Ardagh Group S.A. (ARD) CEO Paul Coulson on Q1 2021 Results - Earnings Call Transcript

Ardagh Group S.A. (NYSE:ARD) Q1 2021 Earnings Conference Call April 29, 2021 10:00 AM ET

Company Participants

Paul Coulson - Chairman and Chief Executive Officer

John Sheehan - Corporate Development and Investor Relations Director

David Matthews - Chief Financial Officer

Conference Call Participants

Michael Leithead - Barclays Bank PLC

Arun Viswanathan - RBC Capital Markets

Anojja Shah - BMO Capital Markets

Roger Spitz - Bank of America Merrill Lynch

Robert Amenta - JPMorgan Chase & Co.

Travis Edwards - Goldman Sachs Group, Inc.

Operator

Good day, everyone, and welcome to the Ardagh Group First Quarter 2021 Investor Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Mr. Paul Coulson. Please go ahead, sir.

Paul Coulson

Thank you. Well, welcome, everybody. We hope you all remain safe and well, and we thank you for joining us today for our first quarter 2021 earnings call, which follows the release earlier today of our results for the quarter. I'm joined today on the call by David Matthews, our CFO; Shaun Murphy, our COO; Oliver Graham, the CEO of Ardagh Metal Packaging; and John Sheehan, our Corporate Development and Investor Relations Director.

As always, our remarks will 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, including those set forth in our SEC filings and in our news releases. Our earnings release, financial report, and related materials for the first quarter can be found on our website at ardaghgroup.com. Information regarding the use of non-GAAP financial measures may also be found in the notes section of our release, which also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share. Details of our statutory forward-looking statements disclaimer can be found in our SEC filings.

So before discussing results for the quarter, I'd like again to acknowledge the dedication of our colleagues right across our group as well as the support of all of our business partners [indiscernible] remains a challenging pandemic-impacted environment for many of our communities.

If I move to the first quarter, we've made an excellent start to the year. Revenue for the first quarter increased by 9% to $1.8 billion. Reflecting higher volumes, the pass-through of increased input costs and also favorable currency effects. Constant currency revenue increased by 5%, with growth of 9% in Metal Packaging and 1% in Glass.

Shipments increased in both Metal and Glass Packaging during the quarter. Adjusted EBITDA increased by 10% to $300 million in the quarter. Constant currency growth was 5% compared to the same period last year. This increase was driven by a 23% increase in Metal Packaging. We look at more detail. And again, I'm talking here about constant currency movements with Metal Packaging, this accounted for 53% of group revenues and 49% of adjusted EBITDA in the quarter. Revenue increased by 9% to $939 million compared to the same period last year.

Beverage can shipments increased by 8% in both the Americas and Europe as demand remained strong across all categories. Growth was strongest in Speciality can, where shipments increased by 16% compared with the same period last year. Speciality cans represented around 45% of our global shipments for the quarter, reflecting a strong footprint and continued investment on our part in Speciality capacity. Metal Packaging EBITDA grew by 29% at reported rates and at 23% at constant currency in the quarter.

Looking at the segment of our Metal business. Metal Packaging Americas revenue increased by 13% to $503 million in the quarter. Total shipments increased by 8%, led by strong growth in Brazil, where new capacity came online in late 2020. North American shipments increased by 8% in the quarter compared with the same period last year. First quarter adjusted EBITDA increased by 34% to $82 million due to strong shipment growth, a favorable products in end market mix and a strong performance right across our network.

Revenue for the quarter of $436 million in Metal Packaging Europe, reflected direct shipment growth of 8% compared to the same period last year. Again, demand across all regions and end markets remained strong, and our end market mix and bias towards Northern Europe was a positive for us.

Adjusted EBITDA in Europe was increased by 12% to $66 million in the quarter, reflecting higher shipments and strong operating performance. The demand drivers in Metal Packaging that we have regularly highlighted, continue to be seen during the quarter, and we expect this situation to continue for the foreseeable future. Our inventories remain very low, and our 2021 output is fully sold. Execution of our $1.8 billion, 2021 to 2024 business growth investment plan in Metal Packaging, which is principally focused on Speciality can expansion remains on track in the quarter.

