AMBP (2021 - Q2)

Welcome to the Ardagh Metal Packaging Second Quarter 2021 Investor Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Oliver Graham, CEO of Ardagh Metal Packaging. Please go ahead. Oliver G

Thank you, Mary. Welcome, everybody, and thank you for joining us today for Ardagh Metal Packaging's Second Quarter 2021 Earnings Call, which follows the release last Thursday of our results for the quarter. I'm joined today by David Bourne, our Chief Financial Officer; and by John Sheehan, Corporate Development and Investor Relations Director. Our remarks today will include certain forward-looking statements. These reflect circumstances at the time they are made and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors, including those set forth in our SEC filings and news releases. Before commencing, we would direct you to our various SEC filings, which include our registration statement on Form F-4, which includes the prospectus and a proxy statement and contains important information about our Metal Packaging business. Gores Holdings V and the proposed transactions, including a discussion of the risks that could affect the proposed transactions. Copies of the registration statement, the Gores Holdings V proxy statement and other documents, including an investor presentation filed with the SEC relating to the proposed transactions are available free of charge on the SEC website. This conference call is for informational purposes only and shall not constitute a solicitation of a proxy from any person or an offer to buy or sell any securities in any jurisdiction in which the offer or sale would be unwilful prior to the registration or qualification under the securities laws of any jurisdiction. Our earnings release and related materials for the second quarter can be found on our website at ardaghmetalpackaging.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of the release, which also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA, adjusted operating cash flow and adjusted free cash flow. Details of our statutory forward-looking statements disclaimer can be found on our SEC filings. As a reminder, for those of you who are not on our April 30, first quarter call, Ardagh Metal Packaging or AMP, comprises the beverage can business of Ardagh Group. In February, the proposed combination with Gores Holdings V was announced, a transaction on which Gores' stockholders will vote today. Assuming approval, we anticipate that AMP will begin trading on Thursday on the New York Stock Exchange under the ticker AMVP, with Ardagh Group holding a stake of approximately 80% in AMP. Briefly, the core strengths of our business, which positions us to deliver excellent returns over the near, medium and long term are as follows. We have real scale as the second largest player in the European beverage can market and the third largest in each of North America and Brazil. We are also a pure-play on strong secular demand growth for beverage cans driven by convenience, innovation and especially sustainability as well as by structural pack mix shifts in certain markets such as Brazil. This growth and sustainability profile are a key differentiator and underpin our exceptional ESG appeal. Our current market position and growth opportunity underpins our $1.8 billion growth investment program. This organic growth plan is both operationally derisked by a heavy focus on under the roof expansions as well as being backed by long-term customer agreements with a highly diversified customer portfolio. I will return to it later, but this program has advanced strongly to date in 2021. Finally, we intend to operate with targeted modest leverage, will have a meaningful free float and will require no further equity to deliver our growth plan. Before moving to the second quarter results. As outlined in May, we experienced a cybersecurity incident in response to which preemptive action was implemented to take systems offline. We were pleased to report that production continued in all our 23 production facilities during this period though it did give rise to some logistical disruptions and delays as well as to incremental costs. We estimate that total beverage can shipments were reduced by approximately 4% in the quarter due to this incident. We do not expect any material impact on shipments in subsequent quarters. As you will have seen in our June filing, key systems are brought back online in accordance with our plan, and I would like to acknowledge the dedication of our teams as well as the support of our customers, suppliers and other business partners in managing through this incident. In addition to having appropriate insurance protection in place, Ardagh Group provides an indemnity to AMP, leaving no impact on our adjusted EBITDA. The adjusted EBITDA impact of this indemnity amounted to $15 million in the quarter. If I now move to our second quarter results. Revenues of $991 million for the quarter increased by 19% on a reported basis and by 14% at constant exchange rates. Revenue growth reflected increased shipments, in particular in the Americas as well as the pass-through of significantly higher aluminum and other input costs. Adjusted EBITDA for the quarter increased by 24% to $173 million on a reported basis and was up 18% at constant currency compared with the second quarter of 2020. Growth in adjusted EBITDA reflected increased shipments, benefits from our business growth investments and a lower level of COVID-related costs compared with the second quarter of 2020. Both the Americas and Europe advanced strongly. Beverage can shipments increased by 3% in the second quarter, led by 9% growth in the Americas. The cybersecurity incident reduced our shipments by approximately 4% in the quarter. As a reminder, our global beverage can shipments had increased by 3% in the second quarter of 2020, significantly outperforming the industry, which declined by low- to mid-single digits. This principally reflected our end markets and our geographic buyers to Northern Europe, which made for a more challenging comparable. First half 2021 beverage can shipments increased by 5%. Specialty can demand remained very strong and shipments increased by 16% across the group during the quarter. Specialty cans represented 46% of total shipments in the second quarter compared with 41% in the same period last year, reflecting our ongoing investments in specialty capacity. Demand in the quarter remained strong across all our markets, supported by the mega trends, including new beverage innovation, share gains by the beverage can from other forms of packaging and the strong tailwinds provided by the sustainability position of the beverage can. In addition to these secular drivers, implementation of our business growth investment program progressed well and contributed