Ardagh Metal Packaging S.A. (NYSE:AMBP) Q1 2024 Earnings Call Transcript

Ardagh Metal Packaging S.A. (NYSE:AMBP) Q1 2024 Earnings Call Transcript April 25, 2024

Ardagh Metal Packaging S.A. reports earnings inline with expectations. Reported EPS is $0.01 EPS, expectations were $0.01. Ardagh Metal Packaging S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Ardagh Metal Packaging S.A. First Quarter 2024 Results Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephen Lyons with Investor Relations. Please go ahead.

Stephen Lyons: Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging’s first quarter 2024 earnings call, which follows the earlier publication of AMP’s earnings release for the first quarter. I am joined today by Oliver Graham, AMP’s Chief Executive Officer; and David Bourne, 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 first quarter can be found on AMP’s website at www.ardaghmetalpackaging.com. 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 the call over to Oliver Graham.

Oliver Graham: Thank you, Stephen. Our performance in the first quarter was encouraging, with good volume growth across each of our markets. Global beverage shipments grew by 7% in the quarter versus the prior year, and adjusted EBITDA growth was marginally ahead of our guidance due to favorable volume and mix. In addition to continued strong shipment growth in the Americas, Europe is showing welcome signs of a recovery post customer destocking. Our disciplined permanent capacity actions are also taking effect and along with our expectation for continued volume growth and increased manufacturing activity will improve fixed cost absorption. This gives us confidence to reaffirm our full year adjusted EBITDA guidance with the expectation of higher adjusted EBITDA for the remaining quarters.

We continue to manage our capacity in a disciplined manner through a mix of curtailment and longer-term actions as appropriate. With our well invested global manufacturing base and a strong diverse mix of customer relationships, we remain well placed to benefit from an ongoing recovery in demand, which we expect to drive further earnings growth over the medium term. The aluminum beverage can continues to outperform, increasing its share of the global beverage packaging mix and also as the package of choice for new market innovation. We believe that we are well placed to benefit from this secular growth story as a pure-play aluminum beverage can manufacturer. In light of heightened geopolitical tensions, we would also remind investors that we have no operations in either Russia or in the Middle East.

We are well hedged on our energy needs for the current year and input materials are predominantly sourced from our local markets. We continue to progress our sustainability agenda with highlights in the quarter, including an improvement in our CDP score to A- the climate change. In parallel, we are progressing a strong pipeline to improve our renewable energy mix. Turning now to AMP’s first quarter results. We recorded revenue for the first quarter of $1.14 billion, an increase of 1%, which reflected favorable volume mix and currency effects, largely offset by the pass through to customers of lower metal costs. Adjusted EBITDA of $134 million was up 3% on the prior year, with growth in the Americas ahead of our expectations and partly offset by a decline in Europe, in line with our expectations as production activity was tightly managed relative to shipments growth.

If we look at AMP’s results by segment, revenue in the Americas in the first quarter increased by 2% to $660 million, which reflected shipments growth, partly offset by the pass-through of lower input costs. In North America, shipments grew by 13% for the quarter, and we’re encouraged by the sustained strong growth in shipments into 2024. This reflects our attractive portfolio mix and our pipeline of contracted growth, which supports our forecast for shipments in our North America business to grow by a mid to high-single digit percentage this year versus our estimate of a low-single digit percentage growth for the industry. And if we look at the industry overall, we are seeing a steady improvement in the outlook, including an uptick in promotional activity, particularly in soft drinks with the potential for further market growth to come.

In Brazil, first quarter shipments increased by 4%, reflecting encouraging strength in the domestic beverage can industry, which grew by a mid-teens percentage. AMP’s lower level of shipments growth reflected customer mix effects after a very strong Q4. We continue to balance our capacity through curtailment of our network, and we’re encouraged by the improved industry trends which are supported by an improving macroeconomic environment. We will closely assess customer demand needs as we now enter into the quieter winter period and are well positioned to service any higher demand by our customers. Adjusted EBITDA in the Americas increased by 12% to $91 million, which represents a record first quarter and was driven by favorable volume mix effects, partly offset by higher anticipated labor costs.

