Ardagh Metal Packaging Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 22, 2024

There are 11 speakers on the call.

Operator

Welcome to the Argonne Metal Packaging S. A. Fourth Quarter 2023 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr.

Operator

Stephen Lyons, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and welcome everybody. Thank you for joining today for Arda Metal Patching's 4th quarter 2023 earnings call, which follows the earlier publication of AMP's earnings release for the Q4 and the full year. I'm joined today by Oliver Graham, AMP's Chief Executive Officer and David Borne, AMP's Chief Financial Officer. Before moving to your questions, we will first provide some introductory remarks around AMP's performance and outlook. AMP's earnings release and related materials for the Q4 can be found on AMP's website at www.ardametalpackaging.com.

Speaker 1

Remarks today will include certain forward looking statements and include use of non IFRS financial measures. Actual results could vary materially from such statements. Please review the details of AMP's forward looking statements disclaimer and reconciliation of non IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn

Speaker 2

the call over to Oliver Graham. Stephen, 2023 represents a year of transition for

Speaker 3

our business as the team navigated a challenging macro demand environment and took decisive action on our footprint and inventories to position the business for growth in 2024 and beyond. Despite the market context, in particular softer European demand, we achieved record global revenues and shipment volumes, which grew by 5% for the full year and 2% in the 4th quarter. Our Americas segment grew at an almost mid teens percentage, driven by strong growth in both regions. Our actions on energy pass through to our customers in Europe resulted in stronger inflation recovery, but this was more than offset by unfavorable volume mix effects with a significant decline in production activity and shipments experienced in the second half of the year, which also impacted fixed cost absorption. In Brazil, full year shipment growth was below initial expectations due to consumer weakness and customer mix, which included a customer restructuring that is now resolved, but with an encouraging sequential improvement in shipment trends during the second half and a strong Q4 against the weak prior year comparable.

Speaker 3

Our team's efforts on working capital management in this challenging environment generated a near troubling of cash from operating activities, resulting in A

Speaker 2

and P ending the year in a robust liquidity position. Our

Speaker 3

4th quarter performance was negatively impacted versus our expectations by weaker than expected volume and mix effects in Europe, which was partly offset by a stronger performance in the Americas. European shipments deteriorated towards the end of the quarter and well below retail scanner trends, which were more positive, reflecting what we view to be largely customer destocking actions. There was a clear divergence of performance by customer and geography and with a gravitation towards value brands and private label. Our confidence in a stronger performance in 2024 reflects our expectations for volume growth in all regions, leading to improved cost absorption in addition to our footprint actions. Inflationary pressures are moderating and the beverage can continues to win share as the package of choice by customer innovation and its sustainability advantages.

Speaker 3

We are committed to balancing our network capacity with demand through a mix of curtailment and longer term action as appropriate. The 2 remaining steel lines in Biesemturm, Germany closed at the end of the year as previously indicated. In North America, we closed our 2 line facility in White House, Ohio this month, which will improve network utilization to a more appropriately balanced position. These permanent actions will optimize our network and drive earnings improvement. With our well invested global manufacturing base and a strong diverse mix of customer relationships, we remain well placed to benefit from a normalization in demand, which should drive further earnings growth over the medium term.

Speaker 3

During the quarter, the publication of our 2023 sustainability report highlighted our progress on sustainability initiatives. The recently announced supply agreement with Novelis in North America for supply from its greenfield development will further contribute towards AMP's metal decarbonization strategy. AMP alongside other industry stakeholders participated in a call for action at COP28 And we look forward to updating on further progress on sustainability during 2024. Turning now our attention to A&P's 4th quarter results. We recorded the Q4 of 1,100,000,000 dollars an increase of 5%, which reflected favorable volume mix and higher input cost recovery, partly offset by the pass through to customers of lower input costs.

Speaker 3

Adjusted EBITDA of $148,000,000 was down 7% on the prior year with growth in the Americas more than offset by a decline in Europe in excess of our expectation, which reflected customer caution and apparent destocking against a weak consumer backdrop. Total beverage can shipments in the quarter were 2% higher than the prior year with 14% growth in Americas offsetting a 10% decline in Europe. We had a strong cash performance with adjusted operating cash flow approaching $500,000,000 for the quarter $680,000,000 for the full year. This reflected our team's focus on working capital, in particular inventory management and our ongoing reduction in capital expenditure. Turning now to A and P's results by segment.

