Ardagh Metal Packaging S.A. Ordinary Shares

Welcome to the Ardall Metal Packaging third quarter 2021 investor call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Oliver Graham, CEO of Ardall Metal Packaging. Please go ahead.

Thank you, Jen. Welcome, everybody, and thank you for joining us today for Ardall Metal Packaging's third quarter 2021 earnings call, which follows the release earlier today of our results for the quarter. I'm joined today by David Bourne, our Chief Financial Officer, and by John Sheehan. Our remarks today will include certain forward-looking statements. These reflect circumstances at the time they are made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors. including those set forth in our SEC filings and news releases. Our earnings release and related materials for the third quarter can be found on our website at ardarmetalpackaging.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of the release, which also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA, adjusted operating cash flow, and adjusted free cash flow. Details of our statutory forward-looking statements disclaimer can be found in our SEC filing. If I now move to our third quarter results, AMP performed well in the quarter, delivering strong earnings growth despite softness in the hard seltzer market and the pressures of a highly inflationary environment with tight global supply chains. Across the group, our teams demonstrated considerable operational agility to deliver this performance, and I want to record our appreciation of our 5,000 colleagues for their dedication and commitment in supporting our customers' growth. Revenue of $1.04 billion increased by 15% on a reported basis and by 14% at constant exchange rates, principally due to the pass-through of higher aluminium and other costs. Adjusted EBITDA for the quarter increased by 17% to $176 million, a 15% increase at constant currency rates. driven by a strong advance in the Americas. LTM adjusted EBITDA has now increased by 17% to $637 million at September 30th, and we expect further progress over the remainder of the year and into 2022. Total beverage can shipments in the quarter were 6% lower than in the prior year, and we estimate that approximately half of this reduction is attributable to the residual impact of the cyber incident. Excluding this, shipments fell by approximately 3% compared with the same period last year, reflecting softness in hard seltzer in North America, as well as strong comparables in both Europe and Brazil. However, we managed these market conditions well, grew earnings strongly, and are slightly raising our full-year outlook. Specialty cans represented 44% of our shipments in the quarter. Looking at our results by segment and at constant exchange rates, revenue in the Americas increased by 16% to $555 million, mainly due to the pass-through of higher input costs. Can shipments were 6% lower than the third quarter of 2020, with reductions in both North America and Brazil. In North America, we were impacted by softer demand in the hard seltzer market. In response, we redirected production to satisfy continued strong demand primarily from the non-alcoholic categories in CSD, sparkling waters, energy and other drinks, as well as the RTD market. This operational agility served us well and drove earnings growth despite the lower volumes. Our response was hindered to some degree by the residual impact of the cyber incident on our capacity as reported in the second quarter, the impact of which has now passed. In Brazil, shipments in the seasonally less important winter quarter were lower than the prior year. The market is estimated to have declined by approximately 15% in the quarter, compared to an estimated 25% growth in the same period last year, which was due to COVID recovery. AMP outperformed the market trend. Despite elevated inflation, including the impact of a weaker AI on domestic consumer spending power, we are optimistic for the upcoming summer season in Brazil, as the longstanding driver of PACNIC's conversion continues to drive demand for beverage cans. Adjusted EBITDA in the Americas increased by 28% to $100 million. Growth reflected favorable production volume and sales mix shifts compared with the prior year, as we further diversified our customer base and benefited from the investments made in the latter part of 2020 and the first half of 2021. The development of and prospects for the hard seltzer market have been a matter of significant discussion recently. AMP's business in the Americas is well diversified across multiple end markets, including CSD, beer, hard seltzers, sparkling waters, energy drinks, coffees, RTD cocktails, and newer categories, including wines, functional and infused drinks. This represents a significant change to the profile of the business we acquired in mid-2016. which is highly concentrated by customer and end market. This diversity, coupled with our ability to react to changing market trends, has delivered resilience and underpins our confidence in future performance. We expect to announce shortly a growth initiative to further enhance our flexibility and ability to serve smaller to medium-sized customers. Returning to Hard Seltzer, in the third quarter, the category represented a mid-single-digit percentage, of our North American business and just one of many long-term growth opportunities we see in the North American market. In the context of the AMP group, it accounted for a low single-digit percentage of total volumes. Commentary generally points to hard seltzer remaining a significant beverage sector category, albeit with more modest growth than in recent years, supported by several long-term megatrends. We therefore view it as an important and attractive end market but note that our growth is well diversified by customer, region, and beverage category. In Europe, third quarter revenue increased by 11% at constant currency to $483 million, compared with the same period in 2020. Shipments declined by mid-single digits compared with the prior year, being partly impacted by the cyber incident early in the quarter, as well as by an exceptionally strong third quarter of 2020, when shipments increased by 10%. The widespread reopening of hospitality across Europe during the quarter has also provided a modest headwind in some markets, particularly the UK, as consumers resumed on-premise occasions, favouring draft over packaged product consumption. Third quarter adjusted EBITDA in Europe increased slightly to $76 million. Looking forward, our near-term growth is constrained in Europe, pending two significant growth projects, which add to our capacity in the UK and Germany in the first half of 2022. First half growth in 2021 was largely achieved through reducing inventories, and we expect full year 2021 volumes to be in line with 2020, following a very strong final quarter of 2020. Turning to our growth initiatives, these continue to make good progress over the course of the third quarter and are materially on target. In the first nine months of 2021, we have invested capital expenditure, including lease additions, of $450 million on these projects, with a full year outturn of approximately $700 million expected. Despite some delays in the delivery of equipment, mainly a consequence of global logistics pressures, implementation to date is largely on plan. To recap on some of our larger growth investment projects, in North America, our two new high-speed sleek lines in Olive Branch, Mississippi, continue