ARD (2020 - Q3)

Hello, and welcome to the Ardagh Third Quarter 2020 Results Call. Throughout the call all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Please note that this call is being recorded. I will now hand you over to Paul Coulson, Chairman and CEO. Please begin your meeting. Paul Cou

Welcome, everybody. We hope that you remain safe and well, and thank you for joining us today for our third quarter earnings call, which follows the publication earlier today of our results for the quarter. With me today are David Matthews, our CFO; Shaun Murphy, our COO; and John Sheehan, our Corporate Development and Investor Relations Director. Our remarks today will include certain forward-looking statements. These reflect circumstances at the time they’re made, and the company expressly disclaims any obligation to update or revise any forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied due to a wide range of factors, including those set out in our SEC filings and news releases. Our earnings release, financial report and related materials for the quarter can be found on our website at ardaghgroup.com. Information regarding the use of non-GAAP financial measures may also be found in the Notes section of the release, which also includes a reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share. Details of our statutory forward-looking statement disclaimer can be found in our SEC filings. Before I move on to discuss our results for the quarter, I’d like to acknowledge the continued dedication of our 16,000 colleagues worldwide and our business partners across Europe and the Americas in recent months. This has been an exceptionally difficult set of circumstances for the communities in which we operate. So, if I turn to the results for the quarter, and I’ll focus here on constant currency performance. Group revenue for the quarter was $1.8 billion and 2% ahead of the prior year, with volume mix growth of 3%, which was partly offset by pass-through of lower aluminum input costs. Adjusted EBITDA of $330 million increased by 1% at constant currency, driven by a 9% advance in Beverage Packaging and is stated after COVID-related costs of some $8 million. Group performance in the third quarter was strong. Our beverage can businesses enjoyed continued broad-based demand growth, while Glass Europe benefited from a continuation of the recovery that you saw in June as on-premise channels reopened. Demand for our products again demonstrated the appeal of sustainable packaging. And during the quarter, we took a further important step on this agenda with our commitment to adopt sustainability targets promoted by the independent science-based Target Institution. So, if I turn to the segmental performance for the quarter in Metal Beverage Packaging, which represented 50% of the revenues in the quarter. Shipments increased by 7% compared with the same period in 2019. Growth was recorded across all regions and major end-use categories. Specialty can shipments increased by 20% in the quarter and by 11% in the year-to-date. And if I look in more detail at the segments, in Metal Beverage Packaging in Europe, revenue of $421 million reflected volume mix growth of 1% in the quarter, offset by the pass-through of lower metal costs. Shipments for the quarter rose 10%, with growth in demand in all major categories. Adjusted EBITDA for the quarter increased by 3% to $73 million compared to the same period last year as a result of increased demand and a strong operating performance. In Metal Beverage Packaging in the Americas, revenue growth of 3% to $478 million reflected a volume mix increase of 6%, partly offset by the pass-through of lower aluminum input costs. Shipments for the quarter increased by 4% compared to the prior year, with strong demand from all end markets in North America, including hard seltzers, sparkling waters, energy drinks and carbonated soft drinks. In Brazil, where we are primarily focused on the beer market, the market grew strongly in the quarter, having recovered pretty rapidly from the brief COVID-related interruptions seen in March and April this year. Adjusted EBITDA in our Metal Beverage Americas business grew strongly, increasingly by 16% over last year to $78 million in the quarter. The backdrop for Metal Beverage America remains very positive with strong demand from long-established brands as well as from new and emerging beverage categories, predominantly packaged and beverage cans in North America. A structural shift from returnable glass packaging to metal packaging continues in Brazil. Sustainability provides a further tailwind and one which we expect to gain increasing momentum in the years ahead as brand owners respond to changing consumer preferences. Our capacity in the Americas in beverage cans is fully sold for the remainder of the year and for 2021 as well. We have been investing in support of our customers’ growth in recent years. And as I will outline later in these remarks, we intend to increase the level of investment and speed up its pace as customer growth accelerates. Turning to Glass Packaging. Total shipments increased by 3% in the third quarter compared to the same period last year. In Glass Packaging Europe, revenue for the quarter of $472 million represented an increase of 10% from the same period last year. Volume mix increased by 8% as on-premise channels