Ardagh Metal Packaging S.A. Ordinary Shares

Welcome to the ARDA Metal Packaging SA Third 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. Please go ahead, sir.

Thank you, operator, and welcome, everybody. Thank you for joining today for ARDA Metal Packaging's Third Quarter 2022 Earnings Call, which follows the earlier publication of AMP's earnings release for the third quarter. We have also added an earnings presentation onto our investor website for your reference. 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. 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 AMP's most recently filed Form 20F with the SEC and any other public filings. AMP's earnings release and related materials for the third quarter can be found on AMP's website at rdametalpackaging.com. Information regarding the use of non-IFRS financial measures may also be found in the notes section of the earnings release, which also includes a reconciliation to the most comparable IFRS measures of adjusted EBITDA, adjusted operating cash flow, and adjusted free cash flow. Details of AMP's forward-looking statements disclaimer may be found in AMP's earnings release. I will now turn the call over to Oliver Graham.

Thank you, Stephen. We experienced a challenging third quarter of 2022. While global shipments increased by 9% compared with the same period last year, earnings were below our expectations. Profits were impacted by a softening in demand conditions relative to our forecast in both Europe and the Americas, together with a reduction in fixed cost recovery. We expect these conditions to persist through the fourth quarter and into the first half of 2023. In response, we are taking a disciplined approach to managing our costs and capacity, including near-term curtailment of some of our production footprints. We are tightly managing our inventory and have further flexed our growth investment program. Near-term demand headwinds reflect further weakening in the hard seltzer category in North America Inflationary pressures across core categories, including CSD and sparkling water, and further weakness in the beer category in Europe. However, the secular trends underpinning the attractive growth outlook for the industry remain unchanged. Those secular trends have continued as evidenced by, firstly, consistent share gains for the beverage can relative to other packaging substrates, secondly, the mix of innovation with over 80% of new products favoring the beverage can as their package of choice. And thirdly, ever increasing engagements with customers to help them enhance their own sustainability profile based on the infinitely recyclable nature of the beverage can. It is worth remembering that in 2019, before the pandemic, before the multiple supply chain challenges we faced, a war in mainland Europe, and now a 40-year record level of inflation, The North American market grew at 3.5%, Europe at 6%, and Brazil at 14%. The fundamental drivers of that growth have not changed. These include the growth of categories packed in cans, such as energy drinks, the beverage can's effectiveness as a package to maintain beverage quality and communicate to the consumer, the beverage can's efficiency as reflected in a very low cost through the supply chain, and the strong sustainability credentials of the can based on its high recycling rate and levels of recycled content. In addition, the beverage can's performance has always proven resilient through economic cycles. So while we are in unusually uncertain times for forecasting, as we look out to 2023, we anticipate market demand growth in all our markets at the level of low single digit percentage in North America and Europe and mid single digit percentage for Brazil. In summary, We are confident in the beverage can's enduring secular growth tailwinds, and the maturity of our investment program leaves us very well placed to serve this growth. At this time, we're focused on managing through a complex operating environment, in addition to a disciplined management of our footprint and our operating costs. This includes addressing our energy requirements, recovering exceptional inflation, and progressing our sustainability agenda. On that agenda, we were delighted to recently gain approval from the Science-Based Targets Initiative for our greenhouse gas emissions reduction target, and to be awarded an improved EcoVadis Platinum rating as part of the wider ADAR group, positioning us in the top 1% of companies assessed. We recently published our Sustainability Update Report, and we're also co-sponsors, alongside Crown, of the Global Aluminium Can Sustainability Summit in Rome, bringing together organizations globally from across the aluminium beverage can value chain. Turning our attention to AMP's third quarter results. We recorded revenue of $1.2 billion, which represented growth of 21% on a constant currency basis, predominantly reflecting the pass-through to customers of higher input costs and strong volume mix growth. Adjusted EBITDA of $140 million was 15% lower than the prior year, on a constant currency basis. This is principally due to input cost headwinds partly offset by favorable volume effects from the group's growth investment program. Total beverage can shipments in the quarter were 9% higher than the prior year, with growth well spread across our global footprint, supported by the contribution of our growth investments. Specialty cans represented 46% of global shipments in the quarter, up from 44% in the prior year quarter. Our specialty mix was higher still at 62% in the third quarter, inclusive of 50 centilitre cans in Europe, which some of our competitors include in their definition of specialty cans.

Looking at AMP's results by segment and at constant exchange rates.

