Ardagh Metal Packaging SA (AMBP) 2023 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ardagh Metal Packaging S.A. Second Quarter 2023 Results Call. As a reminder, today's conference is being recorded. (Operator Instructions).

And now to get us started with opening remarks and introductions, I am pleased to turn the floor over to Mr. Stephen Lyons with Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome, everybody. Thank you for joining today for Ardagh Metal Packaging's Second Quarter 2023 Earnings Call, which follows the earlier publication of AMP's earnings release for the second quarter. We have also added an earnings presentation on to our investor website for your reference.

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 and related materials for the second 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.

Thanks, Stephen. We experienced a challenging quarter against a global backdrop of sustained inflationary and household financial pressures, which was impacting on consumer demand. While we recorded global shipments growth of 5%, which included strong growth of 18% in North America and a solid 2% growth in Europe, we faced difficult conditions in the Brazil market where shipments declined by a double-digit percentage relative to a strong prior year comparative, impacting profitability.

Our performance in Europe proved resilient and was modestly ahead of expectations supported by the anticipated stronger recovery of pass-throughs on energy costs following the contractual actions taken last year. Shipments growth reflected our broad European presence and diverse customer mix.

In North America, we recorded strong shipments growth driven by a favorable customer mix on the ramp-up of our contracted new capacity. Our short-term profitability was impacted by timing issues on sales and actions taken to rightsize inventory, which did drive strong cash generation.

Adjusted EBITDA for the company declined by 17% versus the prior year quarter, but is anticipated to improve through the remainder of the year on further volume growth. Europe's improved input cost recovery and more favorable prior period comparisons in the second half. Nevertheless, we have reduced our full year guidance due to anticipated further weakness in the Brazil market and a delay related to the financial recovery of customer volume commitments in North America.

We continue to project positive adjusted free cash flow in 2023 with further improvement into next year and are committed to our quarterly $0.10 dividend. Our strong cash generation in the first half allows us to raise our full year guidance to $150 million cash inflow from $100 million.

Global demand remains restrained by sustained retail price inflation. Promotional activity continues to improve, albeit modestly, and ahead of a broader demand recovery, we continue to manage our capacity in a disciplined manner. This includes a mix of curtailment actions to balance our footprint ahead of growth in demand as well as more permanent action where necessary, such as our intention to close our remaining steel lines in Germany this year. As previously outlined, we target utilization in the low to mid-90s.

The AMP management team has deep experience across industry cycles, and our discipline reflects our belief that secular tailwinds favoring the beverage can remain intact. With our growth investment program completing in 2023, we're strongly positioned to capture our share of this future growth.

On our sustainability agenda, highlights in the quarter included, in Brazil, we achieved certification by the Aluminum Stewardship Institute of our facility in Manaus as well as our central office in Sao Paulo, which follows on from the certification of the some of our European operations last year. We also published our second green bond report providing an update on the allocation of the proceeds of our green bond issued last year towards various eligible green projects.

Turning our attention to AMP's second quarter results. We recorded revenue of $1.3 billion, which represented a decline of 4% on a constant currency basis as the pass-through of lower metal prices offset the contribution from higher volume mix and nonmetal input cost recovery. Adjusted EBITDA of $151 million was down 17% on the prior year, on both a reported and on a constant currency basis. The impact from higher shipments was more than offset by a less favorable mix of [can] in the Americas, actions to accelerate the rightsizing of our inventory in North America and higher operating costs due to fixed cost under absorption.

Total beverage can shipments in the quarter were 5% higher than the prior year, with 18% growth in North America, 2% growth in Europe, offsetting a double-digit percentage decline in a softer Brazil market. The working capital inflow, net inflow of $171 million compares favorably with a net outflow of $70 million in the prior year quarter and drove a strong overall cash performance.

Looking at AMP's results by segment and at constant exchange rates. Revenue in the Americas in the second quarter declined by 9% to $700 million despite higher shipments growth, mainly due to the pass-through of lower metal pricing and a less favorable mix of cans that ends in the quarter. In North America, shipments grew by 18% for the quarter, supported by our growth investment program, which positions us favorably for future growth.

Demand remains restrained by sustained higher retail pricing, but with greater resilience experienced in nonalcoholic categories, which represent the majority of our North American business. There are also pockets of strong growth from which we benefit in segments such as energy, functional energy, spirits-based drinks and other crossover varieties.

We have experienced a broadening of promotional activity, though the depth of this activity, especially given the scale of retail price rises remains below what we would consider normal. We are encouraged by the increased annual growth in shipments, the sequential quarterly growth as well as our strong momentum into the summer months. This supports our forecast for shipments in our North America business to grow by approximately a high single-digit percentage this year.

