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Ardagh Group SA (NYSE:ARD)
Q2 2021 Earnings Call
Aug 3, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Ardagh Group Second Quarter 2021 Investor Call. [Operator Instruction] At this time, I'd like to turn the conference over to Mr. Paul Coulson, Chairman and CEO of Ardagh Group. Please begin your call.

Paul R. Coulson -- Chairman and Chief Executive Officer

Welcome, everybody. We hope you remain safe and well, and thank you for joining us today for our second quarter earnings call. This follows the release earlier today of our results for the quarter. I'm joined as usual today by David Matthews, our CFO; Shaun Murphy, our COO; and John Sheehan, our Corporate Development and Investor Relations Director. Our remarks 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. 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 news releases.

Our earnings release, financial report and related materials for the second 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 the 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. As you probably know, earlier today, Ardagh Metal Packaging, AMP for short, hosted its second quarter earnings call. And this call can be accessed at www.ardaghmetalpackaging.com. And on this call, we will not be providing any additional information on AMP's performance. So before I move to the second quarter results, I want to update you that in May, we [Technical Issues].

Operator

Please stand by. We have you back.

Paul R. Coulson -- Chairman and Chief Executive Officer

Good. Sorry about that. So in May, we experienced a cybersecurity incident in which we have taken pre-emptive action and brought our systems back online -- brought our systems off-line and then brought them back online. Production continued in all of our 57 facilities during the period, though the incident gave rise to some logistical disruptions and delays as well as to incremental costs. I would like to acknowledge the dedication of our teams as well as the support of our customers, suppliers and other business partners in managing through this incident. As you will have seen in our early June filing, key systems were brought back online in accordance with our plan. The external forensic investigation of this incident is continuing. And ahead of its completion, we have implemented additional measures to further enhance our already robust IT protections.

Second quarter EBITDA of $325 million is stated after incurring $18 million of costs in relation to the cyber incident. Ardagh has appropriate insurance cover in place, and we expect to recover these and other costs related to the cyber incident in the coming quarters. And as we mentioned, the group provided an indemnity to AMP, thereby leaving its earnings unimpacted. So turning to the results for the second quarter. Group performance was strong. Revenues increased by 17% on a reported basis to $1.9 billion and grew by 11% at constant currency, reflecting increased shipments and the pass-through of higher input costs, notably aluminum. Adjusted EBITDA for our reportable segments before the cost of the AMP indemnity grew by 25% to $340 million, driven by excellent growth in AMP and in Glass Packaging Europe, which recorded increases of 24% and 50%, respectively. On a constant currency basis, adjusted EBITDA for these reportable segments increased by 19% compared with the same period last year.

This strong growth was attributable to increased year-on-year shipments, in particular in Glass Europe, a positive contribution from our business growth investments and lower levels of COVID-19-related costs. Turning to our segments. Let me firstly briefly recap on Ardagh Metal Packaging, which you heard on the call earlier today. Shipments by AMP increased by 3% in the quarter, led by 9% growth in the Americas. The cyber incident reduced AMP shipments by approximately 4% in the second quarter, largely in Europe. As a reminder, our global beverage can shipments had increased by 3% in the second quarter 2020, significantly outperforming the industry, which declined by low to mid-single digits. This principally reflected AMP's end markets and our geographic bias to Northern Europe, which made for a more challenging comparable.

Specialty can demand remained very strong and shipments increased by 16%. Specialty cans represented 46% of shipments in the current quarter compared to 41% in the same period last year, reflecting our ongoing investment in specialty can capacity. Demand in the second quarter remained strong across all our markets, supported by the mega trends, including new beverage innovation, share gains by the beverage can from other forms of packaging and growing sustainability awareness. And in addition to these secular drivers, implementation of our business growth investment program, and a lower level of COVID-related costs drove growth in AMP's adjusted EBITDA of 24% to $173 million, an 18% advance at constant currency. As reported earlier, constant currency adjusted EBITDA grew strongly in both in AMP in Europe and in AMP Americas, increasing by 10% and 27%, respectively, compared with the same period last year. AMP's LTM adjusted EBITDA has increased to $613 million at 30th of June from $545 million at 31 December 2020 and is expected to generate full year 2021 adjusted EBITDA of at least $654 million.