Revenue in the Americas increased by 23% to $680 million, mainly due to the pass-through of higher input costs and favourable volume mix effects. Shipments were 10% higher than the third quarter of 2021, with increases in both markets driven by growth investments and improved momentum in Brazil. In North America, shipments grew by a high single-digit percentage for the quarter. Growth was particularly strong in carbonated soft drinks but with some softness in sparkling water and continued pressure in the hard seltzer category. Our new capacity additions continue to support shipment growth, but the near-term growth outlook is softer as higher retail pricing for our product impacts on demand, resulting in ongoing customer destocking. As we emphasized on our last earnings call, we have added increased flexibility to our network, and we will manage our capacity in a disciplined manner to match supply with demand conditions, including near-term curtailment action and further measures in 2023. In Brazil, third quarter shipments grew by a low teens percentage, outperforming the market, which returned a high single-digit growth. Our outperformance reflected customers seeking to diversify their supply. Adjusted EBITDA in the Americas increased by 2% to $102 million in the third quarter. Strong volume growth from increased capacity was largely offset by higher operating costs caused principally by fixed costs under absorption as we aligned production with demand. Looking forward, We expect continued strong shipment growth in the Americas as new capacity continues its ramp up in North America and as the market trends continue to normalize in Brazil, helped by an unrestricted summer period. In Europe, third quarter revenue increased by 19% on a constant currency basis to $493 million, compared with the same period in 2021. Shipments for the quarter grew by 9% on the prior year, supported by the ramp up of installed capacity in the UK and Germany. Across categories, soft drinks perform well, but demand has been lower in alcoholic beverages. There was additional continued weakness in the export market for filled drinks due to elevated freight costs. We noticed a slowdown in activity towards the end of the quarter, which may indicate that inflationary pressures are starting to have some impact on consumer demand. Third quarter, adjusted EBITDA in Europe fell by 42% to 38 million dollars. as input cost headwinds exceeded the contribution from higher shipments. We also incurred costs related to unusual metal valuation timing issues as a result of holding higher raw materials inventory for longer than anticipated while metal prices fell during that period. But we were able to offset this impact through positive one-off factors, and we do not expect this cost to reoccur in the fourth quarter. Looking to the remainder of 2022, shipments in the fourth quarter are likely to see a modest decline reflecting a strong prior year comparable. As part of our actions to manage our capacity, we will muffle the line in 2023 to balance our market needs. We are well advanced on building out our energy hedging target for 2023, and in discussions with our customers to ensure a timely, fair, and effective pass-through of our energy costs. Since our last update, the near-term energy outlook in Europe has improved, with gas storage levels in excess of expectations and various emerging national supports and coordinated European-wide energy measures. We will continue to monitor the situation, and as we previously mentioned, the beverage can sector has historically been favoured as an essential industry by governments, most recently during COVID. As we look ahead to 2023, the price resets within our multi-year contracts for non-metal and non-energy input costs will benefit from a more significant uplift as calculated by the elevated PPI curve in line with current inflation levels. Turning to our growth initiatives, during the third quarter, AMP made additional growth investments of $129 million. Our investment program is now well advanced and will continue to contribute to future shipments growth. Our project delivery teams continue to deliver our investments largely to budget, despite the inflationary and supply chain challenges. As previously outlined, we will be disciplined in our management of capacity and in any additions. Our objective is to match supply with anticipated demand on long-term contracts offering attractive economic terms. We are in constant dialogue with our customers to understand their needs, and we will be reactive to changing demand conditions. In response to the softer near-term demand, we are further revising our expectation for 2022 growth investment to approximately $600 million, split between under $500 million of CapEx and the remainder through leasing. This represents a reduction of nearly $500 million relative to our expectation at the beginning of the year. To recap on some of our more recent growth investment activity, in North America, we started up capacity in Huron, Ohio. We are re-phasing some of the further capacity to come from this project into the first half of next year. Following the previously completed expansions in Winston-Salem, North Carolina, and Olive Branch, Mississippi, We do not anticipate adding any new capacity to the market in the near term. In Europe, our near-term plans include our previously set out capacity expansions of one line each in Germany and France in the first half of 2023. In Brazil, an additional line expansion in Alagoas will complete in the first quarter of 2023. I'll now briefly hand over to David to talk you through our financial position before finishing with some concluding remarks.

Thanks, Olly, and hello, everyone. During the quarter, we issued 250 million euros of perpetual redeemable non-convertible preference shares and also successfully upsized our ABL facility by $90 million to $415 million. We ended the quarter with a healthy liquidity position of circa 1 billion, of which $583 million is in cash. This was notwithstanding an impact on working capital due to softer than expected demand conditions in the quarter, leading to an elevated inventory position. We expect to see a working capital inflow over the fourth quarter. With our growth investment plan well advanced and further flexed, we anticipate a further reduction in planned future growth investment in 2023. Our cash outlay will also continue to be lowered through leasing activity. As such, we do not anticipate any external market financing need in 2023. Net leverage at the end of the quarter at 4.5 times LTM adjusted EBITDA. As a reminder, currency effects are broadly neutral from a leverage perspective, given the currency mix of our debts and our earnings. The majority of our debt has also been issued on fixed rate terms, and we have no bonds maturing before 2027. We have today announced our fourth quarter dividend of 10 cents per share to be paid later in November. This takes our cumulative dividends for 2022 to 40 cents, which we view as sustainable. and is in line with our guidance to pay the 40 cents within the current calendar year. As part of our share buyback program authorized in June, we repurchased a further $32 million of shares in the quarter. And this takes our cumulative share repurchases to 35 million to date. With that, I'll hand back to Ollie.

Thanks, David. Taking questions, I'd just like to recap on AMP's performance and key messages. Our global shipments grew by 9%, supported by our growth investments, which will underpin future shipment growth. Softer-than-expected demand conditions in the quarter resulted in an earnings performance below our expectations, in response to which we're further re-phasing our growth capex, temporarily curtailing some capacity, tightly managing our inventory and planning further capacity reductions in 2023. Our growth investment plans are well advanced and we now anticipate a significant reduction in future investment and do not expect any external market financing need for 2023. We continue to progress our sustainability agenda and are pleased with recent third party recognition of our journey. And in Europe, we're well advanced on the build out of our energy hedges for 2023, continue to progress the recovery of our energy costs and look forward to greater support from the PPI input cost recovery mechanism into 2023. Despite the softer near-term global demand outlook, secular demand trends continue to support the beverage can, for which we're very well-placed to capitalize. We see volume and profit growth into 2023, and we will update with more detailed guidance at our full-year results. Our current view of the market leads us to project global shipment growth for 2022 of a mid-single-digit percentage. Full-year 2022 adjusted EBITDA is projected to be in the order of $640 to $650 million. assuming a euro-dollar parity exchange rate to year-end. This compares to the prior year adjusted EBITDA of $630 million on a constant currency basis. As a reminder, and as a proxy, every one cent movement in the euro-dollar rate represents circa $2 million on an annual basis. Our estimate compares with our previous full year adjusted EBITDA 2022 guidance of $710 million. Of the $60 to $70 million reduction, the majority relates to volume mix effect. through both a lower top-line benefit as well as weaker fixed cost absorption and manufacturing inefficiencies, with a similar impact expected in Q4 as to that experienced in Q3. In terms of guidance for the fourth quarter, adjusted EBITDA is anticipated to be of the order of $175 to $185 million, which compares with prior year adjusted EBITDA of $157 million on a constant currency basis. Having made these opening remarks, we'll now proceed to take any questions that you may have.

