Ardagh Group S.A.
Q4 2020 Earnings Call Transcript

Published:

  • Operator:
    Good day, and welcome to the Ardagh Q4 2020 and Full Year 2020 Results Conference Call. At this time, I'd like to turn the conference over to Mr. Paul Coulson. Please go ahead, sir.
  • Paul Coulson:
    Good. Well, welcome, everybody. And first of all, I must apologize for the -- having to reschedule this call today. I'm afraid that our original service provider -- contracted service provider, notified us at the very last minute that their systems were down and that we couldn't have any kind of call at all. So I thank you for your forbearance, and I apologize. We hope you're all well and safe, and we thank you for joining us for our fourth quarter earnings call, which follows the release earlier today of our results for the quarter.
  • Operator:
    And we'll take our first question from Mark Wilde.
  • Mark Wilde:
    Can you give us some color on where that incremental $300 million in growth CapEx in the beverage can business is going?
  • Paul Coulson:
    Yes. It's going largely in North America. Incremental largely in North America, I think, is where most of it is going to be. If you look at our spend on beverage is going to be 1,800 (sic) . In 2021, about 60-odd percent of that will be in North America and in 2022, nearly 50% of it.
  • Mark Wilde:
    Okay. And then just as a follow-on, Paul, there's such a big spread right now between glass container and beverage can valuations. Any thoughts -- and you're really trading more towards glass container valuations right now. Any thoughts on prospectively splitting these 2 businesses to get the higher valuation on the beverage can piece of the business, which is where much of the growth in the company is occurring?
  • Paul Coulson:
    That's something, Mark. We look at quite on an almost constant basis to see if there are things we can do. And we're always looking at opportunities to see how we can enhance shareholder value. But as at this stage, there's no decision on anything like that.
  • Mark Wilde:
    Okay. All right. Last one for me. Are you seeing any signs of potential improvement in pricing and terms in the European beverage can market, kind of in the same vein that we've seen improvement in the North American market over the last 2 or 2.5 years?
  • Paul Coulson:
    Absolutely. We're seeing significant improvement in demand in Europe. We're sold-out, and we're on a much improved pricing cycle there.
  • Operator:
    And we'll take our next question from Travis Edwards from Goldman Sachs.
  • Travis Edwards:
    I know a lot of the growth story here is on the bev can side, but a question on the glass side, which I know we talked about a little bit in the past. But wondering, just as you think about the competitive environment there, supply/demand environment and some of the cost initiatives that you're putting -- that you're implementing. Can you refresh us on how you're thinking about the margin profile there? What's the time line to get back to sort of pre-restructuring margin levels and 18%, 19% or even low 20s. Is that -- is the path back there even possible? Or are we operating in a new environment now? Any color there would be helpful.
  • Paul Coulson:
    You're presumably referring to North America because Europe is performing fine. Is that right?
  • Travis Edwards:
    Sorry, correct. Yes, on North America side specifically.
  • Paul Coulson:
    Yes. Well, in North America, yes, I mean, there is a path back to margins getting back towards the 20%. It's going to take another couple of years. I think we'll see modest improvement in '21 in glass in North America. But we are making progress. It's slower than we would have liked. COVID has slowed it down a bit. But we have got our capacity right. We're sold-out capacity-wise. And we've taken a number of moves, important moves with customers. I mentioned the Longhorn plant. That further develops a very, very important relationship with ABI. And much of the issues to restore margins in North America will revolve around our cost base and improving efficiencies and improving quality. It's not the market. It's actually market conditions in Glass North America are pretty good right now.
  • Travis Edwards:
    Got it. So a follow-up as far as capacity goes, you feel -- I know in the past, you've mentioned that there may be more capacity has come out, but at this point, you feel like, generally, on the supply side, things are okay, generally rightsized?
  • Paul Coulson:
    Absolutely. We're rightsized for the business. We have and we have no intention of doing anything on that front at the moment at all. So we're quite happy with our balance of supply and demand.
  • Operator:
    And we'll take our next question from Kyle White from Deutsche Bank.
  • Kyle White:
    I just want to follow up on Mark's question in terms of potentially spinning off the beverage can business. What would be the possible implications to the holding company structure in terms of the Class A -- Class B and Class A shareholders? Would anything be done here that could potentially increase the free flow?
