Ardagh Q Loan & Bond Holder Call

Transcription

1 Group Finance Ardagh Q Loan & Bond Holder Call Date: 25 August 2016 Speakers: Paul Coulson, Niall Wall, Ian Curley, David Matthews and John Sheehan Transcript one brandone vision

2 Operator: Hello and welcome to this Ardagh second quarter loan and bond holder call. Throughout this call all participants will be in listen only mode. Afterwards, there will be a question and answer session. Also, just to remind you, this session is being recorded. Today I m pleased to present Paul Coulson, Chairman of Ardagh Group. Please begin. Paul Coulson: Welcome everyone to the Ardagh second quarter 2016 investor call, which follows the publication earlier today of our results for the second quarter. I m joined on the call by our CEO, Niall Wall, Ian Curley, our CEO designate, who takes over CEO on 1 September, David Matthews, our CFO, and John Sheehan, our Investor Relations Director. Group performance in the second quarter, which by the way does not include any contribution from the beverage can business which we acquired recently, was strong, with stable revenue, continued EBITDA growth and strong cash conversion. Financial highlights for the quarter included: - Revenue of 1.3 billion, marginally ahead of the prior year on a constant currency basis. - EBITDA of 256 million, representing growth of 5% at constant currency, versus the prior year. - Increased cash generation, with growth in operating cash flow of 28% and free cash flow increasing by 64% compared with the prior year, to 184 million and 59 million respectively. - On a LTM basis to the 30th June, EBITDA increased to 954 million, with operating cash flow rising to 761 million, and free cash flow increasing to 369 million. - Cash and available liquidity at the end of the quarter was 819 million, compared with 449 million at the end of June If I now turn to each of the divisions. Aside from these financial highlights, it was also a very busy quarter for the group. We closed the acquisition of the beverage can business on 30 June. We financed this transaction at the time of its announcement in April, at an average interest cost of less than 5%. At the same time, we refinanced some 2020 maturities, thereby extending tenor to 2024, and obtaining annual interest savings of over $30 million. Turning to each of the divisions. Looking first at Glass, revenue in the second quarter of 800 million was 2% lower than in the same period 2015 at actual exchange rates, but increased by 1% on a constant currency basis. Constant currency revenue in Glass North America declined by 3%, however over half of this decline was due to the EBITDAneutral reclassification of re-charges for ancillary services to customers, which we now offset against the cost of goods sold rather than report as revenue. Volume was slightly lower, primarily reflecting sluggish beer markets. Glass Europe constant currency revenue increased by 5% compared with the same quarter last year, as the timing of shipments, which had been a drag in the first quarter, rebounded as we expected. EBITDA increased by 4% to 175 million at actual exchange rates and by 6% at constant currency rates. Glass North America and Glass Europe recorded growth of 2% and 5% respectively, primarily due to cost efficiencies and productivity improvements. In Metal, second quarter metal packaging revenue of 481 million was 2% lower than the prior year at actual exchange rates and was in line on a constant currency basis. Growth in volume and mix was offset by the pass through of lower input costs. EBITDA increased by 1% to 81 million at actual exchange rates and by 3% at constant currency, compared with the same period in 2015, reflecting our continuing focus on cost efficiencies. 2