We continue to expect shipments growth in the Americas in the order of a mid-single digit percentage for 2024. Shipment growth and improved fixed cost absorption will drive strong adjusted EBITDA growth for the remainder of 2024. In Europe, first quarter revenue decreased by 4% on a constant currency basis to $481 million compared with the same period in 2023, principally due to the pass-through of lower input cost to customers. Shipments for the quarter increased by 3% on the prior year as sales volumes recovered following the decrease in the fourth quarter, which included customer destocking. We’re encouraged by the improvement in shipment trends. The recovery is being broad-based across regions and categories, but particularly in the beer segment.

There is clearly a shift occurring in customer retail pricing strategies with a greater emphasis on volume. Consumer sentiment and macroeconomic indicators have also shown some improvement. First quarter adjusted EBITDA in Europe decreased by 16% at constant currency to $43 million, as we exercised caution around the level of inventory build ahead of the summer season by pacing production. Performance was however sequentially stronger, growing by nearly 40% from the fourth quarter. For 2024, we continue to expect the low-single digit percent shipments growth as we monitor demand patterns into the summer season. Volume growth and improved fixed cost absorption supported by an increase in production activity will drive adjusted EBITDA growth for the remainder of 2024.

I’ll now briefly hand over to David to talk you through some of our financial position before finishing with concluding remarks.

David Bourne: Thanks, Ollie, and hello, everyone. We ended the quarter with a liquidity position of $329 million. Cash outflow in the quarter was lower than our expectation, while reflecting the usual seasonality in working capital, with working capital outflow in the quarter of $423 million. We will continue to focus on working capital efficiencies, and our guidance for a modest full year working capital net inflow remains unchanged. AMP incurred total CapEx of $62 million in the quarter, including $38 million of growth CapEx. We reiterate our expectation for growth CapEx for 2024 of approximately $100 million, mainly comprising flexibility enhancements to our network and final cash flows for some of our growth projects, including.

Maintenance, sustainability and IT CapEx of the order of $120 million, in line with our steady long-term run rate. We anticipate a further reduction in growth CapEx again in 2025. Our net leverage metric ended the quarter at 6.2 times net debt to adjusted EBITDA, which was better than our expectation, arising from improved working capital as shipment growth outpaced production, which slowed inventory build ahead of the summer season. As previously indicated, we anticipate modest deleveraging on a full year basis during 2024 and a more meaningful reduction thereafter. We 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 in June, in line with guidance.

There is no change to our capital allocation policy. AMP operates with a stand-alone capital structure, which is structurally and legally separate to that of Ardagh Group, our 76% long-term majority shareholder. On the April 15, Ardagh Group announced a new senior secured credit facility with Apollo, principally to enable the refinancing of its 2025 maturities. The details of that facility are set out in our group’s filings. The facility is secured on all material assets of its subsidiary Ardagh Investment Holdings, including a pledge on the equity interest in AMP, both ordinary and preferred equity. The financing is entirely separate to the perimeter of AMP and as such, does not impose any obligations or covenants on Ardagh Metal Packaging S.A. or its subsidiaries.

With that, I’ll hand back to Oliver.

Oliver Graham: Thanks, David. So before moving to take your questions, I’ll just recap on AMP’s performance and key messages for the quarter. Global shipments grew by 7% and America shipments grew by 11%, a third consecutive quarter of double-digit growth, and Europe experienced a good rebound growing by 3%, trends that we continue to see into April. Adjusted EBITDA growth was modestly ahead of guidance due to favorable volume and mix, and this encouraging start to the year gives us confidence to reaffirm our full year 2024 adjusted EBITDA guidance for growth of 5% to 10% into a range of $630 million to $660 million, supported by global shipments growth approaching a mid-single digit percentage. And as David said, in terms of Ardagh Group’s recent financing actions, we can confirm that there are no changes to AMP’s capital allocation policies or how we manage our day-to-day operations.

Our EBITDA guidance is supported by shipments growth and improved fixed cost absorption, accelerated by footprint rationalization and pacing production more in line with sales growth through the summer season. We expect higher adjusted EBITDA growth for the remaining quarters of this year. In terms of guidance for the second quarter, adjusted EBITDA is anticipated to be in the order of $170 million with growth across both geographic segments and compares with the prior year adjusted EBITDA of $151 million on both a reported and constant currency basis. Having made these opening remarks, we’ll now proceed to take any questions that you may have.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we can go ahead and take our first question from Anthony Pettinari with Citi.

