Amcor Q2 2023 Earnings Call Transcript

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Provided by Quartr
February 7, 2023

Key Takeaways

  • Strong H1 performance: Organic sales grew 2% while adjusted EBIT and EPS each rose 8% on a constant-currency basis, powered by effective cost flexing and price-mix actions.
  • A resilient portfolio with 95% exposure to consumer staples and healthcare outperformed peers’ mid-single-digit declines, as volumes fell only 1% versus broader industry weakness.
  • Cautious H2 outlook: Despite reaffirming full-year EPS and free cash flow guidance, management expects to land toward the lower end of its ranges amid ongoing demand volatility and customer destocking.
  • Capital allocation remained disciplined, returning ~$400 million to shareholders in H1, raising share repurchase capacity by $100 million and maintaining a 2.0× leverage ratio following the Russia sale.
  • Strategic growth and sustainability initiatives include bolstering healthcare packaging via the MDK acquisition, expanding recycling-ready solutions across >80% of flexibles and nearly 100% of rigid products, and securing circular-polymer offtakes.
AI Generated. May Contain Errors.
Earnings Conference Call
Amcor Q2 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

Everyone, and welcome to the Amkor Half Year twenty twenty three Results. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Tracey Whitehead, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining Amcor's fiscal 'twenty three first half earnings call. Joining today is Ron D'Elia, Chief Executive 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 that press release and the presentation.

Speaker 1

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 ks 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.

Speaker 2

Thanks, Tracy, and thanks, everyone, for joining Michael and myself today to discuss Amkor's Financial Results for Fiscal 2023. We'll begin with some prepared remarks before opening for Q and A. And I'll start with Slide 3, which covers our first and most important value, safety. Safety is deeply embedded 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.

Speaker 2

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 3 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.

Speaker 2

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 evolves 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. 2nd, although not entirely immune in a weakening demand environment, Our business remains resilient. 95% of our portfolio is exposed to consumer staples and healthcare end markets, which combined with our broad geographic footprint positions us well through economic cycles.

Speaker 2

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. 3rd, a solid first half, Strong execution and a resilient portfolio gives us the confidence to reaffirm our guidance ranges for fiscal 2023. We're confident in the ability of our teams to continue focusing on the controllables. However, we're also mindful that through the Q2, the demand environment softened and became increasingly volatile. We expect this will continue in the near term.

Speaker 2

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 towards 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.

Speaker 2

First half reported net sales were up 6%, which includes approximately $670,000,000 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 mix benefits, including recovering around $160,000,000 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.

Speaker 2

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 $400,000,000 cash to shareholders through a combination of dividends and share repurchases.

Speaker 2

And today, we've increased our planned repurchases for fiscal 2023 by up to $100,000,000 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.

Speaker 3

Thanks, Ron. And beginning with the Flexible segment on Slide 6. The business performed well in the face of challenging macroeconomic conditions, executing to recover high raw material costs, manage general inflation, improve cost performance and deliver solid mix benefits. Reported first half sales grew 5%, which included recovery of higher raw material costs of approximately 460,000,000 representing 9% of growth. Our teams continue to do an excellent job passing on increases in commodity costs.

Speaker 3

And as expected, the related price cost impact on earnings for the Q2 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 healthcare, 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 continue to see strong growth in our businesses in India and Southeast particularly in healthcare and meat 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.

Speaker 3

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 percent 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.

Speaker 3

The business built on its Q1 performance with another solid another quarter of solid earnings growth. First half sales increased by 12% on a reported basis, which included approximately $210,000,000 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 1% price mix benefit. Looking at the December quarter, overall volumes declined by 5% with the beverage business in North in Latin America impacted by lower consumer demand and customer destocking. In North America, first half beverage volumes were down 5%.

Speaker 3

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. Colesville volumes 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. The Specialty Containers business delivered good performance with solid volume growth from Healthcare, Dairy and Nutrition end markets.

Speaker 3

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 and the balance sheet on Slide 8. We had a strong sequential improvement in adjusted free cash flow, which came in at $338,000,000 for the December quarter in line with last year. For the half year cash outflow of $61,000,000 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 Slow seasonality, which is typically weighted for the second half of the year, more pronounced for fiscal 'twenty three.

Speaker 3

Our financial profile remains strong with leverage of 2 point times 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 $40,000,000 worth of shares in the December quarter and expect to repurchase up to $500,000,000 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 $365,000,000 in addition to $65,000,000 of cash, which was repatriated upon completion.

