to say how much off balance sheet securitization, which are ham totaled in March 19, or June 19, because that maybe XL had some off balance sheet securitization extending outstanding.

I think it'd be relatively small what was with accel.

Okay does trivia transaction.

Accelerate potentially the collapse of your capital structure that you've been discussing does it accelerate in any way I recognize it's not going to happen in 2019, but just wondering what the timing might have changed with it.

I think it was an important step on the way and you know we've been working on the Caribbean transaction for all this year. So I don't think it changes the timing as I said to an earlier in answer to an earlier question Roger we will.

We will look at all that next year, but it's an important step in kick starting de leveraging and it opens up various options to us as to how we deal with the Holdco, but we will the first step is to close the trivial transaction and then to a in the new year, we'll look at what the options are in it but it's as I said earlier, it's not something you should expect to see half of this year.

Thanks Lastly.

You've given a 90 million capex for short term payback projects versus outside the 450, so that pro forma Q3, 50 cents to 90, a pro forma to a smaller number what's your view.

They are pretty slightly smaller but clearly.

Tribute who's been part of the group and we'll be past the group for most of the year. So the non 2 million will be broadly that number for the full year.

Thank you very much.

Thank you.

Thank you ladies and gentlemen, if you do have any remaining questions that is zero one on your telephone keypad to register.

Once again that.

Zero, one to register for questions and our next question comes from the line of call Blunden from Goldman Sachs.

Please go ahead. Your line is now open.

Hi, Good morning, this is travis or its on for Carl I want a quick follow up on the Holdco, how with most of the beverage bad can bonds coming out following the.

Pay down or with the asset sale proceeds how are you thinking about the remaining constraints in RP would you consider addressing maybe the the remaining unsecured 20 fours to increase the basket.

Yes, thats something that we would consider we keep our we keep our capital structure under under constant review and obviously you know that that's one of the bonds that we would look at.

Possibly then do you have a balance of your RP capacity right now.

Yes, it's just about 10 to 680 million and dollars at the end of June .

Got it. Thank you and then a quick one if I can on fundamentals are you able to able to elaborate a bit on how the north them glass improvement maybe help US bridge current operations to how you're thinking about the business at more run rate levels and no. One is humming along as you said.

Can you quantify some of the drivers of that improvement.

Well I think we've.

I think we've we've said that we expect modest improvement in the <unk> for the year as a whole I think the drivers of that are you know improving the cost base, taking out excess capacity, which we've done.

And cost savings there are working with the the workforce to improve the labor cost so because labor costs are much higher in the U.S. than in our continental European glass plants. It is one of the big differentiating factors and improving operating performance and improving efficiency. So its acquire Christ across a very wide range of initiatives.

That we've been working on and there's more to go and there's more progress to be made but there's been good progress. So far now we've taken out about 10% of our capacity and you know on the beer side around 20% and in addition to capacity reductions, we'd be making targeting and targeted investments things like automation inspections that.

Which have attractive payback, so it's been that both investing on cost.

Some of them connected.

Got it that's super helpful. If I may sneak one more in real quick is there any impact to RP with Utrophin deal.

No.

Minor timing about 20 million, maybe a 20 minute adverse 20 million write off.

Perfect. Thanks for the time.

Thank you.

Thank you. Our next question comes from the line of Iran discipline, not some from RBC capital markets. Please go ahead. Your line is open.

Great. Thanks, good morning.

I'm just just curious.

Hi, beverage can volumes I guess would you characterize those as a kind of in line with your expectations or was it slightly weaker than what you thought you could achieve in the quarter.

I think if you look across the regions in Europe , and we had.

Growth it was high single digit in the first quarter. There may have been a bit of Brexit pull forward. There, it's hard to gauge and some of that enable unwound. So you know it was fairly moderate in the in the second debt second quarter in North America were relatively constrained and so we had.

Low single digit growth, let's take you know very good mix there in terms of best sales and in Brazil, we were well into double digits. So.

You know quarter to quarter. It can vary but we've been very pleased with the progress that the business combined.

