Deutsche Bank
Research
Europe
North America
Consumer
Consumer Staples
Industry
Beverages &
Packaging
Date
26 February 2020
Industry Update
Can supply meet(ing) demand?
Over the past several months, we have heard multiple companies highlight the
risks/implications of insufficient supply of aluminum beverage cans—specifically,
supply tightness in specialty formats (., all those cans which do not meet CMI's
technical standard for a 12 oz beverage can). The purpose of this note, therefore, is to
evaluate growth prospects for the beverage industry and beverage can sector in
N. America (amidst a growing mix-shift to can production), and the related
implications for companies under coverage, whether among beverage
manufacturers, aluminum can suppliers, or aluminum can sheet suppliers. From our
analysis, we expect tracked traditional retail Nielsen channels for aluminum beverage
packaging to grow +2-3% annually over the next three years with beverage can
shipments likely to outpace this (+4-6%) when factoring in faster- growing non-
traditional channels and starting-point supply constraints. All of this growth is again
likely to be skewed to specialty can formats that should grow with a HSD+ CAGR, set
against relatively flat growth in standard cans. This volume growth profile represents
a significant step-up from historical flat-to-down run- rates, creating both risks and
opportunities for affected companies throughout the supply chain.
For can and can sheet suppliers, we see Buy-rated names such as Ardagh (ARD), Ball
(BLL), Crown (CCK) and Constellium (CSTM) as well placed to benefit both from
newfound volume tailwinds, as well as from better pricing (stemming from tight
supply, despite inflight capacity build-outs) that could assist margins. For Beverage
manufacturers (such as KO, PEP, MNST, ABI, TAP, SAM, and KDP), can supply
constraints (especially for specialty cans) could serve as a sourcing obstacle and/or
potential headwind to production costs; however, we do not see the current
challenges as insurmountable (assuming procurement offices remain focused/ agile),
especially given favorability today in underlying aluminum prices that should serve as an
offset to any incremental cost of securing can supply.
Overall consumer demand is fuelling a mix-shift to cans (especially specialty)
In part driven by growing consumer aversion to PET/plastics, can formats have been
experiencing tailwinds of late. However, much of this is driven by "specialty"
categories and can formats that offer unique consumer appeal above and beyond
standard/traditional 12-oz. formats. Indeed, the majority of can volume growth has
occurred in specialty cans across different beverage categories, whether it be hard seltzers,
energy drinks, domestic super premium beer (Michelob Ultra), or CSD mini
Steve Powers
Research Analyst
+212-250-5480
Debbie Jones
Research Analyst
+1-212-250-2956
Chris Terry
Research Analyst
+1-212-250-5434
Andrea Pistacchi
Research Analyst
+44-20-754-72914
Faiza Alwy
Research Analyst
+1-212-250-7611
Christopher Barnes, CFA
Research Associate
+1-212-454-0778
Kyle White
Research Analyst
+1-212-250-7628
Angeline Goh
Research Associate
+1-212-250-4515
Deutsche Bank Securities Inc. Distributed on: 26/02/2020 06:54:09 GMT
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX
1. MCI (P) 066/04/2019.
7T2se3r0Ot6kwoPa
Figure 1: Historical/Forecasted Can Demand by Beverage Category across Traditional Retail (., "Tracked") Channels
Note: Tracked channels include traditional grocery, drug, c-store and mass channels (including Walmart and Target), but exclude on-premise consumption as well as clubs, small format/independent convenience outlets, and e-commerce.
Source : Nielsen, Deutsche Bank estimates and analysis. Note: L52W period ends January 25, 2020.
cans. Standard or "traditional" can formats have also experienced modest
improvements in trend, but remain roughly flat—with declines in the soft drinks
category (., core CSDs), domestic premium beer (., Bud Light, Miller Lite, Coors
Light), and economy beer (., Keystone, Natural) partially offset by strength and demand
for sparkling water/seltzer water (., La Croix, Spindrift, Bubly), as well as import
beer (primarily STZ's Corona and Modelo) and craft beer. Looking forward over the
next 12-36 months, we see such trends continuing (Figure 1).
YOY Growth L52W 3YA L52W 2YA L52W YA L52W NTMe NTM+1e NTM+2e
Soft Drinks % % % % % % %
Standard % % % % % % %
Specialty % % % % % % %
Beer/FMB/Cider % % % % % % %
Standard % % % % % % %
Specialty % % % % % % %
Energy % % % % % % %
Sparkling Water/Seltzer/Other % % % % % % %
Total % % % % % % %
Supply outlook -- outsized growth, full utilization, in pursuit of pricing
Currently, the US and Canada is a 97B beverage can market, which does not include imports
into the region. The industry is consolidated into four main players: Ball (BLL), Crown
(CCK), Ardagh (ARD) and Metal Container Corporation. Ball is the largest player
with approximately 45% of the market (48% if you include the company's Rocky
Mountain Metal Container JV with Molson Coors). Crown has approximately 22%
market share followed by Ardagh at 17%. Metal Container Corporation (the self-
manufacturing subsidiary of ABI) has ~13% market share.
In aggregate (supporting all beverage consumption channels), beverage can
shipments grew +% y/y in 2019 in the US and Canada (not including imports) with
+% growth in alcoholic beverages and +% growth in non-alcoholic beverages.
This is a significant shift when considering the industry had seen a CAGR of %
from 2012 to 2018. As mentioned above, growth has been skewed to specialty can sizes,
with specialty cans representing approximately 17% of the market in 2012 to now at an
estimated 30% in 2019.
While there is no official industry data showing beverage can capacity, it is well
understood that the industry is currently running at full utilization rates and is
oversold. In fact, we believe some beverage can producers imported an incremental 500M+
of unfilled specialty cans in 2019 from Mexico and South America to support
growth, yet still fell short of customer needs. To capture the growth, new capacity is
currently ramping up in the US and incremental investments are expected. Based on
already announced capacity investments, we estimate supply for the industry will increase
4%+ or ~4B cans from current levels by the end of 2020 and another 4%+ by the end of
2021. As such, we believe incremental capacity projects will be announced in the
coming quarters.