Speaker 3

In terms of the use of total proceeds received, we expect to do 3 things. First, we will invest approximately $120,000,000 in a range of cost saving initiatives across the business to partly offset divested earnings. This is in addition to approximately $50,000,000 of cash we allocated back in August for similar initiatives. 2nd, we plan to allocate up to $100,000,000 for additional share repurchases. And finally, the balance is expected to be used to reduce net debt in proportion with the vested EBITDA, maintaining our leverage ratio.

Speaker 3

Taking us to the outlook on Slide 9. We are maintaining our guidance range for adjusted EPS of 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 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 We expect earnings growth of approximately 3% to 8% on a comparable constant currency basis to be comprised of approximately 5% to 10% growth 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.

Speaker 3

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 3 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.

Speaker 3

We are also reaffirming our adjusted free cash flow range for the year of $1,000,000,000 to $1,100,000,000 although likely toward the lower end of the range as noted on last quarter's call. So in summary for 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 and demand and macroeconomic challenges in the near term. With that, I'll hand back to Ron.

Speaker 2

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 Important priority segments, which is Healthcare. An overview of our Global Healthcare Packaging business is shown on Slide 11. With more than $1,800,000,000 in annual sales in fiscal 2022, our portfolio covers both flexible and rigid packaging formats and is evenly split between medical device and pharmaceutical packaging.

Speaker 2

This is a truly global business with global customers and globally recognized products and technology forms and it's one where we have scale in every region, including in emerging markets. This is not an easy market to enter because healthcare 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 healthcare 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.

Speaker 2

Globally, Healthcare 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 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 healthcare packaging solutions. In another organic growth example, we opened a world class dedicated healthcare greenfield plan in Singapore at the end of calendar 2021, enhancing our ability to serve the rapidly growing Asian market. M and A also plays a role in supplementing organic growth in this segment.

Speaker 2

A few weeks ago, 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. Going 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.

Speaker 2

In terms of package design, Amkor 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.

Speaker 2

We've also seen important progress in the development of the infrastructure and technology required to 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 in 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 offtake commitments. In December, we announced a 5 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 healthcare and food grade packaging applications. We also recently announced a partnership with Lycela to further explore an investment in one of Australia's first advanced recycling facilities.

Speaker 2

These agreements provide another point of differentiation and value, which can be applied across all end markets for customers like Mondelez, We've incorporated 30% advanced recycled material into their packaging for the Cadbury Dairy Milk brand in the UK and Australia. These capabilities also position Amkor 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 Healthcare business, our innovation across a range of substrates 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.

Speaker 2

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 Operator, with those opening remarks, we're now ready to open the call to questions.

Operator

Thank you. We'll take our first question from Anthony Pettinari with Citi.

Speaker 4

Good afternoon. 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 2nd half demand. And then maybe specifically, you talked about restocking and lower demand for rigids.

Speaker 4

I'm just wondering Where you think restocking stands now?

Speaker 2

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 Q2. Very much a mixed picture in October November, depending on the business and the geography, the story was relatively mixed, but across the business, Our volumes were relatively flat in those 2 months.

Speaker 2

December, we definitely saw things soften. We had volumes across the group down mid single digits. I think that's the 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.

Speaker 2

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 rigid 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've also seen demand soft generally.

Speaker 2

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 ridges 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.

Speaker 4

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?

Speaker 4

Or are there maybe 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?

Speaker 2

Yes. Look, I think the primary reason for not Change in the guidance is we have half a year left. We've got 2 quarters. We've got a relatively wide range when you consider that we've got 2 quarters left and we've maintained the full with the range. The swing factor really will be volumes.

Speaker 2

It really will come down to 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.

Speaker 2

We could get out front of raw materials as they come off at a faster pace than we're assuming and a weaker U. S. Dollar would help as well. And the inverse would be true for the lower end of the range. I think it's also fair to say that at this point in the year, we have a wider range of demand outlook than we normally would or wider range of possible scenarios for volume than we ordinarily would.

Speaker 2

Our view would be volumes could be anywhere from up a couple of points to down low single digits. And it's unusual for us To have a forecast that could include a decline in volumes. So for all those reasons, we've decided to Express some caution here, but what we think with 2 quarters left and with some strong cost performance that will continue into the second half, we thought it

Operator

We'll take our next question from John Purtell with Macquarie Asset Management.

