Ardagh Group S.A.
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Paul Coulson:]

Welcome everyone to the Ardagh First Quarter Investor Call, which follows the publication earlier today of our results for Q1. I’m joined in Chicago today by David Matthews, our CFO; and John Sheehan, our Corporate Development and Investor Relations Director. Just before starting my remarks, I would point out that the information provided during this call will contain forward-looking statements. Forward-looking statements 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 risks and uncertainties, including those set out in the Company’s SEC filings, such as the Company’s latest annual report, as well as in the company news releases. Our first quarter earnings release, financial report and related materials can be accessed at ardaghgroup.com. Information regarding descriptions of our segment reporting and the use of non-GAAP financial measures may also be found in the notes section of today’s earnings release. Today’s release also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share. This disclaimer is only a summary of the Company’s statutory forward-looking statements disclaimer, which is included in the Company’s filings with the SEC. So having said that, let’s start. As previously communicated, we now adopted the U.S. dollar as our reporting currency with effect from January 1, 2018. And in the first quarter, revenue increased by 13% to $2.22 billion compared to the same period last year. Constant currency revenue growth was 5% and this reflected volume mix growth of 3% and the pass-through of increased input cost. Group wide volume/mix growth in the first quarter was driven by a strong performance in Metal Packaging and 1% increase in Glass Packaging Europe. This was partly offset by a lower outturn in Glass Packaging North America. Adjusted EBITDA for the quarter was $348 million increased by 9% compared to the same period in 2017. On a constant currency basis EBITDA increased by 1%, reflecting growth in three of our four segments, which highlights the benefits of the group’s scale and diversity across our two substrates and multiple geographies. Adjusted EPS was US$0.33 for the quarter, an increase of 6% compared to the same period last year at actual exchange rates. Growth reflected increased adjusted EBITDA, higher depreciation and interest costs as a result of exchange rates and a higher share count following the March 2017 IPO. We’ve declared a quarterly dividend of US$0.14 per share to be paid on the 31st of May 2018. So if I could turn to each of the divisions in Metal Packaging, first quarter revenue increased by 22% to $1.41 billion at actual exchange rates compared with the same period last year. Constant currency revenue increased 13% with growth of 6% in Metal Packaging Europe and 23% in Metal Packaging Americas. Constant currency revenue growth was primarily driven by volume mix increases of 3% in Metal Packaging Europe and 21% in Metal Packaging Americas as well as the pass-through of higher input costs. EBITDA in Metal Packaging of $197 million increased by 24% at actual exchange rate compared to the same period last year and by 12% on a constant currency basis. Growth was primarily attributable to a strong volume mix performance in Metal Packaging Americas as well as the continued delivery of synergies and cost efficiencies in both Metal Packaging segments with these being partly offset by increased input costs. In Metal Packaging Europe continued delivery of synergies and cost reductions drove a 6 percentage increase in constant currency, adjusted EBITDA to $134 million for the quarter, as higher volumes here were largely offset by a less favorable mix on some increased input costs. Metal Packaging Americas adjusted EBITDA increased by 31% to $63 million for the quarter, reflecting strong volumes, synergy delivery and cost reductions. Our Beverage Can capacity in North America for the year is fully sold out. Investment projects in Beverage Can continued as planned during the quarter. Our Rugby in UK facility is currently ramping up following completion of its steel to aluminum conversion, but our Manaus, Brazilians plant will be commissioned later in the second quarter. Our Glass Packaging division reported first quarter revenue of $810 million, an increase of 2% over the same period last year at actual exchange rates. Constant currency revenue declined by 4% as growth of 3% in Glass Packaging Europe was more than offset by a decline of 10% in Glass Packaging North America. Overall, volume/mix in Glass Packaging for the quarter was 6% lower than the