Amcor plc (AMCR) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining me. So my name is Angel Castillo and I'm the machinery analyst. And today with me today, we have Ron Delia from Amcor. So thank you for joining us.

Thanks for having us.

Appreciate your time.

So maybe, Ron, I'll first open it up to you any introductory comments just to get started.

Yes, just briefly, we have a June 30 fiscal year, and so we just reported our full year earnings a few weeks ago. And we have 4 key messages for the market at that point. First, we delivered a solid operating performance for our fiscal 2023 year. Despite the challenging market dynamic that really has hit our entire industry. Our EBIT was up 1% on a comparable basis despite a volume decline of about 3.5%. And we returned $1.2 billion of cash to shareholders through the year through repurchases and a growing dividend. So we feel like that was a pretty solid performance given the environment. Second point is that performance really was driven by us being very proactive on the price and cost front. We got out in front of softening demand and took over $200 million of cost out of our business in the last fiscal year and about 1,200 FTEs. And we've kept pace with inflation from a pricing perspective. We put through $1.1 billion of price into the market last year to keep pace with both raw material inflation and general inflation, so we're quite proactive and aggressive pricing and cost. We have clear line of sight would be the third point to a return to mid-single-digit earnings growth in the second half of the current fiscal year. And we have that expectation not because we're assuming or hoping that the demand environment improved because we have line of sight to some very visible and controllable factors. Firstly, we will no longer be cycling the divestment of our Russian business, which has been a headwind to reported earnings. Our interest step-up that we've experienced over the last couple of years -- last let's say, 3 or 4 quarters, we'll have largely abated by the time we get to the second half. We'll have ongoing benefits from the pricing cost actions that I just referred to. They'll carry through and continue to accrue benefits in our fiscal second half. We've got a restructuring program that we've launched as well, which will yield another $50 million in structural cost reductions. And we'll be cycling easier comps by the time we get to the second half. So we've got a high degree of optimism and confidence in our fiscal second half in FY '24, getting back towards mid- to high single-digit profit growth certainly as we exit the second half and getting back to the long-term trend levels of growth that the company has produced for a long period of time.

That's very helpful. Maybe starting at a little bit of a higher level. So demand has been much more challenging than I think we anticipated coming into this time period. So even as we go back a year or 2 ago, it seems like there's still some underlying kind of secular themes at play, but help us understand at least in terms of the challenges and the weakness, what's different this time than maybe prior cost is causing such a weak market kind of today?

Yes. I think it's a great question, and it's the question. Firstly, I would just contextualize by saying that the Amcor is 95-plus percent consumer staples and health care. So it's a very defensive collection of end markets, which has proven to be defensive over a number of cycles. What's been different over the last couple of quarters and different in this cycle, I think there's probably 3 things. Number one is just the level of inflation that's been in the economy is really new to the consumer. And so it's been decades since the consumers had to wear the inflation, particularly around food, which impacts our business that they've been wearing for the last little bit of time. That's one thing that's different from, let's say, the GFC. Interest rate increases and the speed with which interest rates have risen as well, I think, has put a damper on consumer demand for everything. And so you've got inflation, and you've got rising rates that have put a damper on the consumer. And then inventory levels have been reduced through the cycle. And everybody in our value chain, all participants have been on a destocking agenda. So you've got really 3 factors that are contributing, I think, that really have led to a pretty self demand environment.

And maybe as part of that, because I think what maybe led people to be more cut off cord with all of this was you generally think of -- you mentioned mostly exposed to consumer staples, right? So generally, think of it as very defensive in nature. So is there something -- you noted those 2 factors, but has there something, has something changed in terms of the defensive nature of your end markets? Or how are you kind of seeing that is it more temporary and you kind of anticipate to get back?

We see it as a cycle. It's really been a quarter and half or so of soft demand for us, and we would expect another couple of quarters of continued soft demand, but we believe that as we get through the end of this calendar year and into calendar '24 and our fiscal second half, things will start to normalize, particularly on the destocking side. We will have been in a destocking cycle by that point for 3 or 4 quarters, maybe even 5 quarters. And so at some point, there's diminishing returns in terms of how much more inventory that can be reduced in the supply chain. So we see this as a cycle. We would fully expect that our end market exposure will revert to kind of a long-term trend of mid -- low single-digit growth that we've seen for a long period of time.

