U.S. Markets closed

Edited Transcript of ARD.N earnings conference call or presentation 25-Jul-19 2:00pm GMT

Q2 2019 Ardagh Group SA Earnings Call

LUXEMBOURG Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Ardagh Group SA earnings conference call or presentation Thursday, July 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Matthews

Ardagh Group S.A. - Group CFO & Director

* John Sheehan

Ardagh Group S.A. - Group IR Director

* Paul R. Coulson

Ardagh Group S.A. - Executive Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Anojja Aditi Shah

BMO Capital Markets Equity Research - Senior Associate

* Arun Shankar Viswanathan

RBC Capital Markets, LLC, Research Division - Analyst

* Kyle White

Deutsche Bank AG, Research Division - Research Associate

* Roger Neil Spitz

BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst

* Travis Edwards

Goldman Sachs Group Inc., Research Division - Research Analyst

* Tyler J. Langton

JP Morgan Chase & Co, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Ardagh Second Quarter 2019 Results Call. (Operator Instructions) Please note that this call is being recorded. Today, I am pleased to present Paul Coulson, Chairman and CEO. Please begin your meeting.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [2]

--------------------------------------------------------------------------------

Welcome, everyone, to our second quarter earnings call, which follows the publication earlier today of our results for the quarter. With me, as usual, are David Matthews, our CFO; 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 forth in our guidelines in our SEC filings and in our news releases.

Our earnings release as well as our financial reports for the period and related materials can be found at ardaghgroup.com. Information regarding the use of non-GAAP financial measures may also be found in the Notes section of the release, which includes the reconciliation to the most comparable GAAP measures of adjusted EBITDA and adjusted earnings per share. Full details of the company's statutory forward-looking statements disclaimer can be found in the company's filings with the SEC.

So having said that, if I could turn to the second quarter performance for the group. Overall results for the quarter were in line with our expectations with group revenue rising 1% at constant currency to $2.3 billion and adjusted EBITDA of $395 million, a 5% advance on the same period last year at constant currency.

Currency effects on revenue and adjusted EBITDA principally on translation of euro earnings to U.S. dollars were $92 million and $16 million, respectively, in the quarter. Three of our four divisions recorded constant currency growth in revenue and adjusted EBITDA for the quarter. And adjusted EBITDA margin for the quarter increased by 70 basis points to 17.4%. Earnings per share for the quarter was USD 0.29 a share, a 16% increase on the $0.25 reported in the same period last year. Adjusted EPS were USD 0.48 per share, a reduction on the $0.51 per share earned in the same period last year as a result of higher depreciation. Our full year outlook is unchanged and before taking account of the recently announced Trivium Packaging transaction, which I will discuss later.

If we look at the segmental performance. Revenues in Metal Packaging Europe of $874 million increased by -- compared with the same period last year due to a positive volume mix effect of 1%. Beverage Can growth moderated from the high single digit seen in the first quarter, reflecting the impact of poor weather in the quarter and some likely unwind of Brexit stock building seen in the first quarter. Adjusted EBITDA of $140 million for the quarter declined by 5% after IFRS 16 effects as a result of some temporary underrecovery of input costs in beverage cans as a result of legacy contractual arrangements. Cumulatively, first half Metal Packaging Europe volume/mix increased by 3%, with Beverage Cans increasing by 6% and Food & Specialty slightly ahead of the same period last year.

Demand for metal packaging in Europe remains healthy with the sustainability benefit of the substrate increasingly apparent. Our Beverage Can footprint remains well placed and capitalized in this growth. While in Food & Specialty, we have continued to pursue selective growth and investment opportunities during the quarter, in areas such as nutrition and pet food.

Metal Packaging Americas revenue increased by 1% to $549 million in the quarter. Volume/mix growth of 4% was partly offset by the pass-through of lower input costs. Volumes increased in our Bev Can businesses in North America and Brazil by a combined 5% with favorable mix and more than offset -- and this more than offset the impact of the closure of the small food & specialty plant in late 2018. Adjusted EBITDA increased by 12% to $83 million compared to the same period last year.

