Ardagh Group S.A.'s (ARD) CEO Paul Coulson On Q3 2021 Results - Earnings Call Transcript

Ardagh Group S.A. (NYSE:ARD) Q3 2021 Earnings Conference Call October 28, 2021 11:00 AM ET

Company Participants

Paul Coulson - Chairman and Chief Executive Officer

John Sheehan - Corporate Development and Investor Relations Director

Conference Call Participants

Robert Spitz - Bank of America

Richard Kus - Jefferies

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Operator

00:06 Welcome to the Ardagh Group Third Quarter twenty twenty one Bondholder Conference Call. Today's conference is being recorded.

00:12 At this time, I'd like to turn the conference over to Mr. Paul Coulson, Chairman and CEO of Ardagh Group. Please go ahead.

Paul Coulson

00:20 Welcome, everybody and thank you for joining us today for Ardagh’s third quarter Bondholder call, which follows the release earlier today of our results for the quarter. We hope you remain safe and well. On the call today, I'm joined by Shaun Murphy, our COO; and John Sheehan, who has succeeded David Matthews as our CFO, following David’s decision to step down after the recent delisting of Ardagh Group S.A.

00:46 Our remarks today will include certain forward looking statements. These reflect circumstances at the time they are made and the company expressly disclaims any obligation to update or revise any forward looking statements.

00:59 Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors. Our third quarter financial report can be found on our website at ardaghgroup.com.

01:13 As you know, earlier today, Ardagh Metal Packaging, AMP for short posted its third quarter earnings, in which it reported growth and adjusted EBITDA of seventeen percent to one hundred and seventy six million dollars.

01:24 LTM adjusted EBITDA to September thirty, increased to six thirty seven million dollars, and AMP raised its full year twenty twenty one adjusted EBITDA outlook to at least six sixty million. The AMP call can be accessed at www.ardaghmetalpackaging.com.

01:48 And I should say that we will not be providing any additional information regarding AMP or its performance on this call. So, if I could move to the results for the quarter, revenues for the group increased by eight percent to one point nine billion dollars, an increase of six percent on a constant currency basis, revenue growth was principally attributable to the pass through of higher metal and other input costs in AMP.

02:14 Third quarter adjusted EBITDA for our reportable segments grew by two percent to three thirty eight million, compared with three thirty million in the same period last year. At constant exchange rates, adjusted EBITDA for these [Technical Difficulty] prior year with strong growth in AMP largely offset by a reduction in [Technical Difficulty] packaging.

02:38 So, moving to the [Technical Difficulty] reported performance, I just briefly recap on our [Technical Difficulty]. And as you heard on the call earlier today, it performed well [Technical Difficulty] strong earnings growth despite softness [Technical Difficulty] and the pressures of a highly inflationary cost environment [Technical Difficulty].

02:58 Revenues of one zero four billion dollars increased by fifteen percent on a reported basis percent [Technical Difficulty] at constant exchange rates principally due to the past for higher aluminum and other costs.

03:12 EBIT in the quarter increased by seventeen eight percent to one hundred and seventy six million dollars, a fifteen percent increase at constant currency rates, driven by strong advance in the Americas. On an LTM basis, AMP’s adjusted EBITDA has now increased by seventeen percent or ninety million year to date to six thirty seven million with further growth coming over the last quarter. And this means it should finish the year twenty one ahead of the target set out in the business plan, which we published in February of this year when we announced the business combination with Gores.

03:48 Now under this business plan, AMP will significantly increase its manufacturing capacity so as to achieve our objective of more than doubling EBITDA to over one point one billion by twenty twenty four.

04:02 We expect the beverage can to continue to gain share and AMP as a pure play beverage can manufacturer with a strong platform in each of the markets where it operates is very well placed to benefit. The contract structure is characterized by multi-year agreements with cost pass through provisions provides significant resilience in an inflationary cost environment albeit subject to some occasional timing likes.

