Quad Graphics, Inc

Welcome to the RDAW Group S.A. Second Quarter 2023 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Paul Coulson, Chairman of RDAW Group. Please go ahead.

Welcome, everybody. Thank you very much for joining us for our Second Quarter 2023 Bondholder Call. This call follows the release of our results for the quarter earlier today, and I'm joined on this call by John Sheehan, our CFO. Our remarks during this call will, as always, include certain forward-looking statements. These reflect circumstances at the time they're 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. Our second quarter bond hold report can be found on our website at rdaigroup.com. And earlier today, RDAI Metal Packaging, or AMP, released its second quarter results. A replay of its earnings call can be accessed at rdaimetalpackaging.com. And on this call, we will not be providing any additional information regarding AMP. So if I could move to review some of the group highlights for the second quarter. Consolidated group revenues of $2.4 billion increased by 2% at constant currency compared with second quarter in 22. Growth reflected higher shipments in metal packaging and the pass-through of increased costs in glass packaging, and this was partly offset by lower shipments in glass packaging. Group adjusted EBITDA increased by 9% at constant currency to $383 million compared with the same period last year. driven by growth in glass packaging. So if I turn to the segmental performance with a focus on constant currency results, and I'll briefly recap on AMP, where second quarter revenue of $1.3 billion was 4% lower than the same period in 22, due to the faster of lower metal prices, which more than offset higher beverage can shipments. Global beverage can shipments increased by 5% in the quarter compared to the same period last year, with growth of 8% in the Americas and a 2% advance in Europe. Within the Americas, AMP grew its shipments by 18% in North America, which was partly offset by challenging conditions in Brazil. AMP's adjusted EBITDA of 151 million for the quarter chiefly reflected continued asset curtailments and weakness in Brazil. Cash generation in the quarter was strong. Full-year adjusted EBITDA of 30 to 640 million is now projected, with a return to strong earnings growth in the second half of 2023. If I turn to glass packaging, second quarter global glass packaging revenue increased by 8% to $1.2 billion. Growth reflected a full quarter contribution from the acquisition of console and the pass-through of input cost increases, which more than offset a reduction in shipments. Total glass shipments in the quarter were 15% below the same period last year. Adjusted EBITDA for the quarter increased by 37% to 232 million, compared with the same period last year. Earnings growth was driven by Europe and Africa, with a modest advance in North America. And if I look in more detail at Europe and Africa, revenue of $766 million was 23% ahead of the second quarter of 22 due to the pass-through of increased costs and the inclusion of a full quarter of console. Total shipments in Europe and Africa were 14% lower in the second quarter than the same period last year. As we noted in recent earnings calls, European glass shipments were exceptionally strong in late 2022 and overall in that year they increased by 6%. This reflected a significant but undetermined level of demand pulled forward from 23. Normalization of demand patterns was expected as 2023 progressed, but shipments in Europe in the second quarter were lower than anticipated and measured against an exceptionally strong comparable 2022 quarter when shipments had risen by approximately 10%. These declines are, we believe, principally attributable to destocking by a number of large customers as they unwind their late 2022 pre-buy activity in a more uncertain and weaker macroeconomic environment. This destocking is being felt unevenly across different regions, with our northern European-focused business more impacted than other geographies. In Africa, higher shipments in the quarter reflected a full quarter contribution from Consul. Second quarter adjusted EBITDA in Europe and Africa was 183 million and increased by 33% compared with the same period last year. Growth in earnings reflected the recovery of 22 and 23 input costs, a consistently strong operating performance, and the flow-through of benefits from the significant investment in our European business over the last four years and in the second furnace at Nigel in South Africa, which entered production in May of last year. The fundamentals of the European and Africa glass packaging markets remain attractive and underpin our positive medium-term outlook. Long-term demand trends are supported by sustainability and premiumization megatrends and point to low single-digit growth in Europe going forward. The industry has responded to this growth opportunity through measured capacity additions over recent years. The business has also shown resilience over many years in all economic conditions, whether pandemic, global financial crisis or energy crisis. And as we look to 2024, we expect volumes to recover from the effects of this year's destocking and expect reduced energy prices to favorably impact our cost base, further supporting a recovery in demand. In Africa, mid-single-digit percentage growth in glass is expected over the medium to long term, with the drivers there including rising income levels, the switch from returnable to one-way premium packaging, and other sustainability developments. In addition, the market still relies on