In Brazil, second quarter shipments declined by a double-digit percentage, underperforming the high single-digit decline in the market. The market declined against a strong 2022 comparator when the country emerged from the COVID-19 lockdown. Market demand remains challenged by consumer inflationary pressures and a challenging macroeconomic backdrop, pressurizing consumption.

Our underperformance in the period reflected customer mix effects as one of our customers' volumes was impacted by destocking as the customer trades through its reorganization process. Our performance is also affected by the pack-mix shift towards returnable glass bottles which we now expect to last for at least the remainder of the year. Profitability was also impacted by a lower ratio of ends to can sales in the quarter, which we view as a one-off's impact.

We now forecast flat shipments growth for our Brazil business in 2023, and we will take additional curtailment to balance our network, including the slower ramp-up of volume in Alagoinhas. We reiterate our confidence in the medium-term growth characteristics of the Brazil market, which has historically been a highly attractive market. Adjusted EBITDA in the Americas decreased by 28% to $87 million in the second quarter, primarily reflecting more challenging conditions in Brazil. Despite overall shipments growth, our performance was negatively impacted by increased fixed cost under absorption and some timing-related issues in North America, including our decision to accelerate the rightsizing of our inventory position through additional Q2 production cuts. This decision on inventory, while resulting in a short-term impact to our adjusted EBITDA helps improve our working capital position and drove strong cash flow in the period.

In 2023, we expect shipments growth in the Americas of a mid- to high single-digit percentage underpinned by continued strong shipments growth in North America. Fixed cost underabsorption, net of our mitigating curtailment actions remain a headwind to our performance, and we will continue to take the necessary action to balance our capacity in line with demand. We anticipate an uplift in EBITDA generation into the second half of the year, supported by our momentum on shipments growth in North America and the seasonally stronger summer selling period in Brazil. But reflecting our challenges in the Brazil market, and a delay related to the financial recovery of customer volume commitments in North America, we now expect a decline in EBITDA for the Americas for the year overall.

In Europe, second quarter revenue increased by 4% on a constant currency basis to $555 million compared with the same period in 2022, mainly due to a more favorable input cost recovery. Shipments for the quarter grew by 2% on the prior year, which we believe is broadly in line with a resilient market. Consumer demand strengthened across the quarter, supported by improved weather, and this positive trend has continued into the summer. The nonalcoholic beverages market has proved more resilient, in particular with strong growth in the energy drink segment. By contrast, beer consumption in Europe has been more pressured, but we have performed well due to our broad-based portfolio of customers in the sector, where there have been significant winners and losers depending on the pricing strategy being pursued.

Second quarter adjusted EBITDA in Europe rose by 5% on a constant currency basis to $64 million, as the contribution from higher shipments and improved cost pass-throughs offset higher costs. Performance was modestly ahead of our expectations. For 2023, we continue to expect shipments growth in the order of a low single-digit percentage and for a significant step change in EBITDA in H2 relative to the prior year through stronger input cost recovery.

During the second quarter, we commenced production at our new line in the La Ciotat plant in Southern France, which is slowly ramping up this year. As mentioned in my opening remarks, our intention is to close our remaining steel lines in Weissenthurm in Germany by the end of this -- the year. This follows the installation of the 2 new efficient aluminum lines the second of which will become operational from early next year as we migrate fully from our steel lines, which concludes our growth investment program in Europe. The earlier closure of the steel lines will help improve our 2024 financial performance through a reduction in our fixed cost under absorption.

I'll now briefly hand it over to David to talk through our financial position before finishing with some concluding remarks.

Thanks, Ollie, and hello, everyone. We ended the quarter with a liquidity position of just over $0.5 billion. Our adjusted operating cash flow in the period was strong, due to the success of our working capital initiatives, including our decision to accelerate the rightsizing of our North American inventory and our regional mix. We will continue to focus on working capital efficiencies and our early visibility on this success allows us to increase our guidance to a full year working capital benefit of $150 million, up from our prior year guide of circa $100 million.

In the quarter, AMP incurred additional growth CapEx of $70 million and the maintenance CapEx of $26 million. As previously indicated, our revised growth investment plans are well advanced and cash outflows comprised the finishing of projects already underway. Our expectation for the current year is unchanged, which includes growth investment of just under $0.4 billion with a cash flow element under $0.3 billion. We anticipate that growth CapEx will fall to circa $0.1 billion in 2024.

