ARD (2020 - Q4)

Good day, and welcome to the Ardagh Q4 2020 and Full Year 2020 Results Conference Call. At this time, I'd like to turn the conference over to Mr. Paul Coulson. Please go ahead, sir. Paul Cou

Good. Well, welcome, everybody. And first of all, I must apologize for the -- having to reschedule this call today. I'm afraid that our original service provider -- contracted service provider, notified us at the very last minute that their systems were down and that we couldn't have any kind of call at all. So I thank you for your forbearance, and I apologize. We hope you're all well and safe, and we thank you for joining us for our fourth quarter earnings call, which follows the release earlier today of our results for the quarter. I'm joined today by David Matthews, our CFO; Shaun Murphy, our COO; and John Sheehan, our Corporate Development and Investor Relations Director. As always, our remarks 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. Our earnings release, financial report and related materials for the fourth quarter can be found on our website at ardaghgroup.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 and adjusted earnings per share. Details of our statutory forward-looking statements disclaimer can be found in our SEC filings. So today, we will provide an overview on the results for the quarter and the full year. And before doing so, I'd like to express great appreciation to our colleagues across the group. 2020 was a unique and challenging year for the communities we operate in, for our people and for our businesses, but we have come through it very strongly. Thanks to the outstanding efforts of our colleagues who have enabled Ardagh to continue to play its central role in the beverage and food supply chain. And we also thank our customers, suppliers and other business partners for their support over the course of last year. If I now move on to the results for the quarter. Our Q4 performance was strong in the group. Revenue grew by 8% to $1.7 billion compared to the same period last year and by 5% at constant currency, principally reflecting 5% volume strong mix growth in metal packaging. Glass Packaging volume/mix was in line with the prior year. Adjusted EBITDA for the quarter increased by 5% to $281 million at actual exchange rates and by 3% at constant currency. Growth was driven by a 25% increase in metal packaging, where an excellent operating performance complemented strong demand. So if I look at our segmental performance, and I'm focusing here on constant currency movements, I'll start with Metal Beverage Packaging, which represented over half of group revenues and adjusted EBITDA in the quarter. Revenue increased by 9% to $893 million compared to the same period last year. Total shipments in the period increased by 7% in the quarter with strong growth recorded in both the Americas and Europe. Demand drivers were similar to those seen in previous quarters, the appeal of the beverage cans convenience, its branding potential, its alignment with the consumer-driven sustainability agenda and our position within the stronger growth categories, including hard seltzers, sparkling waters, energy drinks and teas as well as emerging categories such as coffees and wines. Specialty can shipments in the quarter increased by almost 20% and were 13% higher for the full year. This reflects our strong specialty footprint in all regions as well as following on from our more recent investments. Conversion to earnings were strong, and adjusted EBITDA increased by 25% in the quarter. In terms of a graphical breakdown here, Metal Beverage Packaging in Europe, revenue of $398 million for the quarter was increased by 11%, with total shipment growth of 8% compared with the same period last year. Demand across our end markets remained strong throughout the quarter. Adjusted EBITDA increased by 13% to $52 million in the quarter compared to the same period last year, reflecting continued strong demand growth and good performance across our network. In Metal Beverage Packaging Americas, the revenue grew by 8% to $495 million in the quarter. Shipments increased by 7% led by strong growth in Brazil, which benefited from the ramp-up of recently completed investments and grew shipments by double digits. North American shipments also advanced, though more modestly than Brazil given our capacity constraints, pending new capacity, which we had to come online in late 2020, early '21. Adjusted EBITDA increased by 33% to $88 million in the quarter, with shipment growth complemented by positive mix and a strong operational performance. Demand in all our beverage can businesses remain very strong, inventories are at record low levels and all our 2021 capacity is fully sold. Our growth investments continued to progress during the quarter. In late 2020 and early '21, we started up the 2 new specialty can lines at our Olive Branch, Mississippi facility. Both are on schedule and ramp-up will continue over the first half of this year. In December, we acquired a large manufacturing facility on an extensive and well-located site in Huron, Ohio. Work has commenced to convert the facility into a new can and ends plant to commence production of ends later this year and of cans early next year. Our expansion at our Winston-Salem, North Carolina plant, which involves 2 high-speed specialty can lines is underway, with an expected completion date late in the third quarter of this year. And our growth initiatives in Brazil, in Europe to increase our specialty can capacity in those regions are also on plan. If I turn now to Glass Packaging. Total shipments in our glass businesses increased by 1% during the quarter and were 2% higher in the second half of the year compared to the same period last year. Glass Packaging Europe performed strongly in the quarter, with packaging volume/mix increasing by 2% compared to the same period last year. Volume/mix in Glass Packaging in Europe increased in most categories, notably food, as lockdowns had a diminishing impact on consumption patterns compared with earlier in the year. Adjusted EBITDA in Glass Europe of $92 million was 12% lower than the same period last year due to the timing of furnace rebuild activity and some capacity management initiatives in the quarter. For the full year 2020, Glass Europe volumes are broadly on par with the '19 -- 2019 levels, with an adjusted EBITDA margin of 22.5%. Glass Europe has again underlined its resilience and adaptability in 2020, enabling it to deliver superior performance in all environments. In Glass North America, fourth quarter revenue of $394 million increased by 