same period last year. In Europe, volume/mix increased by 1%, despite the strong first quarter comp when volume increased by 6% last year. Glass Packaging North America declined by a low double digit percentage, due to reduced volumes in several end markets, including beer, where demand remained weak and wine which where we had seen strong growth in the first quarter of 2017. Volumes were also impacted by our ongoing footprint reorganization and repositioning activity. Adjusted EBITDA in the Glass Packaging division of US$151 million for the first quarter, represent a decrease of 5% and 10% at actual and constant currency rates respectively, compared with the same period last year. Glass Packaging Europe EBITDA increased by 4% to $80 million at constant currency with higher volumes and a strong cost performance partly offset by mix effects. EBITDA in Glass Packaging North America declined by 22% to $71 million in the quarter, principally reflecting lower volumes and the impact of sustained increases in freight and logistics costs. The performance in Glass Packaging North America remained weak in the first quarter and we remain very focused on our profit improvement actions. The Milford, Massachusetts plant was closed as planned at the end of March and our initiatives to enhance our capabilities in other areas are on track. Freight market conditions allied to sluggish demand in certain sectors and exacerbated by excess capacity and a growing level of imports from lower cost countries pose a challenging backdrop. However, our objective is to return Glass Packaging North America to an appropriate and sustainable level of profitability, regardless of the operating environment. Optimization of our North American glass footprints and cost base is a major priority for us. We expect to see benefits of our – the benefits of our actions to become evident in the latter part of 2018 and early in 2019. Turning to our capital structure, the refinancing activity undertaken in 2017 leaves the group well placed in what has become more recently more volatile financial markets. As previously outlined, we have an attractive debt maturity profile with significant flexibility and minimal exposure to rising interest rates. In addition, we ended the quarter with cash and available liquidity of over US$1.3 billion Our focus remains on deleveraging over the course of 2018 and 2019, with a view to addressing our whole cost structure as we outlined at our full year results presentation in February. The purpose of this would be to increase the free flows in our Ardagh Group S.A., while maintaining a reasonable level of leverage in the listed entity. So in Outlook, the group’s first quarter earnings were in line with our overall expectations, good progress in three of our four divisions again demonstrating the merits of diversified substrates and geographies. We remain focused on the delivery of progress against our strategic objective, through the remainder of 2018. 2018 represents a somewhat of a transitional year as we take action to restore profitability in Glass Packaging North America. As we look to the full year, we maintain our guidance for adjusted EBITDA of approximately US$1.6 billion with second quarter adjusted EBITDA expected to be approximately US$415 million. Since our last update, we have continued to progress a range of organic investment opportunities, right across our business, which offers short payback profiles. Typically, these payback profiles are two to three years. This process is continuing and we will update on expected 2018/2019 opportunities at the time of our half year results. However, the scale of these investments in 2018 will not materially impact in 2018 leverage, but they will certainly contribute to further deleveraging in 2019. As we look to the medium-term, Ardagh holds leading market positions in metal and glass packaging, which are both infinitely recyclable materials. We have consistently invested to drive advances in initiatives, such as down gauging, lightweighting and the optimization of recycled input usage. This commitment has enabled us to deliver innovative, sustainable and superior solutions and service to the world’s leading brand over many years. And at a time, where there is increased awareness by both our customers and end consumers of the sustainability of packaging formats remain ideally positioned to continue this process in the future. So having made these opening remarks, we will be delighted to take any questions, which you may have. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Anthony Pettinari, Citi. Your line is now open.