across Europe reopened during the quarter. This drove growth in beer and non-alcoholic beverages. Food sector demand was also strong. Third quarter EBITDA of $112 million was in line with the same quarter last year as increased volumes were offset by lower production as we proactively managed our capacity. In Glass Packaging-North America, revenue of $429 was 2% lower than the same period last year due to lower volume mix of 2% and strengthened in wine and other beverages was offset by lower spirits and beer volumes. Adjusted EBITDA of $67 million for the quarter reflected lower volume mix and increased overheads. If I turn to our view of the markets to the end of the year, obviously, there remains considerable uncertainty in the countries we operate in regarding the progression of COVID-19 and the impact of responses there, too. What we currently see is strong demand in all our beverage can businesses backed by consumer shifts, customer innovation and sustainability. Glass Europe’s markets improved in Q3, but national and regional restrictions are increasingly evident in the past week or so, and we will also have some increased furnace rebuild activity in Q4. The North American glass market remains somewhat challenging, and our focus remains there on cost reduction and efficiency improvement. Overall, the group performed very well in the third quarter. And despite the uncertain environment, we are pleased to reiterate our expectation of a mid-single-digit reduction in constant currency adjusted EBITDA for the full year compared to last year. So no change from what we said last time around. If I now turn to our business growth investment plan, earlier this year, we outlined plans to invest $250 million group wise in business growth investments during the current year 2020. These initiatives represent attractive growth opportunities and are backed by multiyear customer contracts. Despite the operational challenges posed by COVID and thanks to the commitment of our operating and engineering teams supported by our suppliers, these investments remain on track with a cumulative outlay of $133 million by the end of Q3 with further expenditure of around $120 million expected in the final quarter of this year. The largest element of this 2020 program involves the addition of two new high-speed specialty can lines at our Olive Branch Mississippi beverage can plant. First of these two new lines will commence production in late November 2020, and the second will come on stream around the end of this year. And following this expansion, the Olive Branch plant will run five production lines and will be the largest facility in our North American beverage can network. In Brazil, in 2020, we’re completing investments in both of our can plants that will add capacity of over one billion cans, with full ramp-up occurring in the first quarter of 2021. In addition, Metal Beverage Americas will this year complete a range of capacity investments and enhancements, including speed up and debottlenecking investments, and this will occur in both North America and in Brazil. Outside of Metal Beverage Americas, we have made incremental capacity investments in Glass Europe and in Metal Beverage Europe, to increase our capacity and especially to expand our specialty footprint. All of these investments that I’ve mentioned are supported by contracted business. I’d like to turn now to, if I may, to future business growth investment. And we’ve recently finalized a detailed business growth investment program for the years 2021 to 2024. This program will see us investing in excess of $1.8 billion over the next four years, principally to expand capacity across all of our Metal Beverage businesses as well as investing in some growth projects in our European glass business and investing in cost reduction and efficiency enhancing projects in Glass North America. New capacity that we bring on stream will be supported by new long-term customer contracts. The investment program is expected to provide attractive deleveraging returns to Ardagh and will be funded from our existing cash resources, future cash flow and where needed incremental debt. The investment program is underpinned by the very favorable market backdrop for our metal and glass products. Demand for Metal Beverage Packaging is growing very strongly, and our output is fully sold in all our markets. We also see good opportunities for our glass business, especially in Europe. And while COVID has caused some short-term changes in demand patterns, we believe the positive outlook for our substrates is underpinned by long-term consumer trends and preferences as well as structural factors, most of which we expect to endure. And given the attractive returns available to us from organic investments in our businesses, especially where we’re expanding our existing plants, we see greater valuation, major value creation, rather, from this new investment program than from acquiring any new businesses, where in any event, the asset valuations of any potential acquisitions remain relatively high. In 2021, we will undertake – an expansion of our Winston-Salem plant in North Carolina with the two high-speed specialty can line expansion. Both these lines will commence production in late 2021, and with the – combined with the Olive Branch and the Winston-Salem investments, similar to earlier