Ardagh Metal Packaging S.A. (NYSE:AMBP) Q4 2022 Earnings Call Transcript

Ardagh Metal Packaging S.A. (NYSE:AMBP) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Welcome to the Ardagh Metal Packaging S.A. Fourth Quarter 2022 Update Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephen Lyons, Investor Relations. Please go ahead.

Stephen Lyons: Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging’s fourth quarter 2022 earnings call which follows the earlier publication of AMP’s earnings release for the fourth quarter. We have also added an earnings presentation on to our investor website for your reference. I’m 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 fourth 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. With that, I would like to turn the call over to Oliver Graham.

Oliver Graham: Thanks, Stephen. Our performance in the fourth quarter proved resilient as we navigated challenging market conditions. Despite softer-than-expected consumer demand in the Americas, we delivered global shipment growth of 1% and equivalent growth in adjusted EBITDA on a constant currency basis. For the full year, we delivered shipment growth of 5%, including 3% growth in North America, supported by our well-advanced investment program. The contribution from higher volume was, however, broadly offset by input cost pressures, particularly in Europe as well as fixed cost under absorption and resulted in a 1% decline in adjusted EBITDA for the year on a constant currency basis. We believe that we have weathered the multiple challenges of 2022 and taken appropriate corrective actions to stabilize and enhance performance.

We look forward with increased confidence to delivering significant growth in earnings and cash flow and generating value for our shareholders in 2023. We anticipate growth in global industry beverage can volumes across each of our markets in 2023, supported by secular trends that we previously outlined such as sustainability-driven pack mix shift and innovation continuing to favor the beverage can. We expect industry growth rates of a low to mid-single-digit percentage in Europe, a low single-digit percentage in North America and Brazil. With our growth investment plan well advanced, we expect to grow a touch ahead of the market globally. Adjusted EBITDA is anticipated to accelerate through the year due to increasing inflation recovery and volume acceleration.

We are encouraged by the strength of the European beverage can market and anticipate more normalized levels of activity returning to the North American and Brazil markets, including promotional activity in the second half of the year. We have been disciplined and reactive to changes in market conditions. And as mentioned, we have taken corrective actions to substantially improve our performance in 2023 and beyond. These include a reduction of our growth investments to balance our supply with demand, a rebalancing of our network to address fixed cost absorption challenges, agreements with our European customers related to the treatment of direct energy costs and an increased focus on adjusted free cash flow generation. On our sustainability agenda, we were delighted to recently receive a first-time stand-alone rating from CDP, achieving a leadership A- rating towards management and a B rating for climate change.

This followed the first stand-alone prime ESG rating from ISS. AMP also achieved ASI certification across certain of our European operations and joined other key aluminum industry leaders in signing up to the mission possible partnership in leading the effort to target the industry’s net zero emission transformation. Turning our attention to AMP’s fourth quarter results. We recorded revenue of $1.1 billion, which represented growth of 5% on a constant currency basis predominantly reflecting the pass-through to customers of higher input costs. Adjusted EBITDA of $159 million was modestly up on the prior year on a constant currency basis. The contribution from volume mix, including from our growth investments was offset by the under absorption of higher operating costs and inflationary pressures.

Total beverage can shipments in the quarter were 1% higher than the prior year with growth in Europe and North America, offsetting a decline in the softer Brazil market. Specialty cans represented 48% of global shipments in the quarter, up from 46% in the third quarter. For 2022 as a whole, specialty cans represented 48% of our shipments, up from 45% in the prior year. Looking at AMP’s results by segment and at constant exchange rates. Revenue in the Americas in the fourth quarter increased by 1% to $638 million, mainly due to the pass-through of higher input costs. Shipments were relatively flat versus the fourth quarter of 2021 with an increase in North America, offset by softer conditions in the Brazil market. In North America, shipments grew by 3% for the quarter and by 5% for the year.

Demand continues to be impacted by inflationary pressures and a lack of promotional activity, but with greater resilience experienced in non-alcoholic categories. We experienced continued weakness in the Hard Seltzer category, which represented 9% of North America shipments. We will conclude our near-term capacity investment activity in North America in the first half of this year as the final new line is here on Ohio becomes operational. Our capacity additions in here on Winston-Salem, North Carolina, and other branch Mississippi position us favorably for a normalization of demand activity as inflationary pressures subside and promotional activity returns. We anticipate some increased level of promotional activity into the second half of the year, supporting our second half volume growth weighting and overall full year shipment growth at a high single-digit percentage.