3 In terms of cash generation, the Group s cash generation as you know is heavily weighted towards the second half of the year. However, we delivered improved cash conversion in the quarter, with operating cash flow increasing by 40 million and free cash flow growth of 23 million. On an LTM basis to 30 June, operating cash flow of 761 million and free cash flow of 369 million increased by 42% and 91% respectively, compared with the prior year. This principally reflected EBITDA growth and working capital improvement, as well as a reduction in growth capital expenditure following our expansionary investment phase. Capital expenditure in the first half was 129 million, taking our total investment to over 1 billion since Turning to the acquisition of the beverage can assets, as I mentioned earlier, we completed this acquisition on 30 June. The acquisition of this business represents a major strategic development for our Group and is consistent in all respects with our long-term focus. - Firstly, the business enjoys scale and strong market positions, as the third-largest player globally and the second-largest player in Europe in the beverage can sector. - The acquisition also further diversifies the Group s product range, customer base and capabilities, while increasing annualised Group revenue by over 50% to some 7.9 billion. We view this as highly complementary to our established positions in glass and metal packaging. - Thirdly, the combination of the beverage can business with our existing businesses affords us scope to generate at least $50 million of cost synergies in the areas of procurement, logistics and SG&A. The opportunity to acquire such a well-positioned and highly cash-generative franchise on attractive terms represented a unique fit and a continuation of our longstanding track record of value creation through disciplined M&A. The newly acquired beverage can business is performing in accordance with our expectations. We welcome our new colleagues to the Group, and the integration of the business is already well underway. The beverage can acquisition and integration provides a new platform for further medium-term growth and de-leveraging. The acquisition, together with our Group-wide pursuit of efficiency and operational excellence, as well as initiatives to optimise existing capacity in our asset base, leave us very well positioned to achieve our EBITDA target for 2017 of 1.4 billion. This 1.4 billion compares with LTM pro forma EBITDA at 30 June 2016 of 1.32 billion. As we indicated in April, we are targeting net OpCo debt i.e. cash pay debt, at the end of 2016 to be of the order of 5 times projected 2017 EBITDA, with net debt through the HoldCo PIK notes targeted to be less than 6 times 2017 EBITDA. Our target is to reduce net OpCo or cash pay leverage by approximately half a turn of EBITDA each year from 2017 to Regarding our capital structure and financing, we have been doing considerable work on this and continue to assess how to optimise our capital structure. We do so from a position of strength, as our increased scale and diversity, allied to timely financing actions, positions us to deliver strong EBITDA progression and high cash flow conversion over the medium term. In conclusion, we ve made good progress to date in We expect to achieve pro forma EBITDA for 2016 of around 1.33 billion, compared with 1.32 billion LTM EBITDA at 30 June This is after a projected second-half currency headwind of approximately 15 million. The Group has a very resilient business model, underpinned by strong franchises, a highly-skilled workforce and a well-invested asset base, focused on serving blue-chip customers in mature, stable markets. We aim to generate attractive growth in earnings and strong cash conversion in the current year and over the medium term. Having made these opening remarks, we will now be pleased to take any questions that you may have. 3

4 Operator: And our first question comes from the line of Karl Blunden of Goldman Sachs. Please go ahead; your line is now open. Karl Blunden: Hi good morning or afternoon. Thanks for taking the questions. I appreciate the colour you provided on the capital structure and what your leverage goals are going forward. I think one wrinkle I d be interested in hearing more thoughts on, is that during the bond deal you d spoken about potentially looking at some equity investment to accelerate deleveraging just in the near term with some long term partners. Can you share anything about how that s progressing and how that fits into your plans? Paul Coulson: We re working on a range of options, Karl, in relation to the whole capital structure. We ve nothing concrete or definitive to report at this point in time. It s under ongoing assessment. Karl Blunden: Got it. That makes sense, thanks very much. And then, on the operating side of the business, now that you have the assets under your control and are operating, could you give us a sense of how customers have received that? You mentioned, you know, initially when you had won the deal to acquire the assets, customers received that well. How is it going from an operating standpoint and anything you can share on metals operating trends in 2Q and then to 3Q would be helpful for me? Didn t see too much of that in the Q. Ian Curley: Karl, I joined the business about eight weeks ago and in that period of time I visited about 20 of the plants and met a number of the customers in person or online. And what I found is that everybody s very proud of what they ve done to date in the business and the Ardagh brand is well integrated and the workforces, as Paul said earlier, highly skilled. There s a lot of focus within the business, a lot of energy on the integration (of beverage can) and on the synergy side. Likewise, there s a big focus with regard to customers and the business has invested a tad over 1 billion since So it s very positive right there. To turn specifically to your question in relation to metals, you will have seen year to date metal volumes were up, actually, 2% within Europe and likewise in North America volumes up by 2%. Karl Blunden: Got it. Paul Coulson: Karl, your question on the reaction of customers to our acquisition of the beverage can business has been extremely positive. Karl Blunden: Got it. Well thanks very much guys for the colour and look forward to seeing more, thanks. Paul Coulson: Thank you. Operator: Thank you. Our next question comes from the line of Bill Mastoris of Baird & Co. Please go ahead, your line is now open. Bill Mastoris: Thanks very much. I wonder if you could kind of give us an idea on the time period to integrate all the purchased assets and maybe a timetable for the expected synergies. What should we be looking for over the next several quarters? And then I do have a follow-up. Paul Coulson: In relation to synergies, we expect the majority of them to come through in 2017 and 2018, as we said previously. That still stands. You know, we started work before we closed the transaction on the whole synergy planning. But it s going according to plan and is going forward in a fairly structured manner, to say the least of it. Bill Mastoris: And Paul, do you care to kind of put numbers on that? How much should we be expecting in 2017? David Matthews: Yes, we expect around $30 million in 2017 and about $20 million in that s dollars. 4

