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.