Our net debt was relatively unchanged on the quarter, which was ahead of expectations. Our leverage metric ended the quarter at 6.2x last 12 months adjusted EBITDA due to lower EBITDA in the denominator. We expect this to represent a peak in the leverage metric with a reduction over the remainder of the year through earnings growth. Our projected 2023 year-end metric has increased to 5.5x last 12 months adjusted EBITDA following our revised full year earnings guidance. A meaningful reduction in leverage is anticipated in 2024.

As a reminder, in addition to our strong liquidity position, we have no near-term bond maturities, with no bonds maturing ahead of 2027 and no maintenance covenants on our bonds. We have today announced our quarterly ordinary dividend of $0.10 per share to be paid later in September, in line with our guidance and supported by the cash generation outlook of our business. Our capital allocation strategy will continue to prioritize dividend sustainability and deleveraging in the near and medium term.

With that, I'll hand back to Ollie.

Thanks, David. So just before taking questions, I'll just recap on the main messages. So firstly, our global shipments grew by 5%. That was led by a strong growth of 18% in North America and a solid 2% in Europe. But with the shipment declines we had in Europe, in Brazil, higher fixed cost, under absorption and some of the timing-related issues in North America, we did end with adjusted EBITDA below expectations in the quarter.

Although cash flow generation was very strong. We anticipate adjusted EBITDA to return to growth in the second half as shipment growth continues and as demand normalizes, we're focused on the disciplined management of our capacity, such as our actions in Europe and on improving our business through actions in operations, in procurement, supply chain, where we have very strong teams in place. And these actions underpin our expected earnings growth in the years ahead.

And with our investment program now well advanced, we anticipate improved adjusted free cash flow generation in the remainder of 2023 and beyond. And this in turn supports our dividend policy and balance sheet deleveraging. We're lowering our guidance for 2023 to include global shipments growth of a mid-single-digit percentage and adjusted EBITDA of between $630 million and $640 million. Our guided free cash flow remains neutral. Thanks to increased working capital inflows.

In terms of guidance for the third quarter, adjusted EBITDA is anticipated to be between $170 million and $175 million, which compares to the prior year adjusted EBITDA of $143 million on a constant currency basis.

Having made these opening remarks, we'll now proceed to take your questions.

(Operator Instructions) We'll take our first question today from the line of George Staphos at Bank of America.

Ollie, David, a couple of questions for you. First of all, you said that Americas EBITDA should be down this year. And we'd imagine obviously, Brazil is the bigger factor there. But you aren't implying that North America will be down. Are you? Just want to get some confirmation there. And then more importantly, can you go a little bit further into what was the comment -- what was behind the comment on the delay of the financial recovery of customer commitments in North America? What does that actually mean in terms of your results and the outlook?

Sure. So no, you're absolutely right, George. We're not saying that North American profitability will be down in the year. We're not saying that. So as you say, in the Americas, overall, Brazil is definitely the major factor. And -- so look, it's in the public domain. We had a set of volume commitment clauses in our customer contracts in North America that was supportive of our investment program, which is something we've talked about on these calls. And we were expecting to receive compensation around one of those this year, and we had outside advice to that, that was pretty secure. We attempted to resolve that in a collaborative fashion, again, with outside support and that hasn't been successful at this point. So we still remain confident in the recovery, but we can't see that coming in 2023 at this point.

Okay. And that's fine, but that is -- you would have expected to have been able to resolve that this year because of what had been in your contracts. Is that -- would that be fair?

That and the external advice we've received and the process we were in, that's right.

Okay. And just poking at that one last time, and I'll let it go. Is that a function of other market participants, perhaps interfering in your ability to gain on your contractual commitments? Is there a competitive factor that we should be mindful of or no? And then last, and I'll turn it over. The timing, the -- basically the lower than prior year shipments on ends. Can you go through what was behind that and the effect on mix?

Sure. So no, it's nothing to do with competitive dynamics. It's just different interpretations of the contract. So yes, no competitive angle to that. And then -- yes, we had a couple of ends effects in the quarter. We had one -- just a natural one that can happen in North America where some ends sales got out of line with can bodies. They are on different ordering cycles, that will resolve very rapidly through Q3, Q4, is a few million dollars. So we're -- it's relatively minor in the context of the overall year, but it did impact the quarter.

And then a more material one was in Brazil, where we had anticipated some degree of imbalance just because we'd had some buildup on the positive side. But we got a much more sharp reversal and that was linked partly to the some specific factors around the judicial reorganization and the way that, that customer is now ordering which is obviously different than previously. So that was more material because more of the profit is in the end in Brazil for various reasons. And so that did have a bigger impact on our results.