Our active investments on our existing -- in our existing North American and Brazilian footprint continue, backed by strong demand for premium, differentiated metal can packaging. In parallel, our efforts to pursue commercial improvements in the North American market continue apace. In Food & Specialty, our leading asset base in North America will underpin Trivium's attractive positioning in this market as brand owners seek more attractive and higher quality packaging solutions for their products.

Turning to glass. In Europe, underlying market conditions remain very healthy. Second quarter revenue of $412 million increased by 5% at constant currency as positive mix, including from higher glass engineering activity as well as the pass-through of higher costs. Adjusted EBITDA for the quarter of $99 million was a 16% increase on a constant currency basis from last year. This reflects positive mix, a strong operating performance and good cost control as well as IFRS 16 effects. We continue to engage with customers and see strong demand for committed long-term capacity from these customers as the purity premium association ability to differentiate with glass packaging containers continues to appeal to brand owners.

In North America. In glass, revenue decreased by 5% to $433 million in the second quarter. This reflected lower demand. Our cost reduction initiatives, including freight and logistics as well as capacity adjustments already made limited -- the ones that we've already made have limited the impact of reduced volumes and adjusted EBITDA for the quarter, and this increased by 4% to $73 million. And as we previously set out, the closure of our Lincoln, Illinois, facility took place in April.

Overall, the North American glass market continues to see significant levels of imports, though there's been some moderation noted in certain end markets as a result of the increase in tariffs on Chinese imports. And whilst our focus on our data remains on targeted investment in our footprint and the pursuit of cost optimization initiatives, we continue to believe that the industry as a whole must adapt to lower demand.

If I could then turn to the Trivium transaction, which we announced last week. As you know, we've agreed to combine our Food & Specialty Metal Packaging business with Exal Corporation, which is a leading producer of aluminum containers in the Americas. And the combined company will be known as Trivium Packaging. And this new combination with Exal, which is currently controlled by Ontario Teachers' Pension Plan, will create one of the largest metal packaging companies in the world, with leading #1 or #2 positions in substantially all of the markets in which it will serve.

To be headquartered in the Netherlands, Trivium will operate 57 production facilities principally across Europe and the Americas and will employ approximately 7,800 people. Annual pro forma revenues were $2.7 billion and adjusted EBITDA of $469 million in the year 31 March 2019.

Trivium will serve a diverse range of leading customers in a wide array of end markets, including food, seafood, pet food, nutrition, beauty and personal care, household care and premium beverages. This combination brings together Ardagh's stable Europe and North America businesses which offer attractive growth opportunities in areas such as nutrition and two-piece food cans mainly focused on these business -- mainly focused on tin-plate steel packaging with Exal's leadership in the faster growing Americas aluminum aerosol packaging sector.

Trivium will produce an extensive and sustainable product range backed by dedicated research and development resources. I will become Chairman of Trivium; and Michael Mapes, who is currently CEO of Exal, will become CEO of Trivium and he will lead a highly-experienced team drawn from across Exal and Ardagh.

We will hold in Ardagh a 43% stake in Trivium, with the balance of 57% being controlled by Ontario Teachers'. Ardagh will also receive approximately $2.5 billion in cash proceeds from the transaction, which we will use to reduce debt at Ardagh. And we outlined how we plan to do that debt reduction last week and also in our call materials today.

This transaction is important strategic move for us in several respects. Firstly, it gives us a large stake in a faster-growing global metal packaging business than Food & Specialty on its own. Secondly, it enables us to focus in Ardagh on our glass packaging and Beverage Can businesses and keep 100% ownership of both these businesses, underpinning our relationships with major customers in the beverage end market. And thirdly, it results in immediate deleveraging of about half a turn of adjusted EBITDA with the receipt of the $2.5 billion.

Ardagh and our partners in Ontario Teachers', with whom we've been working on this transaction for several months, share a common vision for medium- to long-term value creation at Trivium. And as a producer of infinitely recyclable and sustainable metal packaging, we believe that Trivium is well paced to benefit from secular tailwinds.

Over the course of the past year, we've had several approaches for our Food & Specialty business, but we wanted to retain a significant stake given the attractive outlook as the wider consumer focus increasingly turns to sustainability, and this is a business that we wanted to remain involved in.

