Ardagh Metal Packaging SA
NYSE:AMBP
Earnings Call Analysis
Q4-2023 Analysis
Ardagh Metal Packaging SA
The company surpassed guidance by achieving a working capital inflow of $270 million for the full year, higher than the expected $200 million. They also successfully managed inventory to adjust to customer destocking in Europe and growth investments were kept below expectation at $337 million, showing a disciplined capital management approach. With growth CapEx falling to an estimated $100 million for 2024, the company is signaling an easing in capital expenditures and focusing on enhancing flexibility in their operations.
For the full year 2024, the company forecasts a 5% to 10% rise in adjusted EBITDA, translating to a range of $630 million to $660 million. This growth is underpinned by increased shipments and improved fixed cost absorption. The guided EBITDA for the first quarter is expected to align with the previous year's performance. Meanwhile, the company remains committed to its stable dividend policy, with a regular quarterly dividend of $0.10 per share, backed by a solid liquidity position and incoming cash flows.
Looking ahead, the company anticipates global shipment growth to approach a mid-single-digit percentage in 2024 and is considering about $4 billion in curtailment across its global network to support this growth. Furthermore, there are high hopes for a significant uplift in shipment volumes in Brazil and North America, which could be instrumental for the company's anticipated growth.
The company expects a small working capital inflow for the year ahead, with lease repayments of around $90 million and maintenance CapEx of approximately $120 million. Furthermore, the company’s liquidity position is considered healthy enough to sustain its dividend policy, with a minimum cash balance of $100 million set as the floor for operational needs. Cash interest for the year is anticipated to be $200 million.
The company remains confident in its strategy and execution, with a better-than-expected Q4 performance in the Americas and the prospect of rebounding European volumes. The firm financial footing and market growth prospects position the company positively for future shareholder value creation.
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Welcome to the Ardagh Metal Packaging S.A. Fourth Quarter 2023 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephen Lyons, Investor Relations. Please go ahead.
Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging's Fourth Quarter 2023 Earnings Call, which follows the earlier publication of AMP's earnings release for the fourth quarter and the full year. I'm joined today by Oliver Graham, AMP's Chief Executive Officer; and David Bourne, AMP's Chief Financial Officer. Before moving to your questions, we will first provide some introductory remarks around AMP's performance and outlook. AMP's earnings release, related materials for the fourth quarter can be found on AMP's website at www.ardaghmetalpackaging.com. Remarks today will include certain forward-looking statements and include use of non-IFRS financial measures. Actual results could vary materially from such statements. Please review the details of AMP's forward-looking statements disclaimer and reconciliation of non-IFRS financial measures to IFRS financial measures in AMP's earnings release. I will now turn the call over to Oliver Graham.
Thank you, Stephen. 2023 represents a year of transition for our business as the team navigated a challenging macro demand environment and took decisive action on our footprint and inventories to position the business for growth in 2024 and beyond. Despite the market context, in particular, softer European demand, we achieved record global revenues and shipment volumes, which grew by 5% for the full year and 2% in the fourth quarter. Our Americas segment grew at an almost mid-teens percentage, driven by strong growth in both regions. Our actions on energy pass-through to our customers in Europe resulted in stronger inflation recovery but this was more than offset by unfavorable volume mix effects with a significant decline in production activity and shipments experienced in the second half of the year, which also impacted fixed cost absorption. In Brazil, full year shipment growth was below initial expectations due to consumer weakness and customer mix, which included the customer restructuring that is now resolved but with an encouraging sequential improvements in shipment trends during the second half and a strong Q4 against a weak prior year comparable. Our team's efforts on working capital management in this challenging environment generated a near tripling of cash from operating activities, resulting in AMP ending the year in a robust liquidity position. Our fourth quarter performance was negatively impacted versus our expectations by weaker-than-expected volume and mix effects in Europe, which was partly offset by a stronger performance in the Americas. European shipments deteriorated towards the end of the quarter and well below retail scanner trends, which were more positive, reflecting what we view to be largely customer destocking actions. There was a clear divergence of performance by customer and geography, and with a gravitation towards value brands and private label. Our confidence in a stronger performance in 2024 reflects our expectations for volume growth in all regions, leading to improved cost absorption in addition to our footprint actions. Inflationary pressures are moderating and the beverage can continues to win share as the package of choice by customer innovation and its sustainability advantages. We are committed to balancing our network capacity with demand through a mix of curtailment and longer-term action as appropriate. The 2 remaining steel lines in Weissenthurm, Germany closed at the end of the year as previously indicated. In North America, we closed our 2 lines facility in Whitehouse, Ohio this month, which will improve network utilization to a more appropriately balanced position. These permanent actions will optimize our network and drive earnings improvement. With our well-invested global manufacturing base and a strong diverse