projects, they’re focused on expanding existing facilities where we have the advantages of speed of execution, less permitting issues, existing infrastructure support and the availability of skilled labor. However, we have also entered into an agreement to purchase a brownfield site in the U.S.A., Midwest, the U.S. Midwest, at a location close to one of our existing facilities. We will convert the existing buildings into a new can and ends plant, which will commence production in late 2021, ramping up during 2022. The new plant would have three can lines spread across standard and specialty sizes with accompanying ends capacity. These investments in Olive Branch, Winston-Salem and the new Midwest plant are all backed by long-term agreements and will see us increase our annual capacity in North America beverage can business by over eight billion cans by the end of 2021. In Brazil, our 2020 expansion will be followed in 2021 by the addition of capacity equivalent to a further line in an existing plant, with production expected to commence in late 2021. Looking beyond 2021 in Brazil, positive structural growth drivers remain in place, in the bev can market there, including the migration of beer from returnable glass to cans, and we’re reviewing an attractive pipeline of opportunities there, involving further organic expansion in our two existing can plants Alagoinhas and Manaus end plants and also a compelling greenfield development. Over the next four years, we envisage almost doubling our capacity in Brazil again, with all the investments we made being backed by long-term customer contracts. In Europe, backed by our ongoing efficiency initiatives, we will invest further in beverage can capacity at a number of existing – our existing plants during 2021. We plan a new high-speed line in Northern Europe with production commencing in the first half of 2022 while UK capacity will also be expanded during 2021 to support further growth in 2022. We are also currently evaluating a very efficient project to add a new line in Spain and we envisage that in the 2021 to 2024 period, our annual can making capacity in Europe will rise by over $4 billion in cash. At the same time, we will invest to increase our flexibility to produce sleek cans on existing lines. In aggregate, we plan to grow our beverage business of beverage can capacity from 36 billion cans at the time of our acquiring the business in 2016 to 55 billion cans by the end of 2024. In Glass, we will invest in incremental capacity in 2021 to support newly contracted business principally in premium beer. As we reported today, Glass Europe has successfully managed the challenges of COVID-19, and we see the business is well placed to continue to develop organically as a supplier of choice to its market-leading customers. In Glass North America, our investment plans are principally focused on cost reduction and efficiency initiatives to enhance productivity and improve quality. So as you can see, we’re making very significant investments to grow our beverage can and glass businesses. And taking into account our 2020 investment program of some $250 million, we plan to have invested over $2 billion in growth projects during the five years to 2024. Some 85% of this investment will be in beverage cans. Around $800 million is expected to be spent in 2021, with most of the EBITDA impact from this coming in 2022 and onwards, with an additional $500 million to be spent in 2022 and the remaining $500 million to be spent during 2023 and 2024. So that gives you some color in relation to our investment plans. If I turn to our liquidity and capital structure, cash on hand at September 30 was over $1.2 billion after the repayment in full in September of our drawings under our ABL facility. Cash and available liquidity of $1.9 billion leaves us well placed to fund the growth investments that I’ve outlined earlier in these remarks. Net leverage at the end of September was 4.9 times adjusted EBITDA. And we anticipate a similar level of leverage at the end of the year. In 2021, we expect net leverage to stay around five times EBITDA on a reported basis, but with pro forma net leverage, which reflects the full annual run rate EBITDA of the investments we’re making in 2021, but yet to ramp up and contribute for a full year. On a pro forma basis, leverage at the end of next year should be around 4.5 times EBITDA. And following our significant refinancing activity in the second quarter of this year, our weighted average debt maturity is almost six years, and we have no bond maturities arising before 2025. So to wrap up these remarks, the group performed very well in the third quarter, and our expectation for the full year is reiterated as a mid- single-digit decline in constant currency adjusted EBITDA from last year. This year has presented a unique operating environment, but our teams have successfully met the challenges and seized the opportunities that have arisen. The medium-term outlook for our substrates is more positive and exciting than in many years and gives us the confidence to make very significant investment in our teams and assets to take advantage of attractive growth opportunities, which will materially increase long-term stakeholder value. So having made these opening remarks, we’ll now be delighted to take any questions that you may have. Thank you.