[Anthony Pettinari:]

Good morning.

[Paul Coulson:]

Good morning, Anthony.

[Anthony Pettinari:]

Paul you talked about the strength in Metal Packaging Americas. And I think you said volume mix was up 22% if I got that right. I’m just wondering if you could talk a little bit more about the strength you saw in that segment. What’s driving that and then kind of the individual businesses food can, bev can in the U.S., bev can in Brazil.

[Paul Coulson:]

Well, I think Anthony we’ve seen in metal packaging in America is a very strong performance right across the piece here. Brazil has gone very well, for us, we’re very pleased with the evolution of our business down there and look forward to the new ends of Manaus coming on stream. That business is really working very well, there is market growth down there and it’s very good. In the U.S. our food can business is performing very well. As you know, we have one very large customer on a very long-term contract and that customer is performing very well. And we’re very pleased with the way that’s going. And as you know, we have very efficient new high speed plants in the U.S. And that’s reflected in our margins. In terms of beverage cans, again a very strong performance here. We’re not so much in beer as you know more in cogitated soft drinks and particularly the water sparkling waters. We’re seeing great – we’re seeing good growth there we’re seeing, where as I said earlier, we’re completely sold out in bev cans in the U.S. And the performance has been very good and I think the operating environment for us is pretty good there and for the market in general for our peers as well.

[Anthony Pettinari:]

Okay. That’s very helpful. And then just switching to Glass Americas. Is it possible to quantify the freight and logistics costs that you saw in North America in 1Q and then you closed the Milford facility at the end of March I think? Did those volumes kind of transition smoothly is there any kind of drag from an earnings perspective baked into the 2Q guidance from the closure any way to quantify that?

[Paul Coulson:]

Well in the – to your first part of your – your first question Anthony there the – the $20 million shortfall over last – from last year in EBITDA in Glass North America. Firstly, Glass North America had a very strong first quarter last year driven by very strong wine bottles. But the $20 million shortfall or fall back this year over last year is roughly $10 million of that is freight and logistics and $10 million of that is softer volumes. In relation to the second question on Milford, we have transitioned all the business that was in – that was left in Milford and taken into other plants there is no drag of anything on earnings coming from that, that process went very smoothly.

[Anthony Pettinari:]

Okay. That’s helpful. And then just maybe one last one. Last quarter you talked about potential doing, special dividend I think in late 2019, early 2020 with the currency change your leverage is at 5.4 times. Where would you anticipate leverage being around end of 2019 or when you would consider potentially doing that special dividend?

[Paul Coulson:]

Well, as you know the leverage is up because of they switch to dollars – you convert the EBITDA at average rates for last year and then the year-end rate for the debt. So you lose out on that basis. But taking leverage in dollars at 5.2 times at the end of 2017, we would expect to delever by about 0.4 of a churn each year, so that gets you to where it should get to.

[Anthony Pettinari:]

Great, great. I’ll turn it over.

[Paul Coulson:]

Thank you.

[Operator:]

Thank you. Our next question is from Tom Narayan, RBC Capital Markets. Please go ahead your line is now open.

[Tom Narayan:]

Hey thanks. Good morning guys.

[Paul Coulson:]

Good morning.

[Tom Narayan:]

Just a question on the Q2 EBITDA guidance, I guess, why would that EBITDA number be kind of the same or flat year-over-year given synergy capture since the first quarter of 2017? Is there perhaps conservativeness or is that reflecting what’s going on in U.S. glass?

[Paul Coulson:]

Yes, I’d say, it’s a couple of factors actually reported it, so the flatted full 15 and the underlying will be down about 13. Now that comprises two elements it's principally glass and also there’s been a new accounting standards introduced into this year beginning 1 of January 2018, which affects the seasonality of the business from a revenue recognition point of view. And we recognize that $40 million more revenue and $10 million more EBITDA in the first quarter. And that largely reverses in the second quarter. So that accounts for the other bit of the reduction compared to last year at constant exchange.

[Tom Narayan:]

Okay. And where are you guys on the synergy capture?

[Paul Coulson:]

We’re buying on target, as you know it was $30 million last year and $20 million this year and we are on target for that.

[Tom Narayan:]

Okay, great. And lastly, it seems to be from your peers, obviously, the substrate on the metal side has been able to pass through raw material prices very well. Are there any lags or any commentary there, may be geographic differences, or is that really the case that you guys really don't see that much of a negative impact, it seems that way from the financials from the raw material price increases in the metal side.

[David Matthews:]

Your assumption is correct.