Among the largest investments are two new high-speed lines in Olive Branch, Mississippi have now been installed and are ramping up on schedule. A similar expansion is under way at our Winston-Salem plant, and the new capacity there will come on stream later this year. Also, work on our new Huron, Ohio brownfield plant is well under way, and the plant is to be expected to be partly operational in Q4 of this year. These three major projects in North America will together provide us with over 10 billion units of additional capacity.

In Brazil, we will expand our three existing facilities starting this year with Jacarei in the southeast before building a new greenfield plants in Minas Gerais State all to support our customers' very strong growth in that market. In Europe, the focus of our business growth investment, is the high-growth markets of the UK and Germany, and we are bringing on significant additional capacity in 2022 and 2023. All our new capacity has been placed with customers under long-term agreements. And as I said earlier, our $1.8 billion investment program in our Metal Packaging business is fully on track.

Turning to Glass Packaging. Total shipments increased by 2% in the quarter, with a 4% increase in North America and an in-line performance in Europe compared with the same period last year. In Europe, shipments were in-line with a strong first quarter of 2020 performance despite continued lockdowns across most of our markets. Adjusted EBITDA in last year of $97 million was unchanged against the demanding 2020 comparable, and this was a strong outturn in the current environment. We achieved a strong operating and cost performance across our network. And Glass Europe EBITDA margins improved by 50 basis points to 23.7% in the quarter.

In North America, revenue of $425 million increased by 4% compared to the same period last year. Shipment growth was strong at 4% and was broad-based as the U.S. economy began to reopen ahead of most others. Adjusted EBITDA in Glass North America, $55 million, was a few million dollars below our budget. The decrease was as a result of increased operating costs, principally due to freight and severe weather events in parts of The United States in the quarter. The demand outlook, however, in North America is good, and more positive then for some time, and our focus there remains on driving operating and cost efficiencies to convert improved volumes into increased profitability.

In our Glass Packaging business overall, our business growth investments are focused on customer-backed growth initiatives in Europe and on performance and cost efficiency improvement in North America. And these business growth developments projects are all on track.

Turning to the Ardagh Metal Packaging transaction. You will recall that last February, we announced an agreement to combine our beverage can business, AMP, with the Gores V Holdings stack – Gores Holdings V stack and to apply for the business to be separately listed on the New York Stock Exchange under the ticker AMPV.

AMP comprises all our beverage can business and is the second largest player in the European bev can market and the third largest in each of North America and Brazil. And AMP had revenue and adjusted EBITDA of – in 2020 of $3.5 billion and $545 million, respectively. And under its growth investment plan, adjusted EBITDA is projected to double by 2024.

And as I mentioned, our beverage can business performed very well in the first quarter with adjusted EBITDA growth of 23%. Under the terms of the transaction with Gores which values AMP at approximately 10.5x 2022 estimated EBITDA, Ardagh will receive up to $3.4 billion in cash, and will retain an 80% stake in AMP. We will be a committed long-term majority shareholder.

And the transaction values Ardagh's 80% stake in AMP at approximately $5 billion. And AMP will continue to be led by Oliver Graham. Rationale for this transaction, it releases previously unrecognized value in Ardagh. And the new leaders today AMP is ideally positioned to deliver excellent returns to stakeholders over the medium and long-term for many reasons. Firstly, AMP is a pure play in one of the world's leading producers of bev cans.

And as a producer of sustainable, infinitely recyclable packaging, AMP has very strong ESG credentials. Each of AMP's markets are projected to deliver strong growth over the medium and long-term horizons, driven by trends such as convenience, innovation, and sustainability as well as structural shifts such as the Brazilian beer markets move from returnable glass packaging to one way can packaging.

And AMP, as I mentioned earlier, has a clear road map to organically double adjusted EBITDA by 2024. Under a program that has been derisked commercially and operationally. And as I outlined earlier, this program is fully on track. AMP will also operate with moderate leverage, expected to be in the 3x to 3.5x adjusted EBITDA ZIP code. And will require no further equity to fund its operations or indeed its development.

AMP three growth will be a meaningful 20% on completion of the combination with Gores, with a likely increase to over 25%, following a planned offer to Ardagh shareholders to exchange their Ardagh listed shares for AMP listed shares. And of course, AMP will continue to benefit from Ardagh's leading global Glass Packaging presence with the Metal and Glass businesses continuing to enhance each other's customer relationships.