mix of customer relationships, we remain well placed to benefit from a normalization in demand, which should drive further earnings growth over the medium term. During the quarter, the publication of our 2023 sustainability report highlighted our progress on sustainability initiatives. The recently announced supply agreement with Novelis in North America for supply from its greenfield development will further contribute towards AMP's metal decarbonization strategy. AMP, alongside other industry stakeholders, participated in a call for action at COP 28, and we look forward to updating you on further progress on sustainability during 2024. Turning now our attention to AMP's fourth quarter results. We recorded [Technical Difficulty] fourth quarter of $1.1 billion, an increase of 5%, which reflected favorable volume mix and higher input cost recovery, partly offset by the pass-through to customers of lower input costs. Adjusted EBITDA of $148 million was down 7% on the prior year, with growth in the Americas more than offset by a decline in Europe in excess of our expectation, which reflected customer caution and apparent destocking against a weak consumer backdrop. Total beverage can shipments in the quarter were 2% higher than the prior year with 14% growth in Americas, offsetting a 10% decline in Europe. We had a strong cash performance with adjusted operating cash flow approaching $500 million for the quarter and $680 million for the full year. This reflected our team's focus on working capital, in particular, inventory management and our ongoing reduction in capital expenditure. Turning now to AMP's results by segment. Revenue in the Americas in the fourth quarter increased by 11% to $705 million, which reflected shipments growth partly offset by lower input costs. In North America, shipments grew by 8% for the quarter and 13% for the year. Our shipment growth was broadly in line with our expectations, which drove record profitability. This strong outperformance versus the market reflects the contribution from customer contract commitments arising from our investment program as well as the diverse mix of our portfolio weighted towards non-alcoholic beverages, including the high-growth functional energy drinks segment. Looking at the market overall, demand remained somewhat constrained by higher retail pricing and lower levels of promotional activity than historical norms. Industry demand trends improved in Q4, and we expect further improvement into 2024 as input costs moderate, retail pricing stabilizes and consumers see real wage growth. We're encouraged by our strong annual growth in shipments in 2023, our pipeline of contracted growth and good early momentum so far in 2024. This supports our forecast for shipments in our North American business, the growth by a mid- to high single-digit percentage this year versus a low single-digit percentage growth for the industry. In Brazil, fourth quarter shipments increased by 34% against a weak prior year comparable, outperforming the mid-single-digit increase in the market. We experienced encouraging sales momentum with a number of key customers. Shipments grew by 3% for the full year, which was slightly ahead of the market. We forecast modest shipments growth for our Brazil business in 2024, and we continue to balance our capacity through curtailment of our network. We are confident in the growth potential of the business but remain cautious in the near term given the softness over the last 2 years. The market has started the year strongly but we would highlight the earlier date for Carnival this year, which may have had some impact in pulling forward demand. Adjusted EBITDA in the Americas increased by 3% to $117 million in the fourth quarter as the contribution from higher volumes was offset by favorable prior year effects, which included a contribution from unfulfilled customer contractual volume commitments. In 2024, we expect shipments growth in the Americas of a mid-single-digit percentage. Shipments growth and improved fixed cost absorption will drive growth in adjusted EBITDA in 2024. In Europe, fourth quarter revenue decreased by 10% on a constant currency basis to $427 million compared with the same period in 2023, principally due to unfavorable volume mix effects, partly offset by a higher input cost recovery. Shipments for the quarter declined by 10% on the prior year as sales volumes decelerated sharply towards the end of the quarter. For the full year, shipments declined by 2%, with growth in the first half more than offset by the second half deterioration. Consumer demand remains weak, given household financial pressures but the decline in shipments experienced by ourselves and the industry was broad-based and significantly in excess of retail scanner trends in the quarter. We believe this reflected elevated customer destocking into the end of the year. Scanner trends also showed an improvement in consumer volumes towards the end of the quarter [ at odds ] with shipments experience as customers took increased levels of downtime over the holiday period. Fourth quarter adjusted EBITDA in Europe decreased by 35% at constant currency to $31 million due to volume mix effects and reduced fixed cost absorption, which offset stronger input cost recovery versus the prior year. Reduced production activity as finished goods inventory was rightsized earlier than expected, resulted in higher fixed cost under absorption and a lower margin contribution than expected from the period-end contract asset. We took action on our footprint with the closure of Weissenthurm steel lines at the end of the year, and we will continue to keep our network under review to balance supply with demand and improve efficiency. For 2024, we expect low single-digit percent shipments growth with a stronger performance in the second half. Volume growth and improved fixed cost absorption will drive adjusted EBITDA growth in 2024 but partly offset by competitive pressure on a small portion of our business and some upstream cost increases, reflecting elevated energy costs. I'll now briefly hand over to David to talk you through our financial position before finishing with some concluding remarks.
