Ardagh Metal Packaging S.A. Ordinary Shares

Welcome to the Ardhan Metal Packaging SA Fourth Quarter 2023 Results 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 Ardhan Metal Packaging's Fourth Quarter 2023 earnings call, which follows the earlier publication of AMP's earnings release for the fourth quarter and the full year. 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, related materials for the fourth quarter can be found on AMP's website at .ardhanmetalpackaging.com. Remarks today will include certain forward looking statements and include use of non IFRS financial measures. Actual results could vary materially from such statements. Please review the details of AMP's forward looking statements disclaimer and reconciliation of non IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham.

Stephen, 2023 represented a year of transition for our business as the team navigated a challenging macro demand environment and took decisive action on our footprint and inventories to position the business for growth in 2024 and beyond. Despite the market context, in particular, softer European demand, we achieve record global revenues and shipment volumes, which grew by 5% for the full year and 2% in the fourth quarter. Our America segment grew at an almost mid teens percentage driven by strong growth in both regions. Our actions on energy pass through to our customers in Europe resulted in stronger inflation recovery, but this was more than offset by unfavorable volume mix effects with a significant decline in production activity and shipments experienced in the second half of the year. Which also impacted fixed cost absorption. In Brazil, full year shipment growth was below initial expectations due to consumer weakness and customer mix, which included a customer restructuring that is now resolved, but with an encouraging sequential improvement in shipment trends during the second half and a strong Q4 against a week prior year comparable. Our team's efforts on working capital management in this challenging environment generated a near trebling of cash from operating activities, resulting in AMP ending the year in a robust liquidity position. Our fourth quarter performance was negatively impacted versus our expectations by weaker than expected volume and mix effects in Europe, which was partly offset by a stronger performance in the Americas. European shipments deteriorated towards the end of the quarter and well below retail scanner trends, which were more positive, reflecting what we view to be largely customer destocking actions. There was a clear divergence of performance by customer and geography and with a gravitation towards value brands and private label. Our confidence in a stronger performance in 2024 reflects our expectations for volume growth in all regions, leading to improved cost absorption in addition to our footprint actions. Inflationary pressures are moderating and the beverage can continues to win share as the package of choice by customer innovation and its sustainability advantages. We are committed to balancing our network capacity with demand through a mix of curtailment and longer term action as appropriate. The two remaining steel lines in Weisenturm, Germany, closed at the end of the year, as previously indicated. In North America, we closed our two line facility in Whitehouse, Ohio this month, which will improve network utilization to a more appropriately balanced position. These permanent actions will optimize our network and drive earnings improvement. With our well invested global manufacturing base and a strong, diverse mix of customer relationships, we remain well placed to benefit from a normalization in demand, which should drive further earnings growth over the medium term. During the quarter, the publication of our 2023 sustainability report highlighted our progress on sustainability initiatives. The recently announced supply agreement with Novellis in North America for supply from its greenfield development will further contribute towards AMP's metal t-carbonization strategy. AMP, alongside other industry stakeholders, participated in a call for action at COP 28. And we look forward to updating on further progress on sustainability during 2024. Turning now our attention to AMP's fourth quarter results. We recorded the fourth quarter of 1.1 billion, an increase of 5%, which reflected favorable volume mix and higher input cost recovery, partly offset by the pass-through to customers of lower input costs. Adjusted EBITDA of $148 million was down 7% on the prior year, with growth in the Americas more than offset by a decline in Europe, in excess of our expectation, which reflected customer caution and apparently stocking against a weak consumer backdrop. Total beverage can shipments in the quarter were 2% higher than the prior year, with 14% growth in Americas offsetting a 10% decline in Europe. We had a strong cash performance, with adjusted operating cash flow approaching $500 million for the quarter and $680 million for the full year. This reflected our team's focus on working capital, in particular inventory management, and our ongoing reduction in capital expenditure. Turning now to AMP's results by segment. Revenue in the Americas in the fourth quarter increased by 11% to $705 million, which reflected shipments growth, partly offset by lower input costs. In North America, shipments grew by 8% for the quarter and 13% for the year. Our shipments growth was broadly in line with our expectations, which drove record profitability. This strong outperformance versus the market reflects the contribution from customer contract commitments arising from our investment program, as well as the diverse mix of our portfolio, weighted towards non-alcoholic beverages, including the high growth functional energy drink segment. Looking at the market overall, demand remains somewhat constrained by higher retail pricing and lower levels of promotional activity than historical norms. Industry demand trends improved in Q4, and we expect further improvement into 2024 as input costs moderate, retail pricing stabilizes, and consumers see real wage growth. We're encouraged by our strong annual growth in shipments in 2023, our pipeline of contracted growth and good early momentum so far in 2024. This supports our forecast for shipments in our North American business. The growth by a mid to high single digit percentage this year versus a low single digit percentage growth for the industry. In Brazil, fourth quarter shipments increased by 34% against a week prior year comparable, outperforming the mid single digit increase in the market. We experienced encouraging sales momentum with a number of key customers. Shipments grew by 3% for the full year, which was slightly ahead of the market. We forecast modest shipments growth for our Brazil business in 2024, and we continue to balance our capacity through curtailment of our network. We are confident in the growth potential of the business, but remain cautious in their term given the softness over the last two years. The market has started the year strongly, but we would highlight the earlier date for Carnival this year, which may have had some impact in pulling forward demand. Adjusted EBITDA in the Americas increased by 3% to $117 million in the fourth quarter as the contribution from higher volumes was offset by favorable prior year effects, which included a contribution from unfulfilled customer contractual volume commitments. In 2024, we expect shipments growth in the Americas of a mid single digit percentage. Shipments growth and improved fixed cost absorption will drive growth in adjusted EBITDA in 2024. In Europe, fourth quarter revenue decreased by 10% on a constant currency basis to $427 million, compared with the same period in 2023, principally due to unfavorable volume mix effects, partly offset by a higher input cost recovery. Shipments for the quarter declined by 10% on the prior year as sales volumes decelerated sharply towards the end of the quarter. For the full year, shipments declined by 2%, with growth in the first half more than offset by the second half deterioration. Consumer demand remains weak given household financial pressures, but the decline in shipments experienced by ourselves and the industry was broad-based and significantly in excess of retail scanner trends in the quarter. We believe this reflected elevated customer destocking into the end of the year. Scanner trends also showed an improvement in consumer volumes towards the end of the quarter at odds with our shipments experience as customers took increased levels of downtime over the holiday period. Fourth quarter adjusted EBITDA in Europe decreased by 35% at constant currency to $31 million due to volume mix effects and reduced fixed cost absorption, which set stronger input cost recovery versus the prior year. Reduced production activity as finished goods inventory was right-sized earlier than expected resulted in higher fixed cost under absorption and a lower margin contribution than expected from the period end contract asset. We took action on our footprint with the closure of vice and term steel lines at the end of the year, and we will continue to keep our network under review to balance supply with demand and improve efficiency. For 2024, we expect low single digit percent shipments growth with a stronger performance in the second half. Volume growth and improved fixed cost absorption will drive adjusted EBITDA growth in 2024, but partly offset by competitive pressure on a small portion of our business and some upstream cost increases reflecting elevated energy costs. 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 year with a liquidity position in excess of $800 million ahead of our expectation. The success of our working capital initiatives resulted in an inflow for the full year of $270 million ahead of our most recent guidance of $200 million. During the period, our team responded to customer destocking in Europe to write and optimize our finished goods inventory, which followed similar action in the Americas in previous quarters. This resulted in adjusted operating cash flow of $680 million for the year, up from $255 million in the prior year. Our expectation for 2024 is for a further working capital inflow across the full year after our usual seasonal outflow in Q1. P incurred maintenance capex of $112 million, growth capex of $266 million, and growth investment via lease additions of $71 million in 2023. Total growth investment of $337 million was tightly managed below our initial guidance of just under $400 million and represents a 45% reduction versus the prior year. Our growth investment program is substantially complete, with growth capex in 2024 to reduce to approximately $100 million, which mainly comprises of flexibility enhancements to our network, and the final cash flows for some of the growth projects concluding. We anticipate a further reduction in growth capex again in 2025. Our leverage metric ended the year at 5.5 times net debt to adjusted EBITDA, falling by 0.2 times in the quarter, supported by lower net debt arising from strong cash flow generation. We anticipate modesty leveraging on a full year basis during 2024 and a more meaningful reduction thereafter. We note that in addition to our strong liquidity position, we have no near-term bond maturities and no maintenance covenants on our bonds. We have today announced our quarterly ordinary dividend of $0.10 per share to be paid later in March, in line with guidance and supported by our robust closing liquidity position and the cash generation potential arising from our earnings growth and completing growth investments. There is no change to our capital allocation policy. With that, I'll hand back to Olly.