We will engage closely with our customers and manage our capacity in a disciplined manner as reflected in the near-term curtailment of capacity within our network. In Brazil, fourth quarter shipments declined by a high single-digit percentage, underperforming the market, which recorded a low single-digit growth rate. The market overall, well softer than anticipated despite the World Cup staging during Brazil summer period, as a weaker macroeconomic backdrop, pressure consumption. Our performance for the quarter was negatively impacted by some supply rebalancing in the period by our customers. But we should be viewed in the context of our outperformance for the year as a whole, where we grew by 8% against an industry decline of over 4%. Market conditions remain soft, but we expect to grow in ’23 at a high single digit expense, supported by the start of the new capacity Alagoas in the second quarter.

We remain confident in the longer-term attractive growth profile of the Brazil market and our planned greenfield investment in will be phased in only when demand conditions allow. Adjusted EBITDA in the Americas increased by 3% to $114 million in the fourth quarter. We benefited from an increased contribution from volume mix including from our growth investments with a contribution from unfulfilled customer contractual volume commitments. This was partly offset by higher operating costs due to fixed costs under absorption as we align production with demand as well as inflation pressures. In 2023, we expect strong shipment growth in the Americas in the order of the high single-digit percentage, supported by the ramp-up of our new capacity. In the near term, EBITDA growth will be constrained by fixed cost under absorption partly mitigated by our curtailment actions and lapping a tougher first half comparable.

As demand begins to normalize in both markets, we anticipate a significant step-up in EBITDA generation in the second half. In Europe, fourth quarter revenue increased by 12% on a constant currency basis to $438 million compared with the same period in 2021, mainly due to higher input costs. Shipments for the quarter grew by 1% on the prior year despite a strong prior year comparable and by nearly 4% for the year. Consumer demand proved resilience in the quarter and was ahead of our expectations, led by carbonated soft drinks and despite some softness in the beer market. Shipments related to the export market for fill drinks were down on the prior year, but the reduction in ocean freight rates, of course an improved outlook for this segment in 2023.

Fourth quarter adjusted EBITDA in Europe fell by 2% on a constant currency basis to $45 million as the contribution from higher shipments was offset by higher overhead costs and input cost headwinds, including a short-term pass-through cost headwinds created by the sharp fall in metal premiums in the quarter while holding elevated inventory levels. For 2023, we expect shipment growth at the order of low single-digit percentage with a more significant increase in adjusted EBITDA arising from Q2 onwards as a result of a more effective part of our energy costs, inflationary input cost recovery through our PPI mechanisms and the non-recurrence of metal valuation timing issues. Furthermore, the near-term energy outlook in Europe has markedly improved since our last update.

We remain vigilant that the European market continued its long-term journey to diversify 10G sources and we are almost fully hedged for our energy requirements for the current year. In the first half of this year, we will complete the addition of planned further capacity in our Lattus plant in Southern France as well as finalizing additional capacity in Germany. This concludes our brownfield investments under our initial growth investments. As previously indicated, as part of our disciplined capacity management, we will close a legacy steel line in Germany to balance our network needs. I’ll now briefly hand over to David to talk you through our financial position before finishing with some concluding remarks.

David Bourne: Thanks, Ollie, and hello, everyone. We ended the quarter with a healthy liquidity position, approaching $1 billion, of which $555 million is in cash. This was supported by a net inflow of working capital in the quarter, approaching $250 million, reflecting both seasonality and our concerted efforts to rightsize working capital. We anticipate a further benefit from working capital for 2023 in the order of $100 million through our continued efforts. In the quarter, AMP made additional growth investments of $225 million, of which close to $150 million was growth CapEx and the remainder through leasing. Our growth investments for the year totaled just over $600 million with a cash settlement being under $500 million which was in line with our Q3 guidance and reduction of approximately $500 million from our original plan in response to changing market conditions.

Maintenance CapEx of $109 million also finished the year in our guidance range. For the current year, we expect growth investments of just under $400 million with a cash flow element under $300 million as we complete projects currently underway. This includes a recent small investment in a digital can printing business in Europe called Noma in support of early growth customers and follows on from our similar 2021 investment in North America in hard print Net leverage ended the quarter at 4.9 times LTM adjusted EBITDA. As a reminder, currency effects are broadly neutral from a leverage perspective given the currency mix of our debt and earnings, albeit the uptick of the euro just prior to the year-end led to a small artificial headwind. Our bonds have been issued on fixed rate terms and non mature before 2027.

