Amcor plc (NYSE:AMCR) Q2 2024 Earnings Call Transcript

Amcor plc (NYSE:AMCR) Q2 2024 Earnings Call Transcript February 6, 2024

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Operator: Good afternoon. My name is Christa and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Amcor’s First Half and Second Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Tracey Whitehead, Head of Investor Relations. Tracey, you may begin your conference.

Tracey Whitehead: Thank you, operator and thank you everyone, for joining Amcor’s fiscal 2024 first half and second quarter earnings call. Joining today is Ron Delia, our 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 will discuss on this 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 lists 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 second quarter and first half results for fiscal 2024. We’ll begin with some prepared remarks before opening for Q&A. As seen on Slide 3, our focus on safety remains unwavering, and our significant commitment to providing a safe and healthy work environment continues to be rewarded. 70% of our sites have been injury-free for the past 12 months or longer, and we’ve experienced a 17% reduction in injuries when compared to the first half of fiscal 2023. Safety is deeply embedded in Amcor’s culture and is the number one priority for our global teams. Turning to our key messages on Slide 4. First, our reported earnings per share for the second quarter and first half were modestly better than the expectations we set out in October and improved working capital performance helped drive a year-over-year increase of more than $100 million in adjusted free cash flow.

Second, our financial performance through the half was supported by strong and proactive, focus on controlling costs. This helped us offset second quarter volumes that were a couple of percentage points lower than we anticipated. Our teams around the world continue to respond doing an excellent job proactively taking further cost actions. Third, our first half financial performance puts us on track to deliver against our full year guidance, which we are again reaffirming today. Relative to the first half, we believe Q2 was the low point for earnings growth and we continue to expect the trajectory of adjusted EPS growth to improve through the second half of fiscal 2024, including delivering mid-single-digit adjusted earnings growth in the fourth quarter.

Our confidence is supported by our improved earnings leverage as well as a number of known factors we’ll cover in more detail later that will benefit earnings through the second half of the fiscal year. Additionally, our volume trajectory has improved generally through January and this underpins our confidence that Q2 marked the low point for volumes. Finally, we remain confident in our long-term growth and value creation strategy and in our ability to deliver a combination of strong earnings growth and a compelling and growing dividend. The strength of our market positions, execution capabilities, and consistent capital allocation framework collectively continue to make a compelling investment case for Amcor. Moving to Slide 5 for a summary of our financial results.

Organic sales on a comparable constant currency basis were down 8% for the half and 10% for the quarter. Price/mix benefits were around 1% for the first half and flat in the second quarter, reflecting moderating inflation, which resulted in reduced pricing actions by our teams. Volumes were down 9% for the first half and down 10% for the December quarter. Second quarter volumes were modestly lower than our October expectations, with the main difference being an acceleration of destocking, especially in the month of December. First half and December quarter adjusted EBIT was $709 million and $352 million, respectively, modestly above our expectations. On a comparable constant currency basis, declines of approximately 6% in both periods reflect lower volumes, partly offset by benefits related to decisive and proactive cost actions taken across our businesses in response to evolving market dynamics.

In total, our actions reduced costs by more than $200 million in the first half compared to last year, with a reduction of more than $130 million achieved in the second quarter. Adjusted EPS was $0.313 and $0.157 per share respectively, also modestly above our earlier expectations. For both periods, this would count 10% on a comparable basis, reflecting lower adjusted EBIT and the unfavorable impact of higher interest costs. Working capital improvement remains a focus and helped drive free cash flow for the first half, well ahead of the same period last year and in line with our expectations. And we returned approximately $390 million of cash to shareholders in the first half through a combination of share repurchases and a growing dividend, which has increased to $0.125 per share.

I’ll turn it over now to Michael to provide some further color on the financials and our outlook.

Michael Casamento: Thanks Ron and hello everyone. Beginning with the Flexibles segment on Slide 6. Year-to-date, net sales on a comparable constant currency basis were 8% lower, which largely reflects weaker volumes. Volumes were down 9%, mainly due to lower market and customer demand and accelerated destocking. In North America, first half net sales declined at high single-digit rates, driven by lower volumes in categories, including meat, liquid beverage and healthcare, which more than offset growth in the condiments, snacks and confectionery categories. In Europe, net sales declined at low double-digit rates, driven by lower volumes, partly offset by price/mix benefits. Volumes were lower in snacks, coffee, healthcare, and in unconverted film and foil.

