Amcor plc (NYSE:AMCR) Q2 2023 Earnings Call Transcript

Amcor plc (NYSE:AMCR) Q2 2023 Earnings Call Transcript February 7, 2023

Operator: Good day, everyone, and welcome to the Amcor Half Year 2023 Results. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. In the interest of time, we would like to remind participants to limit your questions to one and rejoin the queue for any follow-ups. I would now like to turn the conference over to Tracey Whitehead, Head of Investor Relations. Please go ahead.

Tracey Whitehead: Thank you, operator, And thank you, everyone, for joining Amcor’s Fiscal ’23 first half earnings call. Joining today is Ron Delia, Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amcor.com, under the Investors section, you’ll find today’s press release and presentation, which we’ll discuss on the call. Please be aware that we’ll also discuss non-GAAP financial measures and related reconciliations can be found in the press release and the presentation. Remarks will also include forward-looking statements that are based on management’s current views and assumptions. The second slide in today’s presentation with several factors that could cause future results to be different than current estimates.

And reference can be made to Amcor’s SEC filings, including our statements on Form 10-K and 10-Q for further details. Please note that during the question-and-answer session, we request that you limit yourself to a single question and one follow-up and then rejoin the queue if you have additional questions. With that, over to you, Ron.

Ron Delia: Thanks, Tracey. And thanks, everyone, for joining Michael and myself today to discuss Amcor’s first half financial results for fiscal 2023. We’ll begin with some prepared remarks before opening for Q&A. And I’ll start with Slide 3, which covers our first and most important value, safety. Safety is deeply embedded in Amcor’s culture, and our management teams understand our collective responsibility to provide a safe and healthy working environment. Our dedication to eliminating injuries in the workplace continues to result in industry-leading metrics. In our first half, we improved further and made great progress with a 24% reduction in the number of injuries globally compared to last year. And 65% of our global sites have been injury-free for the past 12 months, with more than 30% injury-free for three years or more.

Safety and a culture of caring for our people will always be our highest priority. Turning to our key messages for today on Slide 4. First, the business delivered a strong first half and second quarter despite ongoing challenges in the macroeconomic environment. Our teams are doing an excellent job driving value for customers while managing the many aspects of the business under their control. We’ve increased our focus on flexing costs as demand evolved, and we’re proactively taking actions to drive further efficiency and productivity improvements while recovering general inflation and passing through higher raw material costs. The outcome was strong operating leverage, with an 8% increase in both EBIT and adjusted EPS in the first half on a comparable constant currency basis.

Second, although not entirely immune in a weakening demand environment, our business remains resilient. 95% of our portfolio is exposed to consumer staples and health care end markets, which combined with our broad geographic footprint, positions us well through economic cycles. Our volume performance through the first half demonstrates that resilience and compares favorably to the mid-single-digit or higher declines reported by others in our value chain. Third, a solid first half, strong execution and a resilient portfolio gives us the confidence to reaffirm our guidance ranges for fiscal ’23. We’re confident in the ability of our teams to continue focusing on the controllables. However, we’re also mindful that through the second quarter, the demand environment softened and became increasingly volatile.

We expect this will continue in the near term. And as we enter the second half of the fiscal year, we’re more cautious in relation to the demand outlook, and we currently expect to be toward the lower end of our EPS guidance range. And our final and most important key message is that we remain focused on executing against our strategy for long-term growth. The business generates significant annual cash flow, which allows us to invest in organic growth opportunities, pursue acquisitions, pay an attractive and growing dividend and regularly repurchase shares. We’re confident in the strength of our underlying business, execution capabilities and capital allocation framework, all of which support our compelling investment case. Moving to a few financial highlights on Slide 5.

First half reported net sales were up 6%, which includes approximately $670 million of price increases related to higher raw material costs. Excluding this impact, organic sales were up 2% on a constant currency basis, and volumes were 1% lower. Both the Flexibles and Rigid segments did an excellent job driving price and mix benefits, including recovering around $160 million of general inflation. We’re making good progress on our commercial and strategic agenda and with our priority segments continuing to deliver high single-digit organic growth and several of our emerging markets businesses also growing at high single-digit rates in line with long-term trends. Positive price/mix performance more than offset modestly lower overall volumes, which reflected generally softer and more volatile demand as well as customer destocking in parts of the business.

Operating leverage was strong as we continue to increase our focus on costs, and the business delivered an 8% increase in both adjusted EBIT and EPS for the first half. Looking at our December quarter financial performance. Reported net sales growth was 4% and 1% on an organic basis. Adjusted EBIT and EPS each grew 7%. So another solid quarter highlighting the benefits of geographic diversification and exposure to more defensive end markets even as we experienced softer demand. Through the first half, Amcor returned approximately $400 million of cash to shareholders through a combination of dividends and share repurchases. And today, we’ve increased our planned repurchases for fiscal ’23 by up to $100 million. Our overall financial profile remains robust with return on average funds employed at 17%.