Thanks, David. And before taking questions, I'll just recap on AMP's performance and key messages. Firstly, global shipments grew by 2% in the fourth quarter and by 5% for the full year. North America's shipments growth was consistently strong and in line with expectations. Brazil's shipment trends inflected positively during the second half. And Europe's shipment trends deteriorated during the second half, but retail scanner data tracked ahead of shipments and would support a more positive market outlook for 2024, in line with historic norms. In response to challenging market conditions, our team successfully optimized our cash generation through disciplined work in capital deployment and inventory rebalancing. We ended the year with a strong liquidity position in excess of expectations. 2023 represented a transition year for AMP, where our team performed at a high level to balance the business. Our continued shipments growth, permanent capacity actions, focus on operational excellence, and tight control of SG&A should all result in stronger adjusted EBITDA generation going forward. Our current view of the market leads us to project global shipment growth for AMP in 2024, approaching a mid-single digit percentage. Full year 2024 adjusted EBITDA is projected to grow by 5% to 10% into a range of $630 to $660 million. Our EBITDA guidance is supported by shipments growth with improved fixed cost absorption, accelerated by the completion and finish goods de-stocking and footprint rationalization. In terms of guidance for the first quarter, adjusted EBITDA is anticipated to be in line with prior year, with growth expected in the Americas but with Europe slightly lower, as we remain cautious on production with volume recovery weighted towards the second half. Having made these opening remarks,