Turning to Glass Packaging and, again, with a focus on constant currency movements, total shipments increased by 7% in the quarter, substantially recovering the decline seen in the second quarter of 2020 when the onset of COVID and related restrictions severely impacted on-premise demand. Total revenues in Glass Packaging increased by 8% at constant exchange rates and by 14% on a reported basis compared with the same period last year. Adjusted EBITDA increased by 27% on a reported basis and by 19% at constant exchange rates. Adjusted EBITDA margin increased by 170 basis points to 18.9%. Looking at each of our glass businesses. In Europe, shipments increased by 10%, with strong growth across all end-use cash results in food, where demand normalized at healthy but lower levels than the pandemic boosted second quarter 2020.

Revenues increased by 8% to $438 million for the quarter. Operating performance was strong as we work to enable our customers respond to actual and planned reopenings across many of our markets. Increased year-on-year utilization and tight cost control led to growth in adjusted EBITDA for the quarter of 36% to $114 million. Adjusted EBITDA margin in glass Europe for the quarter was 26%. In North American glass, revenue of $445 million increased by 9% compared with the same period last year. Shipments were 3% ahead of the prior year, with growth led by beer, spirits and other beverages, more than offsetting some moderation in food demand. Adjusted EBITDA of $53 million was 5% below second quarter 2020 levels. This reflected production inefficiencies and increased costs, including $3 million related to the cybersecurity incident referred to -- which happened in the quarter. In the year-to-date, our shipments in Glass North America have increased by 4% and demand conditions remain favorable.

This improved volume performance has yet to be reflected in earnings, and our continued focus is on implementing targeted investments and efficiency initiatives to drive sustained profitability improvement. In parallel with the strong underlying volume and earnings performance across the group during the quarter, execution of our business growth investment program continued and remains fully on plan. Investment to date in 2021 has been over $270 million, of which 90% was in AMP with the balance in Glass Packaging. Of note, the two new high-speed lines added in Olive Branch, Mississippi earlier this year have continued to ramp up well and in line with our plan. And later this year, we will begin producing cans from a similar expansion at our Winston-Salem, North Carolina plant. And we will also be producing later this year ends from our new Huron, Ohio facility. Our multiple customer back to growth initiatives in Europe and Brazil are also progressing well.

In Glass Packaging, we've continued to pursue targeted and customer-backed growth initiatives in Europe with cost efficiency and performance improvement the primary focus in North America. So if I could move on to the proposed AMP transaction, as stockholders of Gores Holdings V have voted today to approve the business combination with completion expected tomorrow, the 4th of August. And trading in Ardagh Metal Packaging will commence on the New York Stock Exchange on the 5th of August under the ticker AMBP. We look forward to completing the transaction and we now anticipate receiving $3.3 billion in cash and holding on to a stake of approximately 82% in AMP, and this stake is valued at over $5 billion. AMP will be well positioned to deliver excellent returns for its stakeholders over the medium and long term. A quick reminder of its strength. It's the second largest player in the European beverage can market and the third largest in each of North America and Brazil.

It will also be a pure play on strong secular demand growth for beverage cans driven by convenience, innovation and sustainability as well as structural pack mix shifts in certain markets. All these attributes underpin AMP's exceptional ESG appeal. AMP has set out a clear road map to deliver strong organic growth over the medium term. This program, which is operationally derisked by its focus on largely under the roof expansions and is commercially underpinned by long-term customer agreements, has made strong progress to date in 2021. LTM adjusted EBITDA has increased to $613 million at June 30 from $545 million at December 2020. We expect further strong progress over the remainder of the year and beyond. AMP will also operate with targeted modest leverage, will have a meaningful free float and will require no further equity to deliver its growth plan. Turning to our environmental and social sustainability strategy.