Moreover, given the tight supply-demand balance, beverage can producers are
currently pushing for price increases and more favorable contract terms.
Considering that contracts are typically three to five years in length, this push for
increased pricing will likely play out in the near and medium-term as contracts get
renewed. The effort to obtain more favorable contract terms includes obtaining more
lead time to manage production schedules, pass through of freight and more favorable
payment
Implications for Beverage Companies
While supply constraints for cans (especially specialty cans) will likely serve as an
obstacle/headwind to production for producers such as KO, PEP, MNST, ABI, TAP, SAM,
and STZ, these challenges are not insurmountable—especially in the current environment
when any incremental costs of securing can supply are likely offset/ more than offset by
the favorability of underlying aluminum That said, to ensure adequate supply,
beverage manufacturers must be agile in their procurement of aluminum cans,
especially as several announced growth initiatives across beverage categories call for
specialty aluminum (likely enabling beverage can manufacturers to raise prices
where/if necessary). Perhaps, companies will look to import specialty cans from supply
chain partners outside the US, a strategy MNST has mentioned to supplement domestic
supply. Of course, doing so would present greater logistics costs and other challenges all
else equal, but these costs are presumably outweighed by the risk of stock outages.
Overall, we see the situation as manageable, but companies will need to be
cognizant of these potential inflationary pressures in specialty aluminum can
supply in order to mitigate margin degradation.
Implications for Beverage Can Suppliers
It is only positive implications for the three major beverage can producers (ARD, BLL and
CCK) and is relatively the same across each company. The volume growth is a positive
and likely reflected in valuations for the group, but if the growth were to decelerate
then there is risk that the beverage can companies lose their growth multiple. Further,
the growth is providing for a tight supply-demand balance, which the companies are
leveraging to push for higher pricing and more favorable contract terms. Lastly,
while domestic can sheet capacity is a concern, the beverage can producers are able
to globally procure can sheet as imports of can sheet have increased significantly
recently. While this could mean higher costs, the beverage can producers ultimately
pass through the cost of can sheet to its customers without taking on the risk of
aluminum price volatility. The main area of concern for the beverage can producers is
successfully executing on capacity ramp ups given the unprecedented growth and
mitigating growing pains.
Implications for Aluminum Can Sheet Suppliers
Constellium (CSTM, Buy, PT $16/sh) is the key beneficiary from growing demand for
aluminum cans within our Metals & Mining coverage. In 2019, the company
generated 37% of company-wide revenue from sales to the packaging market
(including beverage cans where Constellium is the second largest can stock
1 Separately, there has been some concern that there is not enough aluminum can sheet supply to meet current
demand. We believe, however, that there is sufficient supply. While the domestic US market is tight and
lacking capacity, the three major beverage can producers are global and the procurement of aluminum beverage
can sheet can be executed on a global basis.
2 Metal beverage can producers generally have raw material cost pass through mechanisms built into their
contracts. Thus, customers such as KO or PEP incur the risk on aluminum can sheet price volatility
—with current aluminum pricing in these companies favor (to the extent aluminum exposures have been left
unhedged)
producer in both North America and Europe). Based on the company’s most recent
earnings update for the full year 2019 result, commentary on the conference call, as well
as insights from our NDR with the company late last year (see here) suggests most
packaging contracts typically run 3-5 years and are due to reset late 2020 at the earliest
with most expected to be up for renewal across 2021 and 2022. It is the 2021-22 time
frame where we believe that Constellium will be in the box seat to push for improved
pricing, to improve margins and also to potentially debottleneck select facilities (such as
Muscle Shoals) to also look for volume opportunities to fill the increasing demand for
North American Can Sheet.
Consumer Demand for Aluminum Cans
Over the past several months, we have heard several consumer companies
highlight the risks/implications of insufficient supply of aluminum beverage cans.
Specifically, the apparent supply shortage is contained to the specialty formats (., all
those cans which do not meet CMI's technical standard for a 12 oz beverage can). Specialty
cans, therefore, include all beverage cans ranging from sleek/slim 12 oz (hard seltzers,
Diet Coke Flavors) to 16 oz (Monster and Bang energy drinks) to oz mini cans (Coca-
Cola, Pepsi) to 24+ oz tall cans (primarily beer). The majority of case volume growth
has been in specialty cans3 across different beverage categories, whether it be hard
seltzers, energy drinks, domestic super premium beer (Michelob Ultra), or CSD mini
cans. Declines, for the most part, have occurred in the "traditional" standard can format,
driven by the soft drinks category (core CSDs) and domestic premium (., Bud
Light, Miller Lite, Coors Light) and economy beer (., Keystone, Natural). Helping
mask some of the declines in this format, however, has been strength and demand for
sparkling water/seltzer water (., La Croix, Spindrift, Bubly), as well as import beer
(primarily STZ's Corona and Modelo) and craft beer.
Nielsen data for aluminum beverage packaging shows growth rates of +% over the
latest 52-weeks ending January 25, 2020, while the Can Manufacturers Institute
reported that beverage can shipments in the US and Canada increased
+% in 2019. It is our opinion that this spread is due to outsized growth in
untracked channels, such as e-commerce related shipments, craft beer (. on premise)
and growth in categories such as still water. Nielsen's channel coverage also doesn't
track certain warehouse club stores, and has less coverage of convenience and
smaller, independent stores.
We expect the spread between Nielsen and CMI can continue. Thus our estimated 3%
growth in tracked channels for aluminum cans will lead to something slightly higher
for CMI tracked shipments. This would imply that the 4-5B cans of new capacity
expected to come online by the end of 2020 will be utilized. Note that we also believe
500M+ of unfilled cans were imported into the US from other regions in 2019. This
level of imports are not expected in 2020 and will be served domestically.
Ultimately, we believe the beverage can producers will be able to sell every can they
produce in 2020. Growth could moderate somewhat depending on how beverage
companies choose to execute on their sustainability goals and consumer preferences,
but we think trends and sentiment appear to be in can producers' favor at present.
3 Throughout this section, references to case volume refer to 192 oz cases. All Nielsen volume data has been
equivalized to this definition for comparability across beverage categories.
