Ardagh Metal Packaging S.A. Ordinary Shares

Welcome to the ARDA Metal Packaging SA 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.

Thank you, Operator, and welcome, everybody. Thank you for joining today for ARDA 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 onto 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.ardamnetalpackaging.com. Remarks today will include certain forward-looking statements and include use of non-IFRS financial measures. Actual results could vary materially from 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'll now turn the call over to 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%, an 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 costs 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 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 pandemic shifts 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 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, 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 standalone rating from CDP achieving a leadership A- rating for water management and a B rating for climate change. This followed a first standalone prime ESG rating from ISS. AMP also achieved ASI certification across certain of our European operations and joined other key aluminium 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, 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 A&P's results by segments, 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. 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 in Huron, Ohio becomes operational. 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 containment 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 was softened and anticipated, despite the World Cup staging during Brazil's summer period, as a weaker macroeconomic backdrop pressured consumption. Our performance for the quarter was negatively impacted by some supplier rebalancing in the period by our customers, but we should be viewed in the context of our outperformance for the year as a whole of over 4%. Market conditions remain soft, but we expect to grow in 2023 at a high single-digit percentage, supported by the startup of New Capacity in 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 Minas Gerais will be phased in only when demand conditions allow. Adjusted EBITDA in the Americas increased by 3% to 104%. 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 costs under absorption, partly mitigated by our containment action, 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 resilient in the quarter and was ahead of our expectations. Shipments related to the export market for filled drinks were down on the prior year, but the reduction in ocean freight rates supports the 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 headwind created by the sharp fall in metal premiums 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 pasture 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 as the European market continues its long-term journey to diversify its energy 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 last year's uplands 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, 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.

Thanks, Olly, 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 right-size 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 the cash element being under $500 million, which was in line with our Q3 guidance and a 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 the 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 NOMOC, in support of early growth customers, and follows on from our similar 2021 investments in North America in heart 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 none 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 10 cents 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 growth 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.

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% of the year, supported by our growth investments, which will drive future shipment and earnings growth. Softer-than-expected demand conditions in the Americas in the quarter resulted in an earnings performance below our expectations through lower volume contribution and fixed costs under absorption. Our growth investment plans are well advanced, Secular demand trends continue to support the sustainable beverage count, for which we're very well placed to capitalise as demand normalises. And our actions taken to improve energy pass-through, realign capacity, rebalance inventory as well as volume growth, all 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 of between mid and high single digit percentages. Our full year 2023 adjusted EBITDA growth is projected 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 with a 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

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question.

We'll pause for just a moment. We'll go first to George Staffos with Bank of America.

Thanks very much. Hi, everyone. Good day. Thanks for the details. I wanted to, you know, spend the first couple questions on the Americas. And, Ali and David, you mentioned, you know, the Americas volumes were not where you'd expected. Customers rebalanced there. 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 hows and whys a bit more in detail? And I had one quick follow, and I'll turn it over after that.

Sure, thanks, George. Hi there. So, look, I think that the main elements in this were in Brazil. That will touch on North America as well. So in Brazil in Q4, the market was softer than we anticipated. We'd hoped 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 rebalanced their portfolios towards other suppliers, and that was because we'd had quite strong performance with them earlier in the year, and they'd met their contractual commitments with us to a large extent, and that meant they were able to rebalance their supplies. And that's what happened. But in the end, the core reason for that was the market world 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, have put through significant price rises on cans retail, and we're seeing that impact in volumes. And I think you'll 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 and premium hedges come down. 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 but significant price gains, which was an economic equation that worked for them. And so we still saw that pretty significantly in Q4. 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.

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

Sure, yeah. So 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, we guide that at the America's level. So if you take the overall EBITDA, about half of that growth is Europe, half is America's. much more to North America than to Brazil.

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

Yes, because I think that this is really about a problem for the first half. And we see it as a very transparent problem. You followed the market for a long time. This switch back to returnable we see 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 camp.

Okay. I've overstayed my welcome. I'll turn it over. I'll come back in queue. Thanks. Thanks, Jeff.

We'll go next to Anthony Pettinari with Citi.

Hi, this is actually Brian Bergmeier sitting in for Anthony. Thanks for taking the question. Can you provide some items for the year-over-year free cash flow bridge? You know, we have the 10% EBITDA growth, and you provided some detail on CapEx, but I apologize if I missed some color on that. interest, taxes, working capital, or comparable depreciation. Sure, I'll pass that to David.

Yeah, sure. Hi, Brian. Thanks for the question. So working capital, we think we'll have an inflow of the order of $100 million. Business growth investment, under $300 million for the full year, and that includes small acquisition activities 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-FINEX of around about 25 in addition to that. And then cash taxes of the order of 45 million, I would suspect.