We've made further progress during the quarter in driving social sustainability across our business. As a provider of skilled quality employment to over 16,000 colleagues, we recognize the importance of recruiting, developing and retaining appropriately skilled individuals. We were, therefore, delighted to enter a long-term agreement with Project Lead The Way, a U.S. organization dedicated to promoting the provision of STEM education right across the United States. The group's 10 -- Ardagh's 10-year agreement with Project Lead The Way involving a total commitment on our part of $50 million will extend this STEM initiative to cover all schools in the communities in which we operate right across North America. We expect that over the 10-year life of the program it will provide education and skills development to upwards of 0.5 million students. And ensuring the development of the employees of the future is key to the long-term future of our group, and we are actively working on similar initiatives in Europe and South America.

We will update on this in due course. Turning to our liquidity. Net leverage ended the quarter at five times, little changed on the end of 2020 level despite the seasonal working capital outflow and elevated levels of growth investment. Cash and available liquidity at 30th of June totaled over $4 billion, including $2.3 billion received on the structural separation of AMP in April. We anticipate calling our $800 million 6% senior notes due 2025 at a premium -- at a 3% premium at 103%, therefore, shortly after the completion of the AMP transaction. We have no other debt currently callable, and we will update further once we have assessed the business' cash requirements. This assessment will include evaluating investment opportunities to develop our glass business by bolt-on or by organic development. And as we indicated in February, we also envisage allocating up to $1.4 billion for general corporate purposes, including the potential return of capital to shareholders and the related holdco debt repayments. So we enter the second half of the year with good momentum.

We see continued strong demand for all our products and our output in both metal and glass packaging is fully allocated for the remainder of 2021 and into next year. Second half '21 performance will face more demanding comparables in Glass Packaging given the reopening we've seen in the third quarter of 2020. Broad-based inflationary pressures have also increased over the course of the quarter, and recovery of these costs in line with our contractual arrangements remains a key focus for us. Our business growth investment program has progressed well and we'll see the ramp-up of significant new capacity in the Americas and Europe in the second half, particularly in AMP. We, therefore, are happy to reiterate our full year 2021 adjusted EBITDA guidance of $1.28 billion to $1.3 billion. And this is despite a modest currency headwind since our Q1 results in late April.

Full year net leverage is expected to remain around current levels of five times adjusted EBITDA, reflecting strong earnings growth and continuing high levels of growth investment. And we expect third quarter adjusted EBITDA to be in the range of $335 million to $345 million. To conclude, the group's performed very well in the first half recording broad-based regional sector growth. We remain ideally positioned to invest and benefit from the mega trends driving demand for our products. The expected completion of the AMP listing is an important step for the group creating a leading pure-play global business and unlocking significant value for shareholders. While the further progression of the pandemic remains uncertain, vaccinations have been widely rolled out in many of our regions and our businesses have demonstrated their strong resilience in the last 18 months. And we therefore look to the remainder of the year and beyond with confidence. So having made these opening remarks, we'll now be pleased to take any questions that you may have. Thank you.

Questions and Answers:

Operator

[Operator Instructions] And we'll go to our first caller.

Anojja Aditi Shah -- BMO Capital Markets Equity Research -- a

Hi. Good morning everyone. It's Anojja Shah from BMO Capital Markets. I just wanted to ask about Glass North America. You've been working to improve margins there over a number of years, and you just noted today that you're working on efficiency initiatives. What's a reasonable target level for margins in this segment as you see it? And maybe can you give a time line for getting there?

Paul R. Coulson -- Chairman and Chief Executive Officer

Well, I would think that we're disappointed with progress in that area, and we're working very hard to accelerate the progress. I think in the past, clearly, we were up at about 20%, sometimes over that. We'd like to target to get back to that level. We have a lot of work to do in both investments and improvement in facilities and manufacturing. And I would hope that by the back end of next year, we'd start to see significant improvement in what's going on there. The good thing about North America glass is that the market is very strong. It's very strong demand, and there's a shortage of glass. So we are confident we have the right size in terms of portfolio, in terms of capacity. But we're not happy with the performance on the manufacturing side.