Next, we'll hear from the line of Anthony Pettinari at Citi.

This is actually Bryan Burgmeier sitting in for Anthony. Maybe just following up on George's question a little bit. I'm wondering if you can provide a little bit more detail on Brazil. It feels like a lot of moving pieces with some customer structuring and destocking, but you're also forecasting a stronger end to the season. Do you view destocking as kind of largely completed now? And I know there was a customer that you were sort of over-indexed to you needed to pull back from? Is that resolved now? Just any more detail you can add there would be great.

Yes, sure. Look, I think Brazil is obviously still going through difficult economic times overall and much more impacted by the inflationary environment across the world with the devaluation of the real. The inflation, therefore, much more impactful on cans in Brazil because of the price of the LME, the Midwest premium and the pricing of cans being heavily in dollars. So that is the general macro context where although inflation has impacted us in all markets, I think it's particularly been severe in Brazil.

And then the piece that we've talked about and others have talked about is the 180-degree change in strategy by the major bird down there from what had been a strong pivot into cans to go back more into returnable bottles, for short-term reasons. And I think at the beginning of the year, we have the sense that, that would unwind more in the second half with the inflationary pressures reducing on the can. But our sense now is that it's not clear that there's a significant recovery in that in the second half possibly could even persist somewhat into 2024. So I think that's why we've called down our guidance plus, obviously, we were down further than we anticipated in the quarter.

So that's a significant piece because that's where we saw some growth coming. And then the second piece was with -- yes, with a major customer that went into a judicial reorganization, we think that with the change in all the patterns that, that necessitated that they did some destocking in April and May. They seem to be back trading well in June and July, and they're doing well in the market. So we're not worried about that. But it did impact their ordering patterns on to us, as I said, in my reply to George, both on can bodies, but also particularly on ends. And so that was a very unexpected one-off impact in the quarter that we think is washed through.

And I'd say, overall, yes, we don't think this as a major customer stock issue. I mean maybe a little bit in the market from being slightly slower than realized. But definitely, the overall market is down and looks like it will stay down for a little bit longer. So that's, as I say, why called down our guidance for the year. We're very well balanced. So in terms of the question about our portfolio, I think we're very happy with our portfolio. In Brazil, we're well balanced across the major customers. So we don't have any concerns there. I think it's just mostly market and then, as I say, some very specific one-off issues that arose in the quarter unexpectedly.

Got it. And then last question for me, Europe, I think, was a little bit ahead of our forecast in 2Q. Can you maybe remind us, is there like a key trigger date for your PPI cost pass-throughs? Did that take effect in 2Q? And then relative to your expectations since the start of the year cost inflation in Europe may be coming down a little bit faster than you might have forecasted?

Thanks, Bryan. So I guess the second one first is cost inflation is pretty much where we thought it would be because we were prudent around hedging out and contracting most of our big cost inputs for the year. But for our customers, they should be seeing some benefit from LME hedges coming off through the year. And so there should be some input cost moderation for them and possibly in other input costs as well. But for us, we -- in particular, the big one, we'd hedged out the energy in 2023 -- in 2022 for this year to make sure that we were prudent around what was still a very unclear situation geopolitically. So I think that, that is what we see on the input cost piece.

The PPI recovery, as we said at the Q1, it does accelerate through the year. So we see in Q2 more than Q1, mainly for accounting reasons on the recognition of the inflation recovery. But that does mean that we have higher input cost recovery in our numbers in H2 relative to H1, which is one of the reasons we see our H2 EBITDA higher than H1.

(Operator Instructions) We'll hear next from Arun Viswanathan at RBC Capital Markets.

I guess I just wanted to ask, so it sounds like in North America, how would you kind of assess the overall market? One of your peers is thinking about down 3% to 5%. Obviously, you're well above that. And given your strong performance, I guess, this year from a volume standpoint, will you be facing tough comps next year? And does that mean that in North America, you expect a decline in volumes next year?

No, absolutely not. So look we see the market probably slightly more favorable. I mean it's hard, right, because we don't all have great data for it at the moment. So you're sort of picking up a mix of different data sources. But we'd still be more sort of flat, maybe slightly negative, maybe slightly positive. And obviously, we're positive about our performance, and we're positive about our performance to the year-end. And then I think we're also very positive about our 2024 outlook. I think one thing that's happening for us at the moment is in Europe and North America, we're getting a much better stabilization and visibility on our customer forecast, our forecast and the realization of volumes against those forecasts. And that really strengthened, I'd say, from sort of mid-May onwards. We really saw that come through. And so we have good visibility into 2024. We have contractual positions that we're confident will come through. And so we definitely expect further growth in 2024 in North America.