Speaker 3

Revenue in the Americas in the 4th quarter increased by 11% to $705,000,000 which reflected shipments growth partly offset by lower input costs. In North America, shipments grew by 8% for the quarter and 13% for the year. Our shipments growth was broadly in line with our expectations, which drove record profitability. This strong outperformance versus the market reflects the contribution from customer contract commitments arising from our investment program as well as the diverse mix of our portfolio weighted towards non alcoholic beverages including the high growth functional energy drink segment. Looking at the market overall, demand remains somewhat constrained by higher retail pricing and lower levels of promotional activity than historical norms.

Speaker 3

Industry demand trends improved in Q4 and we expect further improvement into 2024 as input costs moderate, retail pricing stabilizes and consumers see real wage growth. We're encouraged by our strong annual growth in shipments in 2023, our pipeline of contracted growth and good early momentum so far in 2024. This supports our forecast for shipments in our North American business, the growth by a mid to high single digit percentage this year versus a low single digit percentage growth for the industry. In Brazil, 4th quarter shipments increased by 34% against a weak prior year comparable, outperforming the mid single digit increase in the market. We experienced encouraging sales momentum with a number of key customers.

Speaker 3

Shipments grew by 3% for the full year, which was slightly ahead of

Speaker 2

the market. We forecast modest shipments growth for

Speaker 3

our Brazil business in 2024 and we continue to balance our capacity through curtailment of our network. We are confident in the growth potential of the business, but remain cautious in the near term given the softness over the last 2 years. The market has started the year strongly, but we would highlight the earlier date for Carnival this year, which may have had some impact in pulling forward demand. Adjusted EBITDA in the Americas increased by 3% to $117,000,000 in the 4th quarter as the contribution from higher volumes was offset by favorable prior year effects, which included a contribution from unfulfilled customer contractual volume commitments. 2024, we expect shipments growth in the Americas of a mid single digit percentage.

Speaker 3

Shipments growth and improved fixed cost absorption will drive growth in adjusted EBITDA in 2024. In Europe, 4th quarter revenue decreased by 10% on a constant currency basis to $427,000,000 compared with the same period in 2023, principally due to unfavorable volume mix effects, partly offset by a higher input cost recovery. Shipments for the quarter declined by 10% on the prior year as sales volumes decelerated sharply towards the end of the quarter. For the full year, shipments declined by 2% with growth in the first half more than offset by the second half deterioration. Consumer demand remains weak given household financial pressures, but the decline in shipments experienced by ourselves and the industry was broad based and significantly in excess of retail scanner trends in the quarter.

Speaker 3

We believe this reflected elevated customer destocking into the end of the year. Scanner trends also showed an improvement in consumer volumes towards the end of the quarter at odds with our shipments experience as customers took increased levels of downtime over the holiday period. 4th quarter adjusted EBITDA in Europe decreased by 35% at constant currency to $31,000,000 due to volumemix effects and reduced fixed cost absorption, which offset stronger input cost recovery versus the prior year. Reduced production activity as finished goods inventory was right sized earlier than expected resulted in higher fixed cost under absorption and a lower margin contribution than expected from the period end contract asset. We took action

Speaker 4

on our

Speaker 3

footprint with the closure of Vicentherms deal lines at the end of the year, and we will continue to keep our network under review to balance supply with demand and improve efficiency. For 2024, we expect low single digit percent shipments growth with a stronger performance in the second half. Volume growth and improved fixed cost absorption will drive adjusted EBITDA growth in 2024, but partly offset by competitive pressure on a small portion of our business and some upstream cost increases reflecting elevated energy costs. I'll now briefly hand over to David to talk you through our financial position before finishing with some concluding remarks.

Speaker 4

Thanks, Oli, and hello, everyone. We ended the year with a liquidity position in excess of $800,000,000 ahead of our expectation. The success of our working capital initiatives resulted in an inflow for the full year of $270,000,000 ahead of our most recent guidance of $200,000,000 During the period, our team responded to customer destocking in Europe to right size our finished goods inventory, which followed similar action in the Americas in previous quarters. This resulted in adjusted operating cash flow of $680,000,000 for the year, up from $255,000,000 in the prior year. Our expectation for 2024 is for a further working capital inflow across the full year after our usual seasonal outflow in Q1.