imports, which we expect that our recent and upcoming capacity additions will largely replace. Our Europe and Africa operations performed well in the quarter and half year, despite softer than expected demand. We have selectively reduced our capital expenditure plans, but continued to progress key strategic projects, such as the third furnace at our Nigel Johannesburg plant and our next-gen hybrid furnace in Germany, both of which will commence production later this year. If I now turn to glass in North America, Second quarter revenue of $425 million was 12% lower than the same period last year, with a 16% reduction in shipments partly offset by price mix, improvements arising from continued commercial progress and a rigorous focus on the input cost pass-through. Shipments in the quarter were sharply impacted by the controversy related to a major beer brand to which we are a significant supplier. with a consequent reduction in demand for some of our products. Other end markets saw lower volume, reflecting some brand owner and retailer destocking, but declined to a lesser extent than beer. We responded swiftly to curtail production to match demand and brought forward the previously planned closure of our plants in Ruston, Louisiana and Wilson, North Carolina. These plants together represented some 10% of our 2022 output, and the recent reduction in demand provided us with the opportunity to earlier eliminate loss-making operations and to absorb continuing business from these plants into other parts of our network, thereby enabling savings in fixed costs and also improved efficiencies. Adjusted EBITDA of 49 million for the quarter, showed a 7% improvement on the same period last year, principally reflecting commercial progress, improved cost recovery, and further early-stage underlying progress on our improvement plan. Whilst we expect the disruption in the U.S. beer market to remain a drag into the second half of 23, thereby somewhat muting the operational advances being made in North America, we are pleased that the key strands of our turnaround program continue to progress during the quarter. We continue to work towards our objective of having a smaller and more efficient plant footprint. This will involve a lower number of larger-sized furnaces. The new network will be better invested and will confer benefits in terms of energy and operational efficiency, improved environmental performance, and lower future maintenance CapEx requirements. We expect this plan for our Glass North America business to result in a net reduction of around 15% in our capacity over the medium term. If I now turn to the capital structure, being mindful of the volatile environment, we maintain strong liquidity buffers through the quarter, with total group cash and available liquidity of 1.4 billion at the end of June 23, including 600 million in cash. Cash and available liquidity at the ARGID restricted group was 900 million at mid-year. Proforma leverage at the ARGID restricted group was 5.9 times proforma LTM adjusted EBITDA at June 23, in line with 31 March 23, and a 0.3 of the term reduction compared to December 22. This was driven by growth in proforma LTM adjusted EBITDA at the ARDA restricted group to just over 1 billion at June 23, from 893 million at December 2022. We are targeting further deleveraging over the second half of 2023 and this remains our primary short to medium focus. If I turn to sustainability, in May we received grant approval from the German Ministry for Economic Affairs and Climate Action in respect of the construction of our next-gen hybrid furnace at our Obenkirchen plant in Germany. Construction is well underway and production is expected to begin later this year. This furnace will be the first of its kind and scale that can run 80% on renewable electricity and 20% on gas, thereby reducing CO2 emissions by up to 60%. The quarter also saw significant progress in social sustainability, including our agreement to establish the Centre of Excellence in South Africa, focused on IT service. This initiative complements our market-leading position in glass packaging in Africa, and the establishment of this centre will grow our capabilities to support our businesses globally, yielding enhanced efficiencies and savings, while also meaningfully impacting local employment in South Africa. The centre will also provide training and development opportunities to disadvantaged youth with positive multi-replier effects on our communities. This important development closely aligns with our established STEM programs in the US and Germany, and we will soon roll out a new STEM education program in Brazil. So, as we look to the second half and the full year of 2023, we still see elevated macroeconomic and market uncertainty in the second half of the year. But we reiterate our previous guidance of adjusted EBITDA of 1.05 billion for the RGID restricted group in 2023. This is to be made up of adjusted EBITDA from our glass operations of approximately $850 million and dividends from AMP of approximately $200 million. And reflecting our focus on cash generation, net leverage at the end of 2023 is still projected to be approximately 5.5 times adjusted EBITDA compared with a pro forma 6.2 times at the end of 2022. So, having made these opening remarks, we will now be pleased to take any questions that you may have. Thank you.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you'd like to ask a question. We'll pause just for a moment to give everyone an opportunity to signal. We will now take our first question from Roger Spitz with Bank of America. Please go ahead.