strongly to earnings. Like others, we saw broad-based tightness and inflationary pressures in areas, including logistics, but negotiated these challenges successfully during the quarter. Turning to discuss our segments with a focus on constant exchange rate movements. Beginning with the Americas, revenue for the quarter of $527 million increased by 21%. Shipment volumes increased by 9% with strong growth in North America and particularly strong growth in Brazil, which have been impacted by the industry-wide shutdown in April 2020. First half shipments in the Americas increased by 8% and specialty shipments grew by strong double digits. Market demand in both North America and Brazil remains very positive as evidenced by customer dialogue and growing levels of empty can imports into North America in 2021. Inventories remain low and all output is fully committed. Second quarter constant currency adjusted EBITDA grew by 27% to $88 million compared with the same period last year. Moving to Europe. Revenues increased by 7% to $464 million compared to the same period in 2020. Shipments, excluding the impact of the cybersecurity incident was slightly ahead of the same quarter of 2020, which, given our geographic positioning in Europe has seen very strong growth of 8%. We remain relatively constrained on sales growth in Europe, until our 2 BGI projects in U.K. and Germany come on stream in Q1 2022. Specialty can shipments increased by a double-digit percentage compared with the prior year and a 14% up to date in 2021. Demand remains strong across all our regions and our diversified end markets, covering beer, CSD, energy, sparkling water and other beverages as our customers and end consumers seek sustainable packaging solutions. Supply conditions remain tight and the regulatory backdrop in the region is also supportive of our substrate. All our output is fully sold, inventories are low, and we are investing to address the capacity constraints we are seeing as a result of the strong current and projected demand. Adjusted EBITDA in the quarter increased by 10% to $85 million at constant currency. Turning now to our growth investment program, where we plan to add approximately 21 billion cans in capacity by the end of 2024. Investments to date in 2021 has been approximately $250 million and project execution is on plan. Looking at some of the larger projects. In North America, our 2 new high-speed sleep lines in Olive Branch, Mississippi have continued to ramp up well and in line with our plan. Later this year, we will begin producing cans from a similar 2-line expansion in Winston-Salem, North Carolina, where work is well underway. We will also begin producing ends from our new Huron Ohio facility with cans wrapping up in early 2022. Construction and engineering works are underway and hiring of additional employees has commenced as planned. In Europe and Brazil, our multiple customer-backed growth initiatives are also progressing well. In relation to growth investments, we think it's useful to share our perspective on various announced expansions in North America in particular. We and others have announced significant expansion plans in each of our main markets. This is in response to very strong medium- to long-term demand growth, the drivers of which I've outlined. We see all this new capacity as being required over the next few years based on a few key facts. Firstly, in recent years, demand has required a significant level of imports into the U.S. from all over the world. The most recent data indicated canning ports to the U.S. growing by over 200% in the first 4 months of 2021. Over what was already a record 2020 level. Furthermore, inventory levels are well below optimal levels across our industry and are not sustainable in the longer term. These will need to be rebuilt over time, but we don't see an opportunity to do so in the near future. And operating rates have been running above long-term levels, working through Thanksgiving, deferring nonessential maintenance, running reduced SKU numbers. There remains a backlog in pack mix conversion due to a lack of supply to satisfy innovation and conversion. In response to this demand requirement, AMP and others have announced significant new capacity. We view this as an entirely proportionate rational response to market demand and note that it's all underpinned by customer contracts. We would also note that new capacity takes time to ramp up to full utilization and we see this phenomenon in the continued high level of empty can imports into North America this year. I outlined earlier, our leading sustainability positioning, given the level of recycled content in our products and the established collection systems in place in all our markets. We continue to work with our customers, suppliers, communities and trade associations to promote further collection and recycling. Our dialogue with customers on sustainability initiatives, such as lightweighting, which enable them to meet their commitments has also continued to increase. In addition, we've been active on the social sustainability agenda, recently concluding a multiyear agreement with Project Lead The Way, an organization dedicated to promoting the provision of STEM education across North America. This agreement will extend the STEM initiative to all the schools in the communities in which we operate across North America. Ensuring the development of the employees of the future is key to the long-term future of AMP, and we are progressing similar initiatives in Europe and South America. We look forward to updating in due course. So to conclude, recapping on the year-to-date, 2021 performance to date has been strong, with LTM adjusted EBITDA increasing to $613 million at June 30, compared with $545 million, December 31. As we look to the future, we see continued strong beverage can demand in all regions. All of our capacity for 2021 is fully allocated and is significantly contracted in late years. While our business growth investment projects are fully contracted. This demand underpins our $1.8 billion 2021 to 2024 organic investment programs to support our customers' growth. Project execution has proceeded to plan, and we will see increased investment in growth initiatives in the second half of the year. Whilst being mindful of inflationary pressures and the uncertain progression of the pandemic, the fundamentals of our business underpin our confidence for 2021 and beyond. We, therefore, expect to deliver full year 2021 adjusted EBITDA at least in line with the $654 million previously set out. Third quarter adjusted EBITDA is expected to be approximately $170 million compared with $151 million in the same quarter of 2020. Having made these opening remarks, we will now be pleased to take any questions that you may have.