On Friday last, Trivium priced a debt offering of $2.85 billion in 7- and 8-year bonds at a post-swap blended interest rate of approximately 4.8%. The offering was over 7x subscribed, and we're now focused on completing the Trivium transaction and we expect completion to take place in the fourth quarter of this year. We look forward to working with our new partners in Ontario Teachers' and with Michael Mapes and his team in delivering value from Trivium over the medium and long term.

You will also see today that as part of our long-term succession planning, we've announced that Shaun Murphy will join Ardagh as Chief Operating Officer in September. Shaun will report to me, and he will also join the Board of Ardagh. He recently completed a highly successful 6-year term as Managing Partner of KPMG in Ireland. KPMG Ireland is the country's largest professional services firm and employs over 3,000 people serving a wide range of domestic and multinational clients with a broad range of advisory services.

Shaun has been a partner of KPMG for almost 20 years and has -- and served as the Leader Director on KPMG's Global Board from 2015 until earlier this year.

And separately, Johan Gorter has decided to retire as the CEO of our glass business by the end of this year. And also following the recent agreement to combine our Food & Specialty business with Exal to form Trivium, David Wall has decided to step down as CEO of our metal division by also by the end of this year. And following these changes, the heads of our metal and glass business units will report directly to Shaun Murphy.

So as we look to the remainder of the year, our full year outlook is unchanged despite an additional currency headwind since our first quarter results. And just to confirm this as follows, it's at least $1.5 billion in adjusted EBITDA, adjusted free cash flow of approximately $450 million before spending on short payback projects, and adjusted earnings per share of -- in the range of $1.60 to $1.75.

This outlook does not, however, reflect the impact of the Trivium transaction announced last week. As I said earlier, we expect to close that in the fourth quarter. Pro forma for the divestments of Food & Specialty, full year 2019 pro forma adjusted EBITDA is expected to be at least $1.15 billion.

So having made these opening remarks, I will now be pleased to take any questions that you may have. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Tyler Langton from JPMorgan.

--------------------------------------------------------------------------------

Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Just regarding the Trivium transaction, I know you kind of provide what the pro forma EBITDA would look like. I guess give us a sense on how it will impact free cash flow, I guess, since in the food can business, I think, is probably relatively lower CapEx levels?

--------------------------------------------------------------------------------

David Matthews, Ardagh Group S.A. - Group CFO & Director [3]

--------------------------------------------------------------------------------

Yes. I think the free cash flow for the business as it is, is around $450 million and on a pro forma basis, it will come down to about $350 million.

--------------------------------------------------------------------------------

Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

Okay. That's helpful. And then for European metal, just the decline in EBITDA. I think Paul, you mentioned in your -- the opening remarks that there was more from higher cost in Beverage Can. I was just also wondering what you're seeing in food can. I think some of your peers had talked about some pricing pressure in the European food can market.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [5]

--------------------------------------------------------------------------------

I think on the food can side, we're pretty much steady as it goes. We've been happy with the performance there in Q2. And we note what others have been saying, we've had a reasonable quarter. We haven't -- there has been some pressures but the performance was very good. Also a lot of our businesses, we have a very strong business in nutrition and a very strong business in pet food.

--------------------------------------------------------------------------------

Tyler J. Langton, JP Morgan Chase & Co, Research Division - Research Analyst [6]

--------------------------------------------------------------------------------

Got it. Okay. And then just a final question, I guess with the sale of the food can business. I guess -- would anything change in terms of how you view, I guess, the Beverage Can Business in terms of maybe looking to grow more in emerging markets or sort of adding capacity sort of in the markets you're in and kind of growing with your customers? Just any thoughts there would be helpful.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [7]

--------------------------------------------------------------------------------

I think I -- as you know, Tyler, our attitude to growth in emerging markets has been one of -- has been a negative one. We see our future in the markets we're in: Brazil, the U.S. and Europe. We're not sure that the experience of others in emerging markets has been that -- has always been that great.

In terms of, I think what you will see us do is look at some interesting opportunities to invest in our business in our Bev Can Business in those 3 jurisdictions, not in any new plants but more in the way of line conversions that we've done to specialty, for example, or indeed adding selectively on the back of customer demand and customer contracts some additional capacity. But no new plans or anything like that. And I don't see any geographic diversification.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from the line of Kyle White from Deutsche Bank.