Thanks, Ollie, and hello, everyone. We ended the year with a liquidity position in excess of $800 million, ahead of our expectation. The success of our working capital initiatives resulted in an inflow for the full year of $270 million, ahead of our most recent guidance of $200 million. During the period, our team responded to customer destocking in Europe to rightsize our finished goods inventory, which followed similar action in the Americas in previous quarters. This resulted in adjusted operating cash flow of $680 million for the year, up from $255 million in the prior year. Our expectation for 2024 is for a further working capital inflow across the full year after our usual seasonal outflow in Q1. AMP incurred maintenance CapEx of $112 million, growth CapEx of $266 million and growth investment via lease additions of $71 million in 2023. Total growth investment of $337 million was tightly managed below our initial guidance of just under $400 million, and represents a 45% reduction versus the prior year. Our growth investment program is substantially complete with growth CapEx in 2024 to reduce to approximately $100 million, which mainly comprises flexibility enhancements to our network and the final cash flows for some of the growth projects concluding. We anticipate a further reduction in growth CapEx again in 2025. Our leverage metric ended the year at 5.5x net debt to adjusted EBITDA, falling by 0.2x in the quarter, supported by lower net debt arising from strong cash flow generation. We anticipate modest deleveraging on a full year basis during 2024 and a more meaningful reduction thereafter. Note that in addition to our strong liquidity position, we have no near-term bond maturities and no maintenance covenants on our bond. We have today announced our quarterly ordinary dividend of $0.10 per share to be paid later in March, in line with guidance and supported by our robust closing liquidity position, and the cash generation potential arising from our earnings growth and completing growth investments. There is no change to our capital allocation policy. With that, I'll hand back to Ollie.
Thanks, David. And before taking questions, I'll just recap on AMP's performance and key messages. So firstly, global shipments grew by 2% in the fourth quarter and by 5% for the full year. North America shipments growth was consistently strong and in line with expectations. Brazil shipment trends inflected positively during the second half and Europe shipment trends deteriorated during the second half, but retail scanner data tracked ahead of shipments and would support a more positive market outlook for 2024, in line with historic norms. In response to challenging market conditions, our team successfully optimized our cash generation through disciplined working capital deployment and inventory rebalancing. We ended the year with a strong liquidity position in excess of expectations. 2023 represented a transition year for AMP, where our team performed at a high level to balance the business. Our continued shipments growth, permanent capacity actions, focus on operational excellence and tight control of SG&A should all result in stronger adjusted EBITDA generation going forward. Our current view of the market leads us to project global shipment growth for AMP in 2024 approaching a mid-single-digit percentage. Full year 2024 adjusted EBITDA is projected to grow by 5% to 10% into a range of $630 million to $660 million. Our EBITDA guidance is supported by shipments growth with improved fixed cost absorption, accelerated by the completion of finished goods destocking and footprint rationalization. In terms of guidance for the first quarter, adjusted EBITDA is anticipated to be in line with prior year, with growth expected in the Americas but with Europe slightly lower as we remain cautious on production with volume recovery weighted towards the second half. Having made these opening remarks, we'll now proceed to take any questions that you may have.