  • Paul Coulson:
    There's nothing we -- look, there's been some recent press speculation, and I'm not going to comment on any of this sort of stuff at all today, right? I mean we spend a lot of energy looking and seeing at how we can improve things, how we can improve, unlock shareholder value. But I don't want to comment on any of this given recent press speculation that there's been, Kyle, okay?
  • Kyle White:
    Yes. That's fair enough. On start-up costs, with all the new capacity coming online in 2021, what is the level of start-up costs that you anticipate for the year? And how does that compare to kind of last year's?
  • Paul Coulson:
    David, can I ask you to deal with that?
  • David Matthews:
    Yes. The start-up costs have been relatively modest during the course of 2020. And clearly, it will start to ramp up in '21 and maybe sort of $20 million to $30 million of start-up costs as we move through '21.
  • Operator:
    And we'll take our next question from Gabe Hajde from Wells Fargo.
  • Gabe Hajde:
    I was curious, you had kind of given us some guideposts that 2020 EBITDA would be down in that kind of mid-single-digit range, and you did a little bit better than that. I appreciate there was a lot of uncertainty as it related to COVID and otherwise. But just at all, can you comment what maybe drove a little bit of the upside in the fourth quarter? Sounded like Brazil volumes came on a little bit better than what you were expecting. But any other color would be helpful.
  • Paul Coulson:
    Well, I think we saw a very strong performance in the metal beverage business. Brazil, obviously, had a time-out in April and during Q2, parts of Q2, but it's recovered very strongly. And Europe was very strong as well as was the U.S. So that was one of the main drivers. The other driver was the strong performance in the second half of the year in European Glass Packaging. I think they were the main contributors to us doing better than what we had guided at the time, although you appreciate that when we gave that guidance way back, the environment was very uncertain and nobody knew what way this thing would play out. But we're very pleased about it. I think it's been a great exercise by our team in managing the costs and also the markets have greatly helped us with the strength of demand for our products.
  • Gabe Hajde:
    And then I guess on the beverage can side, can you comment at all if you made, I guess, an indication that inventories were sitting at record low levels, that you're moving cans around at all to service the oversold market in North America? Or that's just not an option for you given local demand?
  • Paul Coulson:
    Well, it's pretty modest, what we've been able to move around a little. It came from Brazil earlier in the year, but now that there's no spare space there, small amount from Europe, very, very little though, very modest. And because of the demand we have in Europe and because of the very strong demand we have in Brazil, it hasn't been possible to do much in that regard. So it's pretty modest.
  • Gabe Hajde:
    Okay. And one last one, if you could. We heard from another glass player in Europe that kind of re-lockdown measures were impacting, I think, specifically sparkling water in Europe. But just any kind of directional guidance or thoughts you can give us maybe first half versus second half as things unfold for yourselves and just thinking about glass demand?
  • Paul Coulson:
    No. So far, so good.
  • Operator:
    And we'll take our next question from Bob Amenta from JPMorgan.
  • Bob Amenta:
    Just a quick question on your comment about year-end '21 net leverage still being close to 5x. Just mathematically, if I just take the guidance, I get to me, they're close to $6.5 billion in net debt, you're only at $5.7 billion. So clearly, there's a burn of $700-odd million, give or take. Can you maybe just give us some guidance on whether it's CapEx, working capital, taxes? I just don't know. That seems like a lot to burn doing $1.3 billion of EBITDA.
  • Paul Coulson:
    David?
  • David Matthews:
    Yes. Maybe I can give you the building blocks around the cash flow, which will guide you towards that 5x. If we start with the midpoint of the EBITDA guidance which is $1.290 billion, we then got maintenance CapEx of around $380 million. That clearly averages about $350 million, '20 and '21. Lease payments, $90 million; working capital outflow, around $50 million, interest, $285 million, tax around $75 million. So that will give you a free cash flow before business growth investments of around $400 million. And then the business growth investments of glass and beverage is $900 million, and then we're going to be paying our normal dividends as well. And that's what we're expecting. So if you look at all of that, we see the debt moving from $5.7 billion up to about $6.3 billion, $6.4 billion. And I think if you work that math through, you get to around 5x leverage.