we'll

now proceed to take any questions

that you may have.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. We'll pause for just a moment to allow everyone

an opportunity to signal.

We

can take our first question

from George Stafos with Bank of America.

Yeah, hi, good morning. This is actually Cash and Keylor on for George. We had a conflict this morning. Thanks for taking my questions. I guess first off, given we're almost two months into the quarter here, can you just talk about how you're seeing volumes trending quarter to date at this point across the regions? And I guess relatedly in Europe, have you seen any spillover effects related to the de-stocking you saw at the end of the fourth quarter there?

Oh, yeah. So I think the year has started well in all three regions, probably running slightly ahead of our expectations. There was definitely some transfer from December into January of European volumes. So we had a strong January, but we'd probably say that two-thirds or even more than two-thirds of that looks like it is a crossover from December into January. Region by region, Europe running, as I say, ahead of what would be a guide for the year. We're guiding to low singles, so we're running a bit ahead of that at the moment, but we've got a tough March comp, which we recognize. And there's some funny pieces to the days in the quarter with Easter falling at a very early date. But I think positive on Europe with where that started. North America has started strong in both January and February, running again somewhat ahead of our expectations, and the same for Brazil. The Brazil market grew 20% in January as a total market, which is obviously very encouraging. We weren't at that kind of level just because of our customer mix in January, but February also looks good. So yeah, we're feeling positive about the way the year has started, even though obviously it's still early.

Okay, understood. And as we think about the EBIT.guide for next year, can you just lay out some of the key buckets or puts and takes to help us bridge aside from volume? And also any further call you can provide on your comment regarding those elevated energy costs as well.

Sure. So I think if you take the top end of our guide, you'd be looking at somewhere north of $50 million positive on volume. We'd be looking at, again, somewhat north of $20 million on cost improvements, fixed cost absorption, operation, excellence, and SG&A. And then you've got a negative on price cost, call it mid-teens, to bring you back down to the top end of that guide. And just on that specific point, so the comment about the elevated energy cost is just with some of our upstream suppliers, obviously we've deferred a lot of that coming down to us over the last couple of years, but we have had to take some of that into this year because obviously a lot of energy is used upstream of us as well as in our own operations. And it's been a little bit more difficult to pass that into the current environment where the beverage can market is a little bit looser. So that's why you've got that negative $15 million in there. At the bottom end of our guide, you'd probably just take a bit off all of those. Maybe the volume would be more at $35 million, maybe a negative $20 million on the price cost and a positive $15 million or so on the op costs and other cost pieces. So that's the markets that form the range.

Okay, great. I'll turn it over. Thank you. We will take

our next question from Anthony Patari with Citi.

Good morning. This is actually Brian Bergmeyer sitting in for Anthony. Thank you for taking the question. I'm just trying to gauge the level of curtailment in 2024 that are implied by your guide. It seems like there's still going to be some capacity offline in Europe and Brazil. I'm not sure if that's accurate. And then assuming you reach your volume growth guidance for this year, does that imply essentially no curtailment as we get into 2025?

No, look, I think we're still ramping some of our growth investments and we still have efficiency gains as we pursue various operational excellence initiatives. So I think it's not as simple as that. I mean, if we take the year, we think we've got about $4 billion of curtailment across the network globally split relatively evenly between the regions. We still do have some in North America. And that's giving us good runway on the growth that we've got in the business, particularly in North America. But we also have high hopes for Brazil returning into some good level of growth. So we are still taking curtailments and we are obviously keeping under review more permanent network actions, but at this point, nothing further to say on them.

Got it. Got it. Thanks for that detail. Yeah, last question for me and then I can turn it over. I was under the impression that the growth capbacks in 2024 was kind of related to projects initiated in 2023. There's maybe a little bit of spillover, but the prepared remarks maybe set otherwise. I'm just curious if you can disclose the projects that are included or maybe it's too soon to do that. Thanks. I'll turn it over.