Thank you. [Operator Instructions] And our first question comes from the line of Anthony Pettinari from Citi. Please go ahead. Your line is now open.

Good morning.

Good morning, Anthony.

Paul, in the bev can business, you indicated you’ll be sold out in the Americas in 2020 and 2021. I’m just wondering, given the tightness in the market, we’ve been hearing about offshore imports of cans, are you shipping cans in from any other regions or buying cans from competitors? And then on the Europe side of the business, are you sold out there? Or can you talk about operating rates in Europe as well?

In the U.S., we’re not buying virtually nothing now from our competitors or peers. That was a relic of the deal with Ball in 2016. We’ve had a small amount of import of cans into the U.S. from Europe and an even smaller amount from Brazil early on, but Brazil and Europe are now very tight. We’re fully – everything – we’re selling everything we make, and we’re making as much as we can in Europe. So, we’re sold out there.

Okay. That’s helpful. And then in North America Glass, you talked about continued challenges in that business. From a big picture perspective, is the root cause this year? Is it on-premise weakness with COVID? Or is it substitution into cans, which I guess helps the other part of the business? Or is it Chinese and Mexican imports, like what is sort of the root cause of the weakness in North American Glass? And is it possible to quantify how much excess capacity you think could be in the market?

Well, I mean, demand actually has been pretty good, Anthony, this year, and I think the market is reasonably good. And we’re at full capacity. I don’t envisage any further reductions in capacity. Some of the issues we’ve had have been a less favorable mix, as I mentioned in my earlier remarks. And obviously, we continue to work on improving the operating performance of the business, which is below its fellow business in Europe. But – and in fact, the shortage of cans in the U.S. has actually strengthened demand for beer bottles in the U.S. So it’s not actually so much a demand issue in the market. I think it’s more of a mix issue and more of an operating performance and cost and efficiency, hitting margins. But we have a very concrete set of plans. We’re working our way through. And we see a decent future for that business.

Okay, that’s helpful. I’ll turn it over.

Thank you. Next question comes from the line of Kyle White from Deutsche Bank. Please go ahead. Your line is now open.

Hey, good morning. Thanks for taking my question. Just trying to keep up with you in terms of the business growth that you announced, there is a lot of details there. So, I just want to make sure I had the stuff right. Just focused on the U.S. and primarily in the near-term here, next year, the two new lines in Mississippi, two new lines in Winston-Salem and then a brownfield in the Midwest with three lines. This equates to an additional eight billion in capacity. Did I have that correct? And then additionally, all this is tied to long term.

That’s correct.

Okay. Cool. All tied to long-term contracts. I’m curious what kind of customers are underpinning these contracts? Is it from the new product offerings, the spiked seltzers, energy drinks, just any details there? Any shifts away from maybe a different substrate as well?

No. I don’t think – I think it’s a mixture. It’s right across these spheres, new products, old products, CSD, new energy drinks, et cetera, et cetera. It’s right across the piece. So – and I don’t think we’re seeing it’s very hard to measure where increased demand comes from. I don’t think we’re seeing it come from necessarily from glass or plastic. I mean that’s a very difficult thing to identify. But it’s been flagged by others and is evident from the market demand in the U.S. And I think this is – it’s not just a COVID phenomenon. I think this development was taking place before COVID arrived. COVID has probably accelerated a bit or accentuated it.

That’s helpful. And then when I turn to kind of the whole COVID structure you have, with all these organic growth investments and this pipeline that you have and the amount of capital that it’s going to take, what does that mean in terms of your HoldCo structure or the potential to possibility to increase the float of your stock? Is that something that would even really be considered until you get past this growth phase?

Well, I think the growth will be funded. The growth is – the returns are very good. And as I said earlier, we’re deleveraging because we are, in particular, focusing on investment where possible within the existing walls of our plants, which gives you better returns. And also the new plant where we plan to build the brownfield in the Midwest will be near an existing plant of ours. So that gives us advantages as well and gives us good returns. I think in terms of the – and that will be funded from our existing cash resources, which are quite substantial and from free cash flow as they come on stream. And a lot of the plan in terms of the U.S., in particular, in beverage cans is front-ended. The Mississippi one is virtually complete. And the other two developments will be fully in operation or operational pretty much fully by the end of next year. So that comes on stream pretty quickly and starts earning money and providing cash. In terms of the HoldCo, I don’t think this really impacts on our policy in the HoldCo. Over time, dividends will flow there, which will be used some to ourselves and some to reduce debt in the HoldCo. But we do not plan, certainly not at current share levels – share price levels to place any stock – any HoldCo stock into the market.

Okay, that’s helpful. I’ll turn it over.

Thank you. Our next question comes from the line of Travis Edwards from Goldman Sachs. Please go ahead, your line is now open.

Hi, good morning. This is Travis. Thanks for the time. Just a quick follow-up question on maybe, some of the funding of the new investment projects. And you talked about existing cash resources. Obviously, you have a decent amount of liquidity plus cash on the balance sheet. But just wondering if you could elaborate on maybe, some of the scenarios, where you anticipate potentially issuing debt to finance some of these projects?