2%, principally reflecting increased volumes in food. Adjusted EBITDA of $49 million declined by 16% due to increased operating costs as well as an unfavorable mix effects. Our focus in Glass North America remains on lowering the cost base through investment in automation and other productivity-enhancing measures. In recent weeks, we agreed bolt-on acquisition of the Longhorn Glass plant in Houston from AB InBev as well as entering into a long-term supply agreement with the adjacent ABI brewery. This acquisition further strengthens an important and long-standing customer relationship with ABI. The transaction is subject to regulatory approval. So recapping briefly on the full year. The strong fourth quarter performance meant that 2020 revenue increased by 1% at constant currency to $6.7 billion, while adjusted EBITDA of $1.16 billion was within 2% of prior year levels. We believe this is an excellent outcome for 2020. If I turn to our environmental and social sustainability strategy, in Ardagh, we have always focused on our environmental and social responsibilities. However, over the course of 2020, we've invested significantly in our sustainability team and have launched an ambitious new sustainability strategy. Our sustainability focus is across the environment, ecological and social agenda. Our main targets include a 27% reduction in our total carbon emissions by 2030 as well as the achievement of best-in-class water management standards and zero waste to landfill. On the environmental pillar, we are signatory to the UN Global Compact and in 2020, committed to the adoption of science-based targets. We have also once again been awarded an A- rating for Climate Change from CDP. We continue to work with our customers to lightweight our products and with our suppliers to increase our recycled content and drive sustainability -- sustainable sourcing. Recycled aluminum content in North America and colored juice in Glass Europe are already in excess of 70%. And in Glass, we are working at FEVE, the trade organization to achieve 90% glass collection rates by 2030 through its close the loop -- its Close the Glass Loop initiative. Emissions will be reduced by our targeted move to 100% renewable energy usage, and we are playing the lead role with other European glass producers in developing new innovative furnace technology with the scope to reduce emissions by over 60%. On the social sustainability side, we will materially increase our investment in our local communities through grassroots giving back initiatives and will advance our diversity and inclusion practices. If I turn to our business growth investment program, and let me speak first about metal beverage. Implementation of the various metal beverage projects outlined in late October, has progressed over the quarter and into 2021, in line with our expectations. With a very favorable short-, medium- and long-term outlook for metal beverage, backed by long-term consumer megatrends, we have in recent months, decided to take advantage of attractive additional opportunities to deploy capital in support of our customers' growth. We now expect to invest a total of $1.8 billion during the period '21 to '24 in growing our metal business, from $300 million higher than we previously set out when we talked to you about our third quarter earnings last October. This will add a further 4 billion cans in the period '21 to '24, taking total expansion to approximately 21 billion cans or almost 55% of capacity for this period. We will also increase our specialty can mix from 43% in 2020 to approximately 60% by 2024. These customer-backed investments will provide attractive returns and will be strongly accretive to free cash flow. Execution risk is mitigated by their location, which is prominently in or close by our existing facilities. We have also invested in additional resources to plan, implement and monitor progress at each stage of this major investment program. The high level of contract visibility also materially derisk these investments. Phasing of the program in metal beverage remains front-ended, with an outlay of approximately $800 million in '21 and $600 million in '22. And we are targeting a doubling of adjusted EBITDA to $1.1 billion in '24 from the $545 million reported for 2020. And given the pipeline of opportunities we are currently evaluating, we are confident of driving this growth trajectory even further in the years after 2024. The profile for investments in our Glass Packaging business is unchanged. We will invest approximately $300 million in growth opportunities in Europe as well as inefficiency and cost reduction initiatives in both Europe and North America in the period up to the end of '24. So total outlays on business growth investments will, therefore, now be approximately $2.1 billion for the 4 years from 2021 to 2024. Turning to liquidity and capital structure. We ended the year with cash on hand of $1.3 billion. Total cash and available liquidity, including our undrawn ABL was $1.9 billion. And given the still uncertain macroeconomic backdrop as well as our business growth investment plans, we continue to hold enhanced levels of liquidity. Net leverage was 4.9x adjusted EBITDA at the end of the year. If we look to our view of '21, whilst the near-term environment in many markets is subject to COVID-related uncertainty, the impact of restrictions has been markedly less in Glass Packaging than earlier in 2020, as end customers and our customers have adapted to this new environment. Our bias to off-premise consumption continues to weigh in our favor and metal packaging has continued to see strong secular growth. We enter 2021 with good momentum. And at this early stage, we project full year adjusted EBITDA for the group of between $1.28 billion and $1.3 billion. We expect net leverage to stay around 5x EBITDA on a reported basis, but with pro forma net leverage, which reflects the full annual run rate for EBITDA from the investments made in '21 being at around 4.5x. So in conclusion, our businesses performed well in the quarter and throughout 2020. Medium to long outlook for our sustainable substrates has never been better. We have a clearly defined growth road map in each of our businesses as well as the people and financial resources to grow long-term stakeholder value. In particular, our beverage can business is performing very strongly and is poised to deliver strong growth on the back of our major capacity investment program and related new long-term contracted business. So having made these opening remarks, I'll be very happy to take any questions that anyone has. Thank you.