We’re pleased with our first half and our December quarter financial performance, and I’ll now turn it over to Michael to cover more of the specifics.

Michael Casamento: Thanks, Ron, and beginning with the Flexibles segment on Slide 6. The business performed well in the face of challenging macroeconomic conditions, executing to recover higher raw material costs, manage general inflation, improved cost performance and deliver solid mix benefits. Reported first half sales grew 5%, which included recovery of higher raw material costs of approximately $460 million, representing 9% of growth. Our teams continue to do an excellent job passing on increases in commodity costs. And as expected, the related price cost impact on earnings for the second quarter was modestly positive after being neutral in Q1. Excluding the raw material impact and negative currency movements, sales grew 3% for both the first half and December quarter, driven by favorable price mix benefits of 4%, partly offset by modestly lower volumes.

As Ron mentioned, sales across our higher-value priority segments, which include health care, pet care and protein, remained strong, collectively growing at high single-digit rates through the first half and contributing to positive price/mix. We also continued to see strong growth in our businesses in India and Southeast Asia, particularly in health care and media end markets. This helped limit the impact of lower volumes in some business units across categories, including coffee, dairy, condiments, confectionery and home and personal care, where we have seen varying degrees of customer destocking or lower demand. Volumes were lower in China due to COVID-related lockdowns and in Latin America, where inflationary pressures unfavorably impacted demand in several countries.

In terms of earnings for Flexibles, we again demonstrated strong operating leverage. Adjusted EBIT grew of 8% for the half reflects ongoing price mix benefits and favorable cost performance. Margins remained strong at 12.6% despite the 120-basis-point dilution related to increased sales dollars associated with passing through higher raw material costs. Turning to Rigid Packaging on Slide 7. The business built on its first quarter performance with another solid — another quarter of solid earnings growth. First half sales increased by 12% on a reported basis, which included approximately $210 million or 13% of sales related to the pass-through of higher raw material costs. Organic sales declined by 1% for the half, reflecting 2% lower volumes, partly offset by a 1% price/mix benefit.

Looking at the December quarter, overall volumes declined by 5%, with the beverage business in North America and Latin America impacted by lower consumer demand and customer destocking. In North America, first half beverage volumes were down 5%. This included hot fill container volumes, which increased 2% in the half but were down 2% in the December quarter, which was in line with market. Cold fills were lower in the half and quarter due to a combination of lower consumer demand and customer destocking. In Latin America, volumes were marginally higher for the first half with growth in Mexico and Argentina offset by lower volumes in Brazil. Consistent with what we saw in the Flexibles segment, the December quarter was unfavorably impacted by softer consumer demand in the region.

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The Specialty Containers business delivered good performance with solid volume growth from health care, dairy and nutrition end markets. And overall adjusted EBIT for the Rigid segment in the first half increased 7% on a comparable constant currency basis with our teams being able to adjust to evolving market conditions and improve operating cost performance. Moving to cash on the balance sheet on Slide 8, we had a strong sequential improvement in adjusted free cash flow, which came in at $338 million for the December quarter, in line with last year. For the half year, cash outflow of $61 million was lower than last year, largely reflecting the unfavorable impact on the working capital cycle related to higher levels of inventory and higher raw material costs.

These impacts also make our cash flow seasonality, which is typically weighted to the second half of the year, more pronounced for fiscal ’23. Our financial profile remains strong with leverage at 2.8x on a trailing 12-month EBITDA basis. This is in line with our expectations for this time of year given the seasonality of cash flows and the receipt of proceeds from the Russia business sale. We repurchased $40 million worth of shares in the December quarter and expect to repurchase up to $500 million in total through the 2023 fiscal year. Prior to turning to our outlook, I wanted to provide a few more comments about the completed sale of our Russian business. We received sale proceeds of $365 million, in addition to $65 million of cash which was repatriated upon completion.

In terms of the use of total proceeds received, we expect to do three things. First, we will invest approximately $120 million in a range of cost-saving initiatives across the business to partly offset divested earnings. This is in addition to approximately $50 million of cash we allocated back in August for similar initiatives. Second, we plan to allocate up to $100 million for additional share repurchases. And finally, the balance is expected to be used to reduce net debt in proportion with divested EBITDA, maintaining our leverage ratio. Taking us to the outlook on Slide 9, we are maintaining our guidance range for adjusted EPS of $0.77 to $0.81 per share, assuming current foreign exchange rates prevail through the balance of the year. As Ron mentioned, while we are taking aggressive action now to flex the cost base across the business, we expect the environment will remain volatile in the near term.