And if you would like to ask a question, please signal by pressing star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, it is star one to ask a question. And our first question today comes from Angel Castillo of Morgan Stanley.

Hi, good morning, and thank you for taking my question. I was just wondering if you could give us a little bit more color. I know you haven't laid out a particular, I guess, a specific number for 2023, but you noted that you anticipate volume and profit growth. As we think about all the different buckets and levers that should be benefiting, such as kind of PPI or cost recovery and pulling back on CapEx, broadly, how would you kind of, I guess, describe that bridge and could you quantify some of those buckets so we can kind of get a better sense for that profit growth that you anticipate year over year?

Yeah, hi Angel. I think we're not going to quantify all of them on this call and we're going through our budget process at the moment and we'll update in more detail in February. But just to give you some of the pieces that we'll be talking about then, as we said, we see both volume and profit growth into 2023. We've given you the market guidance of what we think the market will grow at and we'd expect to outperform that market growth. And we also see that we're going to recover 23 inflation in Europe over 2022. So we're not clear at this point, depending on how that plays out, that we'll recover some of the loss that we occurred in 2022. So I think those are two or three of the big pieces. As I say, we're not going to get into detailed guidance on this call because it does remain an uncertain operating environment and we want to go through the entirety of our budget process to give the guidance in February.

Understood. And maybe we can, I guess in terms of the curtailments and the potential shutdowns that you mentioned, maybe some of that is still kind of in discussions, but could you give us a sense for maybe what kind of the size of the assets or kind of the capacity that you have envisioned in terms of the strategy of potential curtailments and both in North America, but then the shutdown in Europe?

Yes. We could see 1 to 2 billion of capacity curtailed in North America next year. We could see up to a billion mothballed in Europe next year. So it's that order of magnitude as we make sure we balance supply with demand. We're very focused on remaining in the 90s utilization rate and maintaining a disciplined stance. And so we'll be doing that in both markets.

Very helpful. Thank you. Pleasure. Our next question comes from Anthony Petanari of Citibank.

Good morning. Just following up on Angel's question, I think at the time of the listing, you outlined a path to maybe 60 billion units of capacity by 2024. Obviously, there have been a number of adjustments along the way. With the curtailments and with the decisions you've made this quarter, Could you talk about where capacity might be exiting next year, exiting 2023 or in 2024?

So I think that in North America, we'll have completed the capacity build out that we described at the time of the listing. I think in both Europe and Brazil, we'll be behind that curve with some of the re-phasing that we've done and some of the plans that we have. So I haven't got the exact numbers to hand. We can give you more detail of those in February, but we'll certainly be behind Europe and Brazil. We'll have completed in North America.

Okay, understood. And then just, can you talk a little bit more about the cost headwinds that offset volume growth in America's in 3Q? I think America's vols were up 10% year over year. EBITDA was up, I think, a couple of million. Can you just talk a little bit more about the... of the cost bridge for the Americas in the quarter?

Yes, look, it is all linked to volume. So, I mean, if you take the MIS, it's 95% linked to volume. But the three elements of that are, firstly, if you like, the straight volume MIS. Then there's also a significant mixed effect in that the volumes that we lost relative to expectations were higher margin. And then the third element, which we referred to in the cost, is the under-recovery of fixed costs. So, you know, we were expecting, obviously, to run... more cans across the new capacity and when you run less cans across that capacity you get an under recovery on your fixed cost so it's not an sgna element it's it's a plant operating cost inefficiency driven by the lack of volume so you you can take 95 of the miss in the americas which is in north america is linked to volume okay that's helpful i'll turn it over thanks anthony

Our next question is from Kyle White of Deutsche Bank.

Hey, good morning. Thanks for taking the question. I just wanted to focus a little bit on Europe and if you could provide a little bit more details on some of the weakness in the quarter that you saw there. Maybe some more details on the metal valuation timing issue that you called out. And then I think you said that you noticed some deceleration in demand late in the quarter. I believe it was because of some of the inflationary pressures. So if you just provide more details on what you're seeing. from that standpoint going into 4Q as well.

Sure. Hi, Kyle. So I think that some of the trends that we saw in the first half continued into the second half a little stronger than we'd anticipated, obviously, particularly in September and going into October. So that is weakness in the northern European markets and particularly in beer. We saw some weakness growing in the Copac segment. And then as the filled goods for export also continued weaker than we anticipated as we thought there would be some recovery in that. So those trends continued and then as we said I think just towards the end of September and coming into October we did see some weakness which we now are attributing more to the pressures that are on the consumer in Europe either because they're beginning to get squeezed by increasing energy costs or because there's enough narrative around it in the air to know that it's coming. And then we saw in the last few days both two big beer customers reporting out and recognizing some potential demand weakness around consumer inflation. So I think that's why we're just signaling that is a risk, I think, going into Q4 and the first part of next year. On the metal issue, I mean, it was sort of a mid-teens dollar million issue. And as we said on the remarks, we managed to offset a good part of that with a number of one-off recoveries. That included some take-or-pay recovery. That included some release of some energy hedges. So there were some one-off factors that meant we could offset that. And as we said also, we don't see that issue persisting into Q4.