Okay. Great. And just on the Brazil situation. Assuming that the challenges from the inflation, I guess, persist potentially into '24. Are there further actions that you would contemplate maybe some reductions in capacity or anything that would reduce the decremental margins and fixed costs on absorption?

Yes, absolutely. I think with what we're looking at in front of us, we're clearly not going to run all of our capacity in 2024 in Brazil. And we'll take the necessary actions to make sure we're curtailed and as you say, that we limit the impact of fixed cost under absorption. I mean we are ramping up Alagoinhas a bit less quickly now, which is the new line 3. And then as I say, we'll definitely be taking action next year on the current forecast to protect our position.

And just lastly, this shift back for returnable glass. Do you think that, that is a broader trend that could continue and potentially spread to other markets in Asia? What's really prompting that? I mean, is there a change in consumption habits as well with many people potentially sharing a glass-bottled beverage? Or is it increased consumption at on-premise? How does this -- I guess, what do you feel as far as this being a structural event and the possible potential for it to spread to other regions?

I mean, we definitely don't see this as a structural event. I think the structural event that occurs in every market over time is the decline of returnable into one-way packaging. And there's some good reasons for that structural event around consumer preferences, around the economics of off-trade consumption versus on-trade consumption. So this is a very much one-off short-term impact, in our view, linked to some extreme inflation sitting in the can relative to returnable bottles and also the particular needs of customers at a time when they need to generate short-term cash versus necessarily think about their long-term market position.

So I think that the same dynamics that occurred in 2016 to 2019, we'll look at again, which is off-trade volumes will start to grow. And at that point, people will move back into the off-trade to defend share and defend brand equity. So yes, for us, this is a clear short-term impact. I don't have a -- we're not in Africa and Asia, but I wouldn't expect any different to be happening except for as GDP per capita grows, you get a shift out of returnable packaging into one-way as the consumer moves and organized retail takes advantage of one-way packaging, particularly in beer and soft drinks to drive traffic. So yes, we're very confident that this will reverse. We're very confident the Brazil market has got significant growth in the years ahead. So I think we're looking at a speed bump, and we had a particular speed bump in Q2 for some unique and unexpected reasons specific to ourselves.

Next, we'll hear from Kyle White at Deutsche Bank.

In North America, just kind of curious how the quarter progressed for you guys and how -- I think you talked about momentum carrying into July, how is July looking? And then what do you think the market growth rate was during the quarter in North America?

Yes. Kyle, so we had a very similar shape to the one outlined earlier this week. So April was a bit weaker, May and June strengthened and July still looks good. So we're confident going into the summer. We, as I say, I think we're sort of picking the market as sort of flat to slightly negative maybe. I mean, there are some players that you just not got sight of. Some of the newer players who could be getting quite a bit of growth that we don't see. So you could imagine there's a tick up, but it's probably flat to slightly negative in our perspective. And so I think, as I say, we feel very confident about the pathway through to the year-end and we feel very good about '24 as well.

Got it. And I know you touched on this quite a bit but in the Americas. Just is there a way to put a finer point on the profitability from a year-over-year perspective. In Americas, I think you're down $33 million. How much of that was driven by the ends in Brazil? How much of it was driven by the rightsizing of inventory that the actions you took there? Any way to actually put dollar amounts to some of these line items?

So look, the year-on-year change was all Brazil. And then so what you've got in the year-on-year changes, some volume and some ends, and maybe David will comment on that in a second. So I think those, they're the specifics of that. I think versus our guidance, there was some in North America, and that was the 2 effects we've talked about. One was, again, ends sales, slightly lagged can sales. But the other thing was that because April was a bit weaker and we went into the first part of May, still not on the stronger side. We took more aggressive action around curtailment to control inventory.

And then when the quarter strengthened strongly through the second part of May and into June, what that meant was we drove significant additional cash off the back of that improved inventory position, but it did impact our EBITDA because of the increased underabsorption on those assets when we didn't run the lines. The good news is we ended up, as I say, with a really strong cash generation in the quarter in North America. And the combination of that and other working capital measures means that we can, as I said in the remarks, up our forecast for working capital inflow by $50 million for the year, and that offsets entirely the drop in our EBITDA guidance. So free cash flow wise, we're in exactly the same place for the year-end as we expected.