[Tom Narayan:]

Okay, great. Thanks. I'll turn it over.

[David Matthews:]

Thank you.

[Operator:]

Thank you. Our next question is from Karl Blunden from Goldman Sachs. Please go ahead.

[Karl Blunden:]

Good morning, guys.

[Paul Coulson:]

Good morning.

[Karl Blunden:]

Appreciate all the guidance here. If you look at your guidance, it looks like the second half is quite a bit stronger than the first. Trying to understand, obviously, some one time things holding you back in the first half and second half looks strong, is that momentum to be maintained into 2019? Maybe looking little too far out. But it sounds like, you've been doing some investments that probably contribute to second half and imply pretty good numbers in 2019?

[David Matthews:]

I think that's reasonable, yes. We've also got headwinds in glass North America to deal within the early part of the year. And then, as I said in my opening remarks, we hope to see improvement there towards the end of the year and next year. And we have been – some of the investments that we've been making and some of these small projects I referred to which are right across the business but they have a good impact on EBITDA position as well for next year. And as I said earlier, I think, particularly in Americas Metal Packaging the market deployment is very good.

[Karl Blunden:]

Got you. And then just is there any color you'd be able to share on this call in terms of what those types of projects are? It seems like a pretty good payback?

[David Matthews:]

Yes. I mean an example is that – a good example is a typical warehouse in Europe at least would cost say EUR 2 million to build. And we have a lot of land on the plants we have and at the moment we outsource, we rent facilities and the payback on those is for your EUR 2 million invested you say roughly a EUR 1 million. So it's a very good payback, that will be an example. Other examples are where you increase automation, for example, some investments in automation one of our U.S. glass plants actually has a payback 0.65 a year.

[Karl Blunden:]

Great.

[David Matthews:]

I think you'll see a blended average somewhere between two and three years payback. But they're right across the piece. Most of them rather would small. So execution risk is reduced because you’ve different teams executing them and we have been pretty rigorous in assessing that there is the real return from these investments.

[Karl Blunden:]

Got you. Thanks for time.

[Operator:]

Thank you. Our next question is from Debbie Jones, Deutsche Bank. Your line is now open.

[Unidentified Analyst:]

It's actually Karl [ph] filling in for Debbie. Thanks taking the question. First question post Milford; I'm just curious how you guys feel about your footprint in glass package in North America? And the broader industry Spider-Man balance there, just curious about your thoughts going forward.

[David Matthews:]

Well I think there’s as I said earlier, there's overcapacity in the U.S. glass market. Our attitude will be – we've always had an attitude of right sizing our capacity to our business. You have seen a reasonable increase in imported glass coming into the U.S. it’s now about 25% of the total market all that 25% roughly one-third is coming from China and one-third from Mexico and that glass is being delivered at significantly lower prices than comes out of the typical plants in North America. This is imports also though are being stuffed in because the cost structure in glass in North America is way, way higher than that in Europe. Labor costs are double of what they are in Europe. And you have quite a lot of inflexibility, particularly in unionized plants. I think quite frankly something's going to have to give here otherwise we will see more Milford's.

[Unidentified Analyst:]

Thank you, that’s really helpful. Shifting gears to metal Americas beverages seems to be having the opposite impact right now in terms of supply demand. The second producer to kind of mention being having capacities sold out, and I understand largest is yet to report. I’m just curious on your thoughts long-term on how you guys see to get more value maybe out of 12 ounce cans or if you think there's more potential shift to specialty to get more value there, just curious going forward?

[Paul Coulson:]

Well, I think there is on an overall basis, we believe there is and should be an opportunity to get more value as you put it, I think the market environment is good for that. And that's something that that has to happen quite frankly. I think in terms of where we are, mix wise we've a strong position in specialty. We will do what the market – we will do our best to service the market and move forward with our customers.

[Unidentified Analyst:]

Thanks, I’ll turn it over. Good luck in the rest of year.