Source : Nielsen, Deutsche Bank estimates and analysis Note: L52W period ends January 25, 2020 Source : Nielsen, Deutsche Bank analysis
Figure 4: From a category perspective, growth has been led
by select segments of Beer, Energy, and Sparkling/ Seltzer
Water utilizing specialty can formats
Figure 5: Looking forward, we expect relatively flat growth in
standard cans to be balanced against HSD+ growth in specialty
can formats (as Energy, Hard Seltzer, and specialized CSD/Beer
SKUs gain further traction)
Soft Drinks (~40% of aluminum case volume)
The majority of aluminum can CSDs are packed in standard cans, which have faced
structural decline for several years as health-conscious consumers pivot toward other
beverage categories. However, the decline rate has moderated to some extent with
the introduction of oz miniature cans. Consumer reception to this format has been
very strong, as it offers less absolute levels of calories/sugar by nature of its reduced
volume.
Figure 2: In aggregate across all beverage categories,
demand for aluminum packaging is accelerating
Figure 3: ...and adjusting for seasonal variation, quadweek
aluminum case volume continues to trend upward
4,100
4,000
2044
(36)
4,200
14 (14)( )
4,300
(8) 64 14
4,500
4,400
Aluminum Case Volume
56131
73
48
-2%
L52W 3YA L52W 2YA L52W YA L52W NTMe NTM+1e NTM+2e
Regular Specialty
0%0%-1%
-1%-2%
-4%
0%
0%
0%
3%
5%6%
4%
2%
6%
8%
9%9%
10%
12%
10%
8%
Total Beverage Aluminum Case Volume Growth
Source : Nielsen, Deutsche Bank analysis Note: L52W period ends January 25, 2020 Source : Nielsen, Deutsche Bank estimates and analysis Note: L52W period ends January 25, 2020
Total Beverage Aluminum Case Volume Growth
%
%
%
%
%
%
%
L52W 3YA L52W 2YA L52W YA L52W NTMe NTM+1e NTM+2e
Total Beverage Aluminum Case Volume Growth
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
02
/2
7/
16
04
/2
3/
16
06
/1
8/
16
08
/1
3/
16
10
/0
8/
16
12
/0
3/
16
01
/2
8/
17
03
/2
5/
17
05
/2
0/
17
07
/1
5/
17
09
/0
9/
17
11
/0
4/
17
12
/3
0/
17
02
/2
4/
18
04
/2
1/
18
06
/1
6/
18
08
/1
1/
18
10
/0
6/
18
12
/0
1/
18
01
/2
6/
19
03
/2
3/
19
05
/1
8/
19
07
/1
3/
19
09
/0
7/
19
11
/0
2/
19
12
/2
8/
19
Source : Nielsen, Deutsche Bank analysis Source : Nielsen, Deutsche Bank analysis Note: L52W period ends January 25, 2020
Beer/FMB/Cider (~36% of aluminum case volume)
After Soft Drinks, Beer/FMB/Cider represents the greatest portion of aluminum
beverage case volume at roughly 36% of total beverage aluminum cases. Despite
structural declines in domestic premium and economy, aluminum case volume has grown
over the past five years. FMBs (particularly hard seltzer), super premium (Michelob
Ultra), craft, and import brands (STZ's portfolio) are the source of this volume growth.
Notably much of this growth has been in specialty format cans, as opposed to traditional
12 oz cans.
Looking forward, several brewers' initiatives rely on continued growth of non-
standard aluminum cans. The fastest growing segment of Beer/FMB/Cider is
unquestionably hard seltzer and only a few exceptions are packed in standard 12 oz cans
(., Natural Light Seltzer), most opting for the sleek 12 oz can.
The demand for non-standard aluminum cans is in fact accelerating. Several new
initiatives across brewers (., Blue Moon Light Sky, Vizzy, Bud Light Seltzer,
Corona Seltzer, etc.), require an array of slim/sleek 12 oz, 16 oz, 24+ oz, and other can
sizes. Likewise, the strength to-date in aluminum (and likely going forward) has been
concentrated as brands lean on packaging innovation for another point of
differentiation relative to domestic premium and economy beer (both of which are
predominantly in standard 12 oz cans). Altogether, 12 oz cans in Beer excluding FMBs
and domestic super premium brands declined by 36 million cases over the past five
years. However, propping up this modest decline rate (4-year CAGR -1%) is the growth in
import brands (., Corona and Modelo).
Figure 6: Despite +DD growth in nonstandard cans,
standard cans declines have typically fallen -MSD...
Figure 7: ...although, in absolute terms, the erosion in
standard cans has moderated
NonstandardStandard
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Soft Drink Aluminum Case Volume Growth by Can Format Soft Drink Aluminum Case Volume Absolute Change
2,100
2,000
1,900
1,800
02
/2
7/
16
04
/2
3/
16
06
/1
8/
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08
/1
3/
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10
/0
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01
/2
8/
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03
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5/
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05
/2
0/
17
07
/1
5/
17
09
/0
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17
11
/0
4/
17
12
/3
0/
17
02
/2
4/
18
04
/2
1/
18
06
/1
6/
18
08
/1
1/
18
10
/0
6/
18
12
/0
1/
18
01
/2
6/
19
03
/2
3/
19
05
/1
8/
19
07
/1
3/
19
09
/0
7/
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11
/0
2/
19
12
/2
8/
19
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Source : Nielsen, Deutsche Bank analysis Source : Nielsen, Deutsche Bank analysis
Figure 10: Non-standard cans (slim/sleek 12 oz, 16 oz,
24oz, etc.) are driving all the aluminum case volume
growth
Source : Nielsen, Deutsche Bank analysis Note: L52W period ends January 25, 2020
Energy Drinks (~10% of aluminum case volume)
Representing about 10% of aluminum case volume in scanned channels, energy drinks
have added 68 million cases over the past five years. Virtually all of this category's
volume is packed in aluminum cans. Moreover, the vast majority of aluminum cans in
energy are specialty forms4 , ranging from the 16 oz can used by most MNST and Vital
Pharmaceuticals (Bang) products to the oz can used for Red Bull's standard serving.