And just to build on Ollie's point, Kyle, on Brazil, if you take the delta to prior year, you could almost call out 3 factors. You've got the post-COVID reopening coming into the prior year quarter, which was a positive double-digit effect. You then got the volume down in this quarter for us relative to our expectations, and you've got the ends rebalancing piece. So I would attribute 1/3, 1/3, 1/3 to each of those, i.e., all 3 are low double digit.

Our next question comes from the line of Gabe Hajde at Wells Fargo Securities.

I was curious if you can, I guess, speak a little bit about PPI escalators, de-escalators. I recognize that there's a decent amount of contract resets that are April 1. We've got visibility into this year. But I guess we have a little bit of carryover into Q1 of next year. I don't know if I look at the right indicator, but it looks like PPI is down this year thus far through the first 7 months. So how would you think about or have us think about pricing in North America for next year? And then relatedly, you guys have talked about kind of unspoken for uncontracted business being a pretty small portion of what you do here in North America. Can you talk about that market at all if it's sufficient supply or more customers coming to you that are sort of out of pattern out of the contract?

Yes. Look, I don't want to overcomplicate the PPI discussion too much, but the truth is most of our resets are Jan 1st, but in Europe, in particular, and to some degree in North America, the accounting impact of that takes place much more Q2 onwards. And that's why we talked about the acceleration of input cost recovery through the year rather than fully coming in Q1.

In terms of next year, I mean, in North America, we also have some slightly different indices where we use a mix of labor cost indexes as well as PPI indexes. So as we look into next year, although there might be negative PPI indexes, work very comfortable with the way that our inflation recovery should occur. And that -- those resets occurred as we took over the business in 2016 through to 2020, where we've got a much more secure inflation recovery into our North American contract. So looking forward into 2024. And as we've seen in the last 3, 4 years, we feel very secure about inflation recovery in North America.

And then in Europe, we talked about it. We got the energy piece pass-through separately. We're not currently forecasting a great deal of overrecovery into next year in Europe. At one point, we thought there might be some over recovery but there clearly is a bit of capacity in the market. So we're being cautious around that number. And then the other thing we've been doing in the last few years is matching between our supplier contracts pass-throughs and our customer contract pass-through. So we also feel pretty robust around that.

On your question on uncontracted, there isn't a huge amount of uncontracted volume in the market is our belief. We are 90% plus contracted through -- into 2025. So -- and we think the major players in the market are in a similar position. So there's a relatively small amount that's washing around at any one time. Clearly, there is now some capacity to meet that demand, but we still see the environment as fully rational. And so yes, pricing slipped a bit from what was some very extreme levels for that smaller customer volume, but it's still in very healthy territory.

Okay. And then I guess a little bit, Kyle kind of probed on it in terms of July trends and sort of the acceleration that we've seen. And I think the commentary between yourselves and a peer is pretty consistent in terms of promotional activity maybe not being -- is better, but maybe not what you'd like to -- where you'd like to see it. And again, I recognize that it's not perfect data, but it's what we have.

When we look at sell-through, it's still tracking negative, yet you guys are kind of talking about positive shipments kind of settled in. So can you help us reconcile that? And then we're kind of pass the 2 big promotional holidays. We've got Labor Day out there, I guess, in September. But is it possible that we kind of get to September time frame and there has to be an inventory correction on behalf of your customers? And I'm just asking because -- this is the first time that I think I've heard a timing difference in terms of cans being sold in versus ends. I thought that stuff kind of happened real time with fillers.

Yes. Look, it's just because when you order a consignment of ends, they're much smaller, right? So you order a big truckload of ends and you get a lot more ends like that than cans. So you can get some imbalances just because of some order patterns. We wouldn't normally call it out, but one of them got a little bit bigger than normal in this quarter in North America. So I wouldn't focus too much on that side of things. I mean in North America and Europe, we get some movements through the year. But by the end of the year, they usually reconcile. And the only reason to call it out in Brazil is again because of the additional profitability sitting in the end and also the very specific event that occurred in the quarter.

Look, I think we need to see the whole market report. We won't see everybody, of course, but there clearly are some quite big differences in the market, alcohol, non-alcohol, and not being exposed to mass beer has been a benefit to us in this quarter and this half year. And this is what we see right, year-on-year customer mix plays through in our results, sometimes are up, sometimes we're down. And being on the non-outside of the market, I think, in this half has been helpful.

We also had some very specific situations, as I say, with functional energy players and some of the innovation that's in the market. Where, again, we happen to, I think, at this point, have a favorable customer mix. We think we have a pretty favorable mix on the CSD side in terms of bottlers and locations in this half. Again, these things can go up and down. So I think that our belief, and I'm pretty confident in is there's not a lot of inventory sitting in the supply chain that needs to destock. I think we're just seeing across these different results and these different numbers to different pockets of the market and different pieces of growth or decline. So I think we need to see the whole picture.