[Operator:]

Thank you. Our next question is from Brian Maguire [Goldman Sachs]. Your line is now open.

[Connor Robbins:]

Hi, good morning. This is actually Connor Robbins sitting in for Brian Maguire. I just had a few questions, the first one relating to how do you guys think about the North American Glass segment, I think previously you mentioned you guys are doing your view, you try to talk about your growing wine markets as one of the end markets has better growth opportunities, and I think you mentioned today that maybe has been come back a little bit and not as strong as 2017, just kind of wondering how you guys are thinking about the North American Glass end market in that segment?

[Paul Coulson:]

Well, I think, Connor, it’s – last year we were unable to serve a certain wine business, because the way our footprint was organized. And this year in the first quarter we've seen unusually soft wine volumes, they're well down on last year which in turn was up I think about 17% and 16% and this year wine volumes was also down about 21%. I think there's undoubtedly softness there, and there’s also the impact of imports, there is no doubt about that. As we look forward to it, I think we've certainly seen improvement as we go forward this year. And again we will make sure that we organize our footprint, organize our production, big focus for us is try and reduce the amount, the distances we are transporting glass. So we're – to see can we service customers closer to the furnaces to reduce the effect of much elevated freight costs and logistics et cetera.

[Connor Robbins:]

Okay, got you. And then same for kind of the other end markets that are still performing, maybe a little bit better or it might have the expectation at least or maybe food or something else?

[Paul Coulson:]

Food I mean, all of them bar liquor were down in Q1, beer wasn't – beer was weak, weaker, but not as weak as it had been previously, there’s been some moderation there. But I think right across the piece there's weakness and the big impact of imports, the impact of Corona being now such a strong beer in the U.S. with those bottles largely made in Mexico that has an impact. But we will optimize and rework our footprint to meet the market as we find it.

[Connor Robbins:]

Okay, got you. And then one last one, before I turnover if I could. As far as the working capital side of things, I think last quarter you guys mentioned you get some benefit, so I think it was around $75 million. So just wondering if any sort of aluminum price spikes from if any of the tariff hit put through anything like that could maybe impact that from some of the working capital side?

[Paul Coulson:]

Yes, in terms of the working capital gone for the year the $75 million, your question is the inflow guidance. We still feel pretty comfortable with that. You probably noted in the first quarter, the outflow was little higher than last year. That was due to the first quarter of last year, we had some one time benefits from working capital projects, and the working capital in this quarter is a little high due to higher inventories in Glass North America as a result of slightly softer sales. But we still feel very comfortable with the overall guidance and some of the inflow for the year was around $75 million. So we don't see that being impacted by the impact of tariffs.

[Connor Robbins:]

Okay, perfect, thanks. I'll turn it over.

[Operator:]

Thank you. Our next question is from [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Yes, hi, thanks for talking my questions and congrats on a good quarter. Just a couple of questions from me, first – just to the last part I think I missed it, did you mentioned on working capital – $75 million outflow overall or inflow overall portfolio.

[Paul Coulson:]

No, it’s an inflow of $75 million for the year.

[Unidentified Analyst:]

Yes, thought so, yes. And second question just wanted to know your thoughts on the split of your business. I mean I just wanted to know on the metals food site, what exactly is the split between food and beverage and if you have a split for that in North America that would be very helpful?

[David Matthews:]

Yes. We don't break that out, but you may have heard me say earlier that performance both in beverage can metal in North America and in food Kansas has been very good. We're very pleased with both businesses.

[Unidentified Analyst:]

Well, all right. So if I could just squeeze in one last question a kind of related one. So we had a bit of discussion around the cost inflation on the metal side, but did you feel entirely confident that over the course of the year, you would be able to pass through all the cost inflation which you would kind of face in both the food and the metal bev can side?

[Paul Coulson:]

Yes, well, we have issues with some of the PPI’s as an index are less than perfect and we're pivoting towards indices in our contracts with customers which more accurately reflect the cost inflation which we suffer or indeed in cases where there’s decrease deflation. So we're working to improve our pass through and reference to more relevant indices and PPI.