As mentioned, our growth investment plan is well advanced which strongly supports earnings and cash flow growth, setting a pathway for deleveraging in 2023 and a more meaningful step lower in 2024. We have today announced our first quarter dividend of $0.10 per share to be paid later in March, in line with our guidance, which we view as sustainable and is supported by a stronger near-term cash generation profile. We anticipate that the business will generate positive adjusted free cash flow this year and will be even stronger again into 2024, as we expect a further significant reduction in our great investments. Our capital allocation strategy will prioritize dividend sustainability and deleveraging in the near and medium term. With that, I’ll hand back to Ollie.

Oliver Graham: Thanks, David. So just before moving to questions, just to recap on AMP’s performance and key messages. So our global shipments grew by 1% in the quarter, and 5% for the year, supported by our growth investments, which will drive future shipments and earnings growth. Softer-than-expected demand conditions in the Americas in the quarter resulted in an earnings performance below our expectations. The lower volume through lower volume contribution and fixed cost under absorption. Our growth investment plans are well advanced, and we expect a significant reduction in investment activity in 2023 and again in 2024 as we remain disciplined in the balancing of our capacity with demand conditions. Secular demand trends continue to support the sustainable beverage can for which we are very well placed to capitalize as demand normalizes.

And our actions taken to improve energy pass-through realign capacity, rebalanced inventory as well as volume growth or support increased positive adjusted free cash flow generation and adjusted EBITDA growth in 2023 and beyond. Our current view of the market leads us to project AMP global shipment growth of 2023 between mid and high single-digit percentage. Our full year 2023 adjusted EBITDA growth is projected to be to grow in the order of 10% weighted to the second half of the year. Our EBITDA guidance reflects the contribution from increased volumes supported by our growth investments, as well as an improved margin on our European business through a more effective recovery of energy and other raw material inflation. Ahead of a return to demand normalization, we continue to efficiently manage our cost base through the balancing of our network.

In terms of guidance for the first quarter, adjusted EBITDA is anticipated to be in the order of $130 million, which compares to the prior year adjusted EBITDA of $142 million on a constant currency basis. In addition to the seasonality of our business, we would note that the first quarter performance in 2023 reflects inflationary pressures that will subside as we move through the year, as well as inventory rebalancing. Having made these opening remarks, we’ll now proceed to take any questions that you may have.

Q&A Session

Operator: Thank you We’ll go first to George Staphos with Bank of America.

George Staphos: Thanks very much. Hi, everyone. Good day. Thanks for the details. I wanted to spend the first couple of questions on the Americas. And Ollie and David, you mentioned the Americas volumes were not where had expected, customers rebalance their suppliers, it sounded like. Can you give us a bit more detail in terms of what might have changed? And what might have surprised you relative to the guidance that you gave coming out of 3Q? And then if you would, can you give us a bit more detail, and I appreciate the overarching comments about the cadence in the Americas for ’23 in terms of EBITDA, it sounds like it’s quite second half weighted. Can you review the house and wise a bit more in detail. And I had one quick follow-on. I’ll turn it over after that.

Oliver Graham: Sure. Thanks, George. So look, I think that the main elements in this were in Brazil that we’ll touch on North America as well. So in Brazil, in Q4, the market was soft – softer than we anticipated, we’d hope for more of a World Cup bounce and a better summer. I think we’ve had another very poor weather season down there. And in those softer market conditions, some of our customers rebalance their portfolios towards other suppliers. And that was because we had quite strong performance with them earlier in the year, and they had met their contractual commitments with us to a large extent, and they were able to rebalance their supplies. And that’s what happened. But in the end, the core reason for that was the market was a little bit softer than anticipated.

And that also goes to the commentary about the Americas in 2023. We do see the Brazil market starting, again, a little softer than we had anticipated. The weather continues to be poor. But I think the macroeconomic situation there continues to be challenging. Inflation pressures are still resting on the consumer and our customers because of the high level of hedging they took last year, on LME and premium and because of the inflation sitting in the metal conversion, have put through significant price rises on cans retail, and we’re seeing that impact in volumes. And I think you will have heard commentary to this effect, but it looks like the market for the first half will prioritize more returnable glass in the short term, while that inflation washes through the can price and the LME premium hedges come down, which we anticipate in the second half.