--------------------------------------------------------------------------------

Kyle White, Deutsche Bank AG, Research Division - Research Associate [9]

--------------------------------------------------------------------------------

Curious, you called out the adverse weather. Just kind of curious what kind of impact do you think that had on your business on food and in beverage throughout the quarter.

--------------------------------------------------------------------------------

John Sheehan, Ardagh Group S.A. - Group IR Director [10]

--------------------------------------------------------------------------------

Yes. I think, Kyle, it was a limited, not impacted the first couple of months on the beverage side of the quarter, I think it was quite cold and wet and the heatwave was slow to arrive. Period of June was better, but the first couple of months, were difficult in that respect and part of the beverage business.

On the food side, as we said, we are very well diversified. Of our food business, about 40% of it is pet food that we're well dispersed and diversified in terms of where we operate. So yes, there's a few challenges clearly that the harvest is to play for over the course of the -- at the summer. But the impact there was fairly moderate, maybe a bit of delay, but nothing that significant in the second quarter.

--------------------------------------------------------------------------------

Kyle White, Deutsche Bank AG, Research Division - Research Associate [11]

--------------------------------------------------------------------------------

Got you. And then on the kind of the inflationary costs, the input costs that you called out in Metal Packaging Europe, just curious what exactly are these costs. And when can we kind of expect them to be passed through? And I guess, why aren't they being passed through currently through your normal kind of traditional pass-through mechanisms that you have in that business?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [12]

--------------------------------------------------------------------------------

Well, I think, Kyle, they'll work their way out through the system. These are some legacy contracts that were entered into at the start of our ownership and even before it. And as we move to better contracts, they will disappear, hopefully.

And also I think as we flagged previously, some of the pass-through mechanisms that we inherited when we came into the Bev Can Business are less than perfect, and some of them aren't caught. Some of these inflationary costs are not caught by them. And we've been working in our -- as we renew contracts, we've been working to change the pass-through arrangement so that they accurately reflect up-and-down customers and ourselves the costs that impact the business.

--------------------------------------------------------------------------------

Kyle White, Deutsche Bank AG, Research Division - Research Associate [13]

--------------------------------------------------------------------------------

Got you. And then following Trivium and getting the $2.5 billion of proceeds and the pro forma deleveraging there, just curious what kind of impact does this have on how you think about the holdco structure and that strategy going forward and also the time line of that?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [14]

--------------------------------------------------------------------------------

I think, Kyle, we -- that's unchanged really in terms of we'll examine our options following the receipt when we opt the $2.5 billion, when we close the Trivium transaction. And again, as we've flagged over our recent quarters, I see that as being something we'll look at in 2020. I don't see anything happening on the holdco in 2019. But we'll look at our various options and see what the markets are, et cetera, et cetera.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question comes from the line of Anojja Shah from BMO Capital Markets.

--------------------------------------------------------------------------------

Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [16]

--------------------------------------------------------------------------------

It seems like you're getting good cost savings now from the North American glass footprint restructuring. Are you fully -- are you satisfied with the way things stand now? Or should we expect further changes?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [17]

--------------------------------------------------------------------------------

No. I think we're -- well, certainly, we don't expect to make any further footprint changes, we've made enough changes there. I think we're satisfied. Well, you're never satisfied until you get the business really humming, and we have much more work to do there. But I think we're satisfied in the progress we've made to date in a market where volumes are declining, where we've addressed our cost base and we're adjusting our cost base to the new environment we find ourselves in.

I mean this is not something new for us. We -- years and years ago, we had the same situation in Europe where there were declining volumes, and it's a matter of adjusting our footprint our -- which we've done and adjusting our cost base to the market conditions we find. So I think so far, so good.