Thanks very much. So the first one is on the North American capacity. I think what I heard is Wilson and the Simmonsboro, Louisiana plant was about 10% of your North American capacity that you took out. I think you then said, out of North America, you'll be taking out a net of 15%, which includes additional capacity you're taking out, less what you're going to be adding during your modernization program. Do I have those facts right? And how much more plants and or capacity will you be taking out on a gross basis?

We expect that overall it will be some 15% or slightly above that, including the 10% that's been taken out in Wilson and Ruston, Roger, okay? So we haven't finalized yet where the reductions will fall, but our plan is clearly to reduce materially the number of furnaces in North America, and that will, as I say, the overall effect on capacity will be 15% plus.

Okay, but that... And it'll be just over the next several years, Roger.

Got it. But are you saying that if 10% was just taken out with these two plants, it's a gross 15% reduction? Or is that net of taking out other furnaces, but you're adding some new furnaces in?

Yeah, there'll be... Well, there's a bit of both going on. The overall impact from our... Prior to the closures of Ruston and... Rustin and Wilson will be, we expect in the medium term to be about 15% below that, including those two closures, to be clear. Okay?

Got it. And then, so you reiterated the guidance on, I'll call it Ardell Glass Receptor Group for EBITDA. How about the other cash flow items? Are you going to? Is that the same, for instance, base glass of 450, glass growth of capex of 200 to 250, including 100 per console, third furnace, glass interest 300, taxes 50, working capital outflow of 50? Is that, that was last quarter's guidance. Are all those kind of?

Yeah, no, Roger, there's a couple of, a couple of tweets there.

We mentioned in a remark that

you know, we have pulled back some of our CapEx items, and some of that will be timing, some of that will be, you know, absolute change. So the 450 plus the 250, which, you know, would have got you to 650, 700, you know, we think that that will be probably somewhere closer to 550, maybe a little bit less than the current gear, and that would be made up of, you know, maintenance probably about 360, and then we'll spend about 180 on call it growth. And the growth would include, you know, the bigger parts, as you said, would be the furnace in South Africa, the hybrid furnace, which will come into production later this year, and then some other smaller items in North America. But the aggregate is probably closer to 550, maybe a little less, versus the 450 plus 250 that we've previously given.

Got it. And cash interest taxes and working capital.

Yeah, it's just still around about 30 tax, you know, say 45 working capital. We'll use about 50. We obviously use, you know, a good bit more at the first half, but we'll see a useful seasonal inflow there. We spend a bit of money to do with restructuring. You know, there'll probably be about 40 or so on that the current year in relation to some of the actions that we've done.

But yeah, no other major changes at all.

Thank you very much.

And we will now take our next question from Ed Brucker with Barclays. Please go ahead.

Hey, thanks for taking the question, and congrats on another good glass quarter. My first question was just on the dividend. I noticed there was a – sorry if I missed this. I had to jump on late, but there was an interim dividend of $132 in the quarter. I had read that as just the dividend to be paid up to pay the interest for ARDFIN, but I just wanted to get your – Thoughts on that dividend?

That's right, Ed. No, there was a balance that was due there from last year. So basically the net was $50 to pay the hold code, and then the balance came back as a repayment by the hold code to ATSA. So it's net mutual. The only cash that's going out of equity is the $100 to pay that hold code, toggle notes to interest, and that's still the same.

Got it. Got it. My second question on the EBITDA guidance reiterating the 850, I mean, do you view it as conservative? You're kind of set up right now, you know, pretty, I'd argue, easily able to get that guidance. So I guess I just want to get your thoughts on maybe, you know, upside of that guidance or downside of that guidance and if you do view it as conservative as well.

Well, I think, Ed, I would regard it as realistic. You know, there's a pretty tough macro environment out there, you know, and some of our big customers are, you know, have lower volumes with us. You know, there's been the destocking effect and there are tough economic conditions in certain parts of Europe, at least.

So I think it's realistic and, you know, neither conservative nor optimistic.

Got it. And then the price increases to start this year. It's done a really good job offsetting some of that weakness in volumes. But I guess what does that look like going into next year or maybe even the rest of this year? Are you able to push more pricing? Is that pricing going to be sticky going into next year or will there have to be some givebacks?