04:27 Execution of the AMP business plan has been strong to date and it remains firmly on track to achieve its twenty twenty four objectives, despite well publicized delays and cost pressures in parts of the global supply chains. Under the AMP plan, free cash flow conversion will also be strong providing a very strong and highly visible growth platform, which is both value creating and free cash flow accretive for our shareholders.

04:56 If I turn out to glass packaging, total shipments in the third quarter was three percent lower than the third quarter of twenty twenty with broadly similar reductions in Europe and North America. Revenues were unchanged on a reported basis and fell one percent constant and currency compared to the same period last year, adjusted EBITDA of one hundred and sixty two million dollars, was eleven percent lower than the prior year constant exchange rates, reflecting lower shipments and increased costs in both regions.

05:26 Looking at our glass packaging businesses, our glass shipments in Europe were three percent lower than the same period last year. You will recall that the third quarter of twenty twenty benefitted from the widespread reopening of hospitality after initial and often severe lockdowns in many of our markets and shipments than increased by six percent. This was a challenging comp and to put it in context, shipments for the third quarter twenty one are some three percent above twenty nineteen levels.

05:57 By end market, food and beer volumes were lower, a function of weather impacted harvest and the resumption of out of home hospitality, respectively. By contrast, strong international demand and the reopening of on-premise consumption underpinned growth in the spirits and non-alcoholic beverage categories.

06:18 Revenue for the quarter in Glass Europe fell six percent compared to the same period last year, of which almost half was attributable to our engineering equipment business. Adjusted EBITDA for the quarter of one hundred and four million dollars was ten percent lower than the same period last year due to the impact of sharply higher energy and other cost, partly offset by a strong operating performance on a contribution from our growth investment program.

06:43 In Glass, North America, revenue of four forty four million dollars increased by three percent, compared with the same period last year, shipments were four percent lower than the prior year with growth in spirits more than offset by lower shipments in other categories as out of home dining and hospitality resumed.

07:04 Adjusted EBITDA fifty eight million was a reduction of thirteen percent on the same period twenty twenty and reflected lower shipments and increased costs, including out of pattern freight costs.

07:15 Against a relatively stable demand backdrop, we continue to address operational challenges and resulting in efficiencies in our Glass North America business. And we continue to address these issues to drive improved profitability there.

07:34 Third quarter [Technical Difficulty] progress our growth investment program, group-wide investment to date in twenty one is in excess of five hundred million, including some of these financed assets was an increase to cover over eight hundred million expected by year end.

07:50 Seven hundred million of this eight hundred million is in AMP and the balance is in our Glass business. As I was outlined earlier, AMP’s growth investment projects remain materially on track, despite the challenges of global supply chains and the projects will deliver significant capacity growth in twenty twenty two.

08:09 Glass Europe, has also been successfully pursuing targeted upper opportunities aimed at premium and faster growing segments of the market, while efficiency and operational enhancement remains a priority in Glass North America.

08:23 Earlier today, AMP set out its intention to build new multi-line beverage can production facilities in the UK and in the Southwestern United States with planned production start-ups in twenty twenty three and twenty twenty four respectively. These projects as with all our existing growth projects will be strongly value enhancing and highly free cash flow accretive.

08:47 If I turn then to the AMP transaction, which was – the combination was completed on the fourth of August and trading in AMP started on the New York stock exchange on the August five. In September, we launched an exchange offer of shares in AMP in return for the outstanding Class A Common Shares of Ardagh Group. And following eighty five percent acceptances under the exchange offer, the free flow of AMP increased to twenty five percent where it sits today.

09:22 The listing of AMP as a pure play fast growing can producer is an important strategic move for the group and Ardagh remains a committed long term majority owner of AMP as it execute its multiyear growth plan.

09:36 As well as being focused on performance and growth of our business, Ardagh is committed to executing a leading sustainability strategy, concentrating on environmental and ecological barriers to a greener planet, but also focusing on their social agenda.