4 Even the Monster Maxx cans are filled in non-standard 12 oz formats.
Figure 8: Total Beer/FMB/Cider growth is entirely from
aluminum cans (vs. glass, plastic, and kegs/other formats)
Figure 9: ...driven by Hard Seltzers, Michelob Ultra, Craft and
STZ's Mexican Import brands
AluminumTotal Ex-Aluminum
9%
6%
3%
0%
-3%
-6%
-9%
Beer/FMB/Cider Case Volume Growth
FMB Super Prem. Craft Import Below Prem. Dom. Prem.
0
+49
+38+56
+81
400
200
-15L52W 4YA L52W
600
-89
800
Absolute Change in Aluminum Case Volume by Segment
12oz ex FMB/SP FMB Super Prem Non 12oz ex-FMB/SP
L52W 4YA L52W 3YA L52W 2YA L52W YA L52W
5681
17
-36
1,000
900
800
700
600
500
400
300
200
100
0
Beer/FMB/Cider Aluminum Case Volume by Can Type
M
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02
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/3
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/2
1/
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Energy Drink Aluminum Case Volume Growth
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Note: YoY quadweek growth.
Source : Nielsen, Deutsche Bank analysis
Source : Nielsen, Deutsche Bank analysis Note: L52W period ends January 25, 2020
Overview of the beverage can suppliers and market
Industry size and market players
The US and Canada is a 97B beverage can market, which does not include imports into the
region. The industry is consolidated into four main players: Ball (BLL), Crown
(CCK), Ardagh (ARD) and Metal Container Corporation. Ball is the largest player with
approximately 45% of the market and 48% if you include the company's Rocky Mountain
Metal Container joint venture with Molson Coors in Golden, Colorado. Crown has
approximately 22% market share followed by Ardagh at 17%. Metal Container
Corporation has an estimated 13% market share and is the self- manufacturing
subsidiary of Anheuser-Busch.
The industry changed significantly in 2016 when Ball acquired Rexam's global
operations, including ~22-23B cans of capacity in the US at the time. Ultimately, Ball
was required to divest roughly ~16-17B cans of US capacity to Ardagh, which had only
operated food can and glass assets prior to acquiring the divested assets.
Figure 11: Virtually all energy drink volume is packed in
aluminum cans, skewed nearly entirely to specialty cans
Figure 12: Vital Pharmaceuticals (Bang), Monster, and Red Bull
have driven nearly all the growth
L52W MNST Red Bull Rockstar Vital NACP CELH PEP Other L52W
01/30/16 Pharma 01/25/20
375
350
325
300
4% -1%
400
0%
Aluminum Volume Contribution by Company
450
425 1% 0% -3%10%
7%
02
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7/
16
04
/2
3/
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/1
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3/
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01
/2
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03
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5/
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05
/2
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07
/1
5/
17
09
/0
9/
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11
/0
4/
17
12
/3
0/
17
02
/2
4/
18
04
/2
1/
18
06
/1
6/
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08
/1
1/
18
10
/0
6/
18
12
/0
1/
18
01
/2
6/
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03
/2
3/
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05
/1
8/
19
07
/1
3/
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09
/0
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11
/0
2/
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12
/2
8/
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Source : Can Manufacturers Institute, Company Filings, Deutsche Bank
RMMC ƒ BLL, 3%
MCC ƒ ABI, 13%
Ball, 45%
Ardagh, 17%
Crown, 22%
Supply outlook - can shipments currently experiencing outsized growth
Beverage can shipments grew % y/y in 2019 in the US and Canada with %
growth from alcoholic beverages and % growth from non-alcoholic beverages. This is
outsized growth considering the industry has seen a CAGR of % from 2012 (when
industry data first included Canada) to 2018 driven by declines in consumption of
carbonated soft drinks. We believe this heightened growth has been driven by positive
demand trends, such as the consumer focus on sustainable and recyclable packaging,
desire for convenience and new product launches (for example energy drinks, craft
beer, sparkling water, hard seltzers, wine, among others – as noted above).
This growth has taken most by surprise, even the beverage can producers.
Interestingly, Ball showed the industry with a % growth rate going forward at its
investor day in October 2018, but it is actually Ball who now appears to be most
optimistic about the demand outlook. In fact, Ball's current outlook is for the
beverage can market to grow by 4-6% annually for the next five years. We are
confident that the industry could at the very least see growth levels similar to that of
2019 (%) or more in the next 2-3 years as the growth in hard seltzers continues and
consumer brands continue to favor the beverage can for new product launches.
Figure 13: US and Canada beverage can market shares (market is ~97B
beverage cans)
Source : Google Trends
120
100
80
60
40
20
0
This growth should be supported by efforts of beverage companies who have various
sustainability targets for 2025-2030. To be fair, plastic packaging is likely not as bad as the
consumer fears in terms of its recyclability or carbon footprint relative to other forms of
packaging. The issue in the US (and elsewhere) is that the current recycling system is not
set up to effectively recycle plastic waste. Thus, much of it goes into a landfill. It may be
at some point the infrastructure can be improved, but this won't incur in time for
companies to meet their sustainability targets in the middle of this decade. Below
highlights various announced sustainability initiatives by CPG companies.
Coca-Cola – aiming to make all consumer packaging 100% recyclable by 2025
and packaging that contains at least 50% recycled material by 2030. Note Coca-
Cola recently noted that it was committed to the PET bottle as a package and is
focused on increasing collection rates for it.
PepsiCo – aiming to design 100% of packaging to be recyclable,
compostable or biodegradable by 2025 and partnering to increase
packaging recovery and recycling rates
Keurig Dr. Pepper – targeting 100% of packaging to be recyclable or
compostable and use of 30% post-consumer recycled content across
packaging portfolio by 2025
Nestlé – aiming to have 100% of packaging recyclable or reusable by 2025
General Mills – targeting 100% of packaging to be recyclable by design by 2030
Campbell’s Soup – targeting 100% of packaging materials to be from
sustainable sources that are renewable, recyclable or contain recycled content
by 2020
Mondelēz – targeting 100% of packaging to be recyclable by 2025 and
elimination of 65 million kg of packaging material worldwide by 2020
Procter & Gamble – aiming to have 100% of packaging be recyclable or
reusable and reduce virgin petroleum plastic in packaging by 50% by 2030
Unilever – targeting 100% recyclable plastic packaging by 2025 Consumer
recycling rates in the US according to the Aluminum Association and
Figure 14: "Plastic waste" search term interest in the US
Figure 15: US and Canada beverage can shipments (in
millions)
Figure 16: US and Canada standard vs. specialty beverage can
shipments
sourced from the EPA and NAPCOR (National Association for PET Container
Resources) show that the aluminum beverage can has a 50% consumer recycling rate,
followed by PET bottles at 29% and glass bottles at 26%. Further, aluminum cans use
73% recycled content on average, while glass bottle use 23% and PET bottles use only
3%.