I think it will be later on as we move our way through the program, if we do that, if we raise debt. I mean in the first instance, we’ll use cash and we’ll use cash flow, which is the returns we get on these investments to fund it. And then if need to be, as we said, as I said earlier in my remarks, we will look at some debt, but the matrix of investing organically, the returns, the matrices, returns using debt are deleveraging and pretty efficient. So, it’s more likely to be at the backend of the investments than at the frontend.

Okay. Got it. That’s helpful. And then just sort of a clarify question on free cash flow trajectory. Our expectation, I guess, would be that in addition to the $800 million to $500 million and the $500 million of cash going out the door for these projects. You have, I guess, still consistently your $330 million to $350 million of maintenance CapEx. Is that accurate on top of the growth investments? Just want to clarify that, to be sure that just as we’re kind of modeling cash flow and maybe, as a quick add on to that...

Yes, yes, yes. That’s the way with all these...

That these cash investments is there, okay. So that’s – okay, clarified there. And then any...?

Yes, I mean, we guided – $330 million, $350 million is the right sort of number, $350 million. And we’ll guide – we’ll give guidance on CapEx for next year when we issue our results early next year for this year.

Got it. Maybe, one more quick one. Is there any risk that – or any intention to pick the HoldCo notes with the additional cash coming through door, so all cash...

Absolutely not. Absolutely not. We plan to make sure that we keep that current.

Great, thanks. Appreciate it. Good luck.

Thanks

Thank you. Our next question comes from the line of Michael Leithead from Barclays. Please go ahead, your line is open.

Great. Thanks and good morning, guys. I guess first question on Europe, and I appreciate its early days in kind of the second wave of lockdowns or restrictions in Europe. But can you give us a sense of your outlook in your European business? Or what you’re seeing in your order books maybe, over the past couple of weeks, just given some of the recent dynamics there.

You’re talking in Glass, sorry, Michael?

Yes. And I guess if there’s anything more glass, but if there’s any changes in beverage cans, that also would be helpful.

No, no. Beverage can is completely sold out, very strong demand. Demand in Europe in glass is good. It’s been strong in recent times. I mean I think we just made some caution. I made some cautionary remarks that you have seen some restrictions reimposed, et cetera, in various countries in Europe. And also, we have some scheduled rebuilds anyway in Q4. That’s a note of caution there. But so far, now, we’ve seen – when the demand recovered, it’s been good.

Got it. And then just on your capital investment program in the next couple of years, obviously, very big numbers. Can you maybe, just talk through how much of that volume is committed? Or how you get comfortable with the return over the next couple of years, just given there’s a lot of new capacity coming on in the next few years?

Well as I said earlier, it’s all backed by new customer contracts. So, it’s all attractive. And secondly, a lot of the investment is being made in our existing plants or in the case of the U.S. one brownfield plant, which, as I said earlier, is near; it’s located quite close to one of our existing plants. And that’s much easier to execute in terms of speed of bringing things on stream to meet the demand that’s there and also in terms of the returns that can be had, because of the cost factors in investing within one’s existing plants, where you’ve got a lot of the infrastructure there. So, we’re not concerned about demand. The main demand in the U.S. is very, very strong, as others have said.

Okay, great. Thank you.

Thanks.

Thank you. Our next question comes from the line of Brian Maguire from Goldman Sachs. Please go ahead, your line is open.

Yes. Good morning or maybe, good afternoon for you guys. Just wanted to circle back again on the growth investment program. And I think earlier, you kind of clarified around the U.S. addition, something around eight billion units with maybe two of those coming on at the end of this year and most of that coming on late next year. Just for the other regions, Brazil, I think I wrote down, you’re expecting to double capacity. I have you down for four billion to start with. So, does that imply about four billion more cans and I don’t know if I caught the timing on that. And then Europe, just to confirm, it’s about four billion cans, additional capacity you are having.

Yes. that’s right.

And just and the timing on that is kind of late 2021 as well?

Not all in late 2021, it’s a little bit later. I mean the Brazilian ones – the U.S. ones are more front-ended. And the Brazilian and European ones are a little – it’s a mixture of frontend and backend there.

Okay. Got it. And others have talked about the European market, maybe not being nearly as tight as the U.S. Curious if you think that’s changed in the last six, nine months and related to that, others have talked about not wanting to add capacity in that region until they’re able to get some better pricing, better commercial terms like the industry seemed to do in the U.S. two years ago or so. Are you seeing that take place now with these new expansions? Or maybe, you just have a different philosophy when it comes to putting capital into that market?

