Group Finance Ardagh Q4 2015 Bond & Loan Holder Call Date: 29 February 2016 Speakers: Paul Coulson, Niall Wall, David Matthews, David Wall and John Sheehan Transcript one brandone vision
Operator: Hello and welcome to the Ardagh Q4 2015 Bond and Loan Holder Call. Throughout this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. And just to remind you, this session is being recorded. I will now hand you over to Paul Coulson, Chairman of Ardagh. Please begin. Paul Coulson: Good afternoon everyone and good morning everyone from us here in London. I m joined today on the call by Niall Wall, our CEO; David Matthews, our CFO; David Wall, CEO of our Metals business and by John Sheehan, our Investor Relations Director. The Group performed strongly in the fourth quarter, continuing the positive performance seen in the first nine months of 2015. Financial highlights for the quarter included: Revenue growth of 5% to 1.2 billion, with pro forma constant currency revenue up 1%, largely driven by our Metal expansion project in North America. EBITDA growth of 13% to 204 million, up 9% pro forma at constant currency; strong advances were achieved in both divisions, with Metal up 15% and Glass increasing by 7% compared with the same period in 2014. There was EBITDA margin expansion in the quarter of 120 basis points, to 16.6% overall, with Glass 150 basis points higher at 18.9% and Metal increasing by 80 basis points to 12.8%. Strong cash conversion, with free cash flow for the quarter increasing by 116% to 197 million, resulting in available liquidity of 823 million at 31 December. Financial highlights for the full year in 2015 included: Group revenue increasing by 3% at constant currency to 5.2 billion, compared with the pro forma 2014 level. EBITDA increased by 10% at constant currency to 934 million. EBITDA margin was 130 basis points higher at 18% and EBITDA growth, combined with a focus on working capital efficiency, resulted in full year operating cash flow growth of 52% to 700 million with free cash flow increasing by 115% to 318 million. So, if I turn to each of our two divisions First of all, in our Glass division, fourth quarter revenue grew by 6% to 761 million. Constant currency revenue, allowing for a capacity change in one of our North American plants in late 2014, was 1% lower than the prior year. EBITDA increased by 15% to 144 million at actual exchange rates and by 7% on a constant currency basis, reflecting successful acquisition integration and a continued focus on efficiencies. Glass EBITDA margin increased by 150 basis points to 18.9% in the quarter compared with the same period last year. In Metal, revenue in the quarter of 467 million was 8% higher than the prior year on a pro forma constant currency basis. This advance was attributable to our new North American plants, which commenced shipments in January 2015. Constant currency EBITDA increased by 15% to 60 million, compared with the pro forma result for 2014. This growth again reflected the North American expansion, combined with the pursuit of operating efficiencies and cost reductions in Europe. EBITDA margin increased by 80 basis points to 12.8%, compared with the same in 2014. Cash generation in the fourth quarter was strong, as operating cash flow rose by 79% to 310 million and free cash flow was up 116% to 197 million. Growth in cash generation was primarily driven by increased EBITDA and a constant focus on working capital reduction. Cash and available liquidity at the year end, as I said earlier, was 823 million. To conclude these remarks, 2015 has been a year of significant progress for Ardagh, with broad based EBITDA growth driven by organic initiatives, the successful execution of development projects and thirdly, ongoing acquisition integration and synergy delivery. 2
Allied to enhanced cash conversion, this has resulted in year on year deleveraging. In less than two years, EBITDA has grown from a pro forma 735 million at March 2014 to 934 million today, in line with the path that we outlined to you in May 2014, when we completed the acquisition of VNA. The Group s progress reflects consistent delivery and is founded on the attractive market positions we hold, serving blue chip customers in the stable market sectors of food and beverage. Geographically, our focus remains largely on developed markets, with Europe and North America representing over 95% of revenues. As we look to 2016, although the global economic outlook has become somewhat more uncertain, our trading to date in 2016 has been satisfactory and is in line with our expectations. We are targeting further progress this year, with continued deleveraging. Having made those few opening remarks, we d be delighted to take any questions which you may have. Operator: Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press 01 on your telephone keypads. You can withdraw your question at any time by pressing 02 to cancel. There will now be a pause while questions are being registered. And our first 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. Good afternoon. To start with, could you provide any 2016 guidance you might be willing to provide, either EBITDA, capex, cash taxes, cash interest, etc.? Paul Coulson: Yes, do you want to give us all your questions to start with or