So that’s why we’re pointing towards more of a second half recovery, particularly in Brazil. There is some effect to that in North America. So volumes were a bit weaker in Q4 in North America than we anticipated. That was ongoing price rises at retail. I think we all thought at some point, we’d see the limit of that, but our customers still saw limited volume loss with significant price gains, which was an economic equation that works for them and so we still saw that pretty significantly in Q4 with the overall volume loss that’s being referenced elsewhere. And we think that’s still persisting to some extent in Q1 particularly on the soft drink side, but we do anticipate that will start to unwind in Q2 and beyond because the inflation will lap.

And I think that we’re hitting the limit of those price rises. We’re particularly seeing some of the retailers start to resist those. So we’re confident that we’ll see a more normal promotional environment in North America as we go through the year.

George Staphos: And just if you mentioned it and I missed it, I apologize. So what are your expectations for Brazil, both in terms of volume and EBITDA growth? I know you maybe you don’t want to do it to the basis point, but if you can give us some directional commentary, given the sort of the laundry list of things that are going against you and perhaps the industry, in ’23 in Brazil?

Oliver Graham: Sure, yes. So we — although we see the market, we call that down a bit from mid-single digits to low single digits, we still see some growth ahead of that. So we pointed in the remarks to high single-digit growth in Brazil across the full year with some second half weighting. On the EBITDA, I mean, as you know, George, if we guide that at the Americas level, so if you take the overall EBITDA, about half of that growth is Europe part of Americas, but it’s true that, that EBITDA growth in the Americas is weighted much more to North America than to Brazil.

George Staphos: Okay. But you feel comfortable about your Brazilian forecast even with everything that we just went through in terms of the weather being poor or the macro, the consumer being weighed down, et cetera, et cetera

Oliver Graham: Yes, because I think this is really about a problem for the first half, and we see it as a very problem, you followed the market for a long time. This return, this switch back to returnable, we see it as temporary. I think that the same trends that were there pre-COVID on the switch to one-way packaging, those will return, and they may even return somewhat in the first half if the returnable switch goes too far. But I think that the inflation in the package will come out in the second half, and then we’ll see a more normal balance between returnable and one-way packaging, which will favor the beverage can.

Operator: We’ll go next to Anthony Pettinari with Citi.

Q €“ Unidentified Analyst: This is actually Bryan Burgmeier sitting in for Anthony. Thanks for taking the question. Can you provide some items for the year-over-year free cash flow bridge? We have the 10% EBITDA growth and you provided some detail on CapEx, but apologies if I missed some color on interest, taxes, working capital or comparable depreciation.

Oliver Graham: Sure, I’ll pass that to David.

David Bourne: Yes. Sure. Hi, Bryan. Thanks for the question. So working capital, we think will have an inflow of the order of $100 million. Business growth investment under $300 million for the full year, and that includes small acquisition activity, as I referenced in the remarks. Maintenance CapEx around the 130, 140 mark. Lease repayments, 80 to 90-ish. Cash interest paid 175. If you’re modeling EPS, of course, we have non-Phoenix of around about 25 in addition to that. And then cash taxes of the order of $45 million I would suspect.

Q €“ Unidentified Analyst: Got it. Thank you for that. And just one quick follow-up for me. Looking at some beverage companies, demand forecasts, seems like Hard Seltzer may be challenged again this year. I’m just curious what your guidance is assuming for Hard Seltzer. And if Seltzer remains continue to see negative growth rates, do you think you can hit the high end of your guidance still, do you have other levers that you can pull/

Oliver Graham: Yes. So look, we were assuming some very small level of growth in Hard Seltzer prior to the – coming into the year, and we’ve downgraded that slightly in this guidance because the category does still seem to be weak. There are some companies doing better, some doing slightly worse. So we’re seeing the shakeout that you would anticipate in a category like that. But yes, we’re basically looking at it being flat to slightly negative in this guidance. We are seeing other categories in good growth. So I think that the spirits sector, the energy sector, we anticipate carbonated soft drinks and sparkling waters to be in growth. So I think the broader soft drink sector, a lot of innovation in there. We do see in growth this year, but we’re not relying on Hard Seltzer too much in that guidance.

Q €“ Unidentified Analyst: Got it. Thank you. I’ll turn it over.

Oliver Graham: Thank you.

Operator: We’ll go next to Curt Woodworth from Credit Suisse.

Curt Woodworth: Yes, hi. Good morning.

Oliver Graham: Good morning.