No. I think there’s been improvements this year. The market strengthened. There’s been improvement in market conditions overall. The remarks that others have made about returns in the market are true. We need to see proper pricing and we’re confident that the investments we’re going to make in Europe will be backed up by proper pricing, where we can make proper returns. So, I think you’ll find that it’s – it depends on where everybody is in their investment cycle. Some of our peers have invested more earlier than we did in Europe. And that gives perhaps a different outlook for some of them on the European market, but we’re very comfortable, where we sit with demand, supply and demand in Europe and the investment program we have for Europe is entirely proportionate and related to customer demand there.

Okay. Just last one for me. Just on the EBITDA guidance. Constant currencies remaining at kind of down mid-single digits, was the third quarter EBITDA in line with your expectations? Was it not better than you expected? And if so, is it just conservatism that’s keeping the – and maybe, just semantics, keeping the guidance from improving a little bit?

Yes. I mean we withdrew guidance, Brian, earlier in the year. I mean this is informal guidance that we gave last time around and I think it’s an element of conservatism, yes. We’d hope to do a bit better.

Yes, okay. Appreciate it. Appreciate the time. Good luck, guys.

Thank you.

Thank you. Our next question comes from the line of Roger Spitz from Bank of America. Please go ahead, your line is open.

Thank you. Good afternoon.

Good afternoon, Roger.

So in the U.S., talking about bev cans. I’ve heard said from others that maybe, the U.S. is currently short 10 billion cans. We’ve had announcements from Ball, Crown, Can-Pack, a bunch of greenfields, some expansions. And then you here are announcing another eight billion cans. There’s going to be growth in cans, no doubt between now and 2024. But how do you think in 2024 or whenever you finish your brownfield plant, that supply demand balance will look. Do you think we’ll be basically balance in? Or is there some risk that with all these announcements, we could be no longer balanced and certainly, no longer short.

Well, first of all, Roger, our investment program in the U.S. will be finished at the end of next year. So, all our capacity changes will take place then and they’re all backed by long-term contracts. So, I mean looking forward three, four, five years, I don’t expect there to be overcapacity. I expect that the investments being made by the existing players on Can-Pack are proportionate to what we’re seeing in the marketplace and demand. And what we’re seeing nowadays, we’re seeing some 70% of new products get launched in cans. So, there’s been a big change there. That’s way up from what it was before in previous years or our previous earlier periods. So, I think the investments that we’ve announced and the investments that our peers have announced are proportionate. And as best way one can read the demand and future demand, and what we’re seeing because we just didn’t roll up and say, well, we’re going to increase capacity by eight billion cans willy-nilly. This was on the back of approaches from customers and demand et cetera. And you’re seeing in cans in the U.S., very, very substantial growth right across the piece, and not just in new type products like seltzers, but in the more traditional CSPs and also in beers as well. So, we’re – we believe that what we’re doing is entirely proportionate to what we see in market demand there.

And do you have a view of where U.S. industry can – bev can demand will be in units, say, in a particular year, by 2024?

I don’t really. I think I mean I mean that’s very hard, Roger. I don’t know where – I don’t know, where it will be that’s four years away. I really don’t know. All I can tell you is that there’s very strong demand from customers, who are entering long-term contracts with us at margins that give us proper returns.

Got it. All right, thank you very much.

Thank you, Roger.

Thank you. Our next question comes from the line of Mark Wilde from Bank of Montreal. Please go ahead, your line is open.

All right. Good morning, Paul.

Good morning, Mark. How are you?

Good. Yes. I wanted just to kind of come back on the new capacity. Can you just help us, in general terms, with kind of these long-term contracts; are they literally take-or-pay for all the volume of the lines?

No, no. But there, the conditions of contracts have improved much for the manufacturers and suppliers. They, in some cases, take-or-pay, but it falls short of that, but it’s much improved in terms of the structure of the contracts the industry as a whole enters into now.

Okay. All right. That’s fair. And then just when we think about like a multi-year program like you’ve laid out and some of your peers have laid out, can you give us some sense of whether the back half of the program is fixed or whether really, only like the next 18 months to 24 months are really fixed with commitments to buy equipment, put up new structures, things like that. I’m just trying to get a sense of what your ability is to kind of either cadence up or cadence down depending on how the market evolves. Because the market clearly today is a heck of a lot different than any of us would have predicted two or three years ago?

