Amcor plc (AMCR) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. We've got Steve Scherger here from Amcor. My name is Ramoun. I'll open it up to Q&A at the end, but I've got a few questions for Steve to kick it off. Steve, we're entering year 2 of the Berry merger. Maybe kick it off with how the pace of that integration is going and touch on the synergy run rate versus your overall targets there. And then we'll jump into.

Yes. No, I'll be glad to. And Ramoun, thanks for taking the time today. Thanks for the audience as well for joining us. So I appreciate that. Yes, thank you. We're now a little over a year into the acquisition of Berry and creating Amcor in the state that it's in today. When we completed the acquisition and established the goal, $650 million of synergies were the 3-year targets that we established for the business. Year 1 target, $260 million. We're now post year 1, and we captured $285 million of synergies in the first year. Importantly, those drop through to the bottom line for us, which is obviously critical when you take on an acquisition of this scale and help to drive double-digit EPS growth for the year. We're entering into a 6-month transition period here. We're changing our fiscal year to 12/31. We expect to capture another $130 million of synergies during that 6-month period, which is also in line with our expectations. $650 million over 3 years, our expectation we'll make that in that 3-year period of time. Our internal goals are obviously to get there faster. The mix is as we expected it to be. We've got an important mix of procurement-related synergies. We acquire every year over $13 billion of raw materials. So we established a strong synergy target around procurement, SG&A, of course, $100-plus million taken out of the business. We've got a nice trajectory on revenue synergies, about a $280 million goal for 3 years, about $60 million of EBIT. We've captured $140 million of real business that is new to the company, much of which will start to come in over the coming quarters. So we also -- just including the commentary, we indicated we would spend about $280 million to capture the $650 million of synergies. We've spent about $160 million of that. So we're nicely on our way. So overall, really in line, slightly ahead of our expectations on synergy capture.

Yes. Maybe on the revenue synergy side, it's a pretty good outcome so early on. What's driving that? Is it cross-sell because there was minimal overlap with Berry in terms of the product set? So just the motivation of customers coming to you...

Yes. It's -- we like what we see. And I say that, and you touched on it there. The combination, there was very little actual product overlap. And so we've seen really no revenue leakage from the combination, meaning we haven't gotten such so large with a customer who says, I've got to kind of redistribute. That's good. And so the revenue synergies are, in fact, additive, and they tend to fall into a couple of categories. One, it tends to be a little more systems-based, meaning that we can sell you now multiple components of a package. For example, we made the yogurt cup before. Now we can make the lid, creates a little more of a systems-based approach. We can sell multiple components to you as customer, gives you confidence that it's coming from one company, more confidence in the combination. We're doing that in our health care space, making for single-dose applications, making the blister card and then also making the bottle and so we're seeing some real nice movement in that direction. We're also seeing some customer wins that are coming from some of the PPWR and some of the EPR fees. We've got some new innovation that is associated with, for example, a bottle with the dispenser on the top. We've got some innovation that allows us to make both of those for you as a customer before either company alone was making one. So we hold a pretty high bar, very high bar actually to what we count. It has to be that we couldn't have sold you that business individually as either company. It has to be new to us. And that's been good traction. It actually has exceeded our expectations a bit, which gives us a lot of confidence in that $280 million run rate over the next few years.

Great. And just turning it to the current sort of operating environment, very volatile in the raws. Maybe just touch on what you're seeing on raw material prices and Amcor's sort of strategy of recouping those costs.