Speaker 5

Good evening, Ron and Michael. How are you?

Speaker 2

Hey, John. Good. Thanks. Hey, John. Good.

Speaker 5

Just in terms of price and mix, so that's been a benefit for you over A sort of long period of time, we saw that continue in this half with a 4% benefit in flexibles and Presumably healthcare, which you called out there on is sort of a key part of that. The question is on how you see that price mix profiling through the second half. I mean, would it be Fair to say that you're expecting slightly less price and mix benefit in the second half relative to the first.

Speaker 3

Yes, John, I can help you with that one. So you're right. The teams have done a good job on price and getting out there ahead of inflation and recovering that. And you saw in the we commented in the half, We've recovered about $160,000,000 in cost inflation during the period, but we also had really good mix benefits, particularly from The strong healthcare performance, particularly in the half where we saw double digit growth, which is above average growth for that part of the business and a bit of rebound versus the prior year. So as we look forward into the second half, there'll still be the price mix benefit there, but Inflation is still there.

Speaker 3

We've got to recover that. And on the healthcare side, comparatively, you're not going to see the same level of growth and therefore the mix benefit. So although we're still expecting that, we would say that it will be lower than what we saw in the first half.

Speaker 5

Okay. Thank you.

Operator

We'll take our next question from George Staphos with Bank of America.

Speaker 6

Hi, everyone. Good day, good evening, good morning. My question on for the call is on cost saves. Ron, you talked about No aggressive actions, I forget exactly how you phrased it, but to obviously offset some of the headwinds that you're seeing. Can you talk a bit further about what those actions are?

Speaker 6

Can you size them either in relation to, I don't know, the volume weakness that you're seeing or the ability to offset the dilution from Russia and How can cost saves build into both calendar 'twenty 23 and fiscal 'twenty 24 to offset that further dilution you'll have from Russia at least in the first half of the upcoming New Year. Thank you.

Speaker 2

Okay. Thanks, George. Look, let me respond to the question and Michael and I will respond to the question in 2 parts. I think there's the cost savings Activities that we've been undertaking through the first half in the face of softer volumes and then there's the offsets to the Russian The divestment of the Russian earnings. So look, we got out front, I think very proactively And fairly aggressively on cost in the first half.

Speaker 2

I mean, I think the way to think about it is we had really strong operating leverage with 2% Organic sales growth really flat to minus 1% on the volume line and we had 8% EBIT growth. And if you think about the drivers of that EBIT growth, price and mix sort of offset and we recovered inflation. So and really the Profit growth was driven by cost outs. And so where did the cost outs come from? We did a really good job of flexing labor.

Speaker 2

We cut shifts, we reduced overtime, several 100 people are out of the business. There's reasonably Meaningful headcount reduction across the business. We've also pulled the procurement lever pretty hard and cut back on discretionary spending. And we got out front early on those actions given the volatility that we saw and just reading the tea leaves from discussions with customers on the demand environment. Those initiatives, those actions will continue into the second half, and they underpin The outlook that we've reaffirmed today.

Speaker 2

I think Russia is almost a Separate topic, if you will. And just to level set, Michael can talk about some of the specifics, but we had a business in Russia with 3 plants that represented about 2% to 3% of our sales and roughly 4% to 5% of our EBIT in any given year. So essentially $80,000,000 to $90,000,000 of EBIT, which we've now divested. And we are resolute in trying to replace that EBIT as fast as we possibly can. And so with the proceeds exceeding our expectations, we generated a pretty healthy profit on the sale of the business as well.

Speaker 2

And then The proceeds of over $400,000,000 $430,000,000 as Michael alluded to, a bit ahead of our expectations. We think it's a good use of cash to reinvest in the business and take cost out structural cost out to help offset the $80,000,000 to 90,000,000 Dollars of EBITDA that we've divested. Michael, maybe you can talk a bit more about the financial profile of what we plan to do.

Speaker 3

Sure. Thanks, Ron. Yes, I mean, just following on from that. So we announced today we're going to use part of the proceeds to help divest to help offset the divested earnings. And we announced today around $120,000,000 of cash will be put to work in cost saving initiatives, things like footprint and SG and A and the like.

