Ardagh Group S.A. (ARD) CEO Paul Coulson on Q4 2021 Results - Earnings Call Transcript

Ardagh Group S.A. (NYSE:ARD) Q4 2021 Earnings Conference Call February 24, 2022 11:00 AM ET

Company Participants

Paul Coulson - CEO

John Sheehan - CFO

Shaun Murphy - COO

Conference Call Participants

Richard Kus - Jefferies

Operator

Good day, and welcome to the Ardagh Group Fourth 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, Chairman and CEO of Ardagh Group. Please go ahead, sir.

Paul Coulson

Welcome, everybody, and thank you for joining us for Ardagh's fourth quarter bondholder call, which follows the release earlier today of our results for the quarter. We hope you remain safe and well. And I'm joined today by Shaun Murphy, our COO; and John Sheehan, our CFO. Our remarks, as always, 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.

Our full year financial report can be found on our website at ardaghgroup.com. I should also point out that earlier today, Ardagh Metal Packaging, AMP, posted its fourth quarter earnings and held its -- has already held its earnings call. A replay of this call can be accessed at ardaghmetalpackaging.com. And on this call, we will not be providing any new information or discussing AMP's performance. So let me look -- turning to the results for the quarter, highlights of which were revenues of the group increased to $2 billion, an increase of 17% on a constant currency basis.

Growth in revenue was broadly evenly attributable to increased volume and mix and the pass-through of higher input costs, principally in metal.

Fourth quarter EBITDA of $284 million was [1%] higher than the same period last year, with strong growth in AMP as expected, which was largely offset by a reduction in adjusted EBITDA in Glass Packaging. During the year, we continued to invest for growth across our business with total growth spending of approximately $800 million in 2021. We ended the year with net leverage of 4.7x adjusted EBITDA and very strong liquidity. And for the full year '21, group revenue increased by 10% to [$7.6 billion] with adjusted EBITDA growth of 5% to $1.25 billion, both at constant currency. And I would like to thank my colleagues across all our businesses for their commitment and dedication during the year.

Turning to segmental performance. Just a quick recap on Ardagh Metal Packaging, AMP. AMP reported a strong fourth quarter today. Global beverage can shipment increased by 6%, led by advances of 11% in Europe and [6%] in North America, partly offset by principally weather-related softness in Brazil. Revenue of $1.09 billion increased by 22% at constant currency, reflecting volume and mix growth and the pass-through of higher input aluminum and other input costs.

Adjusted EBITDA for the quarter increased by 19% to $165 million at constant rates, primarily driven by a strong advance in the Americas. Full year 2021 adjusted EBITDA at AMP increased by 19% to $662 million, slightly ahead of the 2021 targets. And AMP continues to target a more than doubling of 2020 adjusted EBITDA by the year 2024. AMP guided full year 2022 adjusted EBITDA of the order of $775 million. This represents 19% growth after a currency translation headwind, which was approximately $20 million.

AMP will in future operate with net leverage in the range of 3.75 to 4x 12-months forward adjusted EBITDA, and it will also return $400 million in cash to shareholders in calendar year 2022. And we expect progressive growth in annual cash return to shareholders as AMP's business and earnings grow.

AMP remains very well placed to deliver outsized growth as the beverage can continues to gain share across mix and this capital allocation framework at AMP will enable it to continue its value-enhancing growth investment program in tandem with returning significant cash to shareholders and also, at the same time, maintaining leverage at appropriate levels. AMP has also announced that they intend to issue $600 million of nonconvertible preference shares in the near future. If I turn then to Glass Packaging. Total glass shipments in the quarter were strong, increasing by [18%] compared to the prior year. Growth was led by Europe, but demand for glass in both of our markets remains very strong.

We are sold out everywhere and expect this to continue for the foreseeable future. Total revenues increased by 11% to $900 million compared to the same period last year, and adjusted EBITDA of $119 million was [indiscernible] than the prior year, reflecting sharply higher energy cost in Europe and higher operating and other costs in North America.

And if I look at each of our Glass Packaging businesses, again, talking in constant currency, glass shipments in Europe increased by 10% compared with fourth quarter of '21. Growth was broad-based with notable advancements in beer spirits and nonalcoholic beverages. For the full year, shipments increased by 4% with strong gains in most areas other than food, which performed ahead of plan [indiscernible] by the weaker harvest. It was also measured against the pandemic boosted comparable. Our operating performance for the quarter and year was strong and as Glass Europe business has demonstrated the flexibility to work with our customers to manage the impact of fluctuating demand as consumption moved between on-premise and off-premise at various points since 2020.

Our targeted growth principally in premium beer and spirits are on track, and the demand outlook in Europe remain very strong [indiscernible] recognized yields and brand enhancement offered by Glass.