Got it. And then as we think about next year for Europe, how should we understand or think about some of the headwinds still that you're facing regarding energy? Are you still a headwind in the first half of the year? Just trying to understand, given the hedging that you have in place, as well as some of the cost recovery or your proactiveness energy.

Sure. Yeah. So look, I think the team has done a lot of work this year and worked very hard to get energy costs recovered both in this year, in which we're very close to the target we set ourselves, and going into next year. And we've had a lot of very constructive conversations with most of our customers. And as a result of that, we have largely split out energy as a cost element in our contractual structures. And that means we're confident that we'll recover energy costs 23 on 2022. At this point, we don't see ourselves recovering some of the losses from this year in 2023. But we're hopeful as the PPI curve flattens out, which we'd expect it to do next year and going into 2024, that we'd recover some of those in 2024. We've made very good progress on our hedging program. So we've taken a very disciplined approach to that since the second quarter. And we're in good shape now for 2023. And we're in dialogue with our customers about how much of the remaining open portion they want to leave open or they want to hedge out, which obviously is subject to their volume commitments and making sure that their volume commitments are solid around those hedges. So I think overall, we've done a good job, if not a very good job around energy this year.

That's very helpful. I'll turn it over. Thank you. Our next question comes from Aaron Viswanathan of RBC Capital Markets. Okay, we can move on to George Stathos of Bank of America.

Thank you. Hi, everyone. Good day. Good morning. Thanks for the details. Ali, David, I guess the first question I had for you, could you remind us again what your expectation is for market growth and your growth in 23 and then longer term? And with that as the context, assuming those market and RDA fundamentals are hit, those trend lines, When would you expect that you'd need to add capacity said differently? How many years, assuming the markets and your performance play out as expected, can you go without adding new lines, new capacity, recognizing that you'll have some latent capacity as well, you know, two to three billion units worth from, you know, the mothballing and curtailments that you expect to do in 23?

Sure, yeah. Hi, George. So what we see going into 2023 is low single-digit market growth in Europe and North America and mid-single digits in Brazil. And then we'd hope that those numbers would tick up 2024 and beyond as the macroeconomic environment stabilizes, as the hard seltzer category stabilizes, which we'd expect to happen in the first quarter of next year. And as we see the continued sustainability performance of the can, play out without all of this operating disruption that we're facing into at the moment. So we'd see higher growth numbers than those for 2024 and beyond. And as I've already said on the call, I think we see ourselves outperforming those numbers in 2023. And we won't give you a specific number now. We'll do that in February. And then I think we see there's some reason to believe that that could continue into 2024 as well. With that said, I think if we go around the regions, I think Brazil is the market that might need capacity earlier than the other two regions. So that might well need additional capacity during 2024. But we're just evaluating that as part of our business planning process. And then I think both Europe and North America can get through at a reasonable estimate, 23 and 24, before we need additional capacity in those networks.

Okay. Thanks for that rundown. I guess second thing then is could you remind us, if you've said before, or give us some input in terms of where you sit with your contracts and when you have sort of the next stage or a relatively large tranche coming up for renewal across the regions, however you'd like to present that.

Sure. So I mean, we obviously went into the listing process pretty well contracted. And that means that it's really the middle of the decade in any of the regions before we have any major contract renewals. And actually, increasingly in the Americas, those contracts are going out more into the 2026, 2027 time frame, particularly on some of our specialty contracts. The middle of the decade is really the time that we'd expect to see some degree of contract renewal. And that's why also, you know, we're looking to make sure we're in good balance by then.

Understood. And I guess my last question to partner will turn it over related to that. You know, as you think about it, your discussions with your customers and, you know, where their growth expectations were relative to what's materialized during during 2022, what, if anything, are you doing differently in terms of incorporating their growth expectations relative to what you ultimately think will play out in terms of demand, in terms of how you then pivot from a capacity standpoint? Said differently, are you haircutting their expectations any more than normal based on what we've, you know, gone through the last, you know, three quarters, or do you view most of what's happened in terms of the demand shortfall relative to expectations, purely just consumer fatigue, the consumer kind of withering because of the inflation. And relatedly, are you seeing any signs yet, we haven't really seen it from our vantage point, but are you seeing any signs yet that your customers are beginning to promote more volume relative to what we've seen in the last, you know, nine, 12 months? Thanks, guys.

Thanks, George. I think the answer to the last question is no, not really. In fact, during this quarter, we saw a major CSD player pull promotional activity out of one of the major retail channels in the U.S. and we saw an immediate impact on our volume. So I think at the moment, it still looks like retail prices are rising on average and that that's working for our customers and for retailers in terms of the balance of price and volume. And we haven't really seen anything different in Europe. You know, we'd have expected potentially going into a World Cup to start to see some more activity. But I think the input cost inflation means that our customers are still essentially prioritizing on price, which, you know, is understandable given the environment. So I think, you know, we haven't seen any return to promotional activity yet. I think we would expect to see that going, you know, through 2023 and into 2024. once this wave of inflation is through and settled with the consumer. And so that's why we're hopeful for the back end of 23 and into 2024 that we'll see another uptick in volumes, in market volumes. I mean, on the customer forecast, they are already being much more cautious. And I think they're recognizing the uncertainty of the environment. And we are also being more cautious with their forecast too. So I think that combination means that everybody is level setting at a level below you know, where it was, and I think that makes sense, particularly in Europe. You know, there is clearly some uncertainty about how the consumer will react to the inflation that's coming through.