We'll hear next from Mike Roxland at Truist Securities.

First question, in terms of the market, you just made a comment, Ollie, in response to a question about not being exposed to mass beer, which has been a benefit. But given some of the pieces in mass beer, in the beer market over the last couple of quarters, can you talk about possibly any share gains you may have experienced, whether it's speed through CSD or maybe some of the other beers where you have more or the craft beers, energy drinks. You're seeing a shift away from mass beer into product categories where you benefited from what's happened in mass beer?

Yes. Look, seltzers remained globally under quite a lot of pressure, but we actually had a decent quarter. So I don't know if there was some shift back into the seltzers, so spirits based ready-to-drinks are going well. So again, maybe there was some shift into those spaces. But again, generally, we think it was down a bit. So -- and I doubt that there was a big shift into CSD. That wouldn't be a normal shift, I don't think.

So I think most of those effects were going on within beer, and we didn't specifically benefit from the situation going on in the North American beer market at the moment. So that wasn't something where we had the right side of that situation at all. It has impacted, if you like, any potential growth that we had planned in that space in the year, but it's not that we've got any particular positives. There are some share shifts going on in mass beer cans in North America, but they're not linked to that situation. It's just some what I'd call natural diversification and supply going on. So yes, nothing particularly to report on from our perspective from that whole controversy.

Got it. Appreciate the color. Just -- and one last question. In terms of the rightsizing of your inventory in North America, is there anything left to do in 3Q or 4Q? Or has that largely been worked through in 2Q?

No, no, it's more than being worked through to the point where we actually probably have to rebuild a little bit. So by taking decisive action relatively early in the quarter, we definitely got into a good place because of the strengthening of the sales line during the quarter.

(Operator Instructions) Jupiter Asset Management and the line of Ning Yang.

I have several questions. First, on the top line in terms of contract visibility. We were -- I heard that you were talking about 90% of volume visibility contracted into 2025. I just wonder, so in terms of the contracting kind of mechanism, do you have some kind of certainty in terms of the pricing and the volume on those contracts? And secondly, on the cost side, so if we were to think about aluminum and energy cost hedging. How -- usually how well in advance that you would hedge the prices? And just to assess if we were to think about 2023, 2024 energy cost compared to 2022 level, what would be the magnitude of shift? That would take...

So -- yes, so all the customer contracts have pricing agreed with the relevant inflation clauses. So that's all set in those contracts. And then volumes are also agreed in those contracts. We have taken a more cautious perspective on the volumes listed in those contracts on the basis of the last few years. So -- and I think as I said in earlier remarks, I think one thing that's been very encouraging in the last 6 months is the stabilization between our customer forecast, our forecast and the outcomes we're seeing in Europe and North America, clearly, we cannot say the same yet for Brazil. So we need the same stabilization to happen in Brazil. But in our 2 major markets, I think we've got a much more visible picture on volumes and much more security around that volume growth and volume outlook.

In terms of costs, so we have rolling, hedging on LME, where we do it. Sometimes our big customers do it for themselves. So you won't see any impact of that in our EBITDA line. You'll only see it in the revenue line. And then energy costs in Europe, which is where -- I mean, everywhere we hedge on a multiyear basis. So we're rolling forward on a multiyear basis. We're probably sitting above 50%, 60% for 2024 at this point, and we'll have some of '25 taken already. And so with the way the energy market has now developed in this year, we don't see any concerns on those costs over the next few years.

And approximately, how much in terms of percentage of pass-through aluminum prices, on average, like -- can you give kind of a rough kind of idea? Is it more or less almost entirely pass-through or is like 80%, 90% pass-through?

So the LME and premium parts of the aluminum price are all pass-through directly. And then the only piece in some markets, not in a good part of North America, but in the part of North America and in Europe and Brazil, is what we call the conversion cost, so the cost of buying the coil. So call that 30%, 40% of aluminum gets pass-through on the PPI mechanisms as opposed to on a direct pass-through with the LME or the premiums.

Understood. And my second question is related to cash flow. So in 2024 that we're expecting the CapEx to go down significantly. When do you expect the next investment cycle to pick up if we were to look at forecasting the next 7 years?

Not for 2 or 3 years. I think we've been clear that we're curtailing this year. And now with the additional actions we took in the quarter were over $3 billion of curtailment in North America, over $1 billion in Europe and now we're trending that way in Brazil as well. So we've got plenty of capacity to grow into. We've got a cash-free period, if you like, of growth. So I don't think you need to model anything for the next 2 or 3 years.