This was partly offset by higher confectionary volumes. Across the Asian region, net sales were modestly higher than the prior year. Volume growth in Thailand, India, and China helped offset lower volumes in the Southeast Asian healthcare business. In Latin America, net sales declined at high single-digit rates, driven by lower volumes mainly in Chile and Mexico, partly offset by growth in Brazil. First half adjusted EBIT was 5% lower than last year on a comparable constant currency basis, as a result of lower volumes, partly offset by favorable price/mix benefits and ongoing actions taken to lower costs, increased productivity, and strengthen operating cost performance. EBIT margin of 12.6% was comparable to prior year despite a 50 basis point unfavorable comparison related to the sale of our Russian business last year.

For the December quarter, reported sales were down 9% on a comparable constant currency basis, and price/mix was relatively neutral compared with last year. Volumes were down 10% in the quarter, reflecting continued soft market and customer demand. Destocking also continued through the quarter, accelerating in the month of December and was particularly impactful in healthcare where volumes were lower than last year by double-digits. In response to market dynamics, the business continued to take decisive cost actions, focusing on operating efficiencies, delivering procurement benefits, limiting discretionary spend, and advancing structural cost reduction initiatives. This resulted in another quarter of strong performance, partly offsetting weaker volumes with adjusted EBIT declining 5% on a comparable constant currency basis.

Turning to Rigid Packaging on Slide 7. Year-to-date net sales on a comparable constant currency basis were 8% lower, with price/mix contributing around 1%. Volumes were down 9% for the first half, with lower volumes in North America, partly offset by growth in Latin America. In North America, overall beverage volumes for the first half were 14% lower than last year, including a 13% reduction in hot fill beverage container volumes due to lower consumer and customer demand and added levels of destocking through the first half. In Latin America, volumes grew mid-single-digit rates with new business wins in Brazil, Peru, and Colombia, partly offsetting lower volumes in Mexico. Adjusted EBIT was 9% lower than last year on a comparable basis. reflecting lower volumes, partly offset by price/mix benefits and favorable cost performance.

For the December quarter, net sales were also down 10% on a comparable constant currency basis. Price/mix contributed around 2% and volumes were down 12% for the quarter, reflecting lower volumes in North America, partly offset by new business wins, driving mid-single-digit growth in Latin America. Overall, North American beverage volumes were 19% lower for the quarter, reflecting a high single-digit decline from destocking as some of our customers took action to significantly reduce inventories in both hot fill and cold fill categories. Volumes were also impacted in the high single-digit range by incrementally softer consumer and customer demand in Amcor’s key end markets. In addition, we had net new business wins in the hot fill category, which partly offset a loss in cold fill as we elected not to retain volumes that fell short of our profitability threshold.

Second quarter adjusted EBIT declined by 12%, reflecting lower volumes, partly offset by benefits from continuing to proactively manage costs, including realizing labor savings by taking more plant shutdown days to better align capacity with market dynamics, as well as driving procurement benefits. Moving to cash and the balance sheet on Slide 8. As Ron covered earlier, adjusted free cash flow for the half came in more than $10 million ahead of last year with our teams continuing to make progress against our priority to reduce inventories and driving capital increments across the board. Our financial profile remains solid with leverage at 3.4 times, and broadly in line with the first quarter and where we expected it to be as we cycle through temporary increases in working capital and given trailing 12-month EBITDA now fully reflects the divestiture of our Russian business.

Looking ahead, we continue to expect leverage will decrease to approximately 3 times at the end of our fiscal year, supported by seasonally stronger earnings and cash flow in the second half. This brings me to our outlook on Slide 9. As Ron mentioned earlier, we are reaffirming our full year guidance for adjusted EPS of $0.67 to $0.71 per share. We continue to expect the underlying business to contribute organic earnings growth in the plus or minus low single-digit range, with share repurchases adding a benefit of approximately 2%, and favorable currency translation contributing a benefit of up to 2%. This is offset by a negative impact of approximately 3% related to the sale of our Russian business in December 2022, the impact of which was all in the first half.