09:51 We are passionate about sustainability in all its aspects, and we believe it represents a long-term tailwind for our business. When we invest in new facilities, for example, we've set an ambition that each of those facilities will be class-leading in terms of sustainability. We continue to work with our customers, suppliers, communities, and industry bodies to promote collection and recycling.

10:14 We've developed ten year plans across our business to ensure that we achieve our ambitious twenty thirty targets for CO2, VOC, waste and water. These are now being actioned, including focusing on increased renewable electricity usage, starting in North America, and then light weighting, energy efficiency and other initiatives.

10:37 Our community connections are vital to our success. On our previously announced ten-year fifty million dollars investment in STEM education in the U.S. has captured the imagination of our people and their neighbors and is progressing very well. And we will shortly issue our twenty twenty one sustainability report setting out our twenty thirty sustainability targets.

11:01 Through the quarter, we’ve continued to engage actively with our customers and supply chain to drive progress on the environmental and sustainability agenda. If I now turn to our liquidity and capital structure, net leverage at the end of the quarter was four point two times, despite our having made growth investments in excess of four thirty million and despite seasonal working capital in the year to date investment in seasonal working capital.

11:32 This reflected strong EBITDA growth on the funds inflow from the AMP SPAC transaction. Cash and available liquidity at the end of September last amounted over four point three billion dollars, including three point five five billion in cash. As previewed on our second quarter call, we call the remaining eight hundred million six percent notes due in twenty five in August, and following the calling of these notes, we have no further callable debt.

11:59 We continue to evaluate the cash needs of Ardagh Group and our strong and liquid balance sheet positions the group well to take advantage to any value creating growth opportunities that arise for our business. In late September, we declared a dividend of one point two five dollars per Ardagh Group S.A. share or the cost of two ninety five million, which was paid in mid-October. Two seventy two million of this dividend was paid to our Ardagh Finance S.A. and half of this summer is now held an escrow for the benefits of the total note holders at holdco.

12:32 As previously indicated, we have allocated up to one point four billion for general corporate purposes, including the potential return of capital to shareholders and related holdco debt repayment. This allocation of which the recent two ninety five million dividend forms part remains unchanged.

12:51 And if I turn to the full year outlook, demand for our metal and glass packaging products remains relatively strong across our markets. Our business growth investment program has advanced well during the quarter and in the year to date, it's materially on track.

13:07 In the past quarter, we've seen a broad based and sharp increase in inflationary cost pressures for many goods services, including energy, raw materials and logistics. Our business model and contract structures provide a high degree of resilience in the phase of such input cost volatility and this will be a focus entering twenty twenty two.

13:30 And in the light of the cost pressures seen in the quarter and the uncertain duration of some recent cost increases, we now project full year EBITDA for twenty one to be in the range of one point two five billion to one point two seven billion.

13:46 So, having made these opening remarks, we will now be pleased to take any questions which you have.

Question-and-Answer Session

Operator

13:53 Thank you. [Operator Instructions] And we'll take our first question from Robert Spitz with Bank of America. Please go ahead.

Robert Spitz

14:17 Thank you very much. First off, can we just go through some of the twenty twenty one guidance numbers. Firstly, I mean, starting with EBITDA, I don't know if you gave a Q4 consolidated EBITDA guidance or have consolidated twenty twenty one EBITDA? Last quarter was twelve ninety, I think or one point two eight to one point three.

Paul Coulson

14:43 Yes. John, will you handle the guidance please?

John Sheehan

14:47 Yeah, sure. Roger. That's correct. What we said today was that in light of the recent cost pressures and the uncertainty regarding the extent in duration of those. The guidance now is consolidated at twelve fifty to twelve seventy for the year.

15:03 And you know, working down through some of the other items, no major change, you know working capital probably with higher input costs maybe about seventy million. Capex, we've outlined before around about three eighty for the year. Leases, about one hundred million. Growth investments, again consolidated about eight hundred million, and then tax about seventy five million.