--------------------------------------------------------------------------------

Anojja Aditi Shah, BMO Capital Markets Equity Research - Senior Associate [18]

--------------------------------------------------------------------------------

Okay. Great. And then second question is, can we get some perspective on the leadership changes you announced this morning? Maybe just a bit of background and if -- what if any changes we should expect?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [19]

--------------------------------------------------------------------------------

Well, I think the changes are as per of what we've announced this morning. We -- obviously, succession planning is important, and we have been looking to bring in someone into the group who would be a leader of the operating businesses overall. And Shaun Murphy will be joining us in September, will fulfill that role. He will be reporting to me. I will remain the CEO and heavily involved on the executive basis in the group.

In relation to the other changes, Johan had, for some time, indicated that he wanted to retire. Although he will remain involved with us as a consultant, which is great to have his expertise available. But we have, over the last couple of years, been bringing, developing 2 managers, 1 in the U.S. and 1 CEO -- as 1 in the U.S. and 1 in Europe who will eventually report in to a COO. And this has been planned for quite some time.

In relation then and then similarly on the Bev Can Business obviously with the Trivium transaction, we don't have direct management of the food can business or won't have any more from later in the year. And David Wall indicated to me some weeks back that as the business, the trunk that he was responsible for, he would like to step down and pursue some other opportunities outside of Ardagh. Again, he will be doing some consulting work from us, so we'll have the benefit of his expertise as well.

So I see this as a natural evolution. I plan to stay with the business. But like everyone, nobody goes on forever, so we need to make -- we need to plan for the future.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question comes from the line of Roger Spitz from Bank of America Securities.

--------------------------------------------------------------------------------

Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [21]

--------------------------------------------------------------------------------

Could you say what your off-balance sheet securitization was at June 2019? And how much of that might be going with the Food & Specialty Metal Packaging business to Trivium?

--------------------------------------------------------------------------------

David Matthews, Ardagh Group S.A. - Group CFO & Director [22]

--------------------------------------------------------------------------------

That's about $600 million at the end of June. And on the pro forma portion will be going with the Trivium business.

--------------------------------------------------------------------------------

Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [23]

--------------------------------------------------------------------------------

I'm sorry. Did you say a pro forma amount would be going with Trivium?

--------------------------------------------------------------------------------

David Matthews, Ardagh Group S.A. - Group CFO & Director [24]

--------------------------------------------------------------------------------

An appropriate proportion will be going with that business.

--------------------------------------------------------------------------------

Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [25]

--------------------------------------------------------------------------------

Appropriate. Okay. And would you be willing to say how much off-balance sheet securitization with Trivium total in March '19 or June '19? Because that maybe Exal had some off-balance sheet securitization outstanding?

--------------------------------------------------------------------------------

David Matthews, Ardagh Group S.A. - Group CFO & Director [26]

--------------------------------------------------------------------------------

I think it would be relatively small what was with Exal.

--------------------------------------------------------------------------------

Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [27]

--------------------------------------------------------------------------------

Okay. Does Trivium transaction accelerate potentially the collapse of your capital structure that you've been discussing? Does it accelerate in any way? I recognize it's not going to happen in 2019 but just wondering what the timing might have changed with it.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [28]

--------------------------------------------------------------------------------

I think it was an important step on the way. And we've been working on the Trivium transaction for all of this year. So I don't think it changes the timing, as I said, to -- an answer to an earlier question, Roger, we will look at all that next year. But it's an important step in kick-starting deleveraging, and it opens up various options to us as to how we deal with the holdco. But we will -- the first step is to close the Trivium transaction and then to -- in the new year, we'll look at what the options are. But it's -- as I said earlier, it's not something you should expect to see happen this year.

--------------------------------------------------------------------------------

Roger Neil Spitz, BofA Merrill Lynch, Research Division - Director and High Yield Research Analyst [29]

--------------------------------------------------------------------------------

And lastly, you've given a $90 million CapEx for short-term payback projects, which is outside the $450 million, so that pro forma, the $350 million. Does the $90 million pro forma to a smaller number with Trivium, please?

--------------------------------------------------------------------------------

David Matthews, Ardagh Group S.A. - Group CFO & Director [30]

--------------------------------------------------------------------------------

It'll be slightly smaller. But clearly, Trivium has been part of the group and will be part of the group for most of the years, and the $90 million will be broadly that in the full year.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Karl Blunden from Goldman Sachs.