is that it? Roger Spitz: I can ask all of them at the same time, if you prefer? Paul Coulson: Yes, that might be easier if you wouldn t mind. Roger Spitz: Of course. I was curious, 2015 SG&A was 275 million on a recurring basis, up from 245 million in 2014. I m wondering whether the 275 million is a recurring number going forward? On North American Glass, I wonder if you could clarify why the sales were down organically, excluding disposal, on a constant currency basis. And lastly, how much of the 2015 full year Metal organic growth of sales of 187 million and EBITDA of 65 million related to the two new US can plants? Thank you. Paul Coulson: Thanks Roger. David will handle these. David Matthews: I ll handle the first couple. In terms of 2016 guidance, starting with EBITDA, clearly it depends on currency but we are guiding at a range of between 960 million and 980 million at this point. Capex will be lower than 2015 and will be around 280 million. Interest will be just over 300 million at around 310 million, assuming there s no change to the capital structure. Cash tax will be around 80 million. And then if we turn to the cash flow, operating cash flow will be 700 million or slightly above and free cash flow will be around 320 330 million. Hopefully that answers your first question, unless there s any further guidance you would like before I move on to your next question? Roger Spitz: Perfect. David Matthews: Okay. On SG&A, I think if you look across the year, SG&A as a percentage of sales is level at just over 5% and that s where we would guide it going forward into 2016. Roger Spitz: Great. Niall Wall: Just on your North American Glass question, the modest organic decline in volumes has essentially been across the board, but probably most felt in the mass beer section, where our large customers have suffered some volume declines. And on the can plants, we won t be breaking that out, I m afraid. 3
Roger Spitz: Thank you very much; I appreciate it. Operator: Thank you. Our next question comes from the line of Richard Kus of Jefferies. Please go ahead, your line is now open. Richard Kus: Hey guys, good afternoon. I am curious, from a strategic standpoint, what kind of things are you considering at this point, now that you kind of have, the Verallia assets integrated, although I know there are some more efforts there, and the IPO for Oressa is on hold. Could you give us a sense of what types of other things that you re looking at doing to potentially drive EBITDA growth on a go forward basis? Paul Coulson: I think Richard, it s been fairly widely publicised that we re one of the parties looking at the assets to be divested out of the Ball Rexam merger and that is something we are looking at. It s very early days in that situation. It s an asset that is very complementary for our Group and we think can drive forward EBITDA growth. We have good synergies with that business through our existing businesses in North America and in Europe and that s the main thing we re looking at - but obviously we re very conscious of not over leveraging the situation. As you know, from a couple of the things you mentioned, we have been very conservative and careful in our approach to acquisitions. It is three years now since we bought anything. So we are very conscious of making sure that we create value for our stakeholders, our bondholders and our shareholders. I think that s pretty much where it s at, at the moment, in terms of where our focus is. Obviously, IPO markets are pretty much closed at the moment, so there s nothing going on there. Richard Kus: Okay. You know, how do you see yourself financing a transaction, should you end up doing anything, just given the current capital market conditions? Paul Coulson: I think, Richard, clearly we wouldn t go into something without knowing how we d do it. I think that, clearly if we want to do it, we will be able to finance it, but I can t go into that on this call. Richard Kus: Okay. Understood. That s all from me, thanks guys. Operator: Thank you. Our next question comes from the line of Bill Hoffmann of RBC Capital Markets. Please go ahead, your line is now open. Bill Hoffmann: Thank you. Just I wonder if you can give us a little bit of colour on sort of general market conditions, you know, just given the relatively low growth rates, especially on the Glass side right now. What do you guys see, from a competitive standpoint, out there in the markets? Niall Wall: Yes Bill, it s Niall here. Our business is always competitive. I wouldn t say it s become any more competitive than it usually is. The macro conditions in terms of what s happening with our customers, always go upstream to us, so if our customers suffer some declines, we suffer it as well. But we re not seeing anything particularly out of the ordinary or out of the norm; it s pretty much business as usual. I think the numbers which Paul took you through in his opening remarks, you know, reflect a pretty steady-state and successful business. Bill Hoffmann: Great, thank you. And then, with regard to those numbers, the 280 million of capex, is there any capacity growth out of that or what s the focus of that capital spend? David Matthews: Well, we don t split out our capital spend. That s carrying on doing what we re doing. There are no material greenfield projects in there, which is why it s down on the previous year, 2015, when we spent a little bit more finishing off our US plants. 4