Robert Spitz

15:32 Okay, got it. Other than the EBITDA, it looks like the growth CapEx went down from nine hundred from last quarter given to eight hundred this quarter, so you took off eight hundred and then…?

John Sheehan

15:41 Yes. I think that's really just a bit, there was a bit of rounding previously. We done some more leasing in parts and then obviously just prudently managing the cash out flow as we said in the remarks, the projects are very largely and very friendly on track.

Robert Spitz

15:58 Got it. And the other question is, you already announced pushing up money cash, but will you appear to talk about how much further cash you might push up to ARD Finance?

Paul Coulson

16:18 Well, we haven’t Roger given any, made any decisions on that at all. We did give guidance going back since earlier, way earlier this year, which we repeated again today that for general corporate purposes, and possible return of capital to shareholders could be as much as fourteen hundred of which three hundred has already been paid. I don't see it being as much as the balance of that, but there will, I think be some [up-flow] [ph], yes is the answer to that. But we haven't made any decisions on that because we've just recently, as you know, completed the exchange offering in delisting of Ardagh Group S.A. So, no decision as of yet.

Robert Spitz

16:59 Got it. Thank you very much.

Paul Coulson

17:02 Well as you know, Roger, any money that does up-flow half of that goes to reduce the holdco that as has happened with the dividend that's been paid so far. Okay. Thanks.

Robert Spitz

17:14 And that's at one hundred and four, right?

Paul Coulson

17:18 Yes. Yes. That's a one hundred and four, yes.

Robert Spitz

17:21 Yes. Thank you.

Paul Coulson

17:23 Thank you.

Operator

17:24 Thank you. We'll now take our next question from Richard Kus with Jefferies.

Richard Kus

17:29 Hey, thanks for taking my question. So, just first one, just looking at your construct structures, you talk about the cost inflation, obviously going into twenty twenty two with gas being a big portion of your cost base, I know in the U.S. you guys seem to be relatively well protected just in terms of how the contracts work, but can you maybe talk about your pass through mechanisms in Europe? How you expect that work heading into next year and how exposed you may be?

Paul Coulson

17:55 John?

John Sheehan

17:57 Yeah. Hi, Richard. As we said, it's a very inflationary environment and correctly say that in the U.S. the pass throughs are very quick and very clean. In Europe, we're about, you know our business split fairly evenly between multi-year contract and annual contract, the multi-contracts, you know, most of them will have good energy clauses. And then the others, it's a question of it's an annual discussion, but clearly, the inflation is evident to everybody and that will inform the direction in which we need to go the New Year.

Richard Kus

18:37 Got it. And how hedged are you on your gas needs for next year in Europe, right now?

John Sheehan

18:43 In terms of energy, we aim to be about eighty percent going into the New Year and we'd expect to be at around that level as we head into twenty twenty two.

Richard Kus

18:56 Okay. And then I guess my second question in terms of RP capacity that you have at the opco, where does that stand right now?

Paul Coulson

19:06 Two point one billion Richard, two point one billion dollars.

Richard Kus

19:10 Got it. Okay. Thanks very much.

Paul Coulson

19:13 Thank you.

Operator

19:16 Thank you. We'll take our next question from Ruth [indiscernible].

Unidentified Analyst

19:21 Hi. So, for the remaining one point one billion earmarked for [DCP] [ph], including shareholder dividends and the holdco debt repayment, is there any sense of timing on when [indiscernible]?

Paul Coulson

19:35 That we haven't yet made any decision on that. It could happen in the next month or so, I think in terms of the decision.

Unidentified Analyst

19:44 Okay. Thank you.

Operator

19:49 Thank you. [Operator Instructions] As there no further questions at this point, I'll hand it back over to Mr. Paul Coulson for any additional or closing remarks.

Paul Coulson

20:03 Good. Well, thank you very much everyone for joining us on the call today, and we appreciate your support and we look forward to talking to you with our year-end results. Thank you very much indeed.

Operator

20:19 Thank you. That does conclude today's conference. We do thank you all for your participation and you may now disconnect.