We also expect a negative impact of approximately 6% from higher interest and tax expense, which takes into account our estimate for full year net interest expense of between $315 million to $330 million, which is modestly lower than where we were forecasting last quarter. Our full year tax rate expectations are unchanged in the range of 18% to 20%. In relation to phasing, we believe that December quarter marks the low point in terms of Amcor’s earnings growth and volume declines. January volumes have improved, following heavy customer destocking in December and while we expect market dynamics to remain volatile in the near-term, our volume trajectory is expected to continue to improve through the balance of the year. We anticipate Q3 volumes will be down in the mid-single-digit range and expect fourth quarter volume declines in the low single-digit range.

Taking into account offsetting benefits from cost reduction initiatives and a reduced headwind from higher interest costs compared with last year, we expect third quarter adjusted EPS to be down mid-single-digits on a comparable constant currency basis and for the fourth quarter, we expect adjusted EPS to increase by mid-single-digits over the prior year. And Ron will talk through the factors that support this return to growth shortly. Adjusted free cash flow continues to trend better than last year as we expected and we are again reaffirming our guidance range of $850 million to $950 million for our fiscal 2024 full year, which will be up to $100 million higher compared with last year. Our plan to repurchase at least $70 million of Amcor shares in 2024 is unchanged and we continue to pursue value-creating M&A opportunities.

With that, I’ll hand back to Ron.

Ron Delia: Thanks Michael. Prior to opening the call to questions, I want to provide additional insights into our outlook for the balance of the year as well as a reminder of the key components comprising our longer-term model for driving shareholder value. Looking first at the balance of fiscal 2024. As I referenced earlier and as highlighted on Slide 10, there are a number of key factors already known to us that give us confidence our earnings trajectory will improve through the second half of the fiscal year. First, the earnings headwind related to the sale of our business in Russia is now fully behind us, eliminating an unfavorable comparative that impacted reported earnings throughout calendar 2023. Second, while second half interest expense is expected to be higher than last year, the magnitude of the headwind from the rapid rate increases over the past 18 months begins to abate as we move through the balance of the year.

Third, we have benefits from structural cost savings of $35 million in the second half with an additional $15 million to benefit fiscal 2025. These savings are primarily related to plant closures as we optimize our global footprint. And fourth, earnings leverage has improved due to our commitment to take proactive actions to align our cost structure with evolving market dynamics. This includes eliminating shifts to take out labor reducing over time, driving procurement, and maintaining tight control of discretionary spend. In total, over the last 12 months, we reduced headcount by more than 2,000 full-time employees or approximately 5% of our workforce with more than 1,000 of these reductions taken out in the first half of fiscal 2024. From an earnings perspective, operating costs were lower by more than $200 million in the first half of fiscal 2024 compared with the prior period and more than $100 million of this cost reduction was delivered in the second quarter, which is almost double the approximately $70 million delivered in the first quarter.

The result has been and will continue to be improved earnings leverage, which we’ve achieved this financial year-to-date despite significantly lower volumes. As Michael mentioned, we are off to a better start in January and are confident Q2 marks the low point for earnings growth and volume declines and with our overall trajectory expected to improve as we move to the balance of the year. To sum up, we’re confident the positive earnings impact from multiple known factors will drive improved momentum in the second half of fiscal 2024, including delivering mid-single-digit earnings growth in our fiscal fourth quarter. Importantly, we’re not assuming an improving consumer demand environment and we’ll continue to be proactive in taking actions to ensure our cost base and pricing strategies reflect market conditions.

Moving to Slide 11. As we look beyond the second half of this fiscal year, these known factors will serve as important building blocks supporting a return to delivering against our shareholder value creation model, through a combination of strong earnings growth and a compelling and growing dividend, currently yielding 5%. The starting point in creating value will always be growing the business and over the last 10 years, we’ve averaged 8% growth in adjusted earnings per share. As you can see on this slide, we have multiple drivers of margin accretive growth, each with significant opportunity over the longer term. We will also continue to enhance our ability to grow in these areas through stepping up CapEx over a multiyear period and executing on strategic M&A.