Anojja Aditi Shah -- BMO Capital Markets Equity Research -- a

Great. Thank you very much. And just thinking about leverage, it sounds like you're still evaluating your options once the AMP transaction is completed. But do you expect to have a leverage target for Ardagh once that's done?

Paul R. Coulson -- Chairman and Chief Executive Officer

Well, I think I've indicated that we expect leverage to be around the five times at the end of the year. So that's where I would see it as such.

Anojja Aditi Shah -- BMO Capital Markets Equity Research -- a

Great. Thank you very much.

Operator

We'll go to our next caller.

Unidentified Analyst

Hi. Thank you. Good afternoon. Again, just if you had the off-balance sheet receivables amount for June for the entire group, including AMP this time?

Paul R. Coulson -- Chairman and Chief Executive Officer

David?

David Matthews -- Chief Financial Officer and Director

Yes. That's about 450. That's the entire group.

Unidentified Analyst

Perfect. And is any of the opco cash restricted as reported in June? Or is that all effectively unrestricted?

Paul R. Coulson -- Chairman and Chief Executive Officer

Well, I mean, we have various different pockets. It's unrestricted with various different pockets of where we're allowed to make distributions, etc, yes. So you can take it, but it's unrestricted.

Unidentified Analyst

Perfect. Okay. And I just maybe missed the comment about the dividend up to Ardagh finance. Is that to come, you haven't made a decision yet on how much you plan to push up there?

Paul R. Coulson -- Chairman and Chief Executive Officer

We haven't made a decision yet. No, we haven't made a decision. Our focus has been on to close the AMP deal with Gores tomorrow. And in due course, we'll look at what we do there. We haven't made any decision there.

Unidentified Analyst

Got it. And lastly, any -- you gave still some cash flow item guidance. Is there any material differences? Obviously, you gave the EBITDA, but just any other differences in what you gave from last quarter? Is it the same?

Paul R. Coulson -- Chairman and Chief Executive Officer

David?

David Matthews -- Chief Financial Officer and Director

I think it's broadly the same. The interest might be a little bit higher depending on how much debt we paid down in the second half. Clearly, we've talked about the bonds we're calling. But if we pay down more debt, we'll be in line with the $300 million that we indicated previously.

Operator

We'll go to our next question.

Travis Edwards -- Goldman Sachs Group, Inc. -- a

Good morning. This is Travis Edwards from Goldman Sachs. Just had a question structurally. If in the event with your new 82% ownership in AMBP, but if all of the Ardagh shareholders exchange, have you shared or expressed what the pro forma ownership in Ardagh Metal Packaging would be for Ardagh Group?

Paul R. Coulson -- Chairman and Chief Executive Officer

No, we haven't because -- I mean, I think -- look, it's somewhere in the early 70s. It depends on what the exchange ratio is if everybody took it up -- if there -- and we haven't yet made a final decision as to whether there will be an exchange offering, although it is something that we flagged that we're likely to do. So I don't think -- until we know -- until we set what the exchange ratio will be, if it's to happen, it's hard to be precise as to what the shareholders -- it would be -- probably be a little bit bigger now than our early 70s given that we're going to have slightly more shares. We're going to have 82% to start with. And then obviously, off that will come whatever shares are exchanged with the AGSA shares, OK?

Travis Edwards -- Goldman Sachs Group, Inc. -- a

Got it. I appreciate that. That's helpful. And then -- this is a little bit nuanced, so I appreciate maybe too specific, but curious if you can share or differentiate sort of the cash flow walk for just the RemainCo glass business. I know in the past you split out capex. But curious as far as the other cash flow items go, is there a -- are you able to split out sort of what the RemainCo legacy glass business generates as far as free cash flow stripping out the part of them?