Beverage brands favoring specialty can sizes
The industry has gone from specialty cans representing approximately 17% of the market
in 2012 to now at an estimated 30% in 2019. A specialty can is classified as a beverage can
size other than the typical standard 12-ounce size. This includes 12- ounce sleek cans,
which is what most hard seltzers use for packaging. Consumer beverage brands are
using these specialty sizes as means of introducing new products or flavorings to the
market. Further, the companies are using it as a way of increasing profit pools. For
example, shifting to an 8-ounce sleek can and packaging it in a 6-pack that is higher
priced on a per ounce basis than your standard 12-ounce beverage cans in a 12-pack.
100B
90B
80B
70B
60B
50B
40B
30B
20B
10B
0B
Non−Alcoholi
c Beverage
Alcoholi
c
Beverage
Total % Chg.
YoY Standard Specialty
Beverage can supply reportedly oversold (. at full utilization)
While there is no industry data showing beverage can capacity, it is well understood that
the industry is currently running at full utilization rates and are oversold. To capture
the growth, there have been an influx of capacity investments being made and we believe
there will be more announced or finalized in upcoming earnings. Based on already
announced capacity investments, we estimate supply for the industry will increase
4%+ or ~4B cans from current levels by the end of 2020 and another 4%+ by the end of
2021. The table below provides greater details for announced capacity investments.
Beyond these announcements, we believe the companies are investing in line speed ups
to increase capacity and in some cases could be looking to add lines to existing facilities
without flagging to the market. We believe all announced capacity additions will have
speciality capabilities with the exception of the Florida Caribbean Distillers plant.
* Canada included in data in 2012, adding ~ cans
Source : Can Manufacturers Institute, Deutsche Bank
* Data only through 2017; We estimate specialty represents ~30% of all beverage can shipments in 2019. Source :
Can Manufacturers Institute, Deutsche Bank
120,000 %
100,000 %
%
80,000
%
60,000
%
40,000
−%
20,000 −%
0 −%
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Figure 18: CapEx budgets of beverage can companies (in
$ millions)
Figure 19: CapEx budgets as a % of revenue for beverage can
companies
Source : Company Filings, DB estimates Source : Company Filings, DB estimates
Start-up Date Company Location Lines Est. Capacity Notes
2021 Ball US Northeast 2 2,000 Announced that they are "actively" looking to add a beverage can plant but did not provide number of lines or expected start date
Q1 2021 Florida Caribbean Distillers Winter Haven, FL 1 850 Announced by local reports in December 2019; $120m investment with plans for expansion as well; Affiliated with CC1 Companies
Q1 2021 Ball Glendale, AZ 2 2,000 Will have have two lines but room for more; Expected to service Red Bull and Rauch Fruit Juices
mid-2020 Ball Rome, GA 1 1,000 Adding specialty line to existing facility
mid-2020 Ball Fort Worth, TX 1 1,000 Adding specialty line to existing facility
Q2 2020 Crown Nichols, NY 1 1,000 Adding specialty line to existing facility
Q1 2020 Crown Weston, Ontario 1 1,000 Converting a food can line to a beverage can line
Source : Company Filings, Deutsche Bank
$2,500
$2,000
$1,500
$1,000
$500
$0
2016 2017 2018 2019 2020e 2021e
%
%
%
%
%
%
%
%
%
%
%
2016 2017 2018 2019 2020e 2021e
Ardagh Ball Crown Ardagh Ball Crown
Capex budgets for beverage can companies have been moving higher to support this
growth. This has led to a reduction in free cash flow near-term, but valuation for the sector
has only improved on the back of ESG investing, as well as the entrance of growth
investors who have been willing to pay a higher EBITDA multiple for the exposure.
Threat of new entrants? Local reports in December 2019 announced that Florida
Caribbean Distillers will invest $120M to build a beverage can plant in Winter
Haven, Florida. This is a new entrant to the market, but we believe it will primarily be
used as self-manufacturing as the owner of this company also owns CC1
Companies which is a Coca-Cola distributor in Puerto Rico and the Caribbean. The local
reports noted that the company could look to expand within two to three years as well
depending on the growth. We took this announcement as a sign that the market is
growing significantly as this "new entrant" felt it must make this investment to
secure cans. We did not view this negatively. That said, if we were to see new and bigger
announcements from established canmakers in other regions, such as CanPack or a large
beverage company looking to self manufacture, then that would pose risk to the volume
and pricing outlook for beverage can producers. This is a legitimate headline risk over the
next few years, in our opinion.
Typically a new state-of-the-art beverage can plant will have annual capacity of ~1B
beverage cans per line. A plant typically costs $80M - $100M+ for a one line plant, while
adding a line to an existing plant costs $50M+. It takes roughly one year from the time a
company announces its intentions to build a beverage can plant to the time it begins
productions. Then, it typically takes six months to have the facility fully ramped. While
there is some concern about the availability of can sheet supply, if the industry does see the
aforementioned growth then there is also the issue of hiring and training employees.
The growth is unprecedented as is the need to
Figure 17: US and Canada announced beverage can capacity increases (capacity in millions of cans)
Aluminum High Grade Cash Official LME ($/MT) + Midwest Premium
$3,000
$2,700
$2,400
$2,100
$1,800
$1,500
Figure 20: Aluminum spot prices are down nearly 30% from the high in May 2018
Note: Average monthly spot prices, inclusive of the Midwest Premium
Source : Bloomberg, Deutsche Bank analysis
ensure successful production ramps, which don't always go smoothly.