[Operator Instructions] And we'll take our first question from Mark Wilde.

Can you give us some color on where that incremental $300 million in growth CapEx in the beverage can business is going?

Yes. It's going largely in North America. Incremental largely in North America, I think, is where most of it is going to be. If you look at our spend on beverage is going to be 1,800 (sic) [$1.8 billion]. In 2021, about 60-odd percent of that will be in North America and in 2022, nearly 50% of it.

Okay. And then just as a follow-on, Paul, there's such a big spread right now between glass container and beverage can valuations. Any thoughts -- and you're really trading more towards glass container valuations right now. Any thoughts on prospectively splitting these 2 businesses to get the higher valuation on the beverage can piece of the business, which is where much of the growth in the company is occurring?

That's something, Mark. We look at quite on an almost constant basis to see if there are things we can do. And we're always looking at opportunities to see how we can enhance shareholder value. But as at this stage, there's no decision on anything like that.

Okay. All right. Last one for me. Are you seeing any signs of potential improvement in pricing and terms in the European beverage can market, kind of in the same vein that we've seen improvement in the North American market over the last 2 or 2.5 years?

Absolutely. We're seeing significant improvement in demand in Europe. We're sold-out, and we're on a much improved pricing cycle there.

And we'll take our next question from Travis Edwards from Goldman Sachs.

I know a lot of the growth story here is on the bev can side, but a question on the glass side, which I know we talked about a little bit in the past. But wondering, just as you think about the competitive environment there, supply/demand environment and some of the cost initiatives that you're putting -- that you're implementing. Can you refresh us on how you're thinking about the margin profile there? What's the time line to get back to sort of pre-restructuring margin levels and 18%, 19% or even low 20s. Is that -- is the path back there even possible? Or are we operating in a new environment now? Any color there would be helpful.

You're presumably referring to North America because Europe is performing fine. Is that right?

Sorry, correct. Yes, on North America side specifically.