--------------------------------------------------------------------------------

Travis Edwards, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

This is Travis Edwards on for Karl. One quick follow-up on holdco. With most of the Beverage Can bonds coming out following the paydown with the asset sale proceeds, how are you thinking about the remaining constraints in RP? Would you consider addressing maybe the remaining unsecured 24s to increase that basket?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [33]

--------------------------------------------------------------------------------

Yes. That's something that we would consider. We keep our capital structure under constant review. And obviously, that's one of the bonds that we will look at.

--------------------------------------------------------------------------------

Travis Edwards, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Awesome. And then do you have a balance of your RP especially right now?

--------------------------------------------------------------------------------

John Sheehan, Ardagh Group S.A. - Group IR Director [35]

--------------------------------------------------------------------------------

Yes. It's just about $680 million at the end of June.

--------------------------------------------------------------------------------

Travis Edwards, Goldman Sachs Group Inc., Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

Got it. And then a quick one if I can on fundamentals. Are you able to elaborate a bit on how the North Am glass improvement? Maybe help us bridge current operations to how you're thinking about the business at more run rate levels, when it's coming along, as you said. Can you quantify some of the drivers of that improvement?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [37]

--------------------------------------------------------------------------------

Well, I think we've said that we expect modest improvement in -- for the year as a whole. I think the drivers of that are improving the cost base, taking out the excess capacity, which we've done and cost savings there. Working with the workforce to improve the labor costs because labor costs are much higher in the U.S. than in our continental European glass plants, it's one of the big differentiating factors.

And improving operating performance and improving efficiency. So it's quite across a very wide range of initiatives that we've been working on, and there's more to go and there's more progress to be made. But there's been good progress so far.

--------------------------------------------------------------------------------

John Sheehan, Ardagh Group S.A. - Group IR Director [38]

--------------------------------------------------------------------------------

Yes. We've taken out about 10% of our capacity on the beer side, around 20%. And in addition to capacity reductions, we've been making targeting -- targeted investments in things like automation and inspection equipment which have attractive paybacks. So it's been both investing and cost reduction and some of them connected.

--------------------------------------------------------------------------------

Travis Edwards, Goldman Sachs Group Inc., Research Division - Research Analyst [39]

--------------------------------------------------------------------------------

Got it. That's super helpful. If I may sneak one more real quick, is there any impact to RP with the Trivium deal?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [40]

--------------------------------------------------------------------------------

No, minor tiny impact. $20 million, maybe. $20 million. I'm sorry, $20 million [reduction]. Tiny.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Our next question comes from the line of Arun Viswanathan from RBC Capital Markets.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [42]

--------------------------------------------------------------------------------

I'm just curious on Beverage Can volumes. I guess would you characterize those as kind of in line with your expectations? Or was it slightly weaker than what you thought you'd achieve in the quarter?

--------------------------------------------------------------------------------

John Sheehan, Ardagh Group S.A. - Group IR Director [43]

--------------------------------------------------------------------------------

I think if you look across the regions in Europe, we had relative -- it was high single digits in the first quarter. There may have been a bit of Brexit pull forward there, hard to gauge and some of that may have overwhelmed. So it was fairly moderate in the second quarter.

In North America, we're relatively constrained so we had lowest single-digit growth, which I think very good mix there in terms of the sales. And in Brazil, we were well into double digits. So quarter-to-quarter, it can vary. But we've been very pleased with the progress that the business combined with 6% volume/mix growth hasn't changed.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [44]

--------------------------------------------------------------------------------

I think in Bev Cans in Europe, the -- when you take the half year as a whole, it brings -- it points us to the sort of percentage increase we expected for Bev Can volumes in Europe as a whole for the year. And as John has said, in North America, we're full, full, full, so there's not much we can add there. But we're happy with the demand situation in all 3 bev can markets.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [45]

--------------------------------------------------------------------------------

And then on the food side, some of your competitors have reported some challenges, especially in Europe, over the last couple of months. Any thoughts that you can share on food can in Europe? I guess are you guys -- in any early indications on the past or anything that would help us understand that market?