Speaker 3

And that's in addition to $50,000,000 cash that we allocated back in August as well. So in total, About $170,000,000 of cash is going to be invested in cost out initiatives over the next kind of 12 to 18 months. And we'd expect to get kind of a 30% return on that, at full run rate. But if you think about the timing of that, Those initiatives are only starting we'll start to work on those this financial year. So there is no impact factored into no Upside factored into the guidance range in FY2023.

Speaker 3

But certainly, we're expecting benefits from this program in FY2024 and then into FY2025. And if you think about that, bear in mind, in H1 in FY 'twenty four, we will have a headwind. These programs will kick in, but weighted more to the back end of the year. So on that $170,000,000 investment, if you call a 30% return, It's roughly a $50,000,000 potential impact to offset the Russian earnings. I would say that Two thirds of that we think we can achieve in FY 2024.

Speaker 3

So over the course of FY 2024, we feel that we can pretty much Minimize any headwind from the Russian earnings in the first half of FY twenty twenty three. And then you'll get the full run rate as we head into FY twenty twenty five.

Speaker 2

Thank you.

Operator

We'll take our next question from Larry Gandler with Credit Suisse.

Speaker 7

Thanks, Michael and Ron. Might as well just continue on to that last comment. Can you just talk about some of the specifics about how to achieve that 30% return, dollars 50,000,000 savings from those Russia cost saving actions. What are you guys doing there?

Speaker 2

Yes. As Michael alluded to, Larry, we're going to close some plants. And as we think about it and take some overheads out, if we think about this environment that we're in, with the demand backdrop being as uncertain as it is. And the fact that we're also already increasing our CapEx to pursue growth, particularly in our priority segments, I feel like that's pretty well entrained. So then the next the fastest way to generate earnings to offset the divested earnings is through cost reduction.

Speaker 2

And cost reduction in a structural sense, which means optimizing the footprint. And it's a business that we've got 2 20 plants around the world. There's always opportunities to optimize further. And so that's largely what we'll do and we will as I said, we also will reduce overheads in parts Business as well to right size the cost structure.

Speaker 7

Okay. That's pretty clear. Thanks. And One other thing that caught my attention is you guys repurchased only $40,000,000 of stock in the first half and then the target for $500,000,000 now for the full year. So I'm just wondering, was there anything that kind of gave you some hesitancy in the first half?

Speaker 7

I'm interested if on the M and A pipeline, if you guys might have been looking at something that caused some hesitancy?

Speaker 3

Well, look, Larry, I think ultimately we started the buyback in Q2. We spent 40,000,000 If you think about the cash flows in the first half, we also invested in some M and A activities. So we acquired the plant in the Czech Republic, we spent a little more on EPAC. And at the same time, we were managing the cash flow as we Start to release some of the inventory that we built up on the back of supply chain constraints over the past 12 months. So we started to see that come out of the system toward the end of quarter 2, which gave us the ability to start to do the buyback.

Speaker 3

And then as we look forward into H2, We will start to see more as I mentioned in my comments, we'll see the cash flow more weighted to the second half, particularly as we start to get through the inventory and working capital impacts from that. In addition to that, you've got the proceeds from the Russia sale, which we're allocating $100,000,000 to the buyback. So Really it was around the timing of the cash flow and just managing that through and we can get the buyback done in the second half as we've done in the past. So we feel like we can get the $500,000,000 done.

Operator

We'll take our next question from Ghansham Panjabi with Baird.

Speaker 8

Hey, guys. Good day to everybody. I just want to go back to the Anthony's question on the caution Ronny referenced. Can you elaborate on whether this is a caution on any specific region between the Europe and the U. S.

Speaker 8

And Latin America or is it just universal? Just trying to get a sense as to maybe some of the just the moderation of volumes that we're seeing is really a function of perhaps just catching up Over the last year or so from previously depleted inventories and now we're just approaching a more normalization phase and an adjustment related to that.

Speaker 2

Yes. Look, I don't think we know the answer to that is the short response to your question. The caution is based on the volatility that we've seen in demand patterns globally. That we've seen in demand patterns globally. Now if we look specifically in the second quarter, It's more segment specific in North America and Europe.

Speaker 2

And then we had some geographies where things Got even more volatile as we went through the quarter, in particular, Latin America, where we saw some destocking, but also just we think some softer demand in light of the deteriorating macroeconomic environment in several countries down there. China would be another one where we saw Demand softened considerably in the Q2 really concurrent with COVID lockdowns. Now obviously those are behind us. We'd expect the business To bounce back, but how strongly it bounces back is an open question. And look, as far as the Drivers of volume in the quarter and even into January, how much is related to the consumer pushing back on prices that have been put through versus how much is destocking.