5 Bill Mastoris: Okay. And then maybe a quick follow up, and that is do you have a quick pro forma revenue and EBITDA from the purchased assets for the last 12 months? David Matthews: Yes, for the beverage can business it s about 360 million, that s EBITDA, and the sales were around, in dollars, $3 billion, or 2.7 billion. Bill Mastoris: Okay, thank you. Operator: Thank you. Our next question comes from the line of Alexander Hutter of Jefferies. Please go ahead, your line is now open. Alexander Hutter: Good morning and thanks for taking my question. One of your competitors in European glass reported 1% lower pricing this year. Can you talk about whether that s consistent with your experience in Europe and, with input cost potentially rising into 2017, can you talk about your ability to recover rising input costs in the European glass market, or if that could be a headwind for margins? Ian Curley: So, the first part of the question with regard to pricing in Europe, the first six months would have seen pricing fairly flat. And when you look at what we would call the inflation gap, which is the difference between the sales price and cost, the inflation gap would be positive. So overall, you know, 1% isn t a material number, so it would be hard to be more specific than that, but pricing remaining flat, excluding the pass-through obviously. Alexander Hutter: Great, and then on the second part, with potentially rising input costs for 2017, do you think that the market s in good shape to recover those costs? Or could that be a headwind for margins? Paul Coulson: I think we would expect to recover those costs. Alexander Hutter: Great, and then just one more from me: you mentioned that the beverage can capacity acquired from Ball is a good platform for growth. Can you talk about what kind of growth rates you re expecting from each region in the beverage can business, and whether you d need to invest in any new plants or new lines to capture that growth over the next few years? Paul Coulson: I think we only own this business six or seven weeks, so we re obviously assessing what we re going to do. I don t see any great need to build new facilities or anything like that. I think it s a matter of consolidating what we have and seeing how it all fits in and integrating it into our existing business. We are very happy with the franchise we ve bought. We think the environment we bought into is good. You know, we are assessing, together with our customers, what their needs are, but we will certainly be operating within the existing perimeter which we have. Alexander Hutter: Great, thanks very much. Operator: Thank you. Our next question comes from the line of Lizelle du Plessis of APG Asset Management. Please go ahead. Your line is now open. Lizelle du Plessis: Good day. Thank you for taking my question. I just wanted to ask about the deferred consideration of 114 million. It s mentioned in the accounts that you are awaiting the receipt of customary approvals. Could you elaborate on those approvals and also when you expect those to be forthcoming, and also when the amount is then becoming payable? David Matthews: Yes, the amount will become payable in the next few weeks. It relates to the French business, and that s a process we re going through at the moment. But we expect that cash to be paid out in Q3. Lizelle du Plessis: Okay. That s helpful. And could you provide any guidance on capex for 2016 for the full year? 5

6 David Matthews: Yes, including the beverage can business, we expect capex in 2016, and that includes beverage can for a half year, will be million. Lizelle du Plessis: Thank you. Operator: And our next question comes from the line of Roger Spitz of Bank of America Merrill Lynch. Please go ahead. Your line is now open. Roger Spitz: Thank you, and good afternoon. In comparing the Ball/Rexam assets versus your legacy metal container business, can you comment on any differences between the per cent of sales volumes under contract, any differences among contractual pass-throughs and any differences among metal purchase agreements? Ian Curley: So there s a bunch of questions there, but the first one - in relation to contracts about the beverage can business - about 90% would be under contract. Then the remainder would be a passthrough in the vast majority of those contracts with regards to input costs. And I m sorry, I didn t pick up your third question there. Roger Spitz: It was on the metal purchase agreements that you have for the business you bought; whether there is anything special we should know about that? Ian Curley: No, there is nothing special about those. And to your earlier point, we ve a lot of work going on in relation to the purchasing synergies, so we re looking at all that, but there s nothing specific in there. Roger Spitz: Just understanding the pass-through of the vast majority of the input costs - is that done on a one-month lag, or is it - or is there a true-up or something like that?. Ian Curley: It actually depends. On a quarter on quarter basis would be typical - but there s no exact way of doing it. Roger Spitz: Okay and lastly, are you going to report the Ball/Rexam assets as a separate segment, like you break out glass between Europe and North America? Maybe metal between your legacy food can versus beverage can? David Matthews: Yes, what we are going to do going forward is have Metal Americas, Metal Europe and the businesses will be combined within those geographical headings. Roger Spitz: I understand, thank you very much. Operator: Thank you. Our next question comes from the line of Sanjay Aiyar of Coherence Capital Partners. Please go ahead, your line is now open. Sanjay Aiyar: Hi thank you for taking the call. My question is about North American glass. In the 10-Q you mention that there s some softness still in beer and, I was wondering, can you give some colour as far as what s going on there and what the outlook is? Ian Curley: Yes, in North American glass itself, what you see is the big effect is actually mass beer. When you look at that, in quarter two, tonnages overall were down by 1.2%, with mass beer down by 7%, and that s at the quarter. So when you look at the year to date, mass beer is down by 6.5% but then offsetting that, we saw that food was actually quite strong. So, 6 months on 6 months, when you look at the North American volumes, we are effectively flat to half-a-per cent down. Sanjay Aiyar: Okay and then going forward do you see that changing at all? 6