And maybe can you break that out in terms of your expectations for your outlook between -- or what you're seeing as well between developed markets and more kind of emerging markets?

Yes. If we go back to our fiscal fourth quarter, we had a volume decline across the company of about 7%. It was actually higher in the developed markets. So we had higher declines, high single-digit declines in both North America in Europe, Western Europe. And look, I think generally, the consumer, especially in Europe, has been wearing more inflation, and has been making more choices and thinking about more categories as discretionary than you would typically associate with the FMCG space. We had a better outcome in the fourth quarter in emerging markets. And generally, the softness in the destocking has been pretty pervasive, but we did have better volume performance. In Asia, we were up a bit, low single digits despite China being very soft and being modestly down. And in Latin America, we had a modest decline, but we've seen softer demand conditions in Europe and North America.

That's very helpful. And maybe to kind of unpack the destocking dynamic a little bit more. Can you quantify? Or is it possible to quantify how much is destocking versus just kind of underlying weakness in the end markets?

Yes. We would estimate that about 2/3 of our volume decline in the fourth quarter was just the market just demand and about 1/3 is destocking. And if I try to unpack that a little bit, our estimates are based on what we see at scanner data and what other companies have reported and our own conversations with customers. That sort of mid-single-digit decline has been pretty consistent across our space as well as others that have reported and as well the scanner data out of Europe and North America would suggest that that's about where the market has been. So that's roughly about 2/3. And about 1/3, we would point to destocking and destocking has been pretty broad-based, been pretty pervasive. It's been especially acute in segments that went through some kind of a raw material shortage over the last year or 2, where buffer stocks were really built up, inventory was built up and that needs to be worked off.

Yes. I want to remind the audience, if anyone has any questions, feel free to raise your hand, I'll try to see if I can see past the lights over here. But I guess we're going up-front here.

Can you talk about the dynamics being flexibles and rigid and kind of the different trends you're seeing between those 2 segments?

Yes. Yes. Look, flexibles is like 3/4 of the company. So we're broadly exposed to a number of different categories in flexibles and in particular, health care mostly resides in the flexible segment for us. Rigids is an Americas business, North and South America, and it's got a large beverage component, but increasingly, it's been is exposed to other segments as well. On the Flexibles side, I would point to a couple of things. There's definitely been a differential growth rate between some of the segments that we've called out as priorities. Health care has been growing really rapidly, pharmaceutical and medical sales have been very strong for the last 12 to 18 months. Pet care space has been strong. pet care is a premium segment for us. It's an area of focus. On the other hand, we've had soft sales in protein as consumers have down traded and purchased less fresh meat as an example. We've seen softer sales in some of the other items that are more impulse purchases, confectionery and snacks. In the rigid space, the business in North America has performed basically in line with the market. The market in the fourth quarter in liquid refreshment beverages was down about 6% or 7%. That lines up pretty well with our sales. We've also had an adverse mix development in that business where hot fill volumes have declined by about 6%, hot fill is the premium part of the rigid packaging space. It's the technology that is used to package sports drinks and iced teas and juices and things. And we've seen real soft sales and destocking in that set of categories for the last couple of quarters.

[indiscernible] out in on-premises? Or where do you think that dynamic is there? Or is it just inflationary to they're not buying.

I think that in our exposure to the beverage space is a little bit more discretionary because a lot of the PET packaging for beverages goes through the convenience channel or it's the package of choice if you're buying a 4-pack or a 6-pack, you're probably not buying a case of 24 in the PET format. And so whenever the consumer is feeling pinched, I think they pull back on the impulse purchase and the onesies and twosies and they revert more to the value pack, which tends to be in an alternative format. I think that's largely what's been happening.

Great. No, that's helpful. And I guess to that point in the promotional activity, what have you been seeing from customers?