Beverage can producers pushing for price and favorable contract terms (offset
by underlying aluminum deflation for buyers in the current environment)
Given the tight supply-demand balance, beverage can producers are currently
pushing for price increases and more favorable contract terms. Considering that
contracts are typically three to five years in length, this push for increased pricing will
likely play out in the near and medium-term as contracts get renewed. The effort to obtain
more favorable contract terms such as more lead time to manage production
schedules is also occurring.
Metal beverage can producers generally do not take raw material risk. They have raw
material cost pass through mechanisms built into their Thus, customers
such as Coca-Cola or Pepsi incur the risk on aluminum can sheet price volatility—
although currently aluminum pricing is in these companies favor. After peaking in May
2018, the spot price of aluminum (inclusive of the Midwest Premium) has been
deflationary of late, providing a natural offset to higher conversion costs passed
through from beverage can producers (to the extent aluminum exposures have been
left unhedged).
5 In some cases, we believe these larger customers procure the aluminum can sheet on their own
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Figure 21: NA aluminum consumption (2019) Figure 22: US aluminum can sheet facilities
Overview of the aluminum can sheet market
Separately, there has been some concern that there is not enough aluminum can sheet
supply to meet current demand. We believe, however, that there is sufficient supply.
While the domestic US market is tight and lacking capacity, the three major beverage can
producers are global and the procurement of aluminum beverage can sheet can be
executed on a global basis as imports of can sheet have grown significantly
recently. However, the ever-evolving policies with US tariffs have made global
procurement more complex and procurement teams are increasingly focused on finding
opportunities for supply. Ball noted that given the complexity of the tariff situation and
the shortage of rolled aluminum in North America, the company has increased its
metal suppliers from five to 19 from 2018 to 2019. That said, turning to more global
sourcing likely adds to the raw material costs that beverage customers will likely
incur.
The aluminum can sheet market: The below charts show details of the North
American aluminum and can sheet industry. In the US, packaging is ~20% of end market
demand, second only to transportation (~40%). The largest can sheet facilities
include Logan, Muscle Shoals, Oswego, and Warrick.
Heavy Machinery
7%
Other
2%
Others
9%
Electrical
5%
Consumer goods
7%
Transport
41%
Loga
n
38%
Construction
17%
Osw
1
Packaging
21%
MuscIe ShoaIs
22%
As a sub-set of the overall North America (NA) aluminum market, flat rolled
products split into Can sheet, Other sheet and Heat Treat Sheet & Plate are shown below
between 2012 and 2019. With declining trends in beverage cans over the 2012-2018
time frame, can sheet declined as a percentage of total flat-rolled. The Heat Treat Sheet
& Plate category (which includes automotive uses, further explanation follows) has
been gaining market share as a percentage of flat-rolled products in North America. By
2019, the packaging market has become tighter not only because demand started to
improve for beverage cans but also some aluminum rolling mills have switched to
automotive sheet instead of traditional beverage can sheet in an effort to keep up
with the demand from automotive manufacturers to light-weight vehicles (Ducker
Worldwide research most recently expects light vehicles to add 50lbs per vehicle of
aluminum sheet from 2015 to 2020) and also to improve operating margins. As both
packaging and automotive sheet supply demand dynamics are likely to remain tight over
the next several years, we view companies with the ability to shift between packaging
and automotive sheet production (. Constellium) as likely to realize the most benefit.
In the past, EBITDA margins as high as $800/ton for automotive have been mentioned by
some companies, compared to legacy packaging sheet contracts which we believe were
Source : Woodmac and Deutsche Bank Source : Company data and Deutsche Bank estimates
tons
tons
Figure 23: Flat-rolled aluminum shipments (kt per month) Figure 24: Flat-rolled aluminum market share
Figure 25: NA can sheet shipments (kt per month) Figure 26: US aluminum can sheet imports (kt per year)
negotiated close to $200/t.
400
350
300
250
200
150
100
50
0
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
The below chart provides a more detailed view of North America can sheet
shipments with a declining trend. The US aluminum can sheet industry is currently
~ tons of domestic sheet shipments. Can sheet producers include
Constellium, Alcoa, Novelis and Tri-Arrows.
In addition, we have shown US aluminum can sheet imports which have been
growing strongly but off a small base. Can manufacturers have largely stayed away from
importing can sheet material into the US. In 2018 only 85kt of can sheet or nearly 5%
of domestic consumption came from abroad (63% of which was imported from
China), but it has increased significantly from near zero imports in 2010. By 2019, this
number had essentially doubled, as beverage can producers have looked to imports of
can sheet in order to meet demand.
180
170
160
150
140
130
120
110
100
200
180
160
140
120
100
80
60
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
We believe Constellium's can sheet margins have improved in recent years and this is prior
to the potential market tightening further through 2022 in our view. In addition, the
2018 Section 232 trade policy raised imported can sheet prices by 10% equivalent to ~$150-
250/t, but imported can sheet still increased YoY following this event which is a positive
indicator that Constellium could improve prices going forward, and it can still likely be
absorbed and/or passed through. Lastly, when the Muscle Shoals facility was acquired in
2014, the packaging plant was operating at an EBITDA margin of $265/t (vs €249
EBITDA/t that Constellium achieved from
Source : Aluminum Association and Deutsche Bank Source : Aluminum Association and Deutsche Bank
Source : Aluminum Association and Deutsche Bank Source : US Census Bureau and Deutsche Bank
Can sheet Other sheet Heat Treat Sheet & PIate Can sheet Other sheet Heat Treat Sheet & PIate
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P&ARP in 2019). The combination of the above factors provides confidence in our view
that Constellium should be able to favorably negotiate new contracts at higher prices (note
we have conservatively not modeled this scenario in our base case) over the 2021/22
timeframe for contracts last agreed upon during 2015-2017 which is when aluminum
sheet producers were just beginning to announce investments into automotive sheet and
switch capacity from beverage can to automotive sheet.
Recycling importance: Constellium has large recycling businesses at Muscle Shoals
in Alabama and Neuf Brisach in France. Muscle Shoals is capable of recycling
~20% of US beverage cans equivalent to ~20 billion cans per year. In addition, Neuf-
Brisach is capable of ~12 billions cans per year for recycling.