Got it. Thank you for that.

And just one quick follow-up for me, you know, looking at some beverage companies, demand forecasts, things 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, you know, continues to see negative growth rates, you know, do you think you can hit the high end of your guidance still? Do you have other levers that you can pull?

Yeah, so we were assuming some Very small level of growth in hard seltzers prior to 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, yeah, 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, you know, the spirit 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. You know, we do see growth this year, but we're not relying on heart health too much in that guidance.

Got it. Thank you. I'll turn it over.

We'll go next to Kurt Whitworth from Credit Suisse.

Yes, hi, good morning. Good morning.

Yeah, hi. So a couple questions. I think, you know, one of the things that I think we're struggling with a little bit is to unpack, you know, some of the variances with respect to the EBITDA shortfall this year, right? So entering the year, you know, we had roughly 800 million consensus estimates. And you come in at 625. So I was wondering, you know, A, can you unpack some of the moving pieces between, you know, inventory metal premium, fixed cost absorption, you know, energy mix? And then within that, you know, the prior kind of long-term target of doubling EBITDA by 2024, you know, maybe if we FX adjust that, it would put you still in the $1,950,000,000. Yet this year in 2023, we're talking 690. So, you know, is there anything structurally that has really changed a lot? Do you feel like, you know, some of these buckets of either unrecovered inflation or mix are fixable? And just if you could help frame, you know, what you think may be the longer term capability of the business is.

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. And we had another, I don't know, say 20 million of FX out of that. And then I think that, you know, the two big effects in the year were the European energy situation with some addition from metal mismatches in Europe. And then the volume misses, particularly in North America. that are also, I mean, to be clear, a volume and a mix miss because the hard seltzers and some of those innovation categories were a higher margin for us. So I think if you then play that forward into the future, you know, 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 were providing better mix. But then after that, you're essentially saying it's about the timing of growth. You know, we've got two to three years of runway here now with the business, not needing a lot of investment, where we see us growing into the footprint. So, you know, without putting any hard numbers on it, I think the only two structural factors, you know, compared to the original projections are really FX and mix.

The rest we see ourselves growing into as the market returns.

Okay. And then could you just give us a little bit more color on 1Q volume trends? We're roughly two-thirds of the way through the quarter, so 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.

Sure, yeah. 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 It was 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's got off to a solid start, roughly in line with where we saw the market.

Great, thank you. Thank you.

We'll go next to Kyle White with Deutsche Bank.

Hey, good morning. Thanks for taking the question. Just on the fixed costs under absorption, when do you expect to get some 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?

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 2024. I'm not sure I have the numbers to hand on sort of the back end of last year or the first half of this year. We're talking one to two billion of capacity in Europe that we're needing to curtail and a couple of billion, a touch over a couple of billion in the U.S., Yeah, so it's in the tens of millions, the sort of drag that we've got on that, both sides of the Atlantic.

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. You know, 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, you know, next year expected to be down, Should we assume the greenfield in Brazil is indefinitely delayed, and then maybe what's the update on the Northern Ireland plan as well?

Yeah, 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 two years for both of them. So, yeah, significant delay still. 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.

Got it. I'll turn it over. Thank you, Kyle.

We'll go next to Angel Castillo with Morgan Stanley.

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 a slide where it showed 2022 to 2025 CAGRs for kind of the industry. And broadly, it seemed to kind of indicate low single digits 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, you know, what are kind of the factors there that you're kind of looking at and maybe what gives you confidence as you think about, you know, this medium term growth?

Sure, yeah. 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 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 CAN cost structure are prioritized. seen in the last 12 months across those three 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 2010. So we've put 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 North America, we think that is a low single-digit market, obviously grown a lot in the last few years, so off 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 PacMix shares. So we think that's a fair assumption. And obviously, off 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, two years. And then Europe has been a long-term growth story, you know, long-term around 3%, more recent years, pre-COVID, more like 4%, 5%, 6%. We're being cautious with that, saying, you know, 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 underpenetration of the German market, you know, it's a 5 billion can market, can easily grow to being 7 or 8 billion and equivalent markets Single is pretty conservative. Probably low to mid is a safe long-term projection for Europe. So, yeah, overall, we remain very confident in the growth prospects for 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.

That's very helpful. Thank you. And then as you think about the curtailment of some of your assets as well as some of the bearing back of capacity growth, can you talk about your capability to grow should demand reaccelerate and we return maybe back closer to the mid-single-digit growth that we were seeing? Are there any implications from pulling back on cutbacks 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? Your capabilities on that would be helpful as we think about 23, 24.

Yeah, 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 are obviously some frictional costs to starting the lines back up, but essentially those are at the margin, and we have some costs 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.