  • Bob Amenta:
    Right. Now that's extremely uplifted. It was the CapEx that I was low on. I didn't know how much of that $2 billion program was -- how front-end loaded it was over the next 3 or 4 years, so that's helpful.
  • Operator:
    We'll take our next question from Arun Viswanathan from RBC Capital Markets.
  • Arun Viswanathan:
    Yes. And congrats, I guess, on all the growth in '20 and the outlook going forward. Just wanted to, I guess, get your thoughts. Obviously, there's been a lot of continued increase in beverage can growth globally, and you guys have responded with an investment program here as have most of your peers. Could you break out maybe -- you've laid out some of the facilities in North America. Could you help us and just break out that CapEx program, how it kind of evolves over the next couple of years? And maybe what the investments are you're looking for outside of North America?
  • Paul Coulson:
    Well, in the U.S., there's 3 principal investments, one of which is completed in Olive Branch in Mississippi, where we double the capacity there. The second one is the new plant, the brownfield plant in Huron, Ohio, which is a very significant plant, and that will be opened later this year. And then you've got -- thirdly, you've got the expansion at Winston-Salem in our existing plant at Winston-Salem. And then so that principally deals with the U.S., and that's quite, as has just been referenced, quite front-loaded. They'll all be operating by the end of this year. Different stages of ramp-up. As we said earlier, Olive Branch is already operating. In Europe, we see some -- the investment in capacity in Europe will be in our existing plants. There won't be any new plants there. But there will be expansion of capacity in both Continental Europe and in the U.K. And then also, that follows on in '22 as we -- in both the U.K. and in Continental Europe and then Continental Europe in '23, but all within our existing plants. And then if you look at Brazil, we're looking at expansion of one of our existing plants and a new greenfield plant and that expansion in a second existing plant in Brazil over the period between '21 and '23, and those 3 years, '21, '22 and '23. So that's the sort of flavor I'd give you. And the total spend in the plan, '21 to '24 on beverage cans is $1.8 billion. But a lot of it -- it's quite front-end loaded. I mean you're going to -- you'll have the $1.4 billion between '21 to '22 and then $200 million in '23 and '24, so a lot of the program. And that means, of course, that the EBITDA ramps up quicker than if the program was spread more evenly over those years. So the big part of the plan in North America, all of it dealt with this year.
  • Arun Viswanathan:
    Okay. And then was there any consideration? Maybe you can just elaborate. We've heard some, I guess, stories about potentially listing beverage can business separately. Could you just elaborate on that, if at all?
  • Paul Coulson:
    Well, as I said earlier, we don't comment on media speculation. And I'm not prepared to go into any of that now either. I wouldn't comment on that at all.
  • Operator:
    And we'll take a follow-up from Mark Wilde from Bank of Montreal.
  • Mark Wilde:
    Yes. Paul, just a nearer-term question. I'm just curious with the natural gas and electricity prices spiking here in the U.S. with the cold weather, if that's had any significant impact on you or whether it's led you to change kind of cadence at any of your operations?
  • Paul Coulson:
    Sporadic downtimes, but it's relatively small, are very small, and we're working with the different utilities involved. Maybe, David, do you want to -- or Shaun, perhaps like to comment on that?
  • Shaun Murphy:
    Yes. I mean I'd echo that, Paul, in terms of its impact is modest at this point. And obviously, we expect things to improve. So open to add more than that.
  • David Matthews:
    And I guess, just to round off that comment. If we look forward, we're hedged 90% in '21 in terms of our energy use and 60% in '22. So we're in decent shape from a pricing point of view moving forward.
  • Operator:
    And it appears there are no further questions. At this time, I'd like to turn the call over back to Mr. Coulson for any additional or closing remarks.
  • Paul Coulson:
    Good. Well, thank you very much, everyone, for joining us today. And again, I apologize for the problem with the earlier time, and I hope we didn't cause you too much inconvenience. But thank you for your time, and we look forward to talking again with our results for Q1. Thank you very much indeed.
  • Operator:
    Thank you. And that does conclude today's call. You may now disconnect.

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