Understood. And in terms of the working capital positioning, if we were to think about the working capital as a percentage of sales, do you expect that to normalize end of this year and in '24 like is there any kind of guidance that you can give us?

Yes. I think we've guided that we've got an inflow this year. And then I don't know, David, if there's anything else?

Yes. I think we'll guide on next year when we get into the spring, but clearly, we wouldn't expect any adverse capital impact on next year either.

(Operator Instructions) We will take a follow-up from George Staphos at Bank of America.

I'll try to make them quick. Just for posterity, could you give us your view, recognizing it's imperfect data, because we don't have one industry source. What you think North America and what you think Brazil, the markets did in 2Q in terms of volumes? And similarly, what your expectation would be for both regions for '23?

Second, one of the other analysts had raised this, I think it was Arun. Can you tell us, given your perspective, what you're finding in terms of consumer perceptions on glass versus aluminum? I mean, again, we've covered the cycles in the past where you go into a downturn, you got a returnable glass and then it comes back to one way in aluminum over time, but are you seeing any change in consumers' perception such that the recovery won't happen this time around? And last, Ollie, I think you touched a little bit on capacity in South America for next year. I just wanted to probe what you were perhaps indicating there?

Thanks, George. So I think taking those in turn, I mean, our view, as I said, on North America, it was probably flat to slightly negative is our best guess. I think that we've got some people not reporting and not visible at this point where there could be significant growth linked to the beer situation in North America. So that's the uncertainty in our minds. And therefore, that's where we are. We think obviously, there's negative drag from import reduction and domestic is probably in that flat sort of space. So that's the domestic, excluding the people that we can't see.

Then I think expectations for the North American market, I remain in a low single-digit place. I think once retail pricing normalizes, I think we're going to see the impacts of the tailwinds that are sitting in the business, which is that there continues to be a strong sustainability tailwind for cans worldwide. We continue to see pressure on single-use plastic. We continue to see the benefits that can be driven for our customers from the decarbonization of cans, which is something that as recycling rates pick up, and as supply chain decarbonizes the electricity base, we will see in the can, and therefore, we can really support our customers on the sustainability agenda.

And then the other piece that we've seen really play out in this quarter is the innovation going into cans, particularly in North America, but also in Europe, where we see people pop. And one of the reasons we've had a great quarter is because 1 or 2 of those players really popped and that is about the portfolio. We're sitting with others that we'll see our peers have that benefit too in North America when one in their portfolio pops. So I believe those 2 trends, the sustainability and the innovation mean that low single digit is a very confident forecast for the North American can market next year and beyond.

Brazil, we know was down high singles in the quarter. It's minus -- roughly minus 1% year-to-date. And we expect it to sort of recover to a flattish position for the year, possibly could be if you were optimistic, a bit better than that. And as I say, we've predicted ourselves in recovering somewhat from where we were. And I think Brazil, we're still very comfortable in the mid-single digits.

Look, I very honestly, don't have a lot of consumer data. I mean, it's a very interesting question, which is would consumer perceptions be changing around returnable versus one-way packaging. But I don't see it. And our customers also want to move into one way over time because they've got many more strategies they can play around that, premiumization with single-use glass bottles, cans driving the middle and the mass. And I think they will lose brand equity and market share if they don't play significantly in the off-trade.

So I don't have any data that would prove that those perceptions haven't changed or have changed in the consumer. But I think the overall trends have been so strong worldwide in this space that I'd be very confident that we'll see that return to one-way glass and one-way cans in Brazil. And then on capacity, I mean, what we're really talking about is about 1 billion cans in Brazil potentially have to be taken down next year with our current forecast.

(Operator Instructions) And we have no signals from our audience. Mr. Graham, I'll turn it back to you, sir, for any additional or closing remarks that you have.

Thanks, Jim. Thanks, everybody, on the call. So I think, look, we covered the big points about what impacted our Q2 performance. And -- but how we see the second half improving significantly in terms of profit growth, how we see this really as an inflection point for the business as we grow into the second half and into 2024, where we also see significant profit growth next year.

We'll continue to manage our network in a disciplined manner to balance with demand. But I think with our investment program largely complete and with business growth investment dropping significantly into 2024, with the additional cash generation that we've achieved in this quarter and that we expect to achieve towards the end of the year, we're feeling very good about our dividend and our overall balance sheet deleveraging. So we look forward to talking to everyone again at our quarter 3 results. Thank you very much.

This does conclude today's call and thank you for your participation. You may now disconnect.