I'd say more recently, there's been more discussion around promotions. I think many of the brand owners that I talked to would say that they have reached the end or close to the end of their pricing cycle. They've taken enormous amounts of price at retail. And I think most of them would say that they're generally coming to the end of that cycle. There's been some chatter about promotions. We haven't necessarily seen that flow through to our volumes yet. Our base assumptions embedded in our guidance do not include any kind of tailwind from promotional activity. So if that should happen, and if it should gain steam, then that could be upside.

And maybe from the dynamic between kind of private label and what we've been seeing with Scanner data, maybe taking a little bit of share of late. How does this impact Amcor? What's kind of your exposure to that private label side? And just how do you think about it from a volume and margin standpoint impact?

Yes. Look, it's a little different by region. Generally speaking, at an aggregate or enterprise level, I'm not sure that the private label growth has had much of an impact on our sales. I think private label has gained a little bit more share in Europe, maybe 200 to 300 basis points, but we participate in private label. And as you would expect, the packaging tends to be identical, same specs. Margin profile is similar. So it really hasn't had much of an impact on our sales at this stage.

And maybe switching gears to the cost side, so how do the movements kind of in raw materials, impact your profitability? And as you think about 2024, fiscal 2024, how are you kind of seeing that in terms of your outlook and your guidance?

Well, raw materials is obviously the biggest part of our cost base as a converter. It's anywhere from 50% to 70% of our costs of good sold and we function on a pass-through model, as you know. And we pass through the increases on the way up and the increase is on the way down. And I think we've been pretty successful at doing that. We have -- as I said, we put over $1 billion of total pricing in the market in the last fiscal year. And of that, about $775 million was related to higher raw material costs. That started to taper off as we got into the fourth quarter. We were pretty much flat from a sales impact in the fourth quarter. We had a modest EBIT benefit, about $5 million to $10 million in the fiscal year from raw materials coming off at the end of the year. And as we look forward, notwithstanding the recent run up in oil, which hasn't flowed through yet to our commodities, we were seeing basically flattish trends across most of the basket of goods that we buy. If anything, maybe a little bit of downward pressure, but all of that is factored into our guidance range for fiscal '24.

Okay. And maybe just how do you see the evolution and development of a recycled PET industry? And just as you think about Amcor, do you need to participate in a collection kind of processing the value chain to ensure that the industry develops. And maybe also if you could tie it into what you're seeing from an RPET pricing dynamic and how that impacts raw materials side?

Yes. Look, firstly, this whole topic of more sustainable packaging is a really important one for us. I mean we are big believers in responsible packaging, which starts with the right package design, includes the waste management infrastructure and then ultimately requires the consumer to participate and to lean in, in a way that is different than just throwing the used package in the trash. So that's a big topic we can talk about. Within that topic, our agenda is really around two things. One is designing packaging to be recyclable, and the second is using recycled material to make the package, right? And when you're talking about RPET or recycled PET or PCR, post-consumer recycled resin, that's all about using recycled material for the next package. I think the RPET environment in North America is actually improving. So we see some investments being made in the processing side. We see collection rates which have been pretty stagnant for a long period of time starting to edge up. We see more participants in the value chain, including the brand owners supportive of things like bottle bills, which we know leads to increased collection rates. So I think generally, there's some momentum building in our RPET supply chain, particularly in North America. We don't think that it's necessary nor do we think of the best allocation of our capital to put lots of money into the RPET side of the business. We think that we can contribute by sending a demand signal that we are basically in the market for any pound of RPET that we can get our hands on. And our traction on use of recycled material has been really outstanding in the last couple of years. It's been doubling almost every 2 years for the last 5 or 6 years now. And we ended the fiscal year just completed at just shy of 20% of all the material we process in rigid packaging is recycled. So we are really on our way. We've got a global commitment as an enterprise to use 30% recycled content by 2030. And certainly, our rigid packaging business is doing its part.

That's helpful there. And then just as you think about sending that signal down or I guess, upstream to that you want all the RPET, able to get maybe as we think about more downstream than consumer and their willingness to pay, I think one of the dynamics over the last few years is it became kind of real, right, the customer was willing to actually pay for that incremental value. But as we think about maybe greater elasticities or macro that's a little bit more challenging, are you seeing the customer or your customers' willingness to pay for RPET recycled or PCR material change or change in any way?

