Ardagh Group SA (ARD) Q3 2021 Earnings Call Transcript

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Ardagh Group SA (ARD)
Q3 2021 Earnings Call
Oct 28, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Ardagh Group Third Quarter 2021 Bondholder Conference Call. [Operator Instructions]

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 -- Chairman and Chief Executive Officer

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. 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.

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. As you know, earlier today, Ardagh Metal Packaging, AMP for short, posted its third quarter earnings in which it reported growth in adjusted EBITDA of 17% to $176 million. LTM adjusted EBITDA to September 30, increased to $637 million, and AMP raised its full year 2021 adjusted EBITDA outlook to at least $660 million. The AMP call can be accessed at www.ardaghmetalpackaging.com.

And I should say that we will not be providing any additional information regarding AMP or its performance on this call. So I could move to the results for the quarter. Revenues for the group increased by 8% to $1.9 billion, an increase of 6% on a constant currency basis. Revenue growth was principally attributable to the pass-through of higher metal and other input costs in AMP. Third quarter adjusted EBITDA for our reportable segments grew by 2% to $338 million compared with $330 million in the same period last year. At constant exchange rates, adjusted EBITDA for these reports were in line with the prior year with strong growth in AMP, largely offset by a reduction in [Indecipherable] packaging.

So moving to our second report performance. I'll just briefly recap on our [Indecipherable]. And as you heard on the call earlier today, it performed well in the quarter. Strong earnings growth despite softness in our market and the pressures of a highly inflationary cost environment and supply chains. Revenue of $1.04 billion increased by 15% on a reported basis [Indecipherable] 15% at constant exchange rates principally due to the past [Indecipherable] aluminum and other costs. EBIT through the quarter increased by 17% to $176 million, a 15% increase at constant currency rates, driven by a strong advance in the Americas.

On an LTM basis, AMP's adjusted EBITDA has now increased by 17% or $90 million year-to-date to $637 million with further growth coming over the last quarter. And this is means it will -- should finish the year '21 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.

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 $1.1 billion by 2024. 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 structures characterized by multiyear agreements with cost pass-through provisions provides significant resilience in an inflationary cost environment, albeit subject to some occasional timing lags. Execution of the AMP business plan has been strong to date, and it remains firmly on track to achieve its 2024 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. If I turn now to Glass Packaging.

Total [Indecipherable] shipments in the third quarter were 3% lower than the third quarter of 2020, with broadly similar reductions in Europe and North America. Revenues were unchanged on a reported basis and fell 1% at constant currency compared to the same period last year. Adjusted EBITDA of $162 million was 11% lower than the prior year constant exchange rates, reflecting lower shipments and increased costs in both regions. Looking at our glass packaging businesses. Our glass shipments in Europe were 3% lower than the same period last year. You will recall that the third quarter of 2020 benefited from the widespread reopening of hospitality after initial and often severe lockdowns in many of our markets and shipments then increased by 6%. This was a challenging comp. And to put it in context, shipments for the third quarter of '21 are some 3% above 2019 levels.

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 underpin growth in the spirits and nonalcoholic beverage categories. Revenue for the quarter in Glass Europe fell 6% compared to the same period last year, of which almost half was attributable to our Engineering Equipment business. Adjusted EBITDA for the quarter of $104 million was 10% lower than the same period last year due to the impact of sharply higher energy and other costs, partly offset by a strong operating performance and a contribution from our growth investment program.

In Glass North America, revenue of $444 million increased by 3% compared with the same period last year. Shipments were 4% 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. Adjusted EBITDA of $58 million was a reduction of 13% on the same period in 2020 and reflected lower shipments and increased costs, including out-of-pattern freight costs. Against a relatively stable demand backdrop, we continue to address operational challenges and resulting in efficiency in our Glass North America business.

And we continue to address these issues to drive improved profitability there. Third quarter also saw us progress our growth investment program. Groupwide investment to date in '21 is in excess of $500 million, including some of these financed assets with an increase to cover over $800 million expected by year-end. $700 million of this $800 million is in AMP and the balances in our Glass business. As 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 2022. Glass Europe has also been successfully pursuing targeted opportunities aimed at premium and faster-growing segments of the market while efficiency and operational enhancement remains a priority in Glass North America.

Earlier today, AMP set out its intention to build new multiline Beverage Can production facilities in the U.K. and in the Southwestern United States, with planned production start-ups in 2023 and 2024, respectively. These projects, as with all our existing growth projects, will be strongly value-enhancing and highly free cash flow accretive. 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 5th of August. 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 85% acceptances under the exchange offer, the free float of AMP increased to 25% from it sits today. 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 executes its multiyear growth plan.

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 the social agenda. 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. We've developed 10-year plans across our business to ensure that we achieve our ambitious 2030 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 lightweighting, energy efficiency and other initiatives. Our community connections are vital to our success, and our previously announced 10-year $50 million 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 2021 sustainability report setting out our 2030 sustainability targets. 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 4.2 times, despite our having made growth investments in excess of $430 million and despite seasonal working capital in the year-to-date investment in seasonal working capital.

This reflected strong EBITDA growth and the funds inflow from the AMP SPAC transaction. Cash and available liquidity at the end of September last amounted to over $4.3 billion, including $3.55 billion in cash. As previewed on our second quarter call, we called the remaining $800 million, 6% notes due in '25 in August. And following the calling of these notes, we have no further callable debt. We continue to evaluate the cash needs of Ardagh Group and our strong and liquid balance sheet positions the group well to take advantage of any value-creating growth opportunities that arise for our business. In late September, we declared a dividend of $1.25 per Ardagh Group S.A. share, or a cost of $295 million, which was paid in mid-October.