Bill Hoffmann: Okay, great, thank you, that s it. Operator: Thank you. Our next question comes from the line of Derek Ching of Goldman Sachs. Please go ahead, your line is now open. Derek Ching: Hey guys, thanks for taking my question. Just on the potential transaction that you re looking at, but asking it another way, is one of the options on the table to acquire certain plants in a particular geography rather than taking on a whole portfolio of assets? Paul Coulson: I wouldn t want to comment on that, Derek, but I think you ll find that the sellers have, up to now, been wanting to sell things on an overall basis, as far as I m aware. I don t know. Niall Wall: Derek, it s Niall here. It is a portfolio of assets, so they re pretty much businesses in their own right and they re coming as deliverables as business units, per se. Derek Ching: Alright, thanks. And then my second question is related to the new Metal plants that you have in North America. Can you just remind us how much of the capacity is tied to the one initial customer and just any progress you have made around securing additional customers for the new year? Niall Wall: We don t really break that out but we did create these assets with one customer in mind, so, you know, that is how I would answer that question. We re always competitive; if there s new business to be had, we re competitive. We look to, obviously, fulfil and to grow our business and that s probably as much flavour as we could give you on that. Derek Ching: Got it. And then, to my last question, so the 2016 guidance for EBITDA for 960-980 million; can you talk about some of the drivers just behind the uplift from the 934 million that you had in 2015? Niall Wall: No, we wouldn t break that out for you but it pretty much reflects our business as it is in a steady state. Derek Ching: Okay, thanks. Operator: Thank you. Our next question comes from the line of Chris Ellis of Babson Capital. Please go ahead, your line is now open. Chris Ellis: Hi, good afternoon. Can I just clarify that you said they re individual business units, so the three assets would be North America, Europe and then the couple of plants in Brazil? Paul Coulson: That s it, yes. And, I think they will be sold as a group, okay? That s the situation, just to avoid any doubts here. Chris Ellis: Okay, that s great, thank you. And then, given what you said on the Oressa IPO, are we right to assume that Ardagh is fine to go ahead potentially financing that particular transaction ahead of any proposed IPO of the Metal business? Paul Coulson: Yes, we re looking at these assets independent from an Oressa IPO, yes. Chris Ellis: Okay, thank you. And then final question from me is that there s a bit of relatively expensive outstanding subordinated debt, or unsecured debt, that s now callable. Are there any thoughts on the capital structure or is it a case of waiting until that proposed transaction goes through? Paul Coulson: I think it s a case of wait and see. Chris Ellis: Okay. Thanks very much. 5
Operator: Thank you. Just to remind all participants: if you would like to ask a question, please press 01 on your telephone keypad. You can withdraw your question at any time by pressing 02 to cancel. And our next question comes from the line of Chris Croteau of Schroders. Please go ahead, your line is now open. Chris Croteau: Hi, thanks for taking my question. My first question is on the North American Metal business. I saw that the Weirton plant of one of your competitors was closed. How close does that bring us to sort of being in a balanced pricing power position for you guys? Niall Wall: It really has no effect whatsoever and I m not so sure even what that Weirton plant does. Chris Croteau: Okay and then can you talk a little bit about raw material trends and how much you have hedged in versus how much benefit you could potentially see in energy? Niall Wall: Where we are on energy is where we normally would be at this time of the year, which is roughly 80%; we re probably hedged between 75-80% of our total energy needs for 2016. Chris Croteau: Okay. And where are we on FX, as far as your assumption for foreign exchange for your guidance on EBITDA? David Matthews: Yes, I think in the guidance we ve given, it s broadly flat in terms of 2015. Clearly the dollar has strengthened a little bit since the average of 2015 but clearly the pound has weakened quite significantly. But it s broadly flat. Chris Croteau: Okay, do you have any hedging in place on the foreign exchange or not? David Matthews: Well, no, because it s translation; we don t hedge the translation. Chris Croteau: Okay. Great, thank you. Operator: Thank you. And as we have no further questions, I ll hand the call back to our speakers for closing comments. Paul Coulson: Good, well thank you very much, ladies and gentlemen, for joining us today and we look forward to talking to you in the near future, with our Q1 results. Thank you very much indeed. Operator: This now concludes our call. Thank you for attending. Participants, you may disconnect your lines. 6
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