That's helpful. Thank you. Thank you.

We'll go next to Jay Mayers with Goldman Sachs.

Hey, guys. Good morning. Thank you for the time and getting me in here. The first question I had was, last quarter you had commented that you think the outlook for 2023, you know, resulted that you didn't need to access any capital markets to finance either CapEx or dividend payments. You know, given the outlook you provided today, does that view still stand, you know, given the lower CapEx, but, you know, some of the kind of lower earnings for the year? So, curious thoughts there.

No, that view definitely still stands, yeah. Go ahead, David.

I was just going to say the same as you, Ollie. Yeah, yeah.

got it and then just kind of a little bit higher level on how you're thinking about balance sheet leverage you know obviously growth hasn't really kind of materialized to the rate we had expected coming into the year is four and a half times still kind of the right longer-term leverage for this business or do you think kind of given the the lower trajectory coming into 23 and 24 that longer term maybe we want to think about a lower number.

Yeah, David, do you want to pick up?

Yeah. So, yeah, Jay, I think we'll modestly deleverage this year. As I set out, we're 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 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 2023. So, yeah, it's a key focus topic for us, but it will take a little bit of time to get it down.

Thank you.

We'll go next to Gabe Hodgdy with Wells Fargo Securities.

Holly, David, Stefan, 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. I'm just curious how much of your growth outlook is sort of contingent or dependent on that if you're the pressure test? you know, we go through 2023, we're having this conversation in the first part of 2024, you know, if that does not materialize, could we be talking about, you know, a flat performance for RDAW and maybe the industry is down or how would you instruct us in the outside world to think about that?

Yeah, I think that it definitely isn't to that extent. So, look, it essentially means that we've some degree of growth in carbonated soft drink volume in 2023 in North America. But if you take our EBITDA guide, it's 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 contract. 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. activity in North America. You'd be talking, you know, as I say, a portion of America's. And we've not assumed, you know, very significant growth. We've just assumed that there is some growth in volumes in carbonated soft drinks in North America in 2023. Okay.

And then somewhat, I guess, it's an exercise in just thought process. But as we look at a lot of the innovation that's coming across for BevCan's, and the drink categories, the lines are getting blurred. And it seems like it implies a lot more label changes and, you know, 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 got one more question after that. Thank you.

Yeah, 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 to North America. So I don't anticipate that being a huge drag, and obviously when you have a little bit of extra 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, but you said you had another, right?

Yep, 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 the United States, if growth does not materialize, is there an opportunity for you to tighten up some of your capacity, lower costs, inefficient? I don't know how you guys think about it. Or is there a timeframe 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. This is more of a permanent adjustment.

Thank you. Yeah. No, no, thanks, Gabe. 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 are balanced. 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.

Thank you. Thanks, Ken.

As a reminder, if you would like to ask a question, that is star 1. We'll go next to George Staffos with Bank of America.

Thanks very much. 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?

So obviously individual lines, as we're doing at the moment, can be detailed, which does have an impact on cost. It doesn't have the same impact as major decisions because 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. It's not that SG&A has 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 two. We've already taken some action there to make sure that we right-size in certain areas.

Thanks, Holly. 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 event that occurs, and all of a sudden the industry, you know, needs to, and this is my wording, you know, scramble. You know, what are you doing now with your customers to get ahead of that? Hopefully it doesn't happen, but nonetheless it could, you know, looking out to 23 and into 24.

No, great question. I mean, given that it's exactly a year ago that, you know, we were faced with a shock that very few people saw coming. So, look, I think that the answer to that is, you know, we're taking action now to deal in the last two or three 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 for 2023 as we've described on these calls and elsewhere. As 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. What we've been doing in the first part of this year is looking into 2024 and even into 2025 to de-risk our position because like you, we're not resting on the idea that this will persist. There could be other shocks.

No, thanks, Ellie. I would imagine it's maybe a better environment to talk about the elements of the commercial terms that need to change when actually it might help the customer because energy is declining, right, as opposed to, hey, we need to de-risk, and oh, 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?

There's nothing wrong with that view. It's obviously much more straightforward when things are what we consider very equitable mechanisms with larger customers around the situation. So we think we're in a good place around all of that in Europe going forward.

Okay. We appreciate the time. Good luck in the quarter. Thank you, guys. Thanks, Brett. Thank you.

Thank you. 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.

Great. Thank you very much, everybody. We appreciate your time. As we said on the call, I think we had a resilient Q4 and faced some difficult conditions. But as we look forward into 2023, 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 that's pretty much complete, and we look forward to telling you about that journey on subsequent quarters. So we look forward to talking to you at the Q1 results.

Thanks very much. Thanks, everyone.

Thank you. This does conclude today's call. You may now disconnect.