Speaker 4

P incurred maintenance CapEx of $112,000,000 growth CapEx of $266,000,000 and growth investment via lease additions of $71,000,000 in 2023. Total growth investment of $337,000,000 was tightly managed below our initial guidance of just under $400,000,000 and represents a 45 versus the prior year. Our growth investment program is substantially complete, with growth CapEx in 2024 to reduce to approximately $100,000,000 which mainly comprises flexibility enhancements to our network and the final cash flows for some of the growth projects concluding. We anticipate a further reduction in growth CapEx again in 2025. Our leverage metric ended the year at 5.5 times net debt to adjusted EBITDA, falling by 0.2 times in the quarter, supported by lower net debt arising from strong cash flow generation.

Speaker 4

Thereafter. Note that in addition to our strong liquidity position, we have no near term bond maturities and no maintenance covenants on our bonds. We have today announced our quarterly ordinary dividend of $0.10 per share to be paid later in March, in line with guidance and supported by our robust closing liquidity position and the cash generation potential arising from our earnings growth and completing growth investments. There is no change to our capital allocation policy. With that, I'll hand back to Oli.

Speaker 3

Thanks, David. And before taking questions, I'll just recap on A and P's performance and key messages. So firstly, global shipments grew by 2% in the 4th quarter and by 5% for the full year. North America shipments growth was consistently strong and in line with expectations. Brazil shipment trends inflected positively during the second half and Europe shipment trends deteriorated during the second half, but retail scanner data tracked ahead of shipments and would support a more positive market outlook for 2024, in line with historic norms.

Speaker 3

In response to challenging market conditions, our team successfully optimized our cash generation through disciplined working capital deployment and inventory 2023 represented a transition year for AMP, where our team performed at a high level to balance the business. Our continued shipments growth, permanent capacity actions, focus on operational excellence and tight control of SG and A should all result in stronger adjusted EBITDA generation going forward. Our current view of the market leads us to project global shipment growth for AMP in 2024 approaching a mid single digit percentage. Full year 2024 adjusted EBITDA is projected to grow by 5% to 10% into a range of $630,000,000 to $660,000,000 Our EBITDA guidance is supported by shipments growth with improved fixed cost absorption accelerated by the completion of finished goods destocking and footprint rationalization. In terms of guidance for the Q1, adjusted EBITDA is anticipated to be in line with prior year, with growth expected in the Americas, but with Europe slightly lower, as we remain cautious on production with volume recovery weighted towards the second half.

Speaker 3

Having made these opening remarks, we'll now proceed to take any questions that you may have.

Operator

Thank And we can take our first question from George Staphos with Bank of America.

Speaker 5

Yes. Hi, good morning. This is actually Kashan Keeler on for George. We had a conflict this morning. Thanks for taking my questions.

Speaker 5

So I guess first off, given we're almost 2 months into the quarter here, can you just talk about how you're seeing volumes trending quarter to date at this point across the regions? And I guess relatedly in Europe, have you seen any kind of spillover effects related to the destocking you saw at the end of Q4 there?

Speaker 3

Sure. Yes. So I think the year has started well in all three regions, probably running slightly ahead of our expectations. There was definitely some transfer from December into January of European volumes. So we had a strong January.

Speaker 3

We would probably say that 2 thirds or even more than 2 thirds of that looks like it is a crossover from December into January. And region by region, Europe running, as I say, ahead of what will be a guide for the year. We're guiding to low singles. So we're running a bit ahead of that at the moment, but we've got a tough March comp, which we recognize. And there's some funny pieces for the days in the quarter with Easter falling at a very early date.

Speaker 3

But I think positive on Europe with where that started. North America has started strong in both January February, running again somewhat ahead of our expectations and the same for Brazil. The Brazil market grew 20% in January as a total market, which is obviously very encouraging. We weren't at that kind of level just because of our customer mix in January, but February also looks good. So yes, we're feeling positive about the way the year has started even though obviously it's still early.