Anthony Pettinari: Good morning. You performed better than expected in Europe and understanding you don’t give quarterly guidance, but when would you expect EBITDA could be up year-over-year in Europe? Is that — is it possible that we see that in 2Q or is it more likely that, that’s something that happens in the second half or just any kind of thoughts there?

Oliver Graham: Yeah. I think we would start to see it in Q2, and would expect it through the year. So yeah, I think Europe, as you say, has performed slightly ahead of expectations on the volume side, but we did, as we mentioned in the remarks, pace production back relative to shipments growth and so that held the EBITDA growth back in Q1. But if those trends continue on the volume side, again, as we mentioned, then we can pace up production in line with those improved trends, and that should give us a tailwind in the remainder of the year. So we’d expect Q2, I think, to have profit growth.

David Bourne: Roughly, Q2 will get to line ball on a kind of LTM basis and then Q3 onwards progression.

Oliver Graham: Yeah.

Anthony Pettinari: Got it. And then you talked about a greater emphasis on volume in Europe from, I think, some of your customers. I’m just wondering, is this specific to a category like beer or non-alcoholic or certain geographies and understanding it’s hard to kind of measure quarter-to-quarter. Do you think your customers are maybe outperforming the market or are you gaining some share, stable losing? How would you characterize that?

Oliver Graham: Yeah. It’s hard to say at this point among our peers. I mean, only one has reported any numbers and theirs was very strong. But obviously, until we see all of them, we’re not quite sure where we are on share, but I think we think we’d be roughly at the market rate, that’s usually where we are. We have strong positions across particularly Northern European markets, and we are also very diversified between different categories and geographies. So it’s probably a reasonable estimate on the market. I think that we certainly see the beer sector recovering strongly compared to last year, a much more focus on volume relative to price, and we see that again much more broadly across the customer base, whereas last year, there were clear winners and losers depending on their pricing strategies.

But we have strength in other categories as well. We have strength in soft drinks, particularly the U.K., we have strength in the energy sector. So it’s certainly not only one area, and that’s what’s, I think, encouraging. And as I mentioned in the remarks, April is also looking strong. Obviously, we get the benefit that Easter fell into March, which for us means additional shipping days in April. But nevertheless, April trends are also very encouraging.

Anthony Pettinari: Okay. That’s very helpful. I’ll turn it over.

Oliver Graham: Thanks, Anthony.

Operator: Thank you. We will take our next question from Mike Roxland with Truist Securities.

Michael Roxland: Hi, guys. Thanks you, Oliver, David and Stephen for taking my questions, and congrats on a good quarter overall.

Oliver Graham: Thanks.

Michael Roxland: Wanted to just follow up, Oliver, your comments on April and the positive volume trends kind of persist. Can you just — is there any way to quantify what the volumes have been thus far in the U.S., Brazil and Europe in terms of volumes for April?

Oliver Graham: So I think the trends have largely continued. So you certainly see the sort of growth rates that we experienced in Q1 in Americas continuing into April. And then Europe, it’s similar or a tick up actually because, again, I mentioned this extra couple of days shipping, so you’ve probably got a point or 2 up, if you look at the year-to-date number by the end of April on our quarter one performance. So yeah, we’re encouraged by that. Obviously, we all had the experience last year of Europe that we had some decent months going into the summer and then had a pretty poor H2. So that’s why we’re not shifting any guidance or moving any projections at this point. But certainly, compared to where we were in Jan, Feb, we’ve been encouraged by the trends in Europe, which was the main area of risk between the top and bottom of our guidance.

Michael Roxland: Got it. And then just following up on your — is there anything that you can point to that gives you confidence that Europe has reached this positive inflection point and that it will maintain the trend that is currently on? And then just quickly as well, any update on the recovery of European input so that — so I think you mentioned about $15 million of under recovered previous year energy costs. If Europe continues on this trajectory, will you be able to recover more on that $50 million? Thank you.