Now, next year, as I said earlier, our energy costs and some other costs, input costs will decline because obviously we're hedged at higher energy levels this year. So I don't think there'll be any push forward in relation to this year or further input costs. But yes, there will be a decline next year for sure. And that's one of the reasons why we think together with you know, the lack of a pre-buy and then destocking, et cetera, you know, we will see a recovery in volumes next year.

It's really, Ed, it's a path through, you know, both ways. You know, there wasn't full recovery last year, so, you know, we've had to recoup the balance of that, and our objective is to, you know, mirror the cost increases, maybe up or down, or the changes, I should say, with our customers. So, you know, there's been inflation in other areas, which is colors and things like that, pretty strong over the last while. But I think more broadly across the supply chain, in some areas, there's evidence of some easing there and some of those pressures recently.

Got it. Got it. It's super helpful. Thanks. Thanks again.

And as one final reminder, it is star one if you'd like to ask a question. And we'll go ahead and take our next question from Chris Crotto with Schroeder's. Please go ahead.

Hi, gentlemen. Thanks for the opportunity to ask a question. My first one is a contracting update for the glass market. I know that you're very disciplined about not putting in new lines and picking out capacity and contracts reflect the economics there. So is there any update from Q1 where you're still negotiations here in north america um do you feel good that you have the contracts to justify the cutting of the capacity i i'm sorry chris i did the contracts to justify the cutting of what well you know what you were going to put in some new lines that were more efficient but only going to do that if the contracts paid you for that and i think a q1 you talked about being in negotiations with those people to do that. So are you getting new contracts that would support reinvestment in the approved line?

I think, you know, Roger, one, sorry, Chris, one of the key things here is to assess, obviously, as you say, what the contracts are, and we will invest accordingly. And, you know, that is an ongoing process. But we have made no investment and will make no investment unless it's backed up by proper contracts. And we're satisfied that it will, you know, the customers will be there for it or are there for it. For example, I think you will see clearly with what's happened in beer in North America that we will have less beer than we would otherwise have had in our plan, if that answers your question.

Got it. So, yeah, I mean, the Bud White thing, is that going to carry over to the second half also? No.

Yeah, I think there was an entry, you know, we took action very swiftly to, you know, adjust our footprint and, you know, with that, take out some costs. But yeah, you see the Nielsen data or, you know, the various data yourself. And look, I think there will be some carryover effects, but we put ourselves in a position to best manage it. But yeah, it will be a drag. And as we said, it will mute, you know, the underlying progress being made in the, probably for a part of the second half of the year.

But Chris, what we've done, the action we've taken is to tailor our capacity for beer and for the customer you mentioned to be where the real demand is.

That's why we took out, you know, there was a substantial amount of beer being produced in the Wilson plant, for example, and that's gone.

Okay. And then Roger did a good job of sort of going through some of the free cash flow elements there. But I mean, the net number, restructuring and lease, it's still a burn of, I don't know, 50 to 100, is that right? Or am I missing an element there?

Yeah, probably of that order. You know, I think we'd envisage that, you know, if you take the EBITDA and you take the guide of the target five and a half, you know, it gets you to, depending on the exchange rate, you know, 5,700, 5,800 of debt at the end of the year. So, yeah, it would be modest. The restructuring cost will be something, you know, a bit higher than we would have planned in terms of timing. But the other items and, you know, in particular on the CapEx side, we tighten things there and reduce the planned outflow.

Got it. And then the final one, the African plant seemed to be doing really well here. When does that sort of fully get baked into the numbers as far as an annual amount with the capacity that you've built there?

Yeah, it's fully in now. We bought it at the end of April last year. So, you know, in the LTM, there's no co-former or anything left there.

But I thought you had some capacity expansion with their...

We have the third furnace in the Nigel plant, so the second furnace is running just over a year now at this stage, and then the third furnace should commission late this year, and we see some benefits from that through 24.

Okay, good. That's what I thought. Okay. Thank you very much. Nice numbers. Thanks, Chris.

Our next question will come from Ming Yang with Jupiter Asset Management. Please go ahead.

Hi, I have three questions. First, in terms of the top line, what proportion of the revenue this year and next year are contracted as of now? And do you have major contract renewal in the next two years? Yeah.