Speaker 6

Okay, understood. And as we

Speaker 5

think about the EBITDA guide for next year, can you just lay out some of the key buckets or puts and takes to help us bridge aside from volume? And also any further color you can provide on your comment regarding those elevated energy costs as well?

Speaker 3

Sure. So I think if you take the top end of our guide, you'd be looking at somewhere north of 50 $1,000,000 positive on volume. We'd be looking at again somewhat north of $20,000,000 on cost improvements, fixed cost absorption, operation excellence and SG and A. And then you've got a negative on price cost, call it mid teens to bring you back down to the top end of that guide. And just on that specific point, so yes, the comment about the elevated energy cost is just with some of our upstream suppliers, obviously, we've deferred a lot of that coming down to over the last couple of years, but we have had to take some of that into this year because obviously a lot of energy is used upstream of us as well as in our own operations and it's been a little bit more difficult to pass that into the market in Europe in the current environment where the market, the beverage can market is a little bit looser.

Speaker 3

So that's why you've got that negative 15 in there. At the bottom end of our guide, you'd probably just take a bit off all of those. Maybe the volume would be more 35, maybe a negative 20 on the price cost and a positive 15 or so on the op costs and other cost pieces. So that's the buckets that formed the range.

Speaker 6

Okay, great. I'll turn it over.

Speaker 3

Thank you.

Operator

We will take our next question from Anthony Pettari with Citi.

Speaker 7

Good morning. This is actually Brian Bergmeier sitting in for Anthony. Thank you for taking the question. I'm just trying to gauge the level of curtailments in 2024 that are implied by your guide, it seems like there's still going to be some capacity offline in Europe and Brazil, not sure if that's accurate. And then assuming you've reached your volume growth guidance for this year, does that imply essentially no curtailments as we get into 2025?

Speaker 3

Look, I think we're still ramping some of our growth investments and we still have efficiency gains as we pursue various operational excellence initiatives. So I think it's not as simple as that. I mean, if we take the year, we think we've got about 4,000,000,000 dollars of curtailment across the network globally, split relatively evenly between the regions. We still do have some in North America. And that's giving us good runway on the growth that we've got in the business, particularly in North America, but we also have high hopes for Brazil returning into some good level of growth.

Speaker 3

So we are still taking curtailments and we are obviously keeping under review more permanent network actions, but at this point nothing further to say on them.

Speaker 7

Yes. Got it. Got it. Thanks for that detail. Yes, last question for me and then I can turn it over.

Speaker 7

I was under the impression that the growth CapEx in 2024 was kind of related to projects initiated in 2023. Know it's maybe a little bit of spillover, but the prepared remarks maybe said otherwise. I'm just curious if you can disclose the projects that are included or maybe it's too soon to do that. Thanks. I'll turn it over.

Speaker 3

Actually, I think the 2024 growth CapEx is projects that were initiated in 2023. So I think we talked about half of it being about flexibility, enhancements to our North American network together with the changes we needed to make to address the White House closure. And then the other half, we've got some carryover projects from the growth investment that just some of the cash out is in this year. So most of that is 23. There are some 24 projects that will occur during the second half of the year, again, focused mainly on small amounts of flexibility improvement in the European network.

Speaker 3

So, yes, that's the bulk of the $100,000,000

Speaker 7

Got it. Thanks a lot.

Operator

And our next question will come from Curt Woodworth with UBS.

Speaker 2

Yes. Thank you. Good morning. I was wondering if you could help bridge

Speaker 6

a little bit on free cash flow delta this year. You talked about working capital to be a use, but then can you also give us some guidance on lease expense, cash interest and some other line items and provide a rough bridge on free cash flow?

Speaker 3

Kevin, yes?

Speaker 4

Yes. Hi, Kurt. Yes, happy to help. So we think we'll have a small working capital inflow this year as we outlined. Lease repayments of the order of $90,000,000 maintenance CapEx and non business growth investment CapEx of the order of $120,000,000 We will have some operating exceptionals on the closure of our White House and Bois and Town facilities.

Speaker 4

So we'll have 30 to 40 there. We'll have cash interest 200 would be my estimate for the year for that one and cash tax perhaps of the order of 35.