6% volume mix growth has achieved I think in Bev cans in Europe .

The when you take the half year as a whole that it brings that points us to the other sort of percentage increase we expected for Bev can volumes in Europe as a whole for the year.

And as John has said in North America were full full full so there's not much we can add there.

But we're happy with the with the.

Demand situation in all three petco end markets.

And then thanks for that and then on the food side, Yeah. Some of your competitors have reported some challenges, especially in Europe .

Over the last couple of months.

Any any any thoughts that you can share on food cans in Europe .

You know I guess that are you guys any early indications on the pack or anything that would.

That would help.

I understand that market.

Yes, I think again as we said we have quite a diverse business. There. So within the food segment itself. The best to you know well over a third of the pet food. So thats on Nonseasonal, we've got an attractive de growing and significant nutrition business, which.

He has got a very positive outlook today.

This is fairly harvest, it's too early to say, yes, Adam maybe you see a bit of delay, but it's been relatively stable and what we've seen in the year to date.

And just lastly, there I guess, we've heard of some some competitive activity include 10 in Europe , you know obviously.

Slightly different situation now for you given the separation but.

Yeah, I guess was that kind of the the motivating factor you know how did the.

I'm just thinking come about.

Yeah for you guys to exit and you know at least partially.

Oh, no that had nothing to do with his whatsoever in fact, our motivation in putting this transaction together was that we like this business. We wanted to remain in it and we saw an opportunity to grow the.

The range of the business, particularly on the aluminum side, obviously with Xol and diversification into Latin America and in the United States in aerosols.

And as I said earlier on the call.

We did have a number of approaches to sell that business Oh, Holy So we're not far from exiting as we plan to be a very active partner with a 43% shareholding in it and we saw it as an opportunity to combine and achieve a number of objectives. Together. One was you know to de leverage arda itself by the receipt of the two and a half billion to increase the breadth of the of the actual food can and.

Specialty and aerosol business.

And also we saw it as a good opportunity for us to bring onboard Michael Mason his team who have done a great job in exile and so.

We saw a number of factors in this that made this transaction very attractive for us and as you saw last week. It was very well received by the by the debt market. So far from exiting a you know we see this as a vehicle, which will grow significant value for us over the coming years.

Right of course.

And then just lastly on on a you know your your own capital capacity any plans you know there was a competitor has announced some capacity additions in North America, but.

I guess any any plans.

The increase beverage can capacity or globally.

Are you guys.

Well I think I said earlier that we will focus our attention on the three markets were involved in the U.S., Brazil in Europe .

I think where there are opportunities as we've had in the past over the past three years, we will.

Either convertor, perhaps in some cases increased capacity in our existing facilities.

In those three jurisdictions, we do not plan to build any new plants and any any increases that take place will pay will be we will make sure that financially they are very attractive for us and secondly.

That.

They are backed up by customer contracts on increased demand I mean, we are seeing increased demand.

For format will do to the sustainability factors and.

That no doubt, it's what's behind some of the other increases by our competitors that you're talking about but we will as ever be very disciplined in this area. Both in terms of the return that we get from our investment, but we are we do see some attractive opportunities within our existing footprint, which as you know is very large.

Great. Thanks.

Oh.

Thank you. Our next question comes from the line of Congress is from Guggenheim Partners. Please go ahead. Your line is now open.

Hi, Thanks for the presentation than just follow on on the on the last question there.

Rather than Bev cans in terms of the food and specialty business dot two devices into trivial.

What's the capacity outlook looks like in Europe have you seen much additional capacity come by our come on or have you seen in general what sort of utilization to mark a turning out.

Doesn't really change much there you know and it's it's different structure to the basket market. Because you have different types of plants you have much much greater number of smaller plant. So it operates in a very different way, but if your question is have there been changes there knows the answer to that.

Okay. Thanks.

Thank you and our next question comes from the line of Brian Lee from Barclays. Please go ahead. Your line is open.

Hey, guys good afternoon.