Thank you, Ollie. Thank you, George. And our next question comes from Arun Viswanathan of RBC Capital Markets. Great. Thanks for taking my question.

So, yeah, we've seen a little bit of slowdown here, obviously, in North America. I guess, you know, could you elaborate on that? Are you seeing the cross categories? I know that, you know, a lot of folks have pointed out the weakness in seltzers, but are you seeing that also in sparkling water and coffee and teas and CSD? Maybe you can just kind of flesh out what we're seeing. what we're seeing and what you're seeing in different categories. Thanks.

Sure, sure, Aaron. Yes, look, I mean, it obviously is a declining growth relative to our expectations. We grew 9% in North America, but the main drivers of the gap to our expectations were indeed seltzers. So they're down 10% year-to-date in dollar terms, and they were off by 13% in September. And Q3 is against a relatively softer comp 2021, which was the time when seltzers first began to come off the boil in North America. So seltzers were definitely part of it, that we didn't see any recovery there in Q3. But then it's true that in Q3, the point I just mentioned, we did see softness in the core categories relative to expectations, again, because of pricing. So I think retail pricing rising, the pulling of promotions meant that although we've still got growth, we definitely had less growth than anticipated, and that was in our big core categories of CSD and sparkling water. We're not very present in mass beer in North America, so we didn't have any particular impact from the beer sector.

Okay, that's helpful. And when you look out, I guess, excuse me, a couple years from now, what's it going to really take to see some improvement? Is it a factor of you know, better personal income levels, you know, lower pricing or, you know, continued substrate conversion? What would you be looking for as far as factors to improve the growth rate from here?

Yeah, look, I do think normally the can is a heavily promoted item at retail, and the can is an incredibly efficient way to deliver beverages to consumers, and as a result, it can support significant promotional activity, which drives our volume. So we'd expect that to be a major thing to come back into the mix, you know, once this inflationary wave is through, and that will be very, very positive for our volumes. I think a second factor is that, you know, we see over 80% of innovation in beverages coming into the can. We'd expect, like the hard seltzer wave, to see the next wave of successful innovation driving growth, That's probably particularly in North America, but we see those trends also in Europe. In Europe, we do need the overall inflationary environment to come off. Clearly, the energy situation is extreme for governments and consumers. So I think, again, once that comes off, which we hope it will, then we should see the consumer revert to more confidence, and that will mean more items in their weekly grocery basket. I think we feel we're going to be resilient. in Europe to the economic environment because the CAN is traditionally resilient as a relatively promoted item. We also have some pack mix advantage. The LME falling was a disadvantage to us in terms of our inventory revaluation timing. But for the CAN in general, it's highly positive that LME has fallen to the levels it's fallen because it makes it more competitive in the pack mix going into 2023. So we think that we will be resilient to that economic environment, but we do recognize the economic environment is somewhat negative. So once that comes off, I think that will also be very positive for the can. I think the sustainability tailwinds that we had will continue. I think there is increased regulatory pressure on plastics and the plastic recycling system remains under very great strain, difficult to get recycled PET and it's very high cost. And then in Brazil, we just need the market to return to what it was doing pre-pandemic, which is it was substituting very rapidly two-way packaging into one way, and most of that was going into the can. And if you think that we were growing at 14% in 2019, you can see why we're confident that we'd be over 5%, you know, going into 2024. So I think those are the three or four really big factors. And that's why we're very confident in the growth of the can, because what we see at the moment is essentially a set of transitory issues that are impacting our, you know, our and our customers' growth.

That's very helpful. And if I could just ask one more question. So given that backdrop, if you were to increase your financing, what would be the avenues there? Is it further green bonds or what are some of the options ahead of you if you were to ratchet CapEx back up?

I mean, that would be the main one, I think, that we'd look to. David?

Yeah, I think that's right, Ollie. So as we've signaled, we'll continue to pursue leasing activity around our growth investment program, too. But green bond issuance has been our traditional route, and it remains most likely we have plenty of capacity within our covenant, et cetera, to be able to do that. So plenty of levers still to pull there, were we to need to. But just to reiterate what we said earlier, we don't envisage needing to go there in 2023.

Thanks. Our next question comes from Mark Wilde of Bank of Montreal. Morning, Alec. Morning, David. Hi, Mark. Morning.

Ali, is it possible to get, you know, some sense of just order of magnitude on the CapEx number for 23? I mean, you've been quite clear that it's going down from the sort of $600 million of kind of growth capital this year, but just order of magnitude?

I mean, it's a meaningful reduction. You know, I'm not talking about $50 million. It's a meaningful reduction from that $600 million. I mean, we will give you the detail in Fed, but you can certainly take off a significant slug off the $600 million.

Okay. All right. And then just one other one. This co-located plant that you're building down in Brazil, can you just talk with us about sort of the puts and takes as you assess doing that? Because if we think about the container industry over the last 20 or 30 years, the direction has been for companies to be kind of focused on a particular product or a particular substrate, and you're building a plant that's, you know, going to have both glass and metal at it. So I'm just, I'm curious about, you know, any ways in which you think that might handcuff optionality going forward.