Speaker 2

It's difficult to read. So Generally speaking, there's been volatility across the business. And that adds up to a degree of caution on our part.

Speaker 8

Okay, understood. And then just given the increase in interest rates, I mean, obviously, it's a big headwind between fiscal year 2020 fiscal year 2022 just For everybody really. How are we thinking differently if at all in terms of allocating cash flow towards buybacks versus debt paydown?

Speaker 3

Yes. Look, the interest rates where they are for us, the buyback still makes sense. It's EPS accretive. We have strong cash flows and we've regularly been doing buybacks and we'll continue to do that where the interest rates are, it still makes sense from that perspective.

Operator

We'll take our next question from Daniel Kang with CLSA.

Speaker 9

Morning, everyone. Just interested on the impact of destocking. I know it's Quite difficult to quantify, but can you estimate how much it contributed to the volume softness in both Flexibles and Rigids? You're seeing any green shoots at this point in terms of the destocking cycle coming to an end? And just Wondering what you're assuming in terms of destocking in your guidance?

Speaker 2

Look, Daniel, it's a difficult one to estimate. I mean, I think you'd have to triangulate a few different data points. If you look at the scanner data and look at the results of other public companies that have reported. Volumes were down considerably. And in light of those comparisons, our volume performance That was actually good.

Speaker 2

But when we know anecdotally in certain segments, particularly in coffee, Single serve coffee in Europe, some of the dairy segments in the U. S, meat in Europe, we know in some of those places, including beverage in the rigid packaging segment that there was excess inventory in the system. And we know that because customers took shutdowns in a way that they haven't in the past, meaning longer shutdowns. So it'd be very hard to parse out The volume performance of the half, the volumes were down 1%. I think that probably compares favorably to the other external markers out there, but it'd be really hard to parse That 1% in terms of what was destocking versus what is just a softening consumer environment given the price increases that have been put through in pretty much all segments and all regions.

Speaker 9

Thanks, Ron. I'll pass it

Operator

on. We'll take our next question from Adam Samuelson with Goldman Sachs.

Speaker 4

Yes. Thank you. Good afternoon, everyone.

Speaker 3

I guess I wanted to

Speaker 4

come back to this question on mix. And Ronny, Earlier you alluded to maybe healthcare, which has been a strong growth driver, moderating as we go into the back half of the year. Can you just maybe calibrate that a little bit more just in the context of broadly cautious kind of volume outlook? What kind of do you see the healthcare business settling out and kind of help us think about how what happens in fiscal 2024 as you start lapping some of So with the growth there.

Speaker 2

Well, healthcare has been a good grower for us over many, many years. And it's Growing both the medical packaging side and the pharmaceutical packaging side have grown kind of mid single digits globally, obviously a bit higher in the emerging markets. And that's been consistent over a long period of time. I think we saw extraordinary growth in the first half Coming off of actually quite a strong fiscal 2022 as well. A few drivers there that we think have been fueling that growth.

Speaker 2

Obviously, our market position is quite strong and the innovation that we've been bringing to the market is quite strong and we're investing behind that as we've highlighted today. I think there's to be clear, there's been some pent up demand because some of the supply chain constraints that we've talked about and others have talked about really hit the healthcare segments for us in a pretty acute way. Those are unwinding and some of that pent up demand is being satisfied. And I think it's also not a that on the pharmaceutical side, there's been a relatively big cold and flu season. So those are some of the things that really fueled double digit growth globally across both the Medical Device and Pharmaceutical segments for us in the first half.

Speaker 2

And we believe that the business will continue to grow at healthy rates, But we'll revert more towards long term trends that we've seen over a long period of time in the kind of mid single digit range. And that would apply going into FY 2024 as well.

Speaker 4

Okay. So, if I can just squeeze another one in the context of maybe on the food and consumer goods side that Slowing demand and some of you destocking on the part of customers. Have you seen their engagement on

Speaker 2

New products

Speaker 4

and new form factors for packaging change at all? Has bid activity, RFPs, any of that kind of activity different than 6 or 12 months ago?

Speaker 2

No. If anything, it's accelerating. It's particularly around the sustainability side, where many of the brand owners that we work closely with have the same commitments that we have and have made similar pledges around recyclability or recycled content. Those Commitments are fast approaching, the dates are fast approaching. And if anything, we're seeing an acceleration in that dialogue.