Speaker 6

Okay. Thank you. And then I guess in terms of the volume outlook in the Americas, can you give a little bit more granular on maybe the assumptions underpinning that? Like how much of that would be functional around market share win or just kind of contractual commitments you have? I think you said market growth would be about 2%.

Speaker 6

And then with respect to Europe, are there any similar levels of growth there in terms of taking share or leveraging new plant network? Thank you guys.

Speaker 3

Sure. Yes. So look, I think with North America, we guided to a mid to high single digit percentage. And you probably would take the mid as being the contractual gains and the rest being the market. So we see the market in the low single digits.

Speaker 3

And I think we've commented before that we have a couple of contractual gains going into 2024. So that's broadly how those 2 would split down. And then I think on Europe, it's market growth in our mind. There was a reasonable amount of ups and downs in our customer base coming into 2024, but the growth that we're seeing in 2024 is larger from the market, which we're seeing at about a 2% level as you said. Thank

Speaker 6

you. Thank you.

Operator

And we will take our next question from Richard Phelan with Deutsche Bank.

Speaker 8

Thank you. Given the healthy liquidity position at year end and the planned reductions in CapEx, would the business consider using its balance sheet in any way to support the liquidity demands that its majority owner raising a dividend, a special dividend, redemption of the preferred?

Speaker 4

Do you want to take that one? I think we've been clear our capital allocation policy is unchanged. So we regard the current level of dividend as both sustainable and the liquidity, as you say, at year end absolutely supports that. So sustainable dividend at current level is our first priority and then leverage reduction is our second priority.

Speaker 8

Thank you.

Operator

And before we go to our next question, just one more reminder to our audience. We'll take our next question from Roger Spitz with Bank of America.

Speaker 9

I just wanted to clarify the 2024 cash interest. I thought I heard 100,000,000, but I think I might have misheard.

Speaker 4

I think, yes, 200,000,000 dollars Yes.

Speaker 9

Okay, okay. Got it. Yes, that makes more sense. Okay. And so when you do that, you get adding all the things you did, gave midpoint of the range, small working capital inflow.

Speaker 9

It's kind of like a free cash flow before dividends and preferred $35,000,000 plus or minus what have you. Is that kind of the way to think about it, putting all those pieces together that you put together?

Speaker 4

I get to a higher number than that.

Speaker 9

Higher number. Okay. All right. Thanks very much.

Operator

And we will take our last question from Ning Yang with Jupiter Asset Management.

Speaker 10

Hi. Could I just clarify the exceptional cost that you guided earlier in terms of the start up cost or restructuring cost? How much was it? Like adding all together in terms of those exceptional items below EBITDA? And just want to confirming that the CapEx the total CapEx guidance, is it roughly $230,000,000 next year?

Speaker 4

Yes. So total CapEx cash flow is of that order, yes. In terms of exceptionals, you have operating exceptionals, which sit before free cash flow, so the cash element of those maybe of the order of 35 around our restructuring activity. You will then have some start up costs that sit below the free cash flow line. They may be of the order of 25 this year, but they're coming down quite substantially, obviously, from when

Speaker 3

we're in the middle of our growth investment program.

Speaker 10

Thank you. I guess my last question is on your in terms of the cash balance that you have, given that you have operations in Brazil, etcetera, etcetera. So where do you see that your business needs in terms of the minimum cash balance to operate?

Speaker 4

Minimum cash balance offer. We like to have a float of about $100,000,000

Speaker 3

would be our absolute minimum. But

Speaker 4

clearly, we're a long way above that at this stage.

Speaker 10

Okay, understood. Thank you very much.

Speaker 2

Thank you.

Operator

It appears there are no further questions at this time. Mr. Graham, I will turn the conference back to you for any additional or closing remarks.

Speaker 3

Thanks, operator. So we had a better than expected Q4 performance in the Americas, which was counteracted by some customer destocking in Europe. We're very confident in a rebound in European volumes in what has historically been our most stable growth market and where retail scanner trends support a more positive outlook. Furthermore, as mentioned on the call, our year to date volume trends have been positive across each of our markets. And our actions on our footprint addition to anticipated volume growth backed by contracted new volumes in North America should result in an improvement in adjusted EBITDA generation in 2024 and beyond.

Speaker 3

And we look forward to talking to you all again at our quarter one results. Thank you.

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