Yeah, Mark, we should be clear, right? It's not one plant. So these are two separate plants next door. And obviously, I can't really comment on the glass side of the house on this call. That's an AGSA piece. But just to be clear, on the AMP plant, that's underpinned by a number of contractual situations. You've seen our growth this year in Brazil has been significantly above market. We anticipate the same next year. And that underpins the plant. So we're confident that that'll be a good investment. have the exact timing on it yet because you know clearly the market has been softer than we anticipated this year so we're working through that as part of our business planning process but we're still confident that that's a good investment and it'll be underpinned by some strong contractual positions yeah and just if i could are there like shared services at the uh at the two facilities just curious why put them together in one location then Yeah, not really. So it's more that, well, it's more down to the discussions we had with customers and, you know, that it obviously helps, you know, in terms of team and providing support during the build phase. But it's not that the plants themselves have any particular synergies.

Okay. All right. That's helpful. I'll turn it over. Good luck in the balance of the year and into next year.

Thanks, Mark.

The next question is from Jay Mayers of Goldman Sachs.

Good morning. Thank you for the time today. I guess to follow up on the last question a little bit, so assuming a big step down in CapEx, growth CapEx from the $600 million this year, can you talk a little bit about how you're thinking about maybe other capital allocation priorities between shareholder returns, balance sheet, any color you can provide there just in terms of priorities? And then I guess Kind of secondarily, as you think about the kind of leverage you're running at, running at four and a half times right now, which is towards the high end of your target range, but recognizing that your target's kind of off of forward EBITDA, just given growth has been a little bit slower than you envisioned, how does that kind of influence how you think about leverage going forward? Thanks.

yeah only should I pick that up yeah yeah so thanks for the question Jay look I think you're right four and a half times leverage on a trailing LTM basis at the moment I would envisage being in a very similar position at year end at this point that will leave us well placed in terms of liquidity going into 2023 in terms of our capital program clearly we're being conservative with that capital program in terms of cash outflow spend deliberately in order to preserve our balance sheet liquidity and keep within the leveraged position that we feel comfortable with for the longer term. And so we'll continue to kind of look for opportunities to prudently manage both the balance sheet and cash conservation and look at working capital initiatives and that sort of thing. So I think there are plenty of levers at our disposal, but I think the key message at the moment is that from a balance sheet perspective, we're very well placed. For example, over 90% of our debt is fixed interest and term 2027 to 2029. So I think we've given ourselves a very stable platform with which to manage the macroeconomic headwinds that we've been discussing.

Appreciate that, Collar. And I guess just as a follow-up, the preferred equity that was put in place this quarter with RSA, can you just comment on how you kind of view that portion of the capital structure? Is that going to be permanent for kind of the foreseeable future, or is that something that you could see once financing conditions improve, you look to maybe try to put in place a cheaper piece of debt or something there?

Well, I think the key attributes of those preference shares are they're non-convertible, but they are redeemable at any time. So we have full flexibility on that going forward. We have no intention to exercise that flexibility at the moment. Clearly, they are supportive of our overall balance sheet position and our liquidity. And I think from an AMP perspective, represent a very good piece of paper. So yes, we'd have optionality on that, perhaps at some point in the future, but no plans in the short to medium term.

Great. Thank you very much. Turn it over. Thanks, Ted. The next question comes from Ed Brooker of Barclays.

Hey, thanks for taking the question this morning. My first one, just back on inflationary pressures that have been impacting demand. Is there a switching effect that maybe you're seeing from other products or maybe a trade down to some cheaper substrates, whether that would be plastic or glass, or do you think it's more just people buying less given that, or less consumer products or less beverages to pay for other things like rent and gas that have gone substantially higher?

Yeah, hi, Ed. I think it's more that they're buying a bit less and that's because there's less promotional activity. So when there's less promotional activity, obviously they're not picking up 12 cans, they're picking up the number of cans off the shelf instead of the promotional pack. We actually see in the data for North America that the can is still gaining share at the expense of plastic, and I think that's very interesting because 10 years ago, in similar economic conditions, I suspect you'd have seen a shift towards PET, particularly big two-litre bottles of cola. So I think that that shows you the strength of the sustainability support that the CAN now has. And that's one of the reasons that underpins our confidence for the future growth of the CAN. I think going into 2023, it's difficult to pick exactly where we sit substrate to substrate. But all I'd say is that, again, that LME fall is potentially very significant because that is a reflection of a sense of cheap energy in the Far East. For Europe in particular, that means that the can will be highly competitive. And so I think we're well placed going into what will be a difficult year and potentially, you know, recessionary environment.

Got it. And my second question, just on the back of Jay's, more directly, I guess, which lever would you choose? pull first in order to preserve cash? Would that be just lowering capex to maintenance levels? Would that be turning dividends off, not buying back shares? I guess just what point of weakness would you have to see before turning off the dividend?

Yeah, we don't see any scenario for that at the moment. So I think we're very comfortable, as David said, within our liquidity position and within the you know, the forecast we have for cash going into 2023. The obvious right one to address is the growth capital just because, you know, the weakness then is actually because demand is lower and we do need to balance, you know, supply and demand, you know, staying disciplined in our industry. So that's always where we're going to look first and to our overall capacity to conserve our cash.

Great. Thanks for the question. Thank you. Next question is from Roger Spitz of Bank of America.

Thank you very much. On a couple of cash flow items, on the 600 million CapEx, of which 500 is CapEx, 100 is leasing, does that include or exclude the 100 million of maintenance CapEx?