Look, I think from month-to-month or quarter-to-quarter, there are just the realities of the economy that can make things go slower or faster. And certainly, through the last several quarters as our brand owners have been dealing with inflation, they've not been looking to add extra cost. But the long-term trend over, I would say, almost a decade now has been really in one direction, and that is for more and more demand for more sustainable packaging. So packaging that's compostable or designed to be recycled or reusable packaging that's got more recycled content, I think the trend line has been really in one direction. And we had a little bit of a dip in activity during the outset of COVID, where it was just all hands on deck to keep store shelves stocked. There's been a little bit of a slowdown through this more recent inflationary cycle and just in terms of adoption. But our conversations with brand owners around the world continue to be dominated by an agenda around responsible packaging, more sustainable packaging. And so I think we're going to continue to see good take up for some of the innovation platforms that we've launched, and there continues to be, I think, a willingness of consumers to pay a modest premium but a premium for things that are better for the environment.

And maybe can you maybe continuing on that, expand on what are you seeing in terms of the customers' willingness to also shift substrates, right? So maybe not so much going from PET to recycled PET, but just as you think about are you seeing any incremental pickup or shift from PET to cans aluminum cans or to fiber. Can you talk to us maybe how -- what you're seeing and also how that impacts Amcor?

Yes. Well, I mean the first thing I would say is that we are substrate agnostic, correct. We're not making raw materials. We're sourcing raw materials from a variety of different upstream players. A lot of what we do is plastic, of course, for good reasons, reasons that relate to functionality and consumer preference, but about 25% of our revenue and raw material purchases are in foil, aluminum and fiber. So we're broadly diversified across substrates. Look, the PET versus aluminum discussion for beverages is really less around sustainability. It's more about the channel alignment. And as I was describing earlier, just the price pack architecture and where the brand owner feels the consumer is. So when times are tougher and there's more of a value orientation than the can might do better in the carbonated soft drink sector is one example. But generally speaking, we're not seeing any substrate shifting between PET and glass or tetra or cans on the basis of sustainability. I think most consumers now would understand that you can recycle a PET bottle in most places, and it can be made with 100% recycled materials. So I think the sustainability credentials of that package stand up. Fiber is a really interesting space for us. We're doing a lot more in fiber. We've got a product platform called AmFiber, which is a barrier paper solution, can be recycled in the paper recycling stream, which exists pretty much everywhere around the world. Consumers like paper. They have a preference for paper when it's possible. And so we're doing a lot more with paper. We've got a lot of trialing activity underway. There are certain segments that will lend itself -- lend themselves more to the use of paper and the substitution of paper-based packaging. Confectionery is one good example where the barrier requirements can be met with paper, paper with a barrier. And so we've got some unique technology that we're pretty excited about that allows us to capture big chunks of that market, which we haven't previously been interested in.

And maybe moving over to capital allocation a little bit. Part of the value creation that you've developed over the years is also just doing a lot of -- or doing acquisitions, right, and continue to kind of roll some of the business up. I guess, as you think about where maybe there's opportunities or strategic focus, can you just give us a little bit more color as to maybe that pipeline where your focus is things like health care or emerging markets?

Yes. Well, the company has been acquisitive over the years, and we've done about 35 acquisitions over the last decade or so, the largest of which was the acquisition of Bemis about 4 years ago. But we've been active even more recently. We've done 4 small bolt-ons over the last 12 months, which are kind of indicative of the areas of interest for us. We've done some deals that support our priority segments. So we bought a health care packaging business in China. We bought a protein packaging business, machinery business actually, which is in New Zealand. So those two line up very well with the focus segments that we've prioritized. And then emerging markets as well. We bought a business in Eastern Europe and another business in India. So I think across our Flexibles perimeter, generally, there are bolt-on opportunities that can enhance our segment focus or enhance our emerging markets portfolio. And then in the rigid packaging space, we've been growing and diversifying away from beverages. Beverage is a big part of the business. It's an important part, but we also have a scale business now in non-beverage packaging, so pharmaceuticals, personal care, food, et cetera. And there's a roll-up opportunity there in the United States that still exists. We have a big business, but it's got less than 10% share, and it's an area that we think we can do more in.