Implications for US Beverage Companies
While supply constraints for specialty cans will likely serve as headwinds to
production, these challenges are not insurmountable—especially in the current
environment when any incremental costs of securing can supply are likely offset/ more
than offset by the favorability of underlying aluminum prices.
To ensure adequate supply, beverage manufacturers must be agile in their
procurement of aluminum cans, especially as several announced growth initiatives across
beverage categories call for specialty aluminum (likely enabling beverage can
manufacturers to raise prices where/if necessary). Perhaps, companies will look to
import specialty cans from supply chain partners outside the US, a strategy MNST has
mentioned to supplement domestic supply. Of course, doing so would present greater
logistics costs and other challenges all else equal, but these costs are presumably
outweighed by the risk of stock outages. Companies will need to be cognizant of these
potential inflationary pressures in specialty aluminum can supply in order to mitigate
margin degradation.
KO - In our view, because KO has completed its North America
refranchising program (offloading the majority of its US bottling
operatings), the direct impacts from cost/logistics inflation in aluminum cans
would be borne primarily by the bottlers. However, as the ultimate brand
owner and concentrate supplier, KO too would suffer indirect impacts,
including reduced equity method income from its investments in bottlers and in
MNST (to the extent any aluminum can cost inflation is not offset by
productivity/cost management elsewhere) and/or reduced sub- bottling
payments (noting such payments are a function of bottler gross profit).
Similarly, to the extent bottlers raise price to offset the inflationary pressures,
the concentrate volume sales to bottlers could be negatively impacted by the
effect of consumer price elasticity. Still, KO and certain bottlers (., Swire,
Arca) have operations outside the US, which could help attract can supply
from markets overseas.
PEP - Unlike KO, PEP owns the majority of its North America bottling
network (with select exceptions such as Pepsi Bottling Ventures or Wis- Pak).
Yes, PEP has been investing to revitalize its Blue System and scanned trends
appear to be showing sequential improvement in aggregate, but in our view the
system still must prove that such momentum has staying power and is not a
short burst. We see risk that can manufacturers pass pricing on traditional can
production (the majority of PEP's aluminum case volume).
MNST - Given the characteristics of its single-category energy drink
operations, MNST is almost entirely exposed to specialty cans. The
company lamented issues with adequately supplying cans in the US,
ultimately procuring supply from partners in South America to ensure it can meet
its growth plans. Although the company pointed to favorability in aluminum
hedges for this year, the supply constraints on non-standard can production could
offset this tailwind if not managed successfully.
SAM - Nearly all of SAM's recent growth has come from Truly Hard Seltzer and
Twisted Tea brands. While Twisted Tea does have some production in specialty
tall cans, the brand is mostly bottled. Truly, on the other hand, is packed in sleek
aluminum cans, and continued outsize growth of the hard seltzer category
presents challenges. In 2018, the company highlighted the supply pressures and
shortages for sleek cans, headwinds which have likely only exacerbated by
the hard seltzer category's continued acceleration in 2019 (well-beyond the
capacity of suppliers to adjust their supply chains).
STZ - With very little exposure to specialty cans, STZ should be relatively
insulated from cost increases in aluminum cans. However, the company is mix-
shifting to cans within its Corona franchise (including into specialty cans
with the upcoming launch of Corona seltzer), as well as portfolio-wide with
Modelo's momentum persisting (skewed to can format growth). Still, STZ
should be able to offset any modest cost inflation through continued pricing
and volume leverage.
TAP - Relative to rising costs and inadequate supply of specialty aluminum, TAP
faces relatively limited exposure. True, TAP's 2020 growth initiatives like Vizzy
or Blue Moon Light Sky are packed in specialty cans, but the vast majority of its
aluminum case volume is domestic premium beer (Miller Lite, Coors Light) and
economy beer (Keystone), which (i) are typically packed in standard cans, and (ii)
are predominantly sourced through the company's Rocky Mountain Metal
Container JV with Ball. While TAP is likely paying market rates for such can
supply via its JV, any inflationary pressure is likely at least partially offset on
the bottom line by equity income/dividends ultimately received from that
same JV (which is also supplying third-party demand).
ABI - Like TAP, ABI’s aluminium case volume is weighted towards domestic
premium and economy beer. Given its company-owned Metal Container Corp.
production, its global supply chain and ongoing US volume declines, we believe
ABI is most likely insulated from cost pressures/shortages in aluminium cans.
In fact, for 2020 we believe ABI should see a fairly significant benefit on
its US COGS from lower aluminium costs, considering its typical 12 month
hedges.
Implications for Beverage Can Suppliers
It is only positive implications for the three major beverage can producers and is
relatively the same across each company, but we provide nuances between each
company below. The volume growth is a positive and likely reflected in valuations for
the group, but if the growth were to decelerate then there is risk that the beverage
can companies lose their growth multiple. Further, the growth is providing for a
tight supply-demand balance, which the companies are leveraging to push for higher
pricing and more favorable contract terms. Lastly, while domestic can sheet capacity is a
concern, the beverage can producers are able to globally procure can sheet as imports of
can sheet have increased significantly recently (see figure 26). While this could mean
higher costs, the beverage can producers ultimately pass through the cost of can sheet
to its customers without taking on the risk of aluminum price volatility. The main area
of concern for the beverage can producers is successfully executing on capacity ramp ups
given the unprecedented growth and mitigating growing pains. Note we estimate that an
additional line once fully ramped equates to $15M - $25M in incremental EBITDA on
an annualized basis.
ARD - Ardagh is the third largest beverage can manufacturer in the US and
Canada with an estimated 17% market share. We estimate that the
company has ~35% specialty mix exposure in the US and about ~40%
specialty mix on a global basis. We estimate that ~21% of its total revenues are
driven by metal beverage packaging in the US. As a whole metal beverage
packaging represents 50% of its total revenues with glass packaging
representing the other half. The company trades at a discount to the beverage can
peers due to its glass packaging exposure, higher leverage at ~ at the end
of 2019 and lower liquidity given that only ~8% of its shares are public free
float.