Curt Woodworth: Yes, hi. So a couple of questions. I think one of the things that I think we’re struggling with a little bit is to unpack some of the variances with respect to the EBITDA shortfall this year, right? So entering the year, we had roughly $800 million consensus estimate, and you come in at 625. So I was wondering a, can you unpack some of the moving pieces between inventory metal premium, fixed cost absorption, energy mix. And then within that, the prior kind of long-term target of doubling EBITDA by 2024. Maybe if we FX adjust that, would put you still in the $1.950 billion yet this year in 2023, we’re talking 690. So is there anything structurally that has really changed a lot? Do you feel like some of these buckets of either unrecovered inflation or mix are fixable? And just if you could help frame what you think may be the longer-term capability of the business is?

Oliver Graham: Sure. So look, I think — I mean, we guided 775 at the start of last year. I think 800 is on the market, but we guided 775 million. And we had another, I don’t know, say, $20 million of FX out of that and then I think that the two big FX in the year were the European energy situation with some addition from metal mismatches in Europe, and then the volume is, particularly in North America, that are also — I mean, to be clear, volume mix miss because the Hard Seltzer and some of those innovation categories were a higher margin for us. So I think if you then play that forward into the future, structurally, obviously, the FX is different and structurally, there is some mix degradation in our forward forecast because of that fall off in certain categories that we’re providing better mix.

But then after that, you’re essentially saying it’s about the timing of growth. We’ve got 2 to 3 years of runway here now with the business, not needing a lot of investment where we see us growing into the footprint. So without putting any hard numbers on it, I think the only two structural factors compared to the original projections are really FX and mix, the rest we see ourselves growing into as the market returns.

Curt Woodworth: Okay. And then could you just give us a little bit more color on 1Q volume trends, we’re roughly 2/3 of the way through the quarter, to the degree you can. I mean there’s been some conflicting information in terms of promotional activity and volume levels. So if you could give us maybe a little bit more color on how you see 1Q volumes, that would be helpful. Thanks, guys.

Oliver Graham: Sure. Yes. So look, I think North America looks pretty healthy. We had a good January. Even though we’re less beer weighted, which is where I think most of the promotional activity has returned, I think the soft drink space is still more mixed in terms of promotional activity, which is why we signaled it’s more second half weighted in our view. Brazil, market-wise, I think it grew 1% in January as a market. We grew above that but it’s a very soft comp. Q1 last year in Brazil was really soft with COVID as well as the weather. And so the market remains softer than anticipated, I’d say, and we see that persisting through Q1. And Europe has gone off to a solid start, roughly in line with where we saw the market.

Curt Woodworth: Great. Thank you.

Oliver Graham: Thank you.

Operator: We’ll go next to Kyle White with Deutsche Bank.

Kyle White: Hi, good morning. Thanks for taking the question. Just on the fixed cost under absorption. When do you expect to get to more normalized fixed cost absorption? And is it possible to give an estimate of what this headwind was here in the past year as well as what you expect in the first half of 2023 from this?

Oliver Graham: So look, I think that we expect that to normalize during 2024 and certainly be all out of the system by 2025, we’d hope for most of it out during ’24. I’m not sure I have the numbers to hand on the sort of the back end of last year or the first half of this year. We’re talking $1 billion to $2 billion of capacity in Europe that we’re needing to curtail in a couple of billion touch over — a couple of billion in the U.S. And yes, so it’s in the tens of millions, the sort of drag that we’ve got on that, both sides of the Atlantic.

Kyle White: Got it. And then on the capacity, I think I may have missed it in the prepared remarks, but hoping just to get an update on some of the capacity expansion plans. What’s the update on the third line at the Ohio plant? Is that being delayed? And then looking at CapEx this year as well as next year expected to be down, should we assume that greenfield in Brazil is indefinitely delayed? And then maybe what’s the update on the Northern Ireland plant as well?

Oliver Graham: Yes. So the third line in Huron is coming up this year. And then you’re right to say that both the greenfields will only be put in place. The projects will be restarted when demand permits, and that’s definitely over 2 years for both of them. So significant delay those projects. We’re going to be very disciplined about making sure that we put those in place when needed and not before. And obviously, that helps us drive some significant cash flow over the next 24 months.

Kyle White: Got it. I’ll turn it over.

Oliver Graham: Thank you, Kyle.

Operator: We’ll go next to Angel Castillo with Morgan Stanley.