[Operator Instructions] And we can take our first question from George Staphos with Bank of America.
This is actually [indiscernible] on for George. We had a conflict this morning. So I guess, first off, given we're almost 2 months into the quarter here, can you just talk about how you're seeing volumes trending quarter-to-date at this point across the regions. And I guess, relatedly, in Europe, have you seen any kind of spillover effects related to the destocking you saw at the end of fourth quarter there?
So yes. So I think the year has started well in all 3 regions, probably running slightly ahead of our expectations. There was definitely some transfer from December into January of European volumes. So we had a strong January, we'd probably say that 2/3 or even more than 2/3 of that looks like it is a crossover from December into January. And region by region, Europe running, as I say, ahead of what will be a guide for the year, and we're guiding to low singles. So we're running a bit ahead of that at the moment but we've got a tough March comp, which we recognize. And there's some funny pieces to the days in the quarter with Easter falling at a very early day. But I think positive on Europe with where that started. North America started strong in both January and February running again somewhat ahead of our expectations and the same for Brazil. The Brazil market grew 20% in January as a total market, which is obviously very encouraging. We weren't at that kind of level just because of our customer mix in January but February also looks good. So yes, we're feeling positive about the way the year has started, even though, obviously, it's still early.
Okay. Understood. And as we think about the EBITDA guide for next year, can you just lay out some of the key buckets or puts and takes to help us bridge aside from volume? And also, any further color you can provide on your comment regarding those elevated energy costs as well?
Sure. So I think if you take the top end of our guide, and you'd be looking at somewhere north of $50 million positive on volume, and we'd be looking at a again, somewhat north of $20 million on cost improvements, fixed cost absorption, operation, excellence and SG&A. And then you've got a negative on price cost, call it, mid-teens to bring you back down to the top end of that guide. And just on that specific point, so yes, the comment about the elevated energy costs is just with some of our upstream suppliers. Obviously, we deferred a lot of that coming down to us over the last couple of years but we have had to take some of that into this year because obviously, a lot of energy is used upstream of us as well as in our own operations, and it's been a little bit more difficult to pass that into the market in Europe in the current environment where the market -- the beverage can market is a little bit looser. So that's why you've got that negative $15 million in there. At the bottom end of our guide, you'd probably just take a bit of all of those, maybe the volume would be more 35%, maybe a negative 20% on the price cost and a positive 15% or so on the op costs and other cost pieces. So that's the buckets that formed the range.
We will take our next question from Anthony Pettinari with Citi.
This is actually Bryan Burgmeier sitting in for Anthony. I'm just trying to gauge the level of curtailments in 2024 that are implied by your guide. It seems like there's still going to be some capacity offline in Europe and Brazil. I'm not sure if that's accurate. And then assuming you reach your volume growth guidance for this year, does that imply essentially no curtailment as we get into 2025?
Look, I think we're still ramping some of our growth investments, and we still have efficiency gains as we pursue various operational excellence initiatives. So I think it's not as simple as that. I mean, if we take the year, we think we've got about [ $4 billion ] of curtailment across the network globally split relatively evenly between the regions. We still do have some in North America and that's giving us good runway on the growth that we've got in the business, particularly in North America but we also have high hopes for Brazil returning into some good level of growth. So we are still taking curtailments and we are obviously keeping under review more permanent network actions but at this point, nothing further to say on them.
Got it. Got it. Last question for me and then I can turn it over. I was under the impression that the growth CapEx in 2024 was kind of related to projects initiated in '23, there's maybe a little bit of spillover but the prepared remarks maybe said otherwise, I'm just curious if you can disclose the projects that are included or maybe it's too soon to do that?
Actually, I think the 2024 growth CapEx is projects that were initiated in '23. So I think we talked about half of it being about flexibility enhancements to our North American network, together with the changes we needed to make to address the Whitehouse closure. And then the other half, we've got some carryover projects from the growth investment that just some of the cash out is in this year. So most of that is '23. There are some '24 projects that will occur during the second half of the year. Again, focused mainly on small amounts of flexibility improvement in the European network. So yes, that's the bulk of the $100 million.
And our next question will come from Curt Woodworth with UBS.