As volumes normalize and improve, these generally faster growing and higher value growth areas will represent a larger proportion of sales becoming increasingly stronger contributors to earnings. And when we return to a more normalized volume growth environment, this combination of improved mix and the proactive steps we’ve taken to optimize our cost base, positions Amcor well to again deliver strong earnings growth in line with our long track record. To close on Slide 12, we’re executing well to deliver against the earnings and cash flow expectations we set coming into fiscal 2024. Our teams are being proactive as market dynamics evolve and focusing on the controllables to take additional cost out where appropriate. We have line of sight to mid-single-digit earnings growth in Q4 and our commitment to our longer-term growth and value creation strategy positions us well to deliver on our shareholder value creation model when the volume environment normalizes.

Operator, with those opening remarks, we’re now ready to turn the line over to questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Ghansham Panjabi from Baird. Please go ahead.

Ghansham Panjabi: Hey guy, good day. I guess, first off on the volume declines across the portfolio, which looks like it’s about six quarters of negative year-over-year volumes at this point. Obviously, you’re not the only ones, but there’s been quite a bit of chatter on your customer set all the way down to retailers about increased promotional spending. Just curious as to whether you’re starting to see direct science of that at the point? And if so, which categories, food, beverage, consumer staples, et cetera?

Ron Delia: Yes, Look, Ghansham, thanks for the question. Maybe I’ll just mention the volume declines at a high level first and then come back to your question about signs of promotions or more aggressive commercial activity on the behalf of the customers. Firstly, I think where there’s overlap, we’re not really seeing any differences compared to others. So, that would be the first thing I would say. I think our 10% total decline in the quarter is about 2% worse than we expected going into the quarter. So, we weren’t actually expecting a much different outcome. Things did track according to those original expectations in October and November, where we were kind of declining high single-digits. December, we saw a really accelerated destocking, which accounted for the incremental softness in which we more than offset to deliver the profit.

So, that’s kind of the starting point. Now, January, as we’ve alluded to, was much better. We’ve seen improvement in most of our businesses versus H1. And it really underpins our view that Q2 was the low point and it really underpins our Q3 and Q4 expectations. And maybe just to continue and round it out a bit in terms of unpacking the decline roughly by driver, roughly half of our 10% decline, sort of mid-single-digits was related to market impacts. This is a combination of consumer demand, customer, and segment mix. And roughly half or another mid-single-digit contribution was from destocking and that’s pretty much the same in both the Flexibles and Rigid Packaging segments. By geography, emerging markets broadly flat. Asia up modestly, Latin America down modestly.

But the developed markets is where we’ve been especially soft with Europe a little bit weaker versus North America. And another way to think about it, just to sort of close off here is of the 10% decline in the quarter, more than 50% of that decline comes from our global healthcare business and our North American beverage business, both of which have experienced the most significant destocking. So, we’ve had a concentration of impact from those two parts of the business. On the other hand, there are categories growing in some regions, confectionery in North America and Europe; condiments and cheese and coffee in North America and Latin America; beverage in Latin America. So, there are places where the business is growing. Now, to your point, specifically about signs of promotional activity or changing pricing strategies, there is a lot of talk about that.

As you rightly pointed out, we hear that from a lot of customers, both publicly and privately and we’re seeing a little bit of that start to take place in the marketplace. But to be honest, we haven’t seen that as any kind of a tailwind yet for our volume performance. And our outlook doesn’t infer, it doesn’t imply, or it doesn’t assume that we’re going to see any benefit from the market in the second half either. And so we’ll sort of wait and see on whether or not the pendulum swings a bit between price and volume.

Ghansham Panjabi: Okay, terrific. And just for my follow-up on that, on the healthcare destocking, is that just a function of having been destocked? Are you seeing it now versus a little bit later than the other categories? Or is there something unique to the time line associated with the healthcare destocking?

Ron Delia: Yes. Look, I think it is a bit unique. It’s really — the markets have been soft, but the healthcare weakness is really a story of destocking and it’s been significant in both medical device packaging and pharmaceutical packaging. And it’s been pervasive and consistent around the world, the stocking in healthcare. It’s really a multiyear story. It’s been a multiyear journey here for healthcare, which is ironic because it’s been one of the most consistent businesses we’ve had for a long period of time, and we would expect the returns to that level of consistency. But over the last several years, going back to even COVID, where we had really constrained demand, then very strong demand on reopening, but severe supply constraints, severe supply constraints and raw material shortages on things ranging from specialty foils and resins and papers.