[Operator Instructions] We can now take our first question, caller your line is open. Please go ahead.

This is Mike Lee here from Barclays. First question, just on the outlook. I think you mentioned EBITDA being at least in line with previous guide. So it sounds like you might be seeing some upside there. So, curious, is that just market demand coming in better, better cost control or execution? If you can maybe just flesh out a bit more how you're seeing things come in, maybe a little bit better, that would be helpful.

Sure. Yes. I think that we are seeing market demand is extremely strong. I think I mentioned that across all 3 regions. I think we have improved operating performance in a number of areas of the business. So we see -- yes, those are probably the 2 main areas we see some potential upside for the rest of the year.

Got it. That's helpful. And then I think originally, you had laid out expectations for elevated growth CapEx through next year, and then that would drop down and free cash flow conversion would pick up. I guess as we get closer now to 2023, and given everything you just said about your bullishness on the market, should we expect further growth investment as we move out to that time period? Or I guess just how are you thinking about further opportunities for growth CapEx as we move beyond 2022?

Yes. No, I think we've signaled that there are active discussions going on with customers. The market does remain very strong. Customers are keen to underpin their growth plans in the years beyond '23 and '24. And so we are talking to them about that. Nothing is fully concluded. But yes, we would expect to see further growth investments beyond this plan.

Now we can now take our next question, caller your line is open. Please go ahead.

First is, I wonder if you could just review some of the cash items, for instance, for 2021, is -- like CapEx still around $900 million, is cash taxes still around $50 million? And any thoughts on working capital and lower outflow for the full year?

Sure. I'll pass that to David.

Yes. Hi everybody. So yes, our overall CapEx will be around about the $900 million mark, [ BGI ] of $800 million maintenance CapEx of $100 million, cash tax around $50 million. And what was the other question you asked?

Working capital inflow, outflow.

Working capital, we anticipate to be neutral for the full year. Yes.

Will be -- I'm sorry, I didn't catch that last word.

Neutral for the full year, so yes.

Got it. How much we dial in for the second half of 2021 for cash transaction costs? Stand-up costs, that sort of thing.

I think projections around about the 90-ish mark for that.

And your outlook play. And lastly, as of June, what was the amount of the off-balance sheet receivables that were dedicated to AMP?

So the off-balance sheet receivables for AMP were [ $329 million ] for the second quarter.

[Operator Instructions] We can now take our next question, caller your line is open. Please go ahead.

Gabe Hajde, Wells Fargo. I had a question in terms of, I guess, confidence level. I know it's tough sometimes sitting on the side of the table. We're hearing from some of the, I guess, heartfelt brands that they have a little lower level of visibility. And I appreciate that's not the only area of growth. But just in terms of either conversions from PET or other substrates or new product introductions, what gives you the confidence that I guess, at the end of the day, there won't be an oversupply issue when we roll out 18 months from now.

Sure. Yes. So look, first of all, I mean, hard sales is mid-teens of our business, North America, mid-single digits of our business globally. So we obviously have a lot of our business and our business growth at the moment in Brazil and Europe that isn't linked to the category and is linked to other trends, particularly the sustainability trend, but in Brazil, the conversion from 2-way glass into single-use packaging, which is going almost entirely into can. So I think that's probably the first thing to say. The second is that hard sales just grew over 30% year-to-date. And I think I saw a number that they grew nearly 190% July 4, 2019, to July 4 weekend 2021. So we're still talking about a category with excellent growth. And we still see that category as growing almost exclusively in cans. There's a lot of innovation. There's still plenty of room on the advertising and promotion front. So we still predict that, that will get good growth. And our plans haven't changed with any of the recent news around the category, and that hasn't changed any of our belief about the -- our strategic plan and our investments. I think there are many other sources of growth in the North American market. I think if you look across the energy market, the sparkling water, all the mixed drinks that go across that space, they're in huge growth, a lot of innovation in that space. Traditional CSD is actually in growth in cans, which is obviously a big weight in the market when that starts to go up. And we see that there's strong possibilities for still water to come into beverage cans in the years ahead, and that's another huge market. So I think that there's been a shift in the position of beverage can in the packaging industry, and that shift is, we think, going to benefit the growth of the industry for many years to come.

And we can now take our next question, caller your line is open. Please go ahead.

This is Travis Edwards with Goldman Sachs. Just had a quick question as far as your specialty can mix. Can you just refresh us on what the target is as far as -- especially can to your overall total volumes. Is there a target? Or is it just going to based on demand, we'll be curious to see if there's any sort of specifics around what sort of mix you'd like to make that out as part of your total volumes?

Sure. Yes, Travis, I think we've put that out there with the plan, right. So over 80% of the investment in the plant in specialty capacity, and that takes us, I think, over mid-50s in terms of specialty can penetration in our mix by 2024. So that's the current plan, and that fits with the investment program.

There are no further questions at this point. I will hand back to Mr. Oliver Graham for any additional or closing remarks.

Okay. Thank you very much for your time today and we look forward to updating you at the Q3 results. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.