[Unidentified Analyst:]

Okay. So the impact would still be seen this year, some kind of negative impact and probably you'd move to your more progressive contracts next year, is that fair to assume?

[Paul Coulson:]

Yes. Well, contracts take time to run off and they get adjusted, yes, that's correct, some of the other items that are index to things which are not that representative of the metal part as to.

[Unidentified Analyst:]

Right. And I kind of missed the starting part of the call, did you give any guidance with respect to some of cash flow items like CapEx, taxes, dividends et cetera, please?

[Paul Coulson:]

Its unchanged from what we said in February and just to recap the CapEx is around $580, the cash interest is $430. And the cash taxes is about $110 given adjusted free cash flow the range of $550 to $575, but that’s before the special short payback CapEx is that we will update you on in terms of quarter sale when we come to the second quarter results.

[John Contoleon:]

Okay, perfect. Thank you so much for you. Thank you.

[Paul Coulson:]

Thank you

[Operator:]

Our next question is from [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Thanks for taking the call. And the question is, just to try to basically get the credit because I don't know if we've been able in the past to discuss about this, but could you quantify the percentage of contracts for example in metals North America in revenue just to a given number which have effectively cost escalation or references to metal prices just to have a hard number for us when we sensitize. What is that percentage of those contracts across metals plus can and food can in North American for example, how’s that protection? Is it 75% to 80% or substantial amount of that? Number two is that given the significant rising in base metals and metals pricing effectively, have we seen all of the inflation in your cogs in North America in Q1 or do you expect an acceleration of such inflation moving forward because of the kind of maybe the sourcing – the annual sourcing that you have for steel? So maybe it's not yet reflected effectively in the numbers. Third question is I understand there was a benefit to EBITDA of $10 million in the IAS relation to basically the change in accounting IAS. Was that provided for when you gave the guidance of $345 million for Q1 2018 effectively or you gave that guidance in Q4 2017. I just want to try to understand whether that $10 million was included whatever effect we have to add it back or subtracted. And the next question would be in relation to the significant operating cash flow loss burn of $242 million. Could you explain why there's an increase of $160 million – $150 million year-over-year. I think you alluded to working capital effects that other elements with respect to which explain the negative adjusted cash flow. And what will the guidance for adjusted cash flow for the second quarter of 2018? Thank you very much.

[Paul Coulson:]

I think picking those one at the time. In terms of the first question, we would say the vast majority are covered. Moving on to in terms of the inflation, I think it's largely there maybe a little bit more as we move through the year. Question three in terms IFRS 15 points, yes, that was broadly taken account of in terms of the guidance. But what I would say on that is it will reverse largely during Q2, but across the year it has virtually no impact. So there's no impact on the year, it affects the quarter. And the $415 million guidance that we gave for the quarter is the key to clearly include impacts of the reversal. Moving on to your last question which is around the cash flow, the cash flow is a little lower than the first quarter of last year, really for a couple of reasons. The CapEx is a little higher, the CapEx is around $160 million, it was around $120 million last year, and that's due to the time we had furnace rebuild and also in the metal business we are spending many on our Rugby conversion and also our Brazil plant in Manaus. The working capital as well is a little higher in terms of the outflow and there’s two reasons there, and the high inventory in North America as a result of the glass sales being a little softer and also we had a one-time benefit coming through in the first quarter working capital last year from a working capital project that we had running for a period of time. And in terms of your fifth question we don't generally give guidance in terms of quarterly cash flow, we've given guidance only on EBITDA.

[Unidentified Analyst:]

Thank you very much

[Operator:]

Thank you. [Operator Instructions] Okay, we don’t seem to have any questions, over to you.

[Paul Coulson:]

Good. Well, thank you everyone for joining us today. We look forward to talking to in late July when we report on Q2. Thanks very much indeed for your time.