Angel Castillo: Hi, good morning. Thanks for taking my question. I wanted to get a little bit more color on Slide 10. I think there was a slide where it showed 2022 to 2025 CAGRs for kind of the industry. And probably it seemed to kind of indicate low single-digit type growth across the various key regions. Just curious how — this seems to be a little bit kind of moderated versus prior expectations and even to some degree, kind of 2023. But if you could kind of give us more color on your thought process as to the secular growth story? And if there has been any kind of change or step change in how you’re looking at the market kind of over the medium term, what are the kind of the factors there that you’re kind of looking at? And maybe what gives you confidence as you think about this medium-term growth.

Oliver Graham: Sure. Yes. So look, I think the only real change in the last few months has been some caution around the Brazil market in the near term. And again, I think we absolutely see that as a short-term impact driven by this extraordinary inflation. And it was inflation in LME and premium that has really come off, but our customers hedged at a time last year when it was very elevated on both dimensions and those hedges don’t roll off until, in some cases, the middle of this year. So I think that’s one inflationary aspect then obviously, the devaluation of the REI significant amounts of the canned cost structure are priced through in dollars and so that creates inflation in the beverage can in Brazil. And that’s what we’ve seen in the last 12 months across those 3 dimensions.

So that will roll off. The hedges will roll off and then also the inflation will lap and so we anticipate the price rises that our customers have put through on beverage cans at retail will start to moderate in Brazil. And when that happens, the margin profile will ease between returnable and one-way packaging and beverage cans, and therefore, we’ll see a switch back into cans, and we’ll see the return to the sort of growth rates we had in Brazil, which are more 5% to 10%, if not higher in the second half of the 2010. So we book mid-single digit on Brazil for the long term, and we think that’s a very safe assumption. We’ve just been much more cautious in these remarks about the first half of this year. If you turn to the North America, we think that is a low single-digit market, obviously growing a lot in the last few years to offer a much bigger base now.

But we see the sort of trends around innovation, around sustainability, particularly on the soft drink side, supporting the beverage can in the pack mix, you can still see in Nielsen data that the beverage can is winning on pack mix share. So we think that’s a fair assumption. And obviously, of a $120 billion market, low single digits is a good amount of growth, and we’d be confident in that sort of number through the middle of the decade possibly with some upside. Some of the efforts on still water that we see going around and some companies started to make inroads there, that could be some upside as well in the next, say, 2 years. And as Europe has been a long-term growth story, long term, around 3% more recent years, pre-COVID more like 4%, 5%, 6%.

We’re being cautious of that, saying we think it’s a low single digits this year just as we work through some of the softness in beer. The energy sector is growing very well. We still have the under penetration of the German market. It’s a $5 billion can market, can easily grow to being $7 billion or $8 billion in equivalent markets like U.K. and Spain at $10 billion. So you can see big upside in Germany. Eastern Europe was growing before the war, so we hope that, that would return and again, you’ve got the sustainability trend very strong in Europe and the innovation there. So we think low single is pretty conservative, probably low to mid is a safe long-term projection for Europe. So yes, overall, that we remain very confident in the growth prospects of the can in all our markets, there’s no question that the last 12, 18 months, we’ve been hit by some extraordinary and unexpected particularly inflation-related shocks to our growth, and we’re just being cautious in the short term around that.

Angel Castillo: That’s very helpful. Thank you. And then as you think about the curtailment or the curtailment of some of your assets as well as some of the paring back of capacity growth. Can you talk about your capability to grow, should demand reaccelerate and we returned maybe back closer to the mid-single-digit growth that we were seeing, what’s — what are the kind of the — are there any implications from pulling back on CapEx in terms of your ability to grow or your ability to kind of get those curtailed assets or lines back up and running to meet growth? I mean just your capabilities on that would be helpful as we think about ’23, ’24?

Oliver Graham: Yes. Look, I think you can think about ’23, ’24 and into ’25. I mean we’ve got some significant capacity there that we’re curtailing. I think if the market grows ahead of our expectations, we’ll be very well placed to use all that capacity. So I think we’re looking into a period of essentially investment free growth from this point forward. Obviously, we’ve got the overhang this year of the projects we’ve already done, which is in our numbers. But then we expect very significant reductions in growth capital, and we expect to be able to grow into that capacity. There’s no real significant cost to that. There obviously some frictional costs starting the lines back up. But essentially, those are at the margin, and we have some costs to also curtailing. So I think that the story there is that we’ve got a very good position here. If the market grows ahead of expectations, we don’t need any additional capital to grow into that space.