Just an update on where we are with the transaction. In February, AMP priced an upsized offering of $2.8 billion equivalent of green bonds, leaving our current plans in AMP fully funded. In April, the separation of AMP from Ardagh took place with $2.3 billion in proceeds paid to Ardagh, and AMP becoming an unrestricted subsidiary.

Our filings with the SEC are well advanced, and we anticipate closing the transaction before the end of the second quarter. As mentioned earlier, following the completion of the SPAC transaction, Ardagh plans to offer shareholders of its Class A common shares, the opportunity to exchange their Class A common shares for a consideration which will include a portion of Ardagh's holding in AMP. The timing and terms of any such exchange transaction if affected at all, has not yet been determined at this point.

If I could turn to environmentally – our environmental and social sustainability strategy, we made further progress in advancing the implementation of our science-based emissions reduction and social sustainability strategies during the quarter. In Metal Packaging, we issued our inaugural green bond in connection with the AMP transaction, and we were very pleased with the response to this offering, which we were very happy to upsize.

In Glass Packaging, the furnace for the future initiative, which aims to significantly decarbonize the glass production process is advancing. And we will report on these and other initiatives spanning all aspects of environmental and social sustainability regularly. And of course, our next formal sustainability report will be issued in the third quarter of this year.

On liquidity, we ended the quarter with cash and available liquidity of $1.6 billion, with net leverage of approximately 5x adjusted EBITDA. This was almost unchanged from year-end despite the seasonal first quarter working capital outflow and our ongoing investment program.

And as we look to the full-year, we've made an excellent start to the year. We're experiencing very good momentum in the business. Beverage can demand remains strong in all our regions, and our output is, as I said, fully sold for the year. Glass Packaging has demonstrated a high degree of resilience, especially in Europe over the past year and is expected to progress for the full-year.

Uncertainties which we face includes the pace of reopening of some of our markets. However, our bias to off-premise consumption and our focus on single-serve packaging continues to favor our businesses. We are also seeing material inflation in many of our inputs, and we remain focused on the recovery of these costs in line with our customer contractual arrangements.

For the full year, we reiterated our guidance of adjusted EBITDA of $1.28 billion to $1.3 billion. We expect net leverage to stay around current levels. And we expect second quarter adjusted EBITDA to be in the range of $325 million to $330 million.

So as we look to the long-term, our substrates in particular beverage cans, are well positioned to benefit from multiple megatrends. And our near-term focus is to conclude the AMP transaction and separately list this business later this quarter. Secondly, the implementation of our growth investment program with a spend of approximately $900 million this year and continued pursuit of operational and commercial excellence across our businesses to drive stakeholder value.

So having made these opening remarks, we'll now be very pleased to take any questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We'll take our first question from Mike Leithead with Barclays.

Michael Leithead

Great, thanks good morning and good day guys. First question, just on the outlook. I appreciate the guidance is unchanged. But if you just think through your different substrates or regions, has that composition of earnings generation changed at all? Or would you say it's fairly similar to how we started the year?

Paul Coulson

I think it remains. I mean, obviously, Metal Packaging is performing well. I don't think we want to break out the guidance anymore that we've done already.

Michael Leithead

Got it. Fair enough. And then, Paul, I think you mentioned again today the potential for an exchange offer that could involve some switching of people from ARD shares into AMP shares. My question is following the close of the AMP transaction, would there be some sort of lockup period that would need to pass or expire before you can make such an offer? Or could you theoretically make such an offer fairly quickly after the AMP transaction closes?

Paul Coulson

No lockup as such, and we could make such an offer fairly soon after the AMP transaction closes.

Michael Leithead

Great, thank you.

Paul Coulson

Thank you.

Operator

Your next question comes from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan

Yes, thanks for taking my question. Good morning.

Paul Coulson

Good morning.

Arun Viswanathan

I guess, I just wanted to catch up on Glass, maybe. Could you elaborate a little bit on how you see that market evolve over the next couple of quarters? And are there any nuances in different categories? We have seen a little trail off in wine because of the growth on the seltzer side. Have you seen that as well?