Just a couple of quick follow ups for me maybe person I was out of the office last week. So I apologize if I missed this but on your on your pro forma capitalization to 88 million reduction in lease obligations is that just simply that's that's going with the assets is that is that correct.

That's correct.

Okay, Great and then my second one would just be obviously with with the anticipated use of the proceeds you know maybe you're a bit under levered on the secured layer is that something that you would think about rebalancing going forward and maybe what's the right level of secured versus unsecured as you think about not just the holdco, but maybe also the seven in the quarters of 24, which you know maybe the call price drops a bit you know in May of next year as you think about the maybe.

Longer term re Fi.

Well as I mentioned to an earlier to an earlier question, we will review our capital structure and those bonds are one of the ones. That's callable clearly on the bonds that are callable.

You are quite right. We have had a policy over the last three years from the delta between the cost of secured and unsecured debt was very small we raised a lot of unsecured debt.

To to leave ourselves with plenty of spare capacity and we do have.

Quite a large amount of spare capacity on the secured side and Thats something we look at a transaction by transaction I expect that.

Yeah, we would actually seek to use more secured capacity, but still.

Seek to have some you know we use raise some debt on the unsecured markets. We certainly saw last week.

In the Tribune fundraising, where when they both in Europe , and the us some very strong demand.

For.

Packaging stocks I get like ours, and packaging businesses, particularly in the metal on metal and sustainable space. So we were we were very pleased with the demand and with the results that we had in the in the market last week.

That's great and then just one last quick follow up for me I. Appreciate that you know when you get there you'll you'll have a better answer on this but when you think about the refinancing and starting to collapse. The holdco into the Opco is have you still that you may need to do it in a couple of step process. Given you may not have the capacity to deal with the full phase 2 billion.

Of debt that sits at.

Art fan and art Sac levels is that is that still the right way to think about it.

Hi, I think there are a number of options. There I mean, you could envisage a situation where you took it all I hope its more likely I suspect that it will be taken out in part.

But.

You know and and but I think probably you will see a refinancing of everything there I don't think you'll see.

The the picks being left on the.

It's taken et cetera, but you know I don't want to be I don't want to speak prescriptive about now we haven't decided what to do we haven't decided what to do I mean them.

A more likely scenario is is that it's done in stages over that it's part of it's refinanced on favorable terms a lot of that depends on the markets that we find next year.

Sure Yeah, I apologize I, maybe should have been more clear I. What I meant is that do you may be still need to do in a new financings store at a holdco box because you can't.

Bring all 2 billion back into Oh, yes.

Yes, yes, absolutely absolutely sorry, Ian here today, you know, we're certainly not running that refinancing a 2 billion refinancing at the opco to be dividends up okay. No we're not planning on.

Sorry, I misunderstood okay.

Right. So you could look to refinance all of it again, a portion which could come from the operating company.

Refinancing plus dividend and then maybe some additional new art and notes or something along there are many many many ways of getting that particular cash.

Sure.

Alright, Paul Thank you very much appreciate the time thank you.

Thank you. Our next question comes from the line of call White from Deutsche Bank. Please go ahead. Your line is open.

Hey, Thanks for taking my my follow up just one question in glass packaging North America, the unfavorable volume mix of 8% could you just parse it out how much was volume versus mix and then more importantly was this primarily market related or was any of it driven kind of by the recent capacity closures and maybe walking away from some lower margin business.

No that was them.

That was the market base. He has moved more or less in time in the Bath back from the data that we see and over the past year, we've actually gained slightly on the NIM.

And in terms of market share versus the rest of us in to see maybe important in having an adverse effect on the industry itself.

In terms of.

That level of decline that was principally volume but.

Quarter to quarter it can move around.

Yes, with the previous quarter to be in at fairly modest and that I think if you look at the revenue line.

The decline was closer to 5%.

Okay. Thank you.

Thank you and since we have no more questions registered I now hand back to our speakers for any closing comments.

Well. Thank you everyone for joining us today and thank you for your support and we look forward to talking to you when we present, our Q3 results. Thank you very much indeed.

This now concludes our conference. Thank you all for attending you may now disconnect.