Oliver Graham: No, good question. So I think that what is clear, as we said, is that customers are pushing more on volume than price than this time last year. And one of the big bear players I think just reported and articulated that very clearly, and we see that across the market. So I think last year, there had been a big input cost rise into the costs going into ’23 that they put into the market largely, not everybody, but largely. And this year, inflation is clearly moderating, and there is this focus on additional promotional activity or just controlling price on the shelf. So I think that’s the core reason. We do see some recovery in consumer sentiment and macroeconomic indicators in Europe in the last weeks. So there is some encouragement there.

I think the TAM is still highly competitive in the substrate mix, with everything that’s going on with energy in Europe and also the sustainability trends. So I think we have the tailwinds from that position. So I think if you add it all together, yeah, is shaping up well for the year. Obviously, we have the football championships. We see quite a lot of labels and activity around that and so that’s also providing a bit of a tailwind. I think to your second question, it’s not a direct read-through from increased volumes to dealing with the price cost issues and the energy pass-through, but we are starting to see some encouraging signs that we may find offsetting cost actions, and we’ll certainly be able to update on that at the Q2 results.

Michael Roxland: Got it. Good luck in the quarter. Thank you.

Oliver Graham: Thanks, Mike.

Operator: Thank you. Our next question will come from George Staphos with Bank of America.

George Staphos: Hi, everyone. Good morning. Thanks for the details. Oliver, David, quick question for you on aluminum. We have these new trade sanctions on aluminum. Hopefully, it’s not an issue, but how should we think about Ardagh managing through this? Why should it not be an issue? What are you doing on the supply chain? What are the risks? Thanks. And then I had a quick follow-on.

Oliver Graham: Sure, George. No. We’re not seeing any material risks on that front at this point. Obviously, the costs are passed through. We did have some timing effects when we had very high raw materials inventories when the sales slowed in ’22 and [indiscernible] spiked, but, A, our raw material inventory is much lower now; and B, we have some additional hedging procedures in place for that. So we don’t see a particular risk there. And I think our assessment is that, that situation will work its way through in terms of supply getting to the market. So yeah, so at this point, I never say never, but no particular concerns on that front.

George Staphos: Oli, just a quick one on that. Just what are your suppliers saying about if — because you have some of this inventory piling up in the warehouses, but can’t be necessarily used. And so — and this isn’t specific to Ardagh, this is more of an industry question, right? But if you have some sort of production outage that occurs elsewhere, then all of a sudden, there’s maybe some inability for suppliers to meet demand? What are your suppliers saying about their ability to meet you if there’s some sort of — meet your demand if there’s some sort of outage or some other issue that arises? And then my second question would be just you mentioned higher labor cost was one of the headwinds in the quarter. And I know you’ve talked about this before, but can you remind us what’s going on there, how you’re managing it and what are the offsets? Thank you.

Oliver Graham: Sure. No, I mean, to be honest, our suppliers are not raising any concerns at this point about supply or continuity of supply and particularly in Europe. We have some issues with supply in North America more because of mill outages. But again, I think the team has managed through those extremely well. So yeah, at the minute, George, nothing particular being raised with us on any continuity of supply issues on aluminum. And then, sorry, I forgot the second question. [Multiple Speakers] Yeah. So that was just the normal. Obviously, we did get quite a bit of labor inflation coming into the year as real wages caught up with inflation, but PPI mechanisms and other pass-through mechanisms have dealt with that very well, particularly in North America and South America and effectively in Europe, given that the issue we faced was on the energy side.

So yeah, I think we called it out as the noticeable bridging item, but not because we didn’t anticipate it will cover most of it in our pricing actions.

George Staphos: Thanks, Oli.

Oliver Graham: Thanks, George.

Operator: Thank you. Our next question will come from Pamela Kaufman with Morgan Stanley.

Stefan Diaz: Hello. This is actually Stefan Diaz sitting in for Pam. Thanks for taking my question. Looks like promotional levels continue to improve in scanner. And you mentioned it earlier on the call. How much visibility into customer promotions do you have and how do you see this progressing through the balance of 2024?