Paul Coulson

I think right across our Glass business, we're seeing good demand. So in Glass North America, we're seeing very good market conditions in terms of demand. And we're selling all the glass we can. And as I said in my earlier remarks, what we want to do is focus on improve – converting that strong demand into increased profitability.

Arun Viswanathan

Okay. And then what about the cost side? Are there any cost pressures that you guys would point out? Metal is obviously a pass-through, but anything else as far as logistics or raw materials?

Paul Coulson

Well, I think the main one we highlighted on Glass has been in North America, it's been logistics and freight, which in common with a number of other people.

Arun Viswanathan

Okay, thanks.

Operator

All right. Next question will be from Anojja Shah with BMO Capital Markets.

Anojja Shah

Hi, good morning.

Paul Coulson

Good morning.

Anojja Shah

Just to build on that Glass question. You did mention an improving demand outlook in Glass North America better than you've seen in a while. Can you dig into maybe why that is or what's any specific end markets? Or just any more color you can give around that?

Paul Coulson

Well, I think its right across the piece. We're seeing good demand. I mean, obviously, the pandemic has increased food consumption in glass as well as in food cans. But right across the piece, we're seeing good market conditions. And certainly our network is certainly in balance, probably – we're really probably very tight on capacity. So we – and looking forward for this year, anyway, we're seeing pretty good market conditions. And so as I say, it's right across the piece.

Anojja Shah

Okay. Great. Thank you. And over in Europe for Glass, can you give some more details on the lower engineering activity that you called out?

Paul Coulson

John, would you like to comment on that?

John Sheehan

Yes, sure. We have an engineering business, as you know, for many, many years. Quarter-to-quarter, it can be a bit lumpy. So it impacted our revenue line by $5 million or $6 million in the quarter, but there was minimal impact on EBITDA. You can see that EBITDA in Glass Europe was up 8% or 9%. So it tends to be just a little bit lumpier, but there was negligible impact on earnings.

Anojja Shah

Great. Thank you very much.

John Sheehan

Thank you.

Operator

Your next question comes from the line of Roger Spitz with Bank of America.

Roger Spitz

Hi, thanks very much good afternoon. What was the amount of the $423 million of off-balance sheet securitization in Q1 2021 that was attributed to AMP? In December 2020, you put that at $300 million?

Paul Coulson

David?

David Matthews

Roger, it's at about the same level. Overall, it's around $400 million, $420 million, about 3/4 of that is on the Metal side of the house, and 25% of it is in Glass. So similar sort of proportion.

Roger Spitz

Perfect. The – for the full Ardagh 2021 outlook, cash flow items, you reconfirmed the EBITDA of $1.28 billion to $1.30 billion. Would you be reconfirming the other items, for instance, the $380 million maintenance CapEx, 90 lease payments, et cetera?

David Matthews

Yes. Maybe I could just run through that. I think what we said last time, this working capital outflow of 50, maintenance CapEx, $380 million, leases around $100 million, and then the BGI is $900 million. And I think what we said is interest $285 million and tax $75 million. So if you add that lot up and take it off the midpoint of the EBITDA guidance, you get a free cash flow outflow of around $500 million for the year.

Roger Spitz

Okay. Great. And then lastly, would you be interested in providing AMP's Q2 2021 EBITDA and 2021 EBITDA updated guidance?

Paul Coulson

So we'll start to give separate guidance, Roger, when the companies are – this merger is formalized. What we can say is that AMP's trading performance is well on track in relation to the numbers that we published with the SEC as part of the transaction. So the $650 million plus EBITDA this year is on track.

Roger Spitz

Great. Thank you very much.

Paul Coulson

Thank you.

Operator

[Operator Instructions] We'll take another question. This one is from Bob Amenta with JPMorgan Asset Management.

Robert Amenta

Yes. Thank you. Just following up a little on Roger's line of questioning. So from – not counting the proceeds from the bond deal, you had about $7 billion of debt. Then now you say, I'm just a little confused on the April 1, comment in the release. You got $2.3 billion. Are you still getting another $1.1 billion to get to that $3.4 billion or it was $2.3 billion? I'm just wondering now…

Paul Coulson

No. You're quite right. We get the other $1.1 billion when the transaction closes. So it's still $3.4 billion.