And entering the second half of the fiscal year, we are more cautious in relation to the demand outlook and currently expect to be towards the lower end of our EPS guidance range. Our earnings bridge on this slide lays out the elements underlying our expectations. We expect earnings growth of approximately 3% to 8% on a comparable constant currency basis to be comprised of approximately 5% to 10% growth from the underlying business and a benefit of approximately 2% from share repurchases. This will be partly offset by a negative impact of approximately 4% related to higher estimated interest and tax expense. Our effective tax rate for 2023 is expected to be lower than last year in the 18% to 19% range. However, the year-over-year benefit this provides is more than offset by higher interest expense.

Now that we have clarity on the timing of the sale, we expect a negative impact of approximately 3% related to the divestiture of our three plants in Russia. In addition, the U.S. dollar has weakened since our last update, and we now expect a negative impact of approximately 4% from currency translation movements. We are also reaffirming our adjusted free cash flow range for the year of $1 billion to $1.1 billion, although likely towards the lower end of the range, as noted on last quarter’s call. So in summary from me today, the business has delivered another solid result, and we remain focused on supporting our customers and taking actions to continue recovering inflation and flex the cost base. Balancing these priorities will leave our business well positioned as we navigate through higher-than-usual volatility in demand and macroeconomic challenges in the near term.

With that, I’ll hand back to Ron.

Ron Delia: Thank you, Michael. And in previous quarters, we’ve highlighted multiple drivers of organic growth, which you see on Slide 10, and include priority segments, emerging markets and innovation. Before we open the line to questions, I want to just take a few minutes to talk about one of our most important priority segments, which is health care. An overview of our global health care packaging business is shown on Slide 11. With more than $1.8 billion in annual sales in fiscal ’22, our portfolio covers both Flexible and Rigid Packaging formats and is evenly split between medical device and pharmaceutical packaging. This is a truly global business with global customers and globally recognized products and technology platforms and it’s one where we have scale in every region, including in emerging markets.

This is not an easy market to enter because health care packaging is also highly complex with many functional demands, quality standards and regulatory requirements. This complexity provides ample opportunities to differentiate and add value through our industry-leading product innovation, material science and global regulatory capabilities and makes health care a strong contributor to Amcor’s growth profile from both a volume and mix standpoint. It also supports strong collaboration with customers, leading to a book of business that tends to be more consistent over the medium and longer term. Moving to Slide 12. Globally, health care packaging is a substantial market with significant headroom and growing at mid-single-digit rates over time, and we’re investing to capture more of that growth.

As an example, in the December quarter, we localized thermoforming production in Europe at our medical packaging site in Sligo, Ireland. This is an exciting project that leverage the experience and technical know-how of our sites in Minnesota and Puerto Rico. As a result, our European business and customer base will now benefit from local access to a broader range of specialized health care packaging solutions. In another organic growth example, we opened a world-class dedicated health care greenfield plant in Singapore at the end of calendar 2021, enhancing our ability to serve the rapidly growing Asian market. M&A also plays a role in supplementing organic growth in this segment. A few weeks ago, when we announced the acquisition of Shanghai-based MDK, a leading provider of medical device packaging in the China market, this is a great acquisition that enhances our leading position in the broader Asia Pacific medical packaging market by adding product capabilities and a complementary customer base.

Drilling down a little more on sustainability and moving on to Slide 13. Across all substrates and end markets, the sustainability of packaging solutions continues to be a critical consideration for customers, consumers and regulators. Our collective objective is to create a truly circular economy for the packaging industry. And the solution is responsible packaging, including package design, infrastructure development and consumer participation. In terms of package design, Amcor is well positioned as a leader in the industry. Today, nearly 100% of our rigid packaging and specialty cartons products and more than 80% of our flexibles products are designed to be recycled or have a recycle-ready alternative. This matters because as deadlines to meet previously established goals rapidly approach, customers are increasingly adopting more sustainable solutions.

As an example, this quarter, Mars adopted AmFiber performance paper for part of their confectionery range in the Australian market, and Ferrero Rocher launched an AmFiber pilot in the European market. These two companies joined Nestle, who initiated a global transition to paper-based packaging for one of their core brands in 2022 and are now adding a pilot for the KitKat brand. We’ve also seen important progress in the development of the infrastructure and technology required to produce recycled materials. While the use of food-grade recycled PET is growing rapidly, including in our rigid packaging business, the ability to produce recycled content for and from flexible packaging will be a critical ingredient to creating circularity. Significant strides are being made in advanced recycling technologies, which enable use of recycled content and flexible packaging applications where mechanically recycled material may present regulatory or technical challenges.