Oliver Graham: I think in North America, we get quite good data on promo activity, and we certainly can disaggregate that by category. And what you see in that is, as mentioned in the remarks, is that soft drinks promotions are definitely improving in the sense there are more of them and getting closer to historic levels. You see that their promotions are definitely sluggish relative to prior years, and that can be explained by some of the dynamics following the Bud Light incident last year. So I think we are obviously more exposed to the soft drink side of the house and therefore, we’ve been encouraged by that progression in soft drinks promotions.

Stefan Diaz: Thanks for the color. And then maybe can you dig into the consumer dynamic a bit in Brazil? And maybe what you’re seeing in terms of potential substrate shift back to cans from returnable glass?

Oliver Graham: Yes. So I mean the industry grew 16% in Q1 and the leader in the industry, which is the main player in returnable glass grew over 20% in Q1. So I think you can safely say that there’s no trend into returnable glass and the expected reversion into cans is happening. And so I think — not surprising, I think that it’s a long-term trend out of returnable into one-way packaging. I think now that the cost of one-way packaging in terms of LME and conversion costs, metal, dollar price costs have stabilized, and therefore, the inflation in the can has reduced, we see the move back into one-way packaging, which we anticipated. So yes, we’re encouraged by that. The consumer is obviously still very price sensitive. So we certainly see — you’ve got four or five big brewers down there, and you certainly see quite big swings in volumes between them depending on their retail pricing strategies, and we saw that in Q1, our mix with one of our customers going early with price and therefore, reducing volume.

But otherwise, I think the industry, yeah, in a very healthy place, actually.

Stefan Diaz: Thanks for the color. I’ll turn it over.

Oliver Graham: Thanks, Stefan.

Operator: Thank you. And our next question will come from Curt Woodworth with UBS.

Curtis Woodworth: Yeah. Hi, Oli and team. Thanks for taking my questions. I was hoping you could frame out maybe some of your expectations for EBITDA in Europe this year. I know in the past, you talked about some increased net price headwinds for some of the short cycle, I think, small German brewers that you are expecting to hurt you. But then at the flip side, it seems like you’re seeing better operating leverage in the model and then you have some fixed cost takeout from the German steel closures. So how do you see some of those moving pieces? And could you just frame out what you think EBITDA for Europe could look like this year on a year-on-year basis?

Oliver Graham: Yeah. Look, at the top end of the guide, Europe was about a third of the gain. So the guide was, give or take, 60, and Europe was, I say, roughly a third of that gain. And that was heavily cost driven from actions taken around our operating cost position and growing into our fixed costs. And then, there was some volume growth, obviously. But as you said, we called out at the beginning of the year that there were some offsets in terms of energy pass-through due to the increased price competitiveness of the market, which I think you’ve seen in other results that have come to market. So as per Mike’s question at the top of the call, do we see any improvement in that where we could. I think certainly, we feel we’ve derisked the lower end of the guide a bit, but we’re not changing it at this point until we come through the summer.

But I think with that positive Q1 and the way trends are going into April, we could see some improvement there. And we have also got some possible actions that we can take around the cost side that could offset some of that price cost leakage as well. So at this point, we’re not changing anything in terms of guidance, but I think in Q2, we’ll have a much better read on whether we see the summer season having played out well, and therefore, whether some of these positive trends that we’re seeing at the moment are going to play out into the full year.

Curtis Woodworth: Okay. And then with respect to, get back to the aluminum question, prices have spiked up very sharply over the past month. And I think in 2023, you called out a metal cost unit drag of roughly $13 million. And I was wondering, could you see a reversal of that headwind given you’re continuing to inventories? I assume that has cheaper metal units relative to what your pass-through mechanisms would allow for on a revenue basis today?

Oliver Graham: No, it actually works the other way around, right, which is whatever we bought for an inventory is what we sell for winning. Yeah, I don’t think that’s going to help us.

David Bourne: Yeah. So I think the shortening of our working capital cycle relative to the last time we had it mean that we are much more in sync with the time of purchase, be the time of sale, which always contractually has around about six weeks between those two elements to make sure the price evens out. So now that we’re back on a more normal working capital cycle and whether it’s having destocked and if you look at the comparative of Q1 ’23, you’ll see our inventory balance sheet is down by almost $120 million from last year, you’ll see we’ve got a lot less risk there going forward.