So, coming out of what would have been our fiscal 2022, which led really to customers building stocks to ensure supply during our fiscal 2023. And we had extraordinary volume in fiscal 2023 as a result of customers really buttressing their supply chains and derisking their supply chains by building up stock. Now, we have customers sitting on substantial inventories of a range of products from medical gloves to device packaging and pharmaceutical packaging, et cetera. And we started to see destocking, which actually really started in Q1. We flagged it last quarter, but accelerated significantly in Q2. And we would expect that it’s likely to continue certainly through Q3 and possibly into Q4. So, it is a bit later stage. I think in some other categories, we’ve seen signs that there might be that destocking has abated and we’re closer to the end of the beginning.

I think in healthcare, it’s been a later-stage story.

Operator: Your next question comes from the line of Anthony Longo from JPMorgan. Please go ahead.

Anthony Longo: Good day Ron, good day Michael. Just a quick one on the cost savings. So, in the face of the volume declines that you did see throughout the first half and particularly that last quarter, and do take your comments on January and thereafter. But I just want to get a sense as to what the outlook looks like for cost savings going forward? And how you’re still going to manage that declining volume environment with margin growth? What you have tabled thus far, but is there anything over and above that, that you can achieve?

Michael Casamento: Yes sure. I’ll take that one, Anthony. So, look, on the cost out, there’s two things that we’re really doing here. So, — the first is in response to the soften underlying volume demand. So, on that front, we’ve clearly taken proactive and aggressive approaches to the cost flexing and really focusing down on productivity gains and discretionary spend. So, for the first half, we took out more than $200 million in cost in relation to that and it accelerated through the half. In the first quarter, it was about $70 million in the second quarter, kind of $130 million. And we’re achieving that by taking out really flexing the cost base in relation to the volume and demand environment. So, we’re able to take out entire shifts.

We’re able to take out labor, reduce over time. We’re driving the procurement benefits, particularly in this low demand environment and really tightening up on the discretionary spend. So, that will continue as we continue to flex through the volumes. But obviously, as volumes improve, some of that cost — and it’s difficult to say, but some of that cost will go back in as we build the shift patterns up. But we wouldn’t expect that to be linear. I think you’ll see us have better leverage there as we work through the second half because of the way we’ve learned to operate with some of that lower cost and improve the efficiencies there. So, that’s really on the operating cost side. And then secondly, we are taking cost out structurally. So, in parallel, we’re advancing the structural cost reduction initiatives that we’ve talked about on the back of the divested Russia earnings.

That’s mainly plant closures and it’s around up to 10 across the globe and in both segments. To-date, we’ve announced seven closures and two restructures. And recently, actually, two to three of those plants have closed. So, we did start to see a little bit of benefit from that program as we exited the first half. But we’re right on track to deliver the $35 million benefit in the second half from that program and then a further $15 million in FY 2025. So, really, that’s the approach we’ve taken to the cost-out agenda and part of it is structural and part of it’s ongoing.

Anthony Longo: Thanks Michael.

Operator: Your next question comes from the line of George Staphos from Bank of America. please go ahead.

Unidentified Analyst: Yes, hi. This is actually [Indiscernible] sitting in for George. He had a conflict this evening. So, just going off that, are you able to comment at all how much of that temporary cost saving might ultimately end up being permanent and structural costs that are taken out of the business?

Michael Casamento: Look, it’s difficult to say, as I just mentioned, — what I can tell you is that things like procurement, there will be permanent savings. The operating cost out that we’ve taken out of the fixed base will be permanent. And the structural program is obviously permanent cost savings that come out of the business. On the flexing of the cost base, again, it’s really dependent on the volume. We think we’re much more efficient today. We’ve been able to proactively act to take labor out of the business overall versus prior year. We’ve taken nearly 2,000 heads out of the business and about 1,000 since June. So, in total, that’s about 5% of the works. As the volumes come back online, as I mentioned, we will have to increase some of that, but it’s not going to be linear.