7 Ian Curley: In the short term, not particularly, no. The mass beer numbers have been sort of constant in that kind of area. They ve been partly offset by craft beer. But, overall, when you look at it we have a good mix of volume within the North American business. So, we re not very long within the actual beer position. Sanjay Aiyar: Thank you. Operator: Thank you. Our next question comes from the line of Bernardo Miranda of Sagitta. Please go ahead; your line is now open. Bernardo Miranda: Good afternoon, thanks for the question. You have a couple of billion euros of bonds which are already callable or will be in the next month. And we ve seen the recent issuances have been quite successful. So, I wonder if you could share with us what is your strategy to refinance these bonds and, more specifically, are the PIKs attractive too, or all you also considering refinancing? Thank you. Paul Coulson: Well, as I said Bernardo earlier in my remarks, we are looking at our overall capital structure. As you know, we are fairly active always in taking opportunities that arise. You can take it that we obviously look at and see whether or not we are going to call it or not. But we haven t formed any conclusions at this point in time. Bernardo Miranda: Okay thank you. Operator: Thank you. Our next question comes from the line of Roger Spitz of Bank of America Merrill Lynch. Roger Spitz: Thanks very much for the follow-up. Are there any major contracts within the Ball/Rexam that are up for renewal, say between now and December 2017? Ian Curley: Nothing more than the actual run of the mill contracts that would come up in the normal course. Roger Spitz: Okay. Can you give us any sense of 2017 capex just for the combined business, any rough ideas? Paul Coulson: I think, Roger, it s a bit early for that, particularly given the recent acquisition. We are starting into our budgeting process shortly and our planning for next year but, you d appreciate, a detailed assessment of the assets we ve acquired is required before we can put together our own capex plan. So it s premature but, obviously, in due course, we will give guidance. Roger Spitz: Okay just to make sure I heard in your earlier remarks, the 2016 EBITDA guidance was 1.33 billion, did I hear that correctly? Paul Coulson: That s correct. Roger Spitz: Thank you very much. Operator: And our next question comes from the line of Ruizhi Zhang of UniCredit. Ruizhi Zhang: Hello? Can you hear me? Operator: We can hear you now. Thank you. 7

8 Ruizhi Zhang: Thanks for taking my question. I wondered, in the first quarter bond call, management confirmed that its target to reduce the leverage, based on your focus for 2017 EBITDA. I wonder if you re still going to keep this leverage - these targets? From our perspective, it sounds a little bit too ambitious given the implied EBITDA growth rate of about 10% in If you want to keep this, how will you do that? Thank you. Paul Coulson: Thank you. At the start of the call I did outline where we expect leverage to be at the end of this year. And I also outlined what our expected deleveraging is for the next number of years. And the leverage guidance, Ruizhi, is unchanged from what we said in April. Ruizhi Zhang: Okay. Unchanged. Paul Coulson: Unchanged. Ruizhi Zhang: Okay, great. Thank you. Operator: Thank you. And we have no further questions on the line, so I ll return the call to Paul Coulson for closing comments. Paul Coulson: Well, thank you very much, ladies and gentlemen for joining us today and we look forward to talking to you again when we report our Q3 numbers. Thank you very much indeed. Operator: This now concludes our call. Thank you for attending. Participants, you may disconnect your lines. 8

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