Paul R. Coulson -- Chairman and Chief Executive Officer

I think that there's so many moving parts at the moment that what we plan to do is give guidance on these sort of things later in the year because you've got stuff moving all over the place with the AMP transaction, and we'll come back to you on that guidance later on.

Travis Edwards -- Goldman Sachs Group, Inc. -- a

Got it. I appreciate it. And then just one clarifying question. I think you mentioned it earlier, I just want to make sure I understood it. But on the Ardagh North American glass, it sounded like you expect a more positive inflection point you say later next year. I just wanted to confirm that.

Paul R. Coulson -- Chairman and Chief Executive Officer

Yes. I would hope that we would start to see improvement by the back end of next year as a lot of work going on there. It's not satisfactory. We're not happy with it. And the good thing is we've got a good market backdrop. We've got very good demand. We've got -- we've had -- we're doing very well with the new plant we have in Houston. That's been -- we've done a -- our guys have done a great job there. in getting production up there again. That was one we bought from ABI. But there are other plans where we need to affect significant improvements, and we're working on that.

Travis Edwards -- Goldman Sachs Group, Inc. -- a

Good. I appreciate it thanks for the time best luck on the next quarter.

Paul R. Coulson -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We'll go to our next caller.

Unidentified Analyst

Paul David, good morning. I was just wondering. Two-part question for North American glass. One is, I think pre-pandemic, you had talked about there even being a little bit of overcapacity in the market. And now you're talking about things being -- it sounds like pretty tight and a pretty good demand trajectory. I know that some things have changed in terms of imports. Yet, obviously, profitability isn't where you want it to be. So the first part of the question is, what changed in terms of demand? You talked about food starting to normalize, but beer doing well. If you can talk at all, I guess, what's happening in the immediate term and then maybe where you expect to see growth going forward? And then two, was this more internal inefficiencies or supply chain disruptions in terms of ability to get raw materials, outbound freight, inbound freight? Just trying to understand where the bottlenecks are.

Paul R. Coulson -- Chairman and Chief Executive Officer

It's -- I'll take the second part first and ask John Sheehan to comment on the first part of your question. On the second part, it's a mixture of internal things, external items such as freight and internal inefficiencies can sometimes lead to freight patterns not being as ideal as they should be or a freight pattern that we contracted for and that can lead to excess freight costs. And as you know, there's a big shortage of freight capacity in the U.S. at the moment. There's a lot of shortage of drivers, etc. So it's a difficult area. So it's a mixture of factors, I would describe it internal and external, but a lot of which are internal A little bit of supply chain, but more freight than supply chain. John, do you want to deal with the first bit?

John Sheehan -- Group Investor Relations Director

Yes, sure, Gabe. The -- as we said, we saw a good quarter. Our shipments were up around 3%. And that was fairly broad-based across beer, spirits, other beverages. Wine was fairly stable. Food has normalized, but it's normalized at high levels. And the way the pandemic is going, we feel very good about the outlook for food. So we have a balanced portfolio. And sure, the demand over the years in recent years has been declining. But it's been trending positively for the last several quarters, and it's been quite broad-based.

Paul R. Coulson -- Chairman and Chief Executive Officer

I think we're pretty comfortable that we have the right capacity balance at the moment for ourselves. The market is tight -- very tight.

Unidentified Analyst

Thank you, gentlemen.

Operator

As there are no further questions at this point, I will hand the call back to Mr. Paul Coulson for any additional or closing remarks.

Paul R. Coulson -- Chairman and Chief Executive Officer

Well, thank you, everyone, for joining us today. And we look forward to joining you later in the year when we present our Q3 figures. Thank you very much indeed. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Paul R. Coulson -- Chairman and Chief Executive Officer

David Matthews -- Chief Financial Officer and Director

John Sheehan -- Group Investor Relations Director

Anojja Aditi Shah -- BMO Capital Markets Equity Research -- a

Unidentified Analyst

Travis Edwards -- Goldman Sachs Group, Inc. -- a

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