BLL - Ball is the largest beverage can manufacturer in the US and Canada with
an estimated 45% market share or 48% when including its joint venture
with Rocky Mountain Metal Container. We estimate that the company has
~35% specialty mix exposure in the US and about ~43% specialty mix on a
global basis. We estimate that ~39% of its total revenues are driven by metal
beverage packaging in the US and Canada. The company is primarily a pure
play beverage can producer, but does have a
Figure 27: MNST, ABI, TAP, and SAM each sell over half
their respective volume in aluminum...
Figure 28: … but MNST and SAM have the greatest
exposure to specialty cans
MNST ABI TAP SAM KDP KO STZ PEP
26%28%
34%
38%
67%
70%
81%
96%
Percentage of Beverage Case Volume in Aluminum
MNST SAM TAP ABI STZ KO PEP KDP
7%7%8%
30%
36%39%
76%
99%
Percentage of Aluminum Beverage Case Volume in Specialty Formats
Source : Nielsen, Company filings, Deutsche Bank estimates and analysis Source : Nielsen,Company filings, Deutsche Bank estimates and analysis
Figure 29: Packaging Group EV / EBITDA NTM (ARD,
AMC-AU, ATR, BLL, BERY, CCK, OI, SLGN, SON)
Figure 30: ARD EV / EBITDA NTM
Source : Bloomberg Finance LP, Deutsche Bank Source : Bloomberg Finance LP, Deutsche Bank
Figure 31: BLL EV / EBITDA NTM Figure 32: CCK EV / EBITDA NTM
Source : Bloomberg Finance LP, Deutsche Bank Source : Bloomberg Finance LP, Deutsche Bank
fast growing Aerospace business that represents ~13% of sales along with an
aerosol business representing ~5% of sales.
CCK - Crown is the second largest beverage can manufacturer in the US and
Canada with an estimated 22% market share. We estimate that the company
has ~17% specialty mix exposure in the US and about ~35% specialty mix on
a global basis. We estimate that 18% of its total revenues are driven by metal
beverage packaging in the US and Canada. Crown is the most diversified company
out of the three with a large food can business, transit packaging business and
aerosol packaging. We estimate that ~65% of its revenues are driven by metal
beverage packaging globally. The company trades at a discount relative to Ball
primarily due to its food can and transit packaging exposure, along with its
higher leverage at at the end of 2019.
EV/NTM EBITDA Average Std Dev
EV/NTM EBITDA Average Std Dev EV/NTM EBITDA Average Std Dev
Implications for Aluminum Can Sheet Suppliers
Constellium (CSTM) a key beneficiary of improving demand for Can
Sheet
Packaging 37% of CSTM's revenue: Constellium (CSTM, Buy, PT $16/sh) is the key
beneficiary from growing demand for aluminum cans within our Metals & Mining
Five year avg
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coverage. Constellium has three segments (Packaging and Automotive Rolled
Products (P&ARP), Aerospace and Transportation (A&T), Automotive Structures &
Industry (AS&I)). In 2019, the company generated 53% of revenue (€3,149m of
company-wide €5,907m) and 49% of EBITDA (€273m of company-wide €562m) from
its P&ARP segment. This segment contains sales to the packaging market (including
beverage cans where Constellium is the second largest can stock producer in both
North America and Europe) and automotive sheet used for light- weighting of cars.
Within the 53% of company-wide revenue from P&ARP in 2019, 37% of company
revenue was from packaging. Within packaging, Constellium supplied aluminum sheet
for beverage cans and a range of other products including aerosols, cosmetics and food cans.
While the aluminum price has been decreasing, Constellium operates as a pass-through
business and has continued to improve EBITDA.
Contract renewal in packaging largely due 2021/22: Based on the company’s most recent
earnings update for the full year 2019 result, commentary on the conference call as well as
insights from our NDR with the company late last year (see here) suggests most
packaging contracts typically run 3-5 years and are due to reset late 2020 at the earliest
with most expected to be up for renewal across 2021 and 2022. It is the 2021-22 time frame
where we believe that Constellium will be in the box seat to push for improved pricing,
to improve margins and also to potentially debottleneck select facilities (such as
Muscle Shoals) to also look for volume opportunities to fill the increasing demand for
North American Can Sheet. We note that Constellium's 2022 guide of >€700m
EBITDA does not include price rises related to Can Sheet.
Framing the opportunity, Constellium a clear winner from can demand rises: As
mentioned previously in this report, beverage can shipments grew % y/y in 2019 in the
US and Canada with % growth from alcoholic beverages and % growth from non-
alcoholic beverages. This is outsized growth considering the industry has seen a CAGR of -
% from 2012 (when industry data first included Canada) to 2018 driven by declines in
consumption of carbonated soft drinks. Beverage can producers are pointing to 4 -
6% volume growth in North America in the near-term. This is a large opportunity for
Constellium. In terms of the margin potential for Constellium in its P&ARP business:
In 2019 for P&ARP, the company achieved €249 EBITDA/t which was up from €234
EBITDA/t in 2018 while shipments for the segment over the time frame improved
from 1,039kt in 2018 to 1,097kt. We expect margins to continue to improve with the
growing trend in this segment related to light-weighting in automotives in North
America but in addition, can sheet demand increases could add further margin
potential. We note that a €10/t margin improvement in the P&ARP segment is
equivalent to €13m of EBITDA on our calculations. For a revenue sensitivity, using the
current 37% share from packaging within the company, a 1% increase in pricing for
packaging is equivalent to €22m in 2022. Key packaging customers disclosed on
CSTM's website for packaging include AB InBev, Amcor, Anheuser-Busch, Ardagh
Group, Ball and Crown.
Constellium big picture; a very attractive growth story: CSTM ended 2019 with FCF
generation of €175m, at the top of guidance and EBITDA of €562m hitting consensus
and our number (€560). Importantly, the guide for 2020 (6-9% EBITDA growth and FCF
€125-175m) clearly takes the company towards its 2022 goals (unchanged at >€700m
EBITDA and leverage of ND/EBITDA vs currently). In addition, after a very
strong year for FCF in 2019, the 2020 guidance of €125- 175m is solid in our view.
Equity Rating Key Equity rating dispersion and banking relationships
Appendix 1
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