Angel Castillo:

Operator: We’ll go next to Jay Mayers with Goldman Sachs.

Jay Mayers: The first question I had was — last quarter, you had commented that you think the outlook for 2023 resulted that you didn’t need to access any capital markets to finance either CapEx or dividend payments. Given the outlook you provided today, does that view still stand given the lower CapEx, but some of the kind of lower earnings for the year. So curious thoughts there.

Oliver Graham: No, that you definitely still , yes. Go ahead, David.

David Bourne: I was just going to say the same as you want.

Jay Mayers: Got it. And then just kind of a little bit higher level on how you’re thinking about balance sheet leverage. Obviously, growth hasn’t really kind of materialized to the rate we had expected coming into the year. Is 4.5x still kind of the right longer-term leverage for this business? Or do you think kind of given the lower trajectory coming into ’23 and ’24, that longer term, maybe we want to think about a lower number?

Oliver Graham: Yes. David, do you want to take that?

David Bourne: So yes, Jay, I think we’ll modestly deleverage this year. As I set out with 4.9 times at this year-end. So I think we’ll modestly deleverage this year more meaningfully in 2024 as the growth investment requirement drops away because our near-term investments are complete, and so we see a substantial reduction then. So I think you can assume that we’re very focused on the leverage. As I set out in the prepared remarks, we’re looking for at least $100 million of working capital inflow this year and operating cash flow conversions at around about 80% of EBITDA on our modeling for ’23. So yes, it’s a key focus topic for us, but it will take a little bit of time to get it down.

Operator: We’ll go next to Gabe Hajde with Wells Fargo Securities.

Gabe Hajde: Hi, Oliver, David, Stephen, good morning. I had a question, I guess, I heard quite a few references to promotional activity and particularly picking up in the back half of the year. Just curious, how much of your growth outlook is sort of contingent or dependent on that. If you’re to pressure test. We go through 2023, we’re having this conversation in the first part of ’24, if that does not materialize, could we be talking about a flat performance for Ardagh and maybe the industry is down? Or how would you instruct us in the outside world to think about that?

Oliver Graham: Yes. I think that it definitely isn’t to that extent. So it essentially, it means that we’ve assumed some degree of growth in carbonated soft drink volume in 2023 in North America. But if you take our EBITDA guidance split between Europe and North America and we’re not relying on that promotional piece in Europe in the same way because you have some additional inflation recovery in Europe as we’ve reset our contracts. So I think you’re basically talking about a portion of the North America guidance. It’s definitely not even all of the North America guidance, which isn’t all of the Americas guidance. So no, you wouldn’t be looking at that kind of impact on our guidance from promotional activity in North America. You’d be talking, as I say, a portion of Americas. And we’ve not assumed very significant growth. We’ve just assumed that there is some growth in volumes in carbonated soft drinks in North America in 2023.

Gabe Hajde: Okay. And then somewhat, I guess it’s — I don’t know an exercise and just thought process. But as we look at a lot of the innovation that’s coming across for bev cans and the drink categories, the lines are getting blurred. And it seems like it implies a lot more label changes and smaller launches, things like that. How do you as a supplier get paid for that or think about it again from just an operational standpoint. I have one more question after that.

Oliver Graham: So look, I think in a way, the North America market has normalized to what we’ve seen in Europe for years in terms of mix of drink types, mix of SKUs and we have a lot of experience of that, therefore, in our operations, and we’re bringing that experience in North America. So I don’t anticipate that being a huge drag. And obviously, when you have a little bit of extra capacity, it becomes even less of a drag. But typically, the way you get paid for that is that the smaller customers pay a bit extra for their cans, and that reflects that additional complexity in that for additional downtime on the line. So we don’t see that as a major drag to performance. It’s just more, to be honest, North America normalizing with the global market. I think that covers that question when you said you had another right?

Gabe Hajde: Yes. One last one. Just in thinking about, again, kind of how you look across your platform and your capacity utilization, et cetera. If growth does not materialize and I guess this is more a comment on Americas or maybe specifically in the United States. If growth does not materialize, is there an opportunity for you to tighten up some of your capacity, lower cost inefficient. I don’t know how you guys think about it. But — or is there a time frame that we should be thinking about from the outside world where you look at things and say, okay, it doesn’t make sense to curtail production anymore, and this is more of a permanent adjustment?