$272 million of this dividend was paid to our Finance S.A. and half of this sum has now held an escrow for the benefit of the Toggle noteholders at HoldCo. As previously indicated, we have allocated up to $1.4 billion for general corporate purposes, including the potential return of capital to shareholders and related HoldCo debt repayment. This allocation of which the recent $295 million dividend forms part remains unchanged. 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, and is materially on track. In the past quarter, we've seen a broad-based and sharp increase in inflationary cost pressures for many good services, including energy, raw materials and logistics. Our business model and contract structures provide a high degree of resilience in the face of such input cost volatility, and this will be a focus entering 2022. And in the light of the cost pressure seen in the quarter and the uncertain duration of some recent cost increases, we now project full year EBITDA for '21 to be in the range of $1.25 billion to $1.27 billion. So I having made these opening remarks.

We will now be pleased to take any questions which you may have.

Questions and Answers:

Operator

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

Roger Spitz -- Bank of America -- Analyst

Hi, thank you very much. First off, can we just go through some of the 2021 guidance numbers. Firstly, I mean, starting with EBITDA. I don't know if you gave a Q4 consolidated EBITDA guidance or have a consolidated 2021 EBITDA last quarter, it was 12.90, I think, or 1.28 to 1.3?

Paul Coulson -- Chairman and Chief Executive Officer

Yes. John, will you handle the guidance, please?

John Sheehan -- Chief Financial Officer

Yes, sure. Roger, that's correct. What we said today was that in light of the recent cost pressures and the uncertainty regarding the extent and duration of those that the guidance now is at -- consolidated at 12.50 to 12.70 for the year and working down through some of the other items, no major change. Working capital probably an outflow with higher input costs, maybe about $70 million capex, we've outlined before around about $380 million for the year. Leases about $100 million. Growth investments, again, consolidated to be about $800 million and then tax about $75 million.

Roger Spitz -- Bank of America -- Analyst

Okay. Got it. Other than the EBITDA, it looks like the growth capex went down from $900 million from last quarter given to $800 million this quarter. So you took off $800 million and then...

John Sheehan -- Chief Financial Officer

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

Roger Spitz -- Bank of America -- Analyst

Got it. And the other question is, as you already announced pushing up money, cash, but -- were you prepared to talk about how much further cash you might push up to ARD Finance?

Paul Coulson -- Chairman and Chief Executive Officer

Well, we haven't, Roger, given any -- made any decisions on that at all. We did give guidance going back since the start -- 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 1,400 of which 300 has already been paid. I don't see it being as much as the balance of that, but there will, I think, be some upflow funds. 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 and the delisting of Ardagh Group S.A. So no decision as of yet.

Roger Spitz -- Bank of America -- Analyst

Got it. Thank you very much.

Paul Coulson -- Chairman and Chief Executive Officer

But as you know, Roger, any money that does upflow, half of that goes to pay -- to reduce the HoldCo debt as has happened with the dividend that's been paid so far. Okay? Thanks.

Roger Spitz -- Bank of America -- Analyst

Got it. And that's at 104, right?

Paul Coulson -- Chairman and Chief Executive Officer

Yes, yes. That's a 104 yes.

Roger Spitz -- Bank of America -- Analyst

Yes, thank you.

Paul Coulson -- Chairman and Chief Executive Officer

Thank you.

Operator

We'll now take our next question from Richard Kus with Jefferies.

Richard Kus -- Jefferies -- Analyst

Hi, thanks for taking my question. So the first one, just looking at your contract structures, you talk about the cost inflation, obviously, going into 2022 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 to work heading into next year? And how exposed you may be?

Paul Coulson -- Chairman and Chief Executive Officer

John?

John Sheehan -- Chief Financial Officer

Yes. Richard, it's -- as we said, it's a very inflationary environment and correctly say that in the U.S. the past dues are very quick and very clean. In Europe, we're about -- our business split's fairly evenly between multiyear contract and at annual contract, the multiyear contracts, 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 for the new year.

Richard Kus -- Jefferies -- Analyst

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

John Sheehan -- Chief Financial Officer

In terms of energy, we're -- we aim to be about 80% going into the new year, and we'd expect to be at or around that level as we head into 2022.

Richard Kus -- Jefferies -- Analyst

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 -- Chairman and Chief Executive Officer

$2.1 billion Richard, $2.1 billion.

Richard Kus -- Jefferies -- Analyst

Okay. Great. Thank you very much

Paul Coulson -- Chairman and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Ruth Will with Janus.

Ruth Will -- Janus -- Analyst

Hi. So for the remaining $1.1 billion earmarked for GCP, including shareholder dividends and the HoldCo debt repayment, is there any sense of timing on when we should see those funds allocated?

Paul Coulson -- Chairman and Chief Executive Officer

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

Ruth Will -- Janus -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] As there are no further questions at this point. I'll hand it back over to Mr. Coulson for any additional closing remarks.

Paul Coulson -- Chairman and Chief Executive Officer

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

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Paul Coulson -- Chairman and Chief Executive Officer

John Sheehan -- Chief Financial Officer

Roger Spitz -- Bank of America -- Analyst

Richard Kus -- Jefferies -- Analyst

Ruth Will -- Janus -- Analyst

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