to ramp up during the quarter. Our expansion at Winston-Salem, North Carolina, is well advanced, and we anticipate producing cams from the first of these two new lines around the end of the year, with the second high-speed line commencing production in the first quarter of 2022. In Huron, Ohio, our new brownfield expansion will begin to produce ends next month, with can lines beginning to ramp up in the first quarter of 2022. Labour markets across the US remain tight, but we have made good progress with hiring and continue to add well-qualified candidates to support our growth plans. In Europe, our new line in Germany will start up in the first quarter of 2022 and with a significant UK investment also coming online in early 2022. In Brazil, the expansion project at our Jacarei plant is progressing well, with startup expected around the end of this year. We are also adding capacity at our Manaus ENDS plant. Finally, planning and development work on our greenfield expansion in Minas Gerais is also progressing. We continue to minimize execution risk across this breadth of projects, primarily by focusing our expansion on existing facilities, thereby leveraging our established skill base, community presence, and scale. Equipment supply has tightened and shipping has recently given rise to some delays, but our projects remain largely on track and will deliver significant capacity growth in 2022. Our expectation for medium for long-term growth in beverage can demand has led us today to set out two further strategic expansions. We intend to build new multi-line beverage can production facilities in the UK and the southwestern United States. to support our customers' growth. The UK investment will build on our leading presence in one of the strongest performing beverage can markets in Europe, while the US expansion represents an important strategic enhancement of our geographic footprint in that market. Operations are scheduled to commence in 2023 and 2024 respectively, with full production achieved in the next phase of our growth plan beyond 2024. These projects were envisaged in the pipeline of potential growth opportunities we had previously detailed. They will be built out on a phase basis in response to market demand. And as is the case with our 2021 to 2024 growth plan, investments will be fully backed by customer agreements. They will also require no new equity. We will provide further detail on these new projects in due course, but see demand underpinned as follows. Firstly, Long-term secular growth as the beverage can takes share of the pack mix due to its convenience, appeal, and in particular, sustainability. Innovation remains skewed to the beverage can, and while COVID has resulted in a backlog of new product introduction, customer feedback confirms the strength of their forecast for beverage cans in all our markets. Secondly, imports into our core markets have continued to run at elevated levels. with well over 10 billion cans imported to the US market by the end of August, compared with over 8 billion units in the full year of 2020, which was itself a record. Thirdly, continued very low inventory levels, as well as unsustainable operating rates, are expected to normalize across the beverage can industry over time. Moving to our financial position, liquidity totaled in excess of 0.8 billion at the end of the third quarter, including $0.5 billion in cash and the ABL entered into during the quarter. Net leverage ended the quarter at 3.8 times. Subsequent to our second quarter earnings score in early August, we completed the SPAC transaction and following completion of the exchange offer earlier this month, the free float of AMVP has increased to 25%. In parallel with our investment in new sustainable packaging facilities, We are more generally executing a leading sustainability strategy, concentrating on environmental and ecological barriers to a greener planet, but also focusing on the social agenda of our people in the communities in which we operate. The Board of AMP is passionate about sustainability in all its dimensions, and as we have said before, we believe it represents a long-term tailwind for our business. When we invest in new facilities, we have set an ambition that each of those facilities will be class leading in terms of sustainability. We continue to work with our customers, suppliers, communities, and industry bodies to promote collection and recycling. We have developed detailed 10-year plans across our business to ensure that we achieve our ambitious 2030 target for CO2, VOC, waste, and water. We are actioning those plans, including focusing on increased renewable electricity usage starting in North America, and we are moving forward on lightweighting energy efficiency and a host of other initiatives. Our community connections are vital to our success, particularly in securing talented people from the communities we operate in. To that end, ADA announced earlier this year a $50 million investment in STEM education in those communities. We are delighted to report that the initiative has captured the imagination of our people and their neighbours and is progressing very well. We will shortly issue our 2021 sustainability report, setting out our 2030 target. And as outlined earlier, we are also progressing initiatives to enable us to better serve smaller to medium-sized customers with sustainable metal packaging. So to conclude before moving to take your questions, today we reported strong growth in third quarter earnings, reflecting our focus on sustainable metal packaging, our diverse customer base in end markets, and our operational agility in responding to market changes. This has demonstrated the transformation we have made in the diversification and resilience of our business in the last five years. On an LTN basis, adjusted EBITDA has now increased by 17% or $92 million a year, year-to-date, to $637 million. We expect further growth over the final quarter and are modestly raising our guidance for 2021 adjusted EBITDA of at least $660 million, finishing ahead of the 2021 targets set out in the business plan which we published in February of this year. Under this plan, we will significantly increase our manufacturing capacity so as to achieve our objective of more than doubling EBITDA to over $1.1 billion by 2024. We expect the beverage campaign to continue to gain share in each of our markets, and AMP, as a pure play beverage can manufacturer with a strong platform in each of its markets, is very well placed to benefit. Our contract structures, characterized by multi-year agreements with cost pass-through provisions, provide significant resilience in an inflationary cost environment, albeit subject to some occasional timing lags. Execution of our business plan has been strong to date, and we remain firmly on track to achieve our 2024 objectives, despite well-publicized delays and cost pressures in parts of the global supply chain. Under the plan, free cash flow conversion will also be strong. We estimate it at 75% plus before growth capex, given our modest level of maintenance capex, low cost of finance, and efficient working capital model. We therefore have a very strong and highly visible growth platform which is both value-creating and free cash flow accretive for our shareholders. Having made these opening remarks, we will now be pleased to take any questions that you may have.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to George Sappos with Bank of America.