Actually, I think the 2024 growth capbacks is projects that were initiated in 23. So I think we talked about half of it being about flexibility enhancements to our North American network together with the changes we needed to make to address the White House closure. And then the other half, we've got some carryover projects from the growth investment that just some of the cash out is in this year. So most of that is 23. There are some 24 projects that will occur during the second half of the year, again, focused mainly on small amounts of flexibility improvement in the European network. So yeah, that's the bulk of

the 100 million. Got it. Thanks a lot. And our next question will come from Kurt Woodworth with UBS.

Yeah. Thank you. Good morning. If you could

help

bridge

a little bit on free cash flow delta this year, you talked about working capital could be a use, but then can you also give us some guidance on lease expense, cash interest, and some other line items and provide

some rough bridge on free cash flow? Yeah.

Hi, Kurt. Yeah, happy to help. So we think we'll have a small working capital inflow this year as we outlined. Lease repayments of the order of 90 million, maintenance, capex, a non-business growth investment capex, the order of 120. We will have some operating exceptions on the closure of our White House and Bicentum facilities. So we'll have 30 to 40 there. We'll have cash interest, probably 100 would be my estimate for the year for that one, and cash tax, perhaps, of the order

of 35. Okay. Thank you. And then I guess in

terms of the volume outlook in the Americas can you get a little bit more granular on maybe the assumptions underpinning that? Like how much of that would be functional around market share when or just kind of contractual commitments you have? I think you said market growth would be about 2 percent. And then with respect to Europe, are there any similar levels of growth there in terms of taking share or leveraging New Plan Network? Thank you guys.

Sure. Yeah. So look, I think with North America, we got it to a mid to high single digit percentage. And you probably would take the mid as being the contractual gains and the rest being the market. So we see the market in the low single digits. And I think we've commented before that we have a couple of contractual gains going into 2024. So that's broadly how those would split down. And then I think on Europe, it's market growth in our mind. There was a reasonable amount of ups and downs in our customer base coming into 2024. But the growth that we're seeing in 2024 is larger from the market, which we're seeing at about a 2 percent

level,

as you

said. Thank you. Thank you. And

we will take our next question from Richard Phelan with Deutsche Bank.

Thank you. Given the healthy liquidity position at year end and the planned reductions in CAPEX, would the business consider using its balance sheet in any way to support the liquidity demands that its majority owner raising a dividend, a special dividend, redemption of the preferred? Do you want to take

me on? I think we've been clear our capital allocation policy is unchanged. We regard the current level of dividends as very sustainable and the liquidity, as you say, at year end absolutely supports that. So, yeah, sustainable dividend at current level is our first priority and then leverage reduction is our second priority.

Thank you. Thank you. And before

we go to our next question, just one more reminder to our audience, if you would like to ask a question, you may signal by pressing star one. We'll take our next question from Roger Spitz with Bank of America.

I just wanted to clarify the 2024 cash interest. I thought I heard 100, but I think I might have misheard.

I think you did, yeah, 200 million.

Yeah, okay. Okay, got it. Yeah, that makes more sense. Okay. And so when you do that, you get adding all the things you did, gave a midpoint of the range, small working capital inflow. It's kind of like a free cash flow before dividends and preferred 35 million plus or minus what have you. Is that kind of the way to think about it, putting all those pieces together that you put together?

I get to a higher number than that.

Higher

number,

okay. All right, thanks very much.

And we will take our last question from Ning Yang with Jupiter Asset Management.

Hi, could I just clarify the exceptional cost that you got it earlier in terms of the startup cost or restructuring cost? How much was it, like adding all together in terms of those exceptional items below EBITDA? And just want to confirm that the total capex guidance, is it roughly 230 next year?

Yeah, so total capex cash flow is of that order, yes. In terms of exceptionals, you have operating exceptions which sit before free cash flow. So the cash element, those may be of the order of 35 around our restructuring activity. You will then have some startup costs that sit below the free cash flow line. They may be of the order of 25 this year, but they're coming down quite substantially, obviously, from when we were in the middle of our growth investment program.

Thank you. I guess my last question is, in terms of the cash balance that you have, given that you have operations in Brazil, etc., etc., where do you see that your business needs in terms of a minimum cash balance to operate?

Minimum cash balance, we like to have a flow to about 100 million, would be our absolute minimum, but clearly we're a long way above that at this stage.

Okay, understood.

Thank you very much. Thank you.

It appears there are no further questions at this time. Mr. Graham, I will turn the conference back to you for any additional or closing remarks.

Thanks, Alfredo. So we had a better than expected Q4 performance in the Americas, which was counteracted by some customer destocking in Europe. We're very confident in a rebound in European volumes in what has historically been our most stable growth market and where retail scanner trends support a more positive outlook. Furthermore, as mentioned on the call, our year to date volume trends have been positive across each of our markets. And our actions on our footprint in addition to anticipated volume growth backed by contracted new volumes in North America should result in improvements in adjusted EBITDA generation in 2024 and beyond. And we look forward to talking to you all again at our quarter one results. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.