Revenue for the quarter in Glass Europe [indiscernible] by 15% to $476 million, reflecting double-digit growth in shipments and a positive mix effect. Fourth quarter adjusted EBITDA fell 15% to $78 million compared to the same period last year as the strong volume and operating performance was more than offset by sharply higher costs, particularly in energy.

Glass North America. Revenue for the quarter of $44 million increased by 8% compared to the same period last year. Shipments grew by 5% compared with the fourth quarter of '20, chiefly reflecting the acquisition of the Houston facility earlier in the year. Underlying demand remains strongest in the spirits and RTD categories with food demand somewhat lower compared to 2020, which has seen elevated demand due to COVID.

As in Europe, demand for Glass in our well-diversified end markets in Glass North America was very good. Adjusted EBITDA of $24 million for the quarter was sharply lower as a result of continuing production issues, including a number of one-off events resulting in out of pattern freight cost as well as some inefficiencies in our contract arrangements. We continue to address the production and cost challenges affecting our Glass North America business, and we are focused on initiatives to improve operating performance and commercial outcomes to restore appropriate profitability in a market where demand for glass is the strongest we have seen for many years. On our investment program and update, we invested $800 million in growth investment project in '21, principally in AMP with some important initiatives in Glass Europe. AMP's projects advanced well in the year and its most recently announced investments, comprising greenfield multiline beverage can facilities in Northern Ireland and Arizona are progressing with production planned to start up in 2023 and 2024, respectively.

In Glass, we have been pursuing targeted growth initiatives in the premium beer and spirits segment in Europe, while in North America, the focus has been on operating improvement and efficiency improvement. Project implementation remained well on track despite the challenges of global supply tightness, exacerbated in the latter period of 2021 by Omicron-related restrictions. All of these investments are well contracted and backed by diverse [indiscernible] and importantly, expand the strategic reach of our network within attractive markets. Our focus on infinitely recyclable, sustainable packaging, in tandem with our ongoing dialogue with customers on how we can partner to meet their sustainability commitments and the expectations of end consumers, leads us to expect additional growth opportunities in the future. And we plan to pursue opportunities to meet our return criteria which generates attractive stakeholder value and cash flow accretion.

In 2022, we expect to invest over $1 billion in business growth investments across metal and glass.

And if I could turn briefly to key corporate developments in the quarter. We listed AMP as the pure-play bevcan producer in August. In October, we completed the exchange offer of the Class A common shares in Ardagh Group for AMP shares. And following 85% acceptances, Ardagh Group was delisted and the free float of AMP following the exchange offer was increased to 25%.

In November, we agreed to acquire Consol Glass, the leading glass packaging producer on the African component for an equity value of $607 million. Together with existing net debt at Consol, which we inherited with the transaction, the enterprise value of the transaction is some USD 1 billion. Headquartered in Johannesburg and founded in 1946, Consol is the market leader in South Africa, operating there 4 well invested glass production facilities in Johannesburg and Cape Town. It provides a broad range of leading international -- it serves, sorry, a broad range of leading international and domestic customers, principally in beer, wine, spirits, food and nonalcoholic beverage sector. In the year to June 30, '21, it reported revenues of $566 million with South Africa representing 90% of the total and the balance accounted for by smaller operations in Kenya, Nigeria and Ethiopia.

Consol's has a very experienced management team, which has constantly delivered strong results over many years. And we believe that the combination of our 2 businesses is highly complementary with virtually all of Consol's multinational customers also being customers of Ardagh. Glass consumption in Consol's markets is projected to continue to increase driven by long-term trends, including population growth, rising income levels and shifts to premium one-way sustainable glass packaging.

Completion of the transaction, which is subject to certain conditions and approvals is expected in the second quarter of the year, and we look forward to working with the Consol team and to partnering with customers in Africa as we invest in the long-term growth of the African market. In recent weeks, our in Ardagh and Ontario Teachers Pension Plan have initiated a process to sell Trivium Packaging in which Ardagh holds a 42% stake. Since the formation of Trivium in 2019 through the combination of Ardagh's Food & Specialty business and Ontario Teachers Exal, Trivium has been engaged in a significant transformation program. It has invested in growth opportunities to serve its leading customer base, whilst at the same time, divesting or rationalizing noncore assets.

The pandemic has highlighted the value resilience and the sustainability enhanced feed of the food can. And Trivium, with leading positions across Europe and the Americas is well placed to develop strongly against a backdrop of a significantly improved and improving market. Under the sustainability manner, we have made significant progress in 2021. We only produce, as you know, infinitely recyclable packaging, and we're well positioned to gain from sustainability megatrends. And our focus is on overcoming the environment and ecological barriers to greener planet as well as actively driving our social sustainability agenda.

And we are committed to being a leader in sustainability in the packaging industry. During the quarter, we published our 2021 sustainability report, which sets out in great detail our commitment to and leadership in sustainability. This report is available on our website, and I do encourage you to read it.