Robert Amenta

Okay. So if I take out the metal bonds off and the cash that's held off that. You had about $7 billion of debt, and you got about $3.4 billion of cash coming in against that in addition to the $900 odd million of cash you had on the books?

Paul Coulson

Yes. That's correct.

Robert Amenta

Okay. And is there – and maybe you haven't discussed this yet, but is there any limits or any plans to send some of that cash, what I would say, up out to the – like Ardagh Finance to those other bonds? Or have you discussed that yet? Or do you have a target leverage with $600 million of Glass EBITDA, LTM, and I'm sure you feel that's going to go higher given last year was kind of an aberration. But do you have a target at that level of what kind of net leverage you'd like to have, so on that $600 million of EBITDA?

Paul Coulson

Well, it's more than $600 million. But let me first of all say that in regard to use of proceeds, as we indicated in our call in February last, when we announced the transaction, we intend to repay some $2 billion of our existing debt with the balance, some of which will be to call the remaining $800 million of our 6%. $25 million unsecured notes, with the balance probably expected to be applied to mainly reduce U.S. dollar secured debt. And then the balance of $1.4 billion will be retained for general corporate purposes, including shareholder distributions.

But we haven't made any decisions on that yet. And what we will do is we will – with – at the stage of our Q2 results, come forward with guidance on leverage in the separate businesses or in AGSA going forward and what we intend to do cash wise. But do remember that not alone do you have the – at AGSA, you'll have the Glass EBITDA, but you will also have the Trivium stake to 42% in Trivium. And more importantly, you'll have the 80% stake, which currently has a transaction value of $5 billion in AMP itself. Okay?

Robert Amenta

Right. Yes, I guess I was focused more initially on cash flow. I know you're planning on a dividend from AMP, maybe not this year but down the road. But – and then just lastly, for 2021 of all the CapEx you mentioned, can you just – for the Glass business, roughly what is just the Glass business EBITDA – I'm sorry, CapEx for this year?

Paul Coulson

David?

David Matthews

Yes. Of the maintenance CapEx at $380 million, about $250 million of that is in Glass. And of the business growth investments, spend that we're having about $100 million of that is Glass and $800 million of that is Beverage.

Robert Amenta

Okay, perfect. That's all I had. Thanks.

Paul Coulson

Thank you.

Operator

All right. Next, we'll go to Travis Edwards with Goldman Sachs.

Travis Edwards

Hey good morning and thanks for the color. I just had a quick question, if you don't mind refreshing us. Can you – and I know you have more of a bias towards off-premise consumption on the Glass side, but can you refresh us on what your mix is in Europe and North America, just between sort of off-premise and on-premise?

Paul Coulson

John?

John Sheehan

Yes. Obviously, we supply the containers, we don't have full visibility where they go, but we would recommend that 80%-plus of what we do is into the off-premise sector. And it's probably highest on-premise in terms of Glass Europe. But our volumes there even against a pre-pandemic period in the first quarter, where they were slightly up year-on-year. So given that Europe was lockdown for most of the first quarter of this year, it's been very resilient, but somewhere around 80% is off-premise.

Travis Edwards

That's really helpful. And as you think about sort of the path to recovery there, obviously, some volume strength still, but do you have any sort of expectation when you get to pre-pandemic levels? Are you generally there? Again, hard to say with a lot of moving pieces, but any color on sort of your path to pre-pandemic levels?

Paul Coulson

Well, I think we're very pleased with the demand. Well, obviously, the demand in beverage cans is growing very strongly, and we're completely sold out as are our peers. So that side of the house as well. We're very happy with what's happened in Glass Europe so far and its recovery and also with the demand in U.S.

Travis Edwards

Got it. Thank you. Good luck this quarter.

Operator

All right. It looks like we have no further questions at this time. So I'd like to turn the call back over to Mr. Paul Coulson for any additional or closing remarks.

Paul Coulson

Well, thank you, everyone, for joining us today. And we look forward to talking to you again with our Q2 results in late July. Okay. Thank you, everyone, for joining us. Bye-bye.

Operator

That does conclude today’s conference. We thank everyone again for their participation.