--------------------------------------------------------------------------------

John Sheehan, Ardagh Group S.A. - Group IR Director [46]

--------------------------------------------------------------------------------

Yes. I think again as we said, what we called it a diverse business there, so within the food segment itself, about well over 1/3 with respect to nonseasonal. We've got an attractively growing and significant nutrition business, which has got a very positive outlook to it. On the harvested, it's too early to say yet. Maybe you see a bit of delay. But it's been relatively stable obviously in the year-to-date.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [47]

--------------------------------------------------------------------------------

And just lastly there. I guess we've heard of some competitive activity in food can in Europe. Obviously, it's a slightly different situation now for you given the separation. But I guess, was that kind of the motivating factor? How did this kind of decision come about for you guys to exit and at least partially?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [48]

--------------------------------------------------------------------------------

No, that has nothing to do with that whatsoever. In fact, our motivation in putting this transaction together was that we like this business, we wanted to remain in it. And we saw an opportunity to grow the range of the business, particularly on the aluminum side obviously with Exal and diversification into Latin America and into the United States in aerosols. And as I said earlier on the call, we did have a number of approaches to sell that business wholly. So we are now far from exiting it. We plan to be a very active partner with a 43% shareholding in it.

And we saw this as an opportunity to combine and achieve a number of objectives together. One was to deleverage Ardagh itself by the receipt of the $2.5 billion, to increase the breadth of the actual food can and specialty and aerosol business. And also we saw it as a good opportunity to bring on Board Michael Mapes and his team, who have done a great job at Exal.

And so we saw a number of factors in this that made this transaction very attractive for us. And as you saw last week, it was very well received by the debt market. So far from exiting, we see this as a vehicle which will grow significant value for us over the coming years.

--------------------------------------------------------------------------------

Arun Shankar Viswanathan, RBC Capital Markets, LLC, Research Division - Analyst [49]

--------------------------------------------------------------------------------

Right. Of course. And then just lastly on your own capacity. Any plans -- there was a competitor's announcement, especially additions in North America. But I guess any plans to increase Beverage Can capacity globally for you guys?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [50]

--------------------------------------------------------------------------------

Well, I think I said earlier that we will focus our attention on the 3 markets we're involved in the U.S., Brazil and Europe. I think where there are opportunities, as we've had in the past, over the past 3 years, we will either convert or perhaps, in some cases, increase capacity in our existing facilities in those 3 jurisdictions. We do not plan to build any new plants. And any increases that take place will, a, we'll be -- we'll make sure that financially, they're very attractive for us. And secondly, that they're backed up by customer contracts that increase demand. I mean we are seeing increased demand for metal due to the sustainability factors, and that no doubt is what's behind some of the other increases by our competitors that you're talking about.

But we will as ever be very disciplined in this area, both in terms of the returns that we get from our investment. But we are -- we do see some attractive opportunities within our existing footprint, which, as you know, is very large.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Our next question comes from the line of [Carl Grether] from Guggenheim Partners.

--------------------------------------------------------------------------------

Unidentified Analyst, [52]

--------------------------------------------------------------------------------

Just following on the last question there and rather than Bev Cans, in terms of the Food & Specialty business that you divested into Trivium, what's the capacity outlook look like in Europe? Have you seen much additional capacity come by or come on? Or have you seen, in general, what sort of utilization the market's running at?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [53]

--------------------------------------------------------------------------------

Doesn't really change much there. And it's a different structure to the bev can market. It gives you different types of plants, gives much greater number of smaller plants, so it operates in a very different way. But if your question is have there been any changes there, no is the answer to that.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

And our next question comes from the line of [Ryan Wally] from Barclays.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

Just a couple of quick follow-ups from me. Maybe first and I was out of the office last week so I apologize if I missed this. But on your pro forma capitalization, the $88 million reduction in lease obligations, is that just simply that's going with the assets. Is that correct?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [56]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

Okay. Great. And then my second one would just be obviously with the anticipated use of the proceeds, maybe you're a bit under levered on the secured layer. Is that something that you would think about rebalancing going forward? And maybe what's the right level of secured versus unsecured as you think not just the holdco, but maybe also the 7 1/4 of 24, which maybe the call price drops a bit in May of next year as you think about the maybe longer-term refi?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [58]

--------------------------------------------------------------------------------

Well, as I mentioned to an earlier question, we will review our capital structure and those bonds are one of -- they're ones that's callable, clearly out of the bonds that are callable. You're quite right. We have had a policy over the last number of years when the delta between the cost of secured and unsecured debt was very small. We raised a lot of unsecured debt to leave ourselves with plenty of spare capacity. And we do have quite a large amount of spare capacity on the secured side. And that's something we will look at transaction by transaction. I expect that we would actually seek to use more secured capacity but still seek to have some -- use rates on debt on the unsecured markets.