Yes. Well, in North America, yes, I mean, there is a path back to margins getting back towards the 20%. It's going to take another couple of years. I think we'll see modest improvement in '21 in glass in North America. But we are making progress. It's slower than we would have liked. COVID has slowed it down a bit. But we have got our capacity right. We're sold-out capacity-wise. And we've taken a number of moves, important moves with customers. I mentioned the Longhorn plant. That further develops a very, very important relationship with ABI. And much of the issues to restore margins in North America will revolve around our cost base and improving efficiencies and improving quality. It's not the market. It's actually market conditions in Glass North America are pretty good right now.

Got it. So a follow-up as far as capacity goes, you feel -- I know in the past, you've mentioned that there may be more capacity has come out, but at this point, you feel like, generally, on the supply side, things are okay, generally rightsized?

Absolutely. We're rightsized for the business. We have and we have no intention of doing anything on that front at the moment at all. So we're quite happy with our balance of supply and demand.

And we'll take our next question from Kyle White from Deutsche Bank.

I just want to follow up on Mark's question in terms of potentially spinning off the beverage can business. What would be the possible implications to the holding company structure in terms of the Class A -- Class B and Class A shareholders? Would anything be done here that could potentially increase the free flow?

There's nothing we -- look, there's been some recent press speculation, and I'm not going to comment on any of this sort of stuff at all today, right? I mean we spend a lot of energy looking and seeing at how we can improve things, how we can improve, unlock shareholder value. But I don't want to comment on any of this given recent press speculation that there's been, Kyle, okay?

Yes. That's fair enough. On start-up costs, with all the new capacity coming online in 2021, what is the level of start-up costs that you anticipate for the year? And how does that compare to kind of last year's?

David, can I ask you to deal with that?

Yes. The start-up costs have been relatively modest during the course of 2020. And clearly, it will start to ramp up in '21 and maybe sort of $20 million to $30 million of start-up costs as we move through '21.

And we'll take our next question from Gabe Hajde from Wells Fargo.

I was curious, you had kind of given us some guideposts that 2020 EBITDA would be down in that kind of mid-single-digit range, and you did a little bit better than that. I appreciate there was a lot of uncertainty as it related to COVID and otherwise. But just at all, can you comment what maybe drove a little bit of the upside in the fourth quarter? Sounded like Brazil volumes came on a little bit better than what you were expecting. But any other color would be helpful.

Well, I think we saw a very strong performance in the metal beverage business. Brazil, obviously, had a time-out in April and during Q2, parts of Q2, but it's recovered very strongly. And Europe was very strong as well as was the U.S. So that was one of the main drivers. The other driver was the strong performance in the second half of the year in European Glass Packaging. I think they were the main contributors to us doing better than what we had guided at the time, although you appreciate that when we gave that guidance way back, the environment was very uncertain and nobody knew what way this thing would play out. But we're very pleased about it. I think it's been a great exercise by our team in managing the costs and also the markets have greatly helped us with the strength of demand for our products.

And then I guess on the beverage can side, can you comment at all if you made, I guess, an indication that inventories were sitting at record low levels, that you're moving cans around at all to service the oversold market in North America? Or that's just not an option for you given local demand?

Well, it's pretty modest, what we've been able to move around a little. It came from Brazil earlier in the year, but now that there's no spare space there, small amount from Europe, very, very little though, very modest. And because of the demand we have in Europe and because of the very strong demand we have in Brazil, it hasn't been possible to do much in that regard. So it's pretty modest.

Okay. And one last one, if you could. We heard from another glass player in Europe that kind of re-lockdown measures were impacting, I think, specifically sparkling water in Europe. But just any kind of directional guidance or thoughts you can give us maybe first half versus second half as things unfold for yourselves and just thinking about glass demand?

No. So far, so good.

[Operator Instructions] And we'll take our next question from Bob Amenta from JPMorgan.

Just a quick question on your comment about year-end '21 net leverage still being close to 5x. Just mathematically, if I just take the guidance, I get to me, they're close to $6.5 billion in net debt, you're only at $5.7 billion. So clearly, there's a burn of $700-odd million, give or take. Can you maybe just give us some guidance on whether it's CapEx, working capital, taxes? I just don't know. That seems like a lot to burn doing $1.3 billion of EBITDA.

David?