Yes. although there were signs, as I said earlier, pre-COVID, Mark, the things were – were shifting [indiscernible]. In answering your question, I would say the following. I think we have quite a lot of our plans, 75% of it will of the five-year plan is taking the current year will be spent by the end of 2022. So and a lot of it, the bev can stuff in the U.S. will be dealt with in 2021. Obviously, in terms of – we – of course, we haven’t ordered equipment or committed – made commitments in terms of stuff we expect to bring online in 2024 and the lead times differ depending whether it’s glass or bev kind of what type of investment it is, whether it’s greenfield, whether it’s within an existing plant, et cetera. But obviously, if there was to be a collapse in demand in certain sectors, we have the agility to be able to reduce the investment proportionately again. But the first part of the plan is being executed upon and the stuff is ordered, and it’s going to be ready to go I mean, as I said earlier, our Olive Branch will come on stream at the end of this year. And the other two investments we’re making in bev can in North America will be on stream in Q4 next year.

Okay. But just a couple of quick questions on Glass. It sounds like in Europe, in the third quarter, you sold out of inventory. Is that trend going to continue in the fourth quarter?

Perhaps I’d ask John Sheehan to deal with that one, Mark.

Okay.

Yes. Hi, Mark.

Hi, John.

Yes. in the third quarter, we had pretty strong sales, but we were still managing our production post-COVID. And in the fourth quarter, there will be an element of that. And then as we said, we have some rebuilds. So, our production will be constrained by that in the fourth quarter in Europe. For that reason, that region will be down in the fourth quarter.

All right. And then last one for me.

Demand was healthy through the – right through the third quarter.

Okay. And then just finally, on North American glass, John, I’m just curious, like revenues dropped $9 million, but actually EBIT dropped $10 million. You talked about some issues in the North American business. I wonder if you could just put a little bit more color on what went on in North American Glass in the third quarter to take EBIT down by $10 million.

Yes. As you said, revenues were not down that materially. There was – we did have some increased costs from freight. There’s a few million of that in the quarter. And then the mix was a bit less favorable. So that was – that accounted for the proportionate or disproportionate decline in EBITDA.

We also had, Mark, sorry, COVID-related expenses as well, which impacted.

Okay, that’s helpful. Thank you.

Thank you. Our next question comes from the line of Gab Hajde from Wells Fargo Securities. Please go ahead, your line is open.

Paul, David, John, good morning. hope you guys are all well.

Good. Thank you.

I had a question about start-up costs and what you’re incurring this year and then kind of bridging forward to next year. It sounds like maybe, you’ve already incurred some of this in Mississippi. Next year will be in North Carolina and then obviously, ramp-up in the Midwest, feels like it could be a little bit more pronounced next year than this year? And then specifically, what are you doing? I don’t think you guys have brought up a new facility on the beverage can side in its entirety, maybe down in Manaus, the end module. But just what you’re doing in terms of hiring and planning for that to avoid any sort of missteps.

Well, I think you’re absolutely right to focus on execution, because this is something that we’re very focused on. We have been ramping up recruitment at senior level to make sure that we execute upon our plans, and we’re also working with outside consultants, whom we’ve worked with on these projects in the past. And in terms of ramp-up costs, start-up costs, yes, of course, if you increase capacity, they will be bigger than what they were – when you weren’t increasing capacity. I don’t really have color on that yet in terms of – but a lot of it is mitigated by the fact that we’re expanding existing plants and our history of the thing, our experience has been good in the past in that area, where we’re doing a new existing plant. But your remarks on execution are key. We’ve been very focused on that for a number of months in terms of getting things really well executed, but it’s – most of the plan is probably eight, nine projects are the bulk of it. So, it’s not as daunting as it may seem and it’s reasonably apart from the North American thing actually, it is reasonably spread.

Okay. And then I guess I appreciate that you confirmed kind of this year EBITDA to be down on a constant currency basis, mid single digits. You’re not in the business of giving us a look for even 2021 yet. So, I’m going to ask for 2022, because that’s what we do as analysts is, we’re greedy. You gave us a leverage target and what that would look like four and a half times. Would that imply – and I guess the nature of the question or the genesis of the question is, Ardagh’s shareholders are not buying shares based on what you’re going to do today or tomorrow, it’s really kind of on this returns that you’re going to get out of the $2 billion of investment. So, does that sort of imply directionally a $1.35 billion, maybe $1.375 billion EBITDA figure out in 2022 and then kind of grow from there? Or am I not doing something right in my math?