So to be clear, Roger, I'm just under 0.5 of cash business growth investment and 0.1 of leasing. And then there's 0.1 of kind of maintenance capex. That's the right way to look at it.

Thank you. And then you talked about a Q4 22 working capital inflow. Any way you can size that for us?

Yeah, look, I think it will be a significant inflow, so triple digits, and it will take us much closer to where we would expect our normalized position to be at the end of the year. Q4 is a natural seasonality inflow for the business anyway, but we've taken actions relatively early on in Q3 to manage our inventory position. and particular actions around the raw material input to that. That means that if you look at our balance sheet, you'll see our trade payables has fallen while our inventory has kind of held its position. You can assume the natural follow-through on that will be that in Q4, those payables and inventory position will kind of rebalance more in line with where you'd expect that long-term balance to be.

And lastly, it says the preferred shares are payment of the dividends at your discretion. Is a dividend, is it a cumulative preferred, where if you miss a quarter, you make it up later on?

That's correct. Thank you very much. Thank you, Roger. The next question comes from Rachel Fox of Guggenheim Partners.

Morning. Could you give some colour as to what overall industry manufacturing capacity looked like in both Europe and North America back in 2008 and 2009 and how those capacity utilisation rates compared to today?

Thanks. Yeah, I have to admit I don't have the exact numbers to hand. But to the extent, maybe to give some colour on what happened during the financial crash is that There was some deterioration of demand in Europe, so I think in 2008 the market went down a few percent, low 2%, 3%, but then the following year grew by 5%, and I think utilization rates remained in a good place. North America, I think, was less impacted, though at the time, obviously, it was a lower growth market. What's different about this time is that there is inflation. which is impacting consumer demand. So I think it's a different environment, but overall, you know, we see the resilience of the can to these kind of economic downturns because firstly, you know, the consumer moves from out-of-home consumption, restaurants, holidays, bars, to at-home consumption. And then within the at-home consumption, the can is pretty resilient. So, yeah, that's why I mentioned a few times that I'm relatively confident in our 2023 outlook despite the uncertainties in the environment.

Thanks. Just on the energy cost inflation, you previously spoke about the recovery through the surcharges. What percentage of your customers pay those surcharges in the end?

I don't have the percentage of customers, but we recovered pretty much in line with our expectation. which was around 50, 60% of what we suffered in this year. And then going into next year, we're getting up to a very high percentage of our customers who've accepted what we believe is a very fair and equitable way to pass through the exceptional situation that we're all facing in Europe. Because we only put it through when it's high and we'll take it out again when it falls, which it will.

and therefore there's no ongoing effect of it for our customer base. Thanks. Thank you. Our next question comes from Eric Seave of Golden Tree.

Hi, guys. Thanks for taking the call. Your guidance implies a nice sequential increase in EBITDA from Q3 to Q4. Can you talk about the factors that you're seeing that lead you to

So I think there's three or four factors. So firstly, in Q3, we talked about some of these metal impacts, even though we offset them. We don't see those reoccurring, and we weren't able to offset them all. We see ongoing energy recovery in Europe with the efforts we've been putting in there. We see a good position in Brazil. Again, with some of the customer growth and the mix. And we see some overall mixed effects in our volumes, particularly in North America. So there's three or four factors that lead us to see an improved performance in Q4 versus Q3. I'll just check with David. I didn't miss something out there.

Yeah, no, I think that's right. Obviously, some of our capacity is even further up as well. So that may support the volume number quarter on quarter.

Yeah. Okay, and you mentioned it sounded like... Subsequent to the quarter in October, you saw some more deterioration. It sounds like it was mostly in Europe. Have you factored this into your outlook, and what specifically is your expectation for European volumes in Q4?

Yes, we put that in the outlook as part of the reason for the range. And I think we mentioned we do expect Q4 European volumes to be negative relative to Q421. Q421 was very strong in Europe. And traditionally, European sales in Q4 are down a bit. We typically take some stoppages. We've not done that for the last few years. So it's really a reversion to some normality there as well. But we do see a slightly negative growth path, and we did include in that some conservatism based on what we'd seen in the back end of September and early October.

Okay. And did you see a corresponding weakness in North America over that timeframe as well, or no?

I mean, we've seen weakness in North America, and some of that definitely came through in September, but it was just a slightly different reason, which was more around the Seltzer market. You know, as I said, it was minus 13 in September last you know, relative to minus 10 years today. So there was some further weakness. And then also this removal of promotional activity by some of the big CSD players. So we also took that into account that, you know, we saw that weakening at the back end of September.

Okay. And what's the expectation for North American volumes in Q4?

We still see growth. I mean, we've got, you know, capacity coming through, but I don't have the exact number. So we still see growth in Q4 over Q4 21.

Okay, great. Thank you. And then last one for me. On the energy side, do you have a sense of how much of a headwind energy is to EBITDA in 2022 and expectations for 2023?

2022, I think we were of the order of 50 million, of which we offset.

Of which we offset 50 to 60%.

Yeah. In 2023, we're not expecting a headwind from energy because of the way we've worked with customers to split that out and make it linked directly to the costs of energy. And we've also got a significant hedge position in place that's giving our customers good certainty on what that number looks like.

Okay. And in terms of the, just to follow up on the hedging part, it sounded like when you're formulating your hedge book, you're doing that in concert with your customers. Do you have contracts with them that at this point you know will, you know, you'll be able to pass along the energy costs you're hedging, you're locking in via those hedges?