Maybe as you look at your pipeline, how are valuations kind of evolving, particularly in these markets?

Yes. Look, valuations have been high for a while. I think more recently, and I mean like very recently in the last couple of quarters, valuations have started to modulate a little bit. I think that's probably a good reason why we've been more active in the last 12 months. Even on the small deals, we're going to be disciplined. We're not going to overpay. And as rates have gone up, valuations have pulled back a bit.

And just given, I guess, where you are from a leverage standpoint uncertainty in the market, should we still think about it as kind of small tuck-ins type transactions or...

I think -- look, we would love to deploy bigger amounts of capital, and we think that we've earned the credibility to do that. Just the nature of our industry is such that most of the players are small. So the deal pipeline is a reflection of the competitive set in the segments that we're in, and most of the players are smaller. So just in terms of number of deals, more of the deals we do will be smaller, but we certainly would have the appetite and the desire to deploy bigger amounts of capital if we could find something that was strategically sound and financially attractive and responsible.

And maybe kind of sticking to that. You made the Moda acquisition and you talked about [venture] into protein. Can you talk about the strategy overall to kind of enter that market to expand and build kind of within that?

Protein is a really exciting space for us. It's a business -- it's an area that Amcor hadn't been in historically. We acquired our way into the protein space through the Bemis acquisition. We like it for a lot of reasons that the packaging is, got a lot of demand and it's quite functional. It's quite sophisticated. If you think about fresh meat packaging, there's a barrier requirement, there's a puncture-resistant requirement. There's the need to be able to seal the package with integrity and run at high speeds. There's a number of different features that are embedded in a protein package, which make the opportunity for differentiation quite compelling. So we find it a very attractive space, plus you've got just the demographics in certain emerging markets, which will lead to mid-single-digit growth over time. So we find the space very attractive. We have a pretty comprehensive product portfolio in films and bags for that segment, and we've got a global footprint. What we haven't had until now is a machinery offering. And in many situations, there's a total system solution that is required to generate sales, particularly in the meat packing space. And we just didn't have a machinery offering, which we now have. And so we're now able to offer a full suite of consumables and packaging as well as machinery spare parts, aftermarket and service, which we think is going to really allow us to compete. And Sealed Air is the leading player in that space is no secret, but really a credible case to be a global #2 and capture some real growth on the way to get there.

And what does it take to get that growth in terms of gaining market share or getting the customer to kind of make that transition? I generally think of that equipment as being a little bit stickier. So as you kind of build that, what's kind of that entry?

Well, certainly, any new installations are up for competition, I think as -- and in particular, in the emerging markets, where, there's less of an installed base, there's less of a -- even the market for the packaged portion of proteins is quite small in places like China. There's plenty of white space opportunities where we don't have to necessarily butt up against an existing installation and try to out finesse an entrenched competitor. I think there's enough white space out there for us to gain share just by capturing growth in new installations.

Yes. That makes sense. And maybe kind of last one on the capital allocation side. Your leverage 3 turns, I guess, what's kind of the right level? Can you remind us what -- when and what's the right level for the company? And then what would you be comfortable getting that through M&A?

Yes. Well, look, the starting point is that we're believers in an investment-grade balance sheet for a company of our size with the financial profile that we have and the geographic footprint we have. We believe that's the right balance sheet philosophy. That would see us be typically levered between 2.5 and 3x. A little bit higher right now because of the interest increase that we've weathered and working capital being a bit of an outflow last year. But 2.5 to 3 turns is generally where we're going to be levered, for the right deal, we can go above that and maintain our credit rating and work our way down over time. I think we would be perfectly comfortable doing that. But generally speaking, we're going to be between 2.5 and 3 turns.

Okay. No, that's perfect. And I think that kind of gets us to close to the end of time. So if there's any last questions on the audience. Not. Thank you, Ron. Really appreciate your time.

Thank you very much.

Thank you.