Yes. No, and I appreciate you raising it, and it has been. It's been a very volatile time really for the last several years. If you think about the inflation that the day-to-day consumer has absorbed over the last several years, it is very substantial. And we, of course, are a part of that as a packager. And with the Middle East conflict and the movement in resins. So of that $13 billion a year that we acquire in raw materials, $5 billion of it is resin based. Within that resin base, we acquire resins around the world, only about 4% of it actually comes from the Middle East, which is obviously experiencing the significant unfortunate disruptions that are happening there. Overall, inflation has been very substantial. We passed through $280 million of price inflation to our customers in what was our fourth quarter, so the last quarter, and that was in line with the inflation that we were experiencing. So we, over the last several years, have developed the muscle, if you will, the capabilities that when we see significant disruption on costs that we work with our customers kind of hand-in-hand to pass that through them on a significantly reduced lag basis. So in other words, do it quickly, do it in line with the inflation that we're experiencing. And we were successful at doing that in the prior quarter, and we'll continue and have expectations we'll do that here for the coming quarters. Unfortunately, it's not unprecedented because we've seen periods like this. It's not preferred, obviously, but our customers have come to understand that we want to keep you in product. We want to keep you in supply, want to do it well and that this is the best way to do it is to pass it through to you in a way that's consistent, that is not a win-lose. It's in line with what we're actually experiencing. And there's -- we've had good execution on that front and expect to continue to do so. But it remains a volatile environment, as you indicated.

Yes. And you guys have tightened the lags historically that you've had to much shorter.

We have. And it's important because generally, the lags, if you will, lag from an inflationary environment to a price change has tended to be in that 3-month range. It was historically went years back, it would have been longer. It's been tightened down to 3. And actually, in times of significant disruption like we've been experiencing, we'll tighten them up even more down to like a month so that we're in literally a very reduced lag. Now that tends to be temporary because you don't want it to be a permanent. It doesn't help with forecasting for our customers. It doesn't help them with cost consistency, but it's something that we'll do for periods of time when we have this level of disruption which allows us to keep that relationship in line like we did in the prior quarter and we'll do for the coming quarters. And so it's -- you do what is appropriate and do it in connection with our thousands of customers and overall customer receptivity. Like I said, no one wants to have that level of volatility, but we've got to keep our customers in product. They want to keep we as consumers in product, and it's one of the best ways to do it.

Got it. Shifting gears maybe to volume. The fourth quarter was encouraging. You had modestly positive volumes across the business. Maybe just touch on that backdrop. What's driving that? And what you're seeing from customers?

Yes, it was important because as we were just talking, the consumer being under very significant pressure, our customers, generally CPGs, private label producers, QSRs, et cetera, have been in a multiyear environment of taking significant price up at the expense of volume. And they too took a little more of a balanced approach balanced this year in 2026 that we saw play itself out in our fourth quarter, where we moved sequentially, we improved volume about 200 basis points. We were down about 1.5% in what was our Q3, up 0.5% in our Q4. And it was pretty broad-based. And so it showed a little more of a balanced approach by our customers, volume and price, which was good. It was a little more broad-based in categories that we're focusing on higher growth. So categories where the consumer is moving like proteins, food service applications, health care, personal care, us taking care of ourselves, us taking care of our pets. And so the categories that we've been focused on, we saw a little bit better growth. And then categories which are very important to the company, a little under half of the company, more center of the store, we saw our customers take a little more of a balanced approach. And then finally, in some of our emerging regions. So for us, that's China, India, Brazil, Mexico, we continue to see multiple quarters now of growth. The summary of that is pretty broad-based, which was important. It wasn't -- it didn't appear to us to be kind of a one-off event. And through now August, it's continued for us. And so the guide that we provided for this 6-month period of being flat to modestly positive, what we've seen to date through August is consistent with that.

Great. You talked through the stub period. We've got to get through that period over the next few months. But calendar year '27, you seem pretty confident of delivering a double-digit growth year. Maybe just talk us through that and size up what's going to drive that double-digit growth into a more normal year.