To meet ongoing demand for more recycled material and to support infrastructure and technology development, Amcor continues to increase our long-term off-take commitments. In December, we announced a five-year extension of our partnership with ExxonMobil to purchase certified circular polyethylene, giving us line of sight to significant quantities of recycled material that can be used in health care and food-grade packaging applications. We also recently announced a partnership with Licella to further explore an investment in one of Australia’s first advanced recycling facilities. These agreements provide another point of differentiation and value, which can be applied across all end markets for customers like Mondelez, who’ve incorporated 30% advanced recycled material into their packaging for the Cadbury Dairy Milk brand in the U.K. and Australia.

These capabilities also position Amcor to meet the sustainability goals we share with our customers and to contribute to a truly circular economy for the packaging industry. Turning to Slide 14. The opportunities and investments I’ve outlined today in our health care business, our innovation across a range of substrates and our increasing access to advanced recycled materials are just a few examples of the initiatives we have underway, giving us confidence that we have built and continue to build a strong foundation for growth and value creation. We don’t expect to be immune to macroeconomic challenges, but we believe we’re well positioned with a resilient portfolio and multiple drivers of growth, including cost productivity. Additionally, our consistently strong cash flow provides the ability to reinvest in the business, to pursue acquisitions, repurchase shares and grow the dividend, all of which positions us well to generate strong and consistent value for shareholders over the long term.

And finally, in summary, on Slide 15, we’ve delivered a strong first half in a macroeconomic environment that remains challenging. We’re more cautious on the demand environment entering the second half, but our portfolio leaves us well positioned. And most importantly, we remain focused on executing against our strategies for long-term growth. Operator, with those opening remarks, we’re now ready to open the call to questions.

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Q&A Session

Operator: We’ll take our first question from Anthony Pettinari with Citi.

Anthony Pettinari: Ron, a lot of CPG companies and packagers have talked about a drop in December volumes, but kind of a meaningful improvement and maybe a strong start in January. Just wondering, have you seen this? Or did you see kind of December weakness continue into January? I’m just trying to square what sounds like maybe a weaker view on fiscal second half demand. And then maybe specifically, you talked about restocking and lower demand for Rigids. I’m just wondering where you think restocking stands now.

Ron Delia: Yes. Sure. Thanks for the questions, Anthony. Look, maybe I’ll just back up a step and talk about the chronology of volumes that we saw through the second quarter. Very much a mixed picture in October and November, depending on the business and the geography, the story was relatively mixed. But across the business, our volumes were relatively flat in those two months. December, we definitely saw things softened. We had volumes across the group down mid-single digits. I think that’s a function of softening demand but also destocking in a number of segments. We know that because customers took more shutdowns than normal and longer shutdowns than normal. As we worked our way into January, we did see some improvement.

I’m not sure that we would call it a trend, but we definitely saw some improvement in January, albeit mixed. And so, the word I would use with regard to our outlook is cautious and it’s caution around this demand outlook from here given the volatility, which really had swung quite considerably from month to month and almost week to week. I’d say that despite the improvements in January, we just remain cautious on the demand side of the equation. As it relates specifically to Rigids and destocking, I think it’s clear there has been some destocking in that — in the beverage segment in North America and also Latin America to a certain extent. We have also seen demand soft generally. If you look at the scanner data for the quarter, the market generally in North America for beverages was down mid-single digits.

We also know that our mix is more exposed to the convenience channel. Convenience store sales were down even further than the broader market. So I think that our volume performance in Rigids through the quarter is a function of a softer market, probably some destocking and then offset by some business wins that we picked up, particularly in the hot fill side. So, that’s the way we see it as it relates to volume.

Anthony Pettinari: Okay. That’s very helpful. And then just in the release, I think you talked about maintaining the full year EPS and free cash flow guide. In your comments, you said you could be at the lower end. Without putting too fine a point on it, is there any reason not to sort of formally lower the guidance range? Or are there may be circumstances that could get you maybe to the higher end of the guide? Is it just completely dependent on volumes? Or is there any way that we should think about getting to maybe the higher end or the lower end of the guide?

Ron Delia: Yes. Look, I think the primary reason for not changing the guidance is we have half year lap. We’ve got two quarters. We’ve got a relatively wide range when you consider that we’ve got two quarters left, and we’ve maintained the full width of the range. The swing factor really will be volumes. It really will come down to volume — the volume outlook for the second half. I think we also feel pretty good about the execution capabilities of the business and the ability to continue to take cost out, which was a real highlight for us in the first half. We believe we’ll continue to do that in the second half. But the swing factor will be volumes. And what could lead us to the high end of the range? We could have low single-digit volume growth.