Yes. Yeah, so that's what the work we've been doing this year is to split energy out as a separate item because it was so exceptional. And also to be fair to customers, to be clear that, you know, we weren't trying to take anything on it. We were just dealing with this exceptional situation caused by a war. So we've split it out. very transparent the way we've done that. And we've also kept certainly big customers up to date on our hedge position. And then we're in dialogue with them about what they want us to do with the open portion. And again, that does also link to their volume commitments because we obviously don't want to be over-hedged. We do have a number of support schemes coming into place now, UK and Germany, which we also think will help the overall situation. So we think we've got very good transparency now on energy into 2023.

Thanks, guys. Thank you. Our next question is from Gabe Hajdi of Wells Fargo.

Oliver, David, good morning. If we can kind of, I don't want to go through a whole teach-in on contracts and how they behave, but just I'm curious, Oliver, having lived through kind of when there's been too much capacity in the market, your customer commitments and contracts, I sort of look at them more as supply agreements and you don't necessarily have 100% of their volumes locked up. There's, you know, they have the flexibility or the ability to go out and maybe, you know, dual source or what have you. So can you give us a sense for within your, your contracts, supply agreements, how much flexibility there is on, on behalf of the customer to go out and call it buy in the spot market. And, you know, again, kind of coming from Rex and, and, moving through other times, how does that work in terms of, you know, do they come knocking on your door as a supplier and say, hey, can you help me out?

Just curious. Sure.

Yeah, so I think many large customers will have dual supply or even three or four suppliers, either because of geographic location or to de-risk their business. And they will give guidance on the volumes expected either through giving dedication to a filling location or giving some sort of overall guidance for a geography. And then, so relatively few of them are if you like buying on spot because they will have those contractual positions in place because they'll want to be protected and make sure that their business can confirm, you know, that marketing has got the cans that it needs. I think what, you know, we were clear about during the listing process is that we have a range of commitments around those volumes and those range from rebate type structures where customers lose money by not taking their full volume allowance right through to take or pay. And those were contracts, particularly the take or pay or the minimum volume legal requirements were put in place, particularly in North America, both because of the size of the growth that we saw in North America and because of the uncertainty of some of that with some of the players. And because the market was extremely tight, and so it was possible to get those kind of contracts through. And that was a very significant upgrade to the contractual structures that historically had persisted in North America. And I think Europe and Brazil stayed more with traditional rebate structures because there wasn't that same level of growth. So we have now a number of situations where customers do have very firm commitments with us. And obviously, some of them are missing them. And so we're in very active dialogue with customers about those clauses and getting recovery on them because we think that's fair and appropriate that we are recompensed for the capital we put in the ground. And we don't think that impacts an ongoing constructive commercial relationship. So that is in progress. We're not going to give a running commentary on that. And we're obviously doing that in a very constructive way with our customers. But those types of contracts were put in place and they are relevant for this environment.

I appreciate the transparency there, Ali. And then one question, I guess, on leverage and cash flow. If we are looking at 2023, you know, op cash flow, less CapEx, I don't know, maybe I put a $400 million in there for CapEx and you guys are cash flow neutral, let's say, on an operating basis. And then, you know, with dividend and maybe some share repurchase, burning cash. Would you expect to be at the same leverage rate kind of at the end of 2023 or below, obviously, with the earnings growth that you referenced during your prepared remarks?

Yeah, no, look, I think once we've gone through our budget exercise and present back in February, we'll be able to give you a bit more precision on kind of our leverage projection for the end of 23. And clearly, part of that leverage projection is EBITDA too, right? So, yeah, you have to wait a little bit longer for that. But I think the reassuring message is is the one around kind of where our balance sheet is today will be at the year end um and and that we are very focused on preserving um our liquidity and and leaving us in a strong position for for weathering weathering the short-term impacts we're seeing okay and and one last one if i may i recognize late nicole um specific projects on the list um i think ollie referenced maybe delaying a line

I just want to make sure that was originally expected to be three lines. And then we've seen an announcement, you know, from some local officials about a new plant in Ireland. So I'm curious if that's one that you're talking about delaying. And then again, it sounds like Arizona sort of, you know, indefinitely postponed.

No, look, I think that's fair in Arizona. I think that until, you know, we see the capacity in North America come back into balance, you know, that isn't needed. And that is going to take a bit of time. But obviously, long term, we still have positive views on the region and the customer base. But yes, I think it's fair to say that at the moment we don't have a timing on that. Huron, that capacity initially was planned to come up at the back end of this year. And now we'll slip into the first half of next year. And Northern Ireland, we've actually had some natural delays on that project. We're in discussion both with the contracting and with customers. about timing for that, so I don't have an exact date for that at the moment, but clearly we did get planning permission, which is why there's been some announcements in the press.

Great. Thank you, guys, and good luck. Thanks. Thank you.

And as there are no further questions, I'd like to hand the call back to Oliver Graham for any additional or closing remarks.

Thank you, Kevin. So thanks to everyone on the call for your interest in AMP. To summarize again, our shipments grew 9% in the quarter versus the prior year period, but earnings were below expectations. That was because of softer demand conditions and higher operating costs. We're taking action around that, which we've talked about at length, to align our supply with demand and improve our efficiency. And as we said, in Europe, we're looking forward to a good recovery of our input cost inflation into 2023. I think, as we said a number of times on the call, we remain very confident in the secular demand trends that support the beverage can, and we see as we come through this difficult macro environment in 2023 that we'll see stronger growth into 2024 and beyond. And as we put in place our investment program, we're very well placed to take advantage of those trends.

So thanks for your interest, and we look forward to talking to you again at our Q4 results. And that does now conclude today's conference call.

We thank you all for your participation, and you may now disconnect.