Oliver Graham: Yes. No, no. So look, we’re constantly keeping the network under review. I think is the answer to that. We will look at it through this year and into 2024. So if there are additional changes needed, we’ll be looking at through this year. But to be honest, we’re always having to keep that under review. We’re very disciplined as is the industry, I think, around ensuring that supply and demand balance, we expect to run in the 90s utilization preferably near the middle of the 90s. And that’s where we’re going to try and keep the network over the next few years.

Operator: We’ll go next to George Staphos with Bank of America.

George Staphos: Piggybacking on some of the topics from the last Q&A that Gabe had put on the table, do you have the ability to make discretionary cost reductions that would not require a larger decision around your capacity? Or are you pretty much limited right now with your existing cost structure until you make — not saying you will, but until you make a change on your platform, how should we think about that?

Oliver Graham: So obviously, individual lines as we’re doing at the moment, can be curtailed, which does have an impact on cost, it doesn’t have the same impact as major decisions because overhead — more overhead stays in place. So those decisions that we are taking and we have that ability to continue to make those. Then most of the costs in beverage cans are sitting in the plants, but we are being very tight on SG&A at this point not that SG&A expanded too much in the growth phase, but we are being very attentive to SG&A, and we will keep that under strong review over the next year or 2, and we’ve already taken some action there to make sure that we rightsize in certain areas as we pivot from more of a growth focus to more of a filling the capacity we’ve already got. So I think the step changes typically do occur on the network side, but we’ll be keeping a close eye on all aspects of cost in this period.

George Staphos: And then you mentioned earlier that it’s been a more favorable energy environment this year than perhaps we were worrying about or thinking about third quarter last year, looking into ’23. What do you do? And what are you doing now if, in fact, the energy markets don’t behave like you’d like. There’s some other exogenous effect — event that occurs and all of a sudden, the industry needs to — and this is my wording scramble. What are you doing now with your customers to get ahead of that, hopefully it doesn’t happen, but nonetheless, it could looking at the ’23 and into ’24?

Oliver Graham: No, great question. I mean given that it’s exactly a year ago that we were faced with a shop that very few people still coming. So look, I think the answer to that is we’re taking action now to derisk the situation. So clearly, in the last 2, 3 months with the very mild weather we’ve had in Europe, there’s been a complete step change in the energy market and the outlook for the energy market. I mean we were already pretty much covered to 2023 as we described on these calls and elsewhere, that’s we’ve hedged through the year, our normal hedging policy to be pretty much hedged by Q3 and we’ve done that in a way that led to a reasonable outcome given the extreme situation we were in. And that’s what we discussed with customers and got some good cooperation with customers on passing that through.

What we’ve been doing in the first part of this year is looking into 2024 and even into 2025 to derisk our position because like you, we can’t — we’re not resting on the idea that this will persist. There could be other shocks. So we’re materially derisking our position going forward at this point, including discussions with suppliers upstream of us about the derisking of their position. So we’re very active around that as we speak, George.

George Staphos: Thanks, Ollie. I would imagine it’s maybe a better environment to talk about the elements of the commercial terms that need to change when actually might help the customer because energy is declining, right, as opposed to, hey, we need to derisk. And by the way, that means there’s an increased level of cost we need to pass through. Would you agree with that statement? Or what’s wrong with that view?

Oliver Graham: There’s nothing wrong with that here. It’s obviously much more straightforward when things are on the decline like this in terms of costs. And we’ve set up some very — what we consider very excitable mechanisms with larger customers around the situation. So we think we’re in a good place around all of that in Europe going forward.

Operator: We are nearing the top of the hour and to be mindful of everybody’s time. I would like to turn the call back over to Mr. Graham.

Oliver Graham: Great. Thank you very much, everybody. We appreciate your time. And as we said on the call, I think we had a resilient Q4 and some — face some difficult conditions. But as we look forward into time ’23, we see a lot to be optimistic about. We see a return to promotional activity in the Americas. We see Brazil, I think, particularly in the second half, we see returning to more normal levels of growth. And with Europe, with the energy situation and the way we’ve addressed the energy situation, we see good recovery there on margins. We’re probably three quarters back to where we were prior to the energy crisis in terms of margins this year and we expect to be more or less fully there next year. So we see a good situation for the company.

We see a great platform now to drive a much more free cash flow generation on the back of the investment program is pretty much complete, and we look forward to telling you about that journey on subsequent during quarters. So we look forward to talking to you at the Q1 results. Thanks very much.

Operator: Thank you. This does conclude today’s call. You may now disconnect.+