Thanks for the question. It varies region by region. Just sticking with the glass business, in Europe, it's about 50% or so is under multi-year, and then the other 50% is an annual contract, but very high retention rate, very long history of dealing with customers year in, year out, and I'm talking there 20, 30, 40 years, in some cases longer. In Africa, the business there is predominantly under long-term contracts, nothing coming up there for several years. And in North America, Probably 95% of the business is under long-term contract, and then there would be some annual business. But there's very little, you know, the next-to-no-spot business really in the market. So I hope that's helpful. There's no major renewals that are coming up in the next, of course, the next 12 months.

Understood. And roughly what percentage of your expectation of revenue this year are contracted as of now?

Well, if you look at the various segments, if I'm saying that you'd be 95% plus, very, very high.

Oh, perfect. And my second question is regarding on the cost side. And what proportion, if you think about the energy cost and raw material cost, on average, what proportion of the cost increases that you can pass through to the customer?

Paul, you know, the model is that the cost, whether they're high or low, whether they're increasing or decreasing, is that that's fully passed on. We have a number of facilities, for example, with some of these costs such as energy, where our customers directly make the decision regarding do they want to hedge, do they not want to hedge. And it's not a one-size-fits-all. You know, with the volatility, for instance, in European energy prices over the past couple of years, you know, some customers have opted to go more into floating arrangements and, you know, we're happy to accommodate them provided it, you know, it works and it doesn't conflict with anything that we've put in place already. So, but the idea is full-cost recovery and, you know, very disciplined in that respect. In terms of the cost pressures, obviously there's been some easing in energy prices, and we'll see benefits of that as we go into next year in particular. But colour prices have been very, very high, and there has been continued pressure there. I think there's been some left up in soda ash in some places of late. But that's still kind of among the bigger costs that we have.

Perfect. And just in terms of energy cost hedging, could you give a quantified guidance in terms of energy cost next year compared to this year and what proportion you have hedged?

Yeah, we'd have covered pretty much everything for this year, and we would have significant coverage being built in gradually for next year, so hence we would see the benefits coming through next year. We still have some open, but we would be looking at a significantly lower energy price coming through to the cost base in the new year.

Understood. My final question, in terms of the CAPEX, I heard this year's guidance is $550 million. So do you see that, if you look at the next five years, do you have any major refurbishment requirement in your facilities that are required? Or do you feel that, can you give a kind of indicative for CAPEX level beyond 23?

Yeah, no, that's a, you know, we've trimmed some items this year. Typically, our maintenance elements would be you know probably closer to uh to 450 and um uh you know we rephrase a little bit of that this year but on the growth side so that's going to be probably about 360 this year on the growth side we're we're building a hybrid furnace which will be the first of its kind and scale in germany uh which is is included this year you know that won't repeat on an annual basis We're building a new furnace in South Africa, which we mentioned, and that will come on stream in December this year. But nothing else, you know, in terms of increasing capacity. North America, you know, we've had a separate exercise going on there, just looking at how to optimise our footprint. But, no, the growth capex we would see falling away to, you know, the minimum levels from kind of early 2024 and onwards.

Understood. Thank you. Our next question will come from Camilo Vecco with Arcano. Please go ahead.

Hello. Good afternoon. Thanks for taking my question. I was wondering if you could kindly confirm whether your 2023 glass guidance, so adjusted EBITDA and change at $850 million? Correct. Working cap unchanged at minus 50 million?

Yeah.

And capex curtailed by 100 million from minus 650 to minus 550? Yeah, probably, yeah. Thanks. Then taxes at minus 45 million-ish versus minus 50 before?

Yeah, no real change, yeah.

And then leases and interest and restructuring. I'm not sure I got it. Well, if you could kind of repeat.

Yeah, interest is about 300 million cash interest. Leased repayments, which, you know, the leased repayment is effectively a debt repayment. So that's about 80 million. And restructuring, you know, it's probably 40, 50 million, that level of spend.

And that's it. My thanks. That's it for me.

Thank you. Thank you.

And with that, that does conclude our question and answer session. I would now like to hand the call over to Mr. Paul Coulson for any additional or closing remarks.

Well, thank you very much, everyone, for joining us today. And we look forward to talking to you with our Q3 results in due course. Thank you very much for your help. Bye-bye.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.