Well, as you say, you’re being greedy, looking for guidance for 2022 by your own intention. So, I think, look, clearly, making – investing $2 billion, we’re expecting significant increases in EBITDA and we would expect a sizable ramp-up in 2022 as the – particularly, the bev North American ones come on stream. I don’t want to get you into exact numbers. And obviously, then you have the other parts of the plan delivering that as well. And you’ll have – so, we obviously – we wouldn’t make these investments if we didn’t think that there were going to be sizable returns from them. So directionally, yes, there’s – we intend there to be a significant increase in EBITDA. Yes. Otherwise, we wouldn’t make these investments.

Understood. Last one, is there anything to think about contractually as it relates to the glass business? I’m specifically thinking about North America, 2020 was mostly a deflationary year such that next year could be a little bit of price cost headwind? Or is it too early to make that call?

We have relatively little of our business up for renewal next year actually. So, I’m not so sure that it will be that way. We have some very specific initiatives to reduce costs there. That’s what we’re working on there.

Okay. thank you and good luck, Paul.

Thank you.

Thank you. Our next question comes from Brian Maguire from Goldman Sachs. Please go ahead, your line is open.

Yes. Thanks for taking my follow-up. Paul, earlier, I think you talked about how the returns on these projects much better than the acquisition pipeline could provide and what you’re seeing there. Just curious on the timing of the decision to put this much capital to work. I mean in the U.S., you’re adding about eight billion cans. I know about a year ago, there were some talks that one of the large brewers that self-makes some might look to sell or spin-off their bev can-making business. Just wondering if that was something that you looked at and maybe, decided at this point to kind of move more on the greenfield organic route? Or when you’re talking about M&A, were you really talking about kind of like other substrates or other regions?

No. I mean I can’t comment on anything we might have looked at in the past, are subject to confidentiality agreements, some things that we look at, and our policy is never to comment anyway. But I think in the – look, we’ve seen changes in our markets. We’ve seen increased demand for our products. We’ve seen customers coming to us saying, “Will, you do this, will you do that?” And that’s what’s driven. This is a customer and demand-driven program. It’s not us saying, “What are we going to do to deploy capital?” That’s the first thing. It’s important to say that, that’s why backed by these customer contracts. My remarks on M&A were not about any other substrates. We have absolutely no intention in going near another substrate. We’re not going to do that. It was within our existing businesses that those remarks were made. And if you – I said earlier that the returns on the business development program will be deleveraging. So by definition, they’re inside five times EBITDA. And that – you compare that to what you have to pay, for example, for a bev can business today or even the glass business. So – and in any event, given our size and scale, we don’t feel the need to buy anything else. We’re not going to expand geographically and we’re not interested in expanding to another substrate. So, it’s a pretty clear decision for us as to what the right thing to do was.

Great. Okay. Thanks, again.

Thank you.

Thank you. Our next question comes from Kyle White from Deutsche Bank. Please go ahead, your line is open.

Hey, thanks for taking the follow-on. Shifting gears a little bit, a little bit more detailed question. I’m a bit confused on the Trivium contribution to earnings. I think it was just $2 million this quarter, which should have been a pretty strong seasonal quarter for that business. I know they don’t report until early November. But just curious as to why maybe I was so off in terms of modeling that figure? And what should we expect from that joint venture on an annualized basis?

Yes. John, would you deal with that? I mean, Trivium, as you say, reports on the 5th of November.

Yes. I think if you go to Page 12 of the release, you’ll see that pre-amortization that the contribution was $12 million in the quarter and it was $33 million. So, that equates to about $0.05 per share in the quarter, about $0.14 year-to-date. So, it is in line with the kind of that mid to high teens that we referred to. It is projected on the Page 12 of the press release.

All right. Nice outlook for that, John. Appreciate it.

Okay.

Thank you. As we have no more questions registered, I’ll now hand back to our speakers for any closing comments.

Good. Well, thank you very much, everyone, for joining us today and we look forward to talking to you again in the New Year when we report our annual results, and please be careful and stay safe. Thank you very much, indeed.

This now concludes our conference. Thank you all for attending and you may now disconnect.