Yes. Maybe I can give you the building blocks around the cash flow, which will guide you towards that 5x. If we start with the midpoint of the EBITDA guidance which is $1.290 billion, we then got maintenance CapEx of around $380 million. That clearly averages about $350 million, '20 and '21. Lease payments, $90 million; working capital outflow, around $50 million, interest, $285 million, tax around $75 million. So that will give you a free cash flow before business growth investments of around $400 million. And then the business growth investments of glass and beverage is $900 million, and then we're going to be paying our normal dividends as well. And that's what we're expecting. So if you look at all of that, we see the debt moving from $5.7 billion up to about $6.3 billion, $6.4 billion. And I think if you work that math through, you get to around 5x leverage.

Right. Now that's extremely uplifted. It was the CapEx that I was low on. I didn't know how much of that $2 billion program was -- how front-end loaded it was over the next 3 or 4 years, so that's helpful.

We'll take our next question from Arun Viswanathan from RBC Capital Markets.

Yes. And congrats, I guess, on all the growth in '20 and the outlook going forward. Just wanted to, I guess, get your thoughts. Obviously, there's been a lot of continued increase in beverage can growth globally, and you guys have responded with an investment program here as have most of your peers. Could you break out maybe -- you've laid out some of the facilities in North America. Could you help us and just break out that CapEx program, how it kind of evolves over the next couple of years? And maybe what the investments are you're looking for outside of North America?

Well, in the U.S., there's 3 principal investments, one of which is completed in Olive Branch in Mississippi, where we double the capacity there. The second one is the new plant, the brownfield plant in Huron, Ohio, which is a very significant plant, and that will be opened later this year. And then you've got -- thirdly, you've got the expansion at Winston-Salem in our existing plant at Winston-Salem. And then so that principally deals with the U.S., and that's quite, as has just been referenced, quite front-loaded. They'll all be operating by the end of this year. Different stages of ramp-up. As we said earlier, Olive Branch is already operating. In Europe, we see some -- the investment in capacity in Europe will be in our existing plants. There won't be any new plants there. But there will be expansion of capacity in both Continental Europe and in the U.K. And then also, that follows on in '22 as we -- in both the U.K. and in Continental Europe and then Continental Europe in '23, but all within our existing plants. And then if you look at Brazil, we're looking at expansion of one of our existing plants and a new greenfield plant and that expansion in a second existing plant in Brazil over the period between '21 and '23, and those 3 years, '21, '22 and '23. So that's the sort of flavor I'd give you. And the total spend in the plan, '21 to '24 on beverage cans is $1.8 billion. But a lot of it -- it's quite front-end loaded. I mean you're going to -- you'll have the $1.4 billion between '21 to '22 and then $200 million in '23 and '24, so a lot of the program. And that means, of course, that the EBITDA ramps up quicker than if the program was spread more evenly over those years. So the big part of the plan in North America, all of it dealt with this year.

Okay. And then was there any consideration? Maybe you can just elaborate. We've heard some, I guess, stories about potentially listing beverage can business separately. Could you just elaborate on that, if at all?

Well, as I said earlier, we don't comment on media speculation. And I'm not prepared to go into any of that now either. I wouldn't comment on that at all.

[Operator Instructions] And we'll take a follow-up from Mark Wilde from Bank of Montreal.

Yes. Paul, just a nearer-term question. I'm just curious with the natural gas and electricity prices spiking here in the U.S. with the cold weather, if that's had any significant impact on you or whether it's led you to change kind of cadence at any of your operations?

Sporadic downtimes, but it's relatively small, are very small, and we're working with the different utilities involved. Maybe, David, do you want to -- or Shaun, perhaps like to comment on that?

Yes. I mean I'd echo that, Paul, in terms of its impact is modest at this point. And obviously, we expect things to improve. So open to add more than that.

And I guess, just to round off that comment. If we look forward, we're hedged 90% in '21 in terms of our energy use and 60% in '22. So we're in decent shape from a pricing point of view moving forward.

And it appears there are no further questions. At this time, I'd like to turn the call over back to Mr. Coulson for any additional or closing remarks.

Good. Well, thank you very much, everyone, for joining us today. And again, I apologize for the problem with the earlier time, and I hope we didn't cause you too much inconvenience. But thank you for your time, and we look forward to talking again with our results for Q1. Thank you very much indeed.

Thank you. And that does conclude today's call. You may now disconnect.