Yes. I was wondering if you could help bridge a little bit on free cash flow delta this year. You talked about working capital could be a use. But then can you also give us some guidance on lease expense, cash interest and some other line items and provide rough bridge on free cash flow.
David?
Yes. Curt, yes, happy to help. So we think we'll have a small working capital inflow this year as we outlined lease repayments of the order of $90 million, maintenance CapEx, a nonbusiness growth investment CapEx of the order of $120 million. We will have some operating exceptionals on the closure of our Whitehouse and Weissenthurm facilities. So we will have $30 million to $40 million there. We'll have cash interest [indiscernible] would my estimate for the year for that one and cash tax, perhaps of the order of $35 million.
Okay. And then, I guess, in terms of the volume outlook in the Americas. Can you get a little bit more granular on maybe the assumptions underpinning that? Like how much of that would be functional around market share wins or just kind of contractual commitments you have? I think you said market growth would be about 2%. And then with respect to Europe, are there any similar levels of growth there in terms of taking share or leveraging new plant network?
Sure. Yes. So look, I think with North America, we guided to a mid- to high single-digit percentage. And you probably would take the mid as being the contractual gains and the rest being the market. So we see the market in the low single digits. And I think we've commented before that we have a couple of contractual gains going into 2024. So that's broadly how those 2 would flip down. And then I think on Europe, it's market growth in our mind. There was a reasonable amount of ups and downs in our customer base coming into 2024 but the growth that we're seeing in '24 is larger from the market, which we're seeing at about a 2% level, as you said.
And we will take our next question from Richard Phelan with Deutsche Bank.
Given the healthy liquidity position at year-end and the planned reduction in CapEx, would the business consider using its balance sheet in any way to support the liquidity demands that its majority owner raising a dividend, the special dividend, redemption of the preferred?
Do you want to take that one? I think we've been clear, our capital allocation policy is unchanged. So we regard the current level of dividend is very sustainable and the liquidity, as you say, at year-end absolutely supports that. Sustainable dividend at current level is our first priority and the leverage reduction is our second priority.
[Operator Instructions] We'll take our next question from Roger Spitz with Bank of America.
I just wanted to clarify the 2024 cash interest. I thought I heard $100 million but I think I might have misheard.
I think, yes, $200 million.
Yes. Okay. Okay. Yes, that makes more sense. Okay. And so when you do that, you get -- adding all the things you did, gave the midpoint of the range, small working capital inflow, it's kind of like a free cash flow before dividends and preferred $35 million plus or minus what have you. Is that kind of the way to think about it, putting all those pieces together that you put together?
I get to a higher number than that.
Higher number. Okay. All right.
And we will take our last question from Ning Yang with Jupiter Asset Management.
Could I just clarify the exceptional cost that you guided earlier in terms of the start-up costs, the restructuring costs. How much was it like adding all together in terms of those exceptional items below EBITDA, and just want to confirming that the CapEx -- the total CapEx guidance, is it roughly [ $230 million ] next year?
Yes. So total CapEx cash flow is of that order, yes. In terms of exceptionals, you have operating exceptionals, which sit before free cash flow. So the cash element of those may be of the order of $35 million around our restructuring activity. You will then have some start-up costs that sit below the free cash flow line they may be of the order of $25 million this year but they're coming down quite substantially, obviously, from when we were in the middle of our growth investment program.
I guess my last question is on your -- in terms of the cash balance that you have, given that you have operators in Brazil, et cetera, et cetera. So where do you see that your business needs in terms of a minimum cash balance to operate?
Minimum cash balance, so We like to have a float of about $100 million, would be our absolute minimum. But yes, clearly, we're a long way above that at this stage.
It appears there are no further questions at this time. Mr. Graham, I will turn the conference back to you for any additional or closing remarks.
Thanks, operator. So we had a better-than-expected Q4 performance in the Americas, which was counteracted by some customer destocking in Europe. We're very confident in a rebound in European volumes in what has historically been our most stable growth market and where retail scanner trends support a more positive outlook. Furthermore, as mentioned on the call, our year-to-date volume trends have been positive across each of our markets. And our actions on our footprint in addition to anticipated volume growth backed by contracted new volumes in North America, should result in an improvement in adjusted EBITDA generation in 2024 and beyond.
And we look forward to talking to you all again at our quarter 1 results. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.