Turning to liquidity and capital structure. Group net leverage at the year-end, as I said earlier, was 4.7x EBITDA. Cash and available liquidity was $3.7 billion, including $2.9 billion in cash. And since the year-end, we have renewed our $500 million ABL facility out to 2027. Our strong liquidity enables us to evaluate and act up on attractive organic and other development opportunities such as the recent Consol transaction. And whilst we currently have no callable debt as always, we continually monitor our capital structure.

In December, ARD Finance S.A. launched tender offers for $485 million in 2027 HoldCo Toggle Notes of 104% utilizing the funds held in escrow arising from the dividend received from Ardagh Group in October '21 and January '22. This tender was fully taken up by Toggle Note holders, thereby reducing our HoldCo's debt to $1.8 billion.

We turn to the outlook. Underlying demand for our metal and glass packaging products remained very strong across Europe and North America, founded on the increasing appeal of sustainable packaging to end consumers and its role in enabling our customers to meet their commitments. Our organic growth initiatives progressed well over the year. And as well, the Consol acquisition is a very important and attractive strategic development for our group. Entering '22 -- 2022 input costs are elevated.

And our focus remains on their recovery, strong demand fundamentals allied to our contract structures underpin our confidence in this recovery of cost regardless of near-term lag and pass-through.

In 2022, we expect full year adjusted EBITDA of the order of $1.35 billion compared with $1.25 billion in 2021. The guidance for 2022 is after a year on currency translation headwind of approximately $40 million.

So having made these opening remarks, we'll be very happy to take any questions that you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Richard Kus with Jefferies.

Richard Kus

So first one for me. Just I'm curious, as you look at -- and you had noted higher costs here in early 2022, and you gave full year guidance, which seems to me to imply that Glass ends up being relatively flat, I think, for 2022. But maybe, Paul, you can correct me if I'm wrong. But big picture, how are you handling the increase in energy cost? What type of price increase are you seeing under Glass business, maybe both in North America and Europe? And how do we further manage that if we get some additional increases here over the course of the next few months?

Paul Coulson

Well, you're correct, Richard. We do -- we are managing our costs, and we are obviously, particularly with energy, there is inflationary pressures in Europe, and we have been recovering these from adjustments in pricing with our customers. And if there are further unforeseen ones resulting from the trouble in Ukraine, then we will be going back to customers again to recover them. And I don't think I want to go into the detail of the numbers in terms of the cost increases, but particularly in Europe, they are well into double digits, significant double-digit figures. North America, not quite so much.

Richard Kus

Got it. Right. And how much hedging do you do on your natural gas or your energy purchases?

John Sheehan

Yes. Richard, it's John Sheehan here. We have lots of different arrangements in place depending on the market and the customer. We typically would go into, at the beginning of the year, with about 80% covered. Obviously, there were some spikes at the back end of last year, so we would have a little bit less than that. But then we would layer it in gradually. So that part of that open position did cost us in the second half or the fourth quarter of last year. But we have substantial cover in place for the year ahead, and that's factored into what we've laid out today.

Richard Kus

Got it. And then the combination of the higher pricing that we should start to see here in Q1, should we expect glass margins then to rebound? Is there better reflective of what the underlying energy environment is early in 2022?

John Sheehan

I think it's going to be relatively flat versus for the full year, as you said, from the guidance. If you look at the projection from AMP, you adjust for the exchange rate, Glass will be relatively flat but the -- at current levels, there will be definitely a headwind there in energy, but we have achieved significant cost recovery, but there still is a net headwind.

Paul Coulson

Yes. I mean it's -- the cost recovery is also, Richard, assisted by the very strong demand that exists for our products, particularly on both the AMP and on the Glass side. But on the glass side, specifically, a very strong demand.

Richard Kus

Got it. Okay. That's good. And then maybe lastly from...

Paul Coulson

Sorry?

Richard Kus

I didn't mean to cut you off.

Paul Coulson

I'm finished.

Richard Kus

Okay. And then lastly for me, just in terms of -- you've got -- in 2022, you've got some distributions that metal beverage can is going to be making up to you guys and if you're potentially going to be monetizing that stake in Trivium. What is the plan for cash proceeds coming out of maybe those 2 areas? Do you plan to delever with that? Or is there something else that, that will go towards?

Paul Coulson

I think we're certainly not going to pay any further dividends to shareholders in 2022. So it will go to delever. Obviously, we've got to pay for Consol, but you're right there. We will have those two inward flows outside of our Glass. But our plan is to use them for deleveraging.

Operator

[Operator Instructions] And there are no further questions at this time. I'd like to turn the conference back to Mr. Coulson for any additional or closing remarks.

Paul Coulson

Well, thank you very much, everyone, for joining us, and we look forward to joining you with our Q1 results in April. Thank you very much indeed.

Operator

And this concludes today's conference. Thank you all for your participation. You may now disconnect.