We certainly saw last week in the Trivium fundraising where both in the Europe and the U.S. a very strong demand for packaging stuff like ours and packaging businesses particularly in the metal and sustainable space. So we were -- we've -- we're very pleased with the demand and with the results that we had in the market last week.

--------------------------------------------------------------------------------

Unidentified Analyst, [59]

--------------------------------------------------------------------------------

That's great. And then with just one last quick follow-up from me. I appreciate that when you get there, you will have a better answer on this. But when you think about the refinancing and starting to collapse the holdco into the opco, is the view still that you may need to do it in a couple step process given you may not have the capacity to deal with the full basically $2 billion of debt that sits at ARD Fin and ARD Sec levels? Is that still the right way to think about it?

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [60]

--------------------------------------------------------------------------------

I think there are a number of options there. I mean you could envisage a situation where you took it all out. It's more likely, I suspect, that it will be taken out in part. But I think probably you'll see a refinancing of everything there. I don't think you'll see the [fixed] being left and the top of it has taken out, et cetera. But I don't want to be -- I don't want to speak prescriptive about that now. We haven't decided what to do. We haven't decided what to do. I mean a more likely scenario is that it's done in stages or that it's part of the refinance on favorable terms. A lot of that depends on the markets that we find next year.

--------------------------------------------------------------------------------

Unidentified Analyst, [61]

--------------------------------------------------------------------------------

Sure, yes. And I apologize, and maybe I should have been more clear. What I meant is that do you maybe still need to do a new financing stall at a holdco box because you can't bring all $2 billion back into the opco.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [62]

--------------------------------------------------------------------------------

Yes. Yes. Absolutely. Absolutely. Sorry. Yes, yes, yes. We're certainly not planning that. The $2 billion refinancing at the opco to be dividends of holdco. No, we're not planning on that. Sorry, I misunderstood you.

--------------------------------------------------------------------------------

Unidentified Analyst, [63]

--------------------------------------------------------------------------------

All right. Okay. Right. So you could look to refinance all of it again, a portion of which could come from the operating company, refinancing plus dividend, and then maybe some additional new ARD Fin notes or something along the line.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [64]

--------------------------------------------------------------------------------

There are many, many, many ways of getting that particular cash.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Our next question comes from the line of Kyle White from Deutsche Bank.

--------------------------------------------------------------------------------

Kyle White, Deutsche Bank AG, Research Division - Research Associate [66]

--------------------------------------------------------------------------------

Just one question. In Glass Packaging North America, the unfavorable volume/mix of 8%, could you just parse that out, how much is volume versus mix? And then more importantly, was this primarily market-related? Or was any of it driven kind of by the recent capacity closures and maybe walking away from some lower-margin business?

--------------------------------------------------------------------------------

John Sheehan, Ardagh Group S.A. - Group IR Director [67]

--------------------------------------------------------------------------------

No. That was -- the market basically has moved more or less in time at the back from the date that we see over the past year. We've actually gained slightly on the -- in terms of market share versus the rest of the U.S. industry. Trading imports have been having adverse effects on the industry itself.

In terms of that level of decline, that was principally volume. But quarter-to-quarter, it can move around, the previous quarter in the beginning for every [market]. And that I think we look at the revenue line, the decline was posted at 5%.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Thank you. And since we have no more questions registered, I will now hand back to our speakers for any closing comments.

--------------------------------------------------------------------------------

Paul R. Coulson, Ardagh Group S.A. - Executive Chairman & CEO [69]

--------------------------------------------------------------------------------

Well, thank you, everyone, for joining us today, and thank you for your support. And we look forward to talking to you when we present our Q3 results. Thank you very much indeed.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

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