No, and thank you for that. And what we were really working to do, particularly with this last quarter, because we have a little bit of an unusual period of a 6-month transition period that we guided to, we wanted to provide some context, at least what we call a look into 2027 and we believe that 2027 sets up for us to show the value that we are creating as this day-to-day life global consumer packager. And in doing so, what we expect to see in 2027 is a continuation of several things. One, that we have kind of the third year or year 1.5 to 2.5, but basically, the last portion of that $650 million of synergy capture. So that will be important to driving improvement. We also should be in a little bit of a cleaner environment, meaning that we'll have worked through some of the realities of the volume headwinds that we were experiencing. And we are expecting to have what I'd characterize as globally a little more of steady and consistent demand at the customer level. So nothing of substance, but that gives us the opportunity to outperform that with the revenue synergies, with the focus on the categories that we're committed to, us investing behind private label as an example, investing in those couple of emerging regions that gives us confidence that a low single-digit organic growth business is plausible. And that, along with the synergy capture, gives us confidence we can have kind of mid-single-digit EBITDA growth, which can drive that double-digit EPS growth. So it's a look into it. Obviously, we're operating in unique and volatile times, so it doesn't have perfect line of sight, but those are the fundamental assumptions that are implied in our look into 2027.

Got it. Just the enabler of that longer-term organic growth, I think you've talked through a CapEx up to 5% of sales to support growth initiatives. Maybe just talk us through those a bit more. Is it about modernizing plants or putting greenfield plants on? Or is it more incremental spend as your customers demand it?

Yes. And thanks for asking that. I think one of the things we've been working to do is as part of that algorithm we were just talking about is talk about CapEx is what kind of level of CapEx as a percentage of sales for our business allows for and enables low single-digit organic growth. And based upon all the work that we've done around CapEx as a percentage of sales to maintain our assets, think about that in the 2% to 3% range of sales. Productivity enablers, so automation, driving cost out, driving productivity and then organic growth. Cumulatively, we believe at around 5% of sales that we can consistently operate in that low single-digit organic growth environment. What's good about it is, and you just touched on it in your question, is it's more small and incremental investments that tend to be customer-specific as opposed to large-scale greenfield style investments where you have to put iron in the ground and then look for ways to populate it, if you will, or fill it. That's good because it makes it a little more variable. It, of course, ties to the realities of do you have the organic growth opportunities with customers. And so if those don't exist, if we're in an environment where that isn't as available, then, of course, CapEx wouldn't be at that 5% of sales. So it is, of course, variable. The 2 businesses prior Amcor and Berry tended to operate more in the 3s and 4s, but with relatively limited positive organic growth. So we're just trying to put it out there in terms of this is probably what it takes, what we think is plausible and appropriate. The free cash flow generation from that with the kind of margin profile in which we operate drives above cost of capital returns and is a nice enabler for value creation.

I guess just culturally as well, if you could touch on Berry was very much an M&A-focused business. Amcor probably more returns based. How does this new sort of thinking compare to those 2 businesses previously?

Yes. And by the way, both great businesses with excellent capital allocation philosophies, M&A driven, a little more margin enhancing ROIC driven in environments that were conducive to that. Both of those are, of course, important to the long-term value creation of the business. But what we are investing behind is building out the fundamental skills, the capabilities to allow ourselves to leverage our scale, leverage our innovation, which is larger capacity than anyone in our space and leverage the geographic reach of the business to reach into more of our customers' opportunities to win with them in ways that are consistent with kind of what we were just talking about, which is the right to win and being very targeted in it. We're in the early days. We have more data about our customers and about the realities of where we're operating than anybody, leveraging that data to determine where, in fact, should we be placing our commercial efforts. Use an example. We've got a great business with a customer in Germany. They're a global producer. We now have the data to say, gosh, we've got them in Germany. We don't have them in Brazil. Let's go after that. Let's target that, let's head that direction. Now you would say to yourself, that should be common knowledge. Well, historically, not as simple. Now we can get after that very time effectively and really target our commercial efforts to give us more confidence that the organic growth is, in fact, plausible. Now you got to build a culture around that. You got to build reward systems around that, and that's what we're doing, and you've got to put dedicated leadership around it. So that's why we have invested in a new private label commercial team. That's why we've invested in efforts around how do we reward our commercial teams for winning and capturing new opportunities for growth. So it is a culture build. We're in early stages, which is good, but we now are seeing evidence of it playing itself out.

Maybe just switching to free cash. Free cash was a bit lower in that period versus your guide because of what was going on in the Mid East. I guess just give us your perspectives around how you get back to that $500 million? And then beyond that, what to expect from free cash for this business?