Speaker 2

And we're seeing good take up. Some of the examples we cited today with our AmFiber performance paper platform, which is getting good take up in the marketplace. We're seeing good early take up of advanced recycled material and products that contain That off take. And so look, I think at the moment it's not slowed down at all. I think also brand owners are looking for ways to differentiate as they try to scratch out whatever growth they can.

Operator

We'll take our next question from Nathan Reilly with UBS.

Speaker 4

Hey, guys. Ron, would you mind just talking to how the latest round of General price increases have been received by customers, just given that lower demand outlook, particularly with those December volumes take us to more notable turndown. I'd imagine it's getting even harder to recover inflation on costs, but I also note your comment on managing Manufacturing capacity, so just interested or any views on pricing?

Speaker 2

Yes. Look, I mean, we've been at it now for a while. We put about $670,000,000 of price into the market in the quarter just to recover higher raw material costs, another $160,000,000 or so to recover general Inflation. It's certainly not getting easier, but we are passing it through and we're recovering. And I think you can see that in the margins.

Speaker 2

The margins have expanded excluding the dilution effect of the raw material prices going through the top line. The margins have continued to expand and not shrink. And I think that's, it should give some confidence that we are out there recovering. It doesn't mean that the conversations are getting easier. I think the consumers are probably starting to get a bit tired.

Speaker 2

Elasticities, If they haven't already or likely to increase, I think that's what we're hearing from most of our brand owners, brand owner customers. But At this stage, we're still recovering and we expect to continue to fully recover our inflationary costs in the second half.

Speaker 3

Perfect. Thank you.

Operator

Our next question comes from Mike Roxlin with Truist Securities.

Speaker 4

Thank you, Ron, Michael, Tracy, and Dave. Appreciate taking the question. Just 1st one is on the $120,000,000 in cost takeout in SG and A removal. Ron, can you comment on what regions you're looking at And whether there are any particular end markets that you're looking to restructure? And just quickly, on your Asian business, especially with China Eliminating its color restrictions, have you seen any type of improvement recently in the volumes there?

Speaker 4

And was that fact you considered in your recent MDK acquisition. Thank you.

Speaker 2

Maybe I'll address the second question first and then Michael Come back on the $120,000,000 Look, it's relatively recent that China's reopened and then we went into the Chinese New Year in January. But we do expect that business to bounce back. More importantly, the China business has done an outstanding job managing costs. So despite the volume declines that rental on side of the COVID lockdowns. The business grew earnings in the first half, which was just an outstanding outcome.

Speaker 2

It's been a business for us that has grown at least mid to high single digits over many years. What's really important in China is to be very focused in our participation strategies. Healthcare is a place we want to participate and we want to go deeper in China and we're doing that both organically and we're doing that through M and A and the MDK Acquisition that we announced last month is a good example of that. It's a small business, one plant outside of Shanghai, complements very well Another medical packaging plant that we have near Shanghai as well. It brings us some complementary Our products that we didn't have local production of in China and it also expands our book of business with a new set of customers.

Speaker 2

So we're pretty excited about that and We think that's all part of the long term secular growth that we've experienced and will continue to experience in China. On the $120,000,000 do you want to comment on where the

Speaker 3

Yes, so the $120,000,000 I mean we see opportunities across the business as Rob mentioned. There's Under 220 plants around the globe, it's going to be focused on taking some plants out of the network and as well as SG and A opportunities to right size the business. So there is some focus in Europe, but generally speaking, we'll see opportunities across the globe.

Speaker 2

That's to come wherever we can find EBITDA to offset the EBITDA that we've sold is where we'll be looking.

Operator

We'll take our next question from Jacob Kukarnas with Jarden Australia.

Speaker 4

Evening, Ron. Evening, Michael. Michael, just a question for you.

Speaker 9

I was wondering if you could talk through some of the fixed variable cost Structures across both of the divisions and just noting you did talk about some plant downtime, which is a little bit higher than expected. Can you just talk about how that flowed through to some of the cost benefits in the half, whether that will occur into the second half of the year if the volume environment remains weak?

Speaker 2

Yes, I think you got

Speaker 3

to think about it in the context of just our cost of goods and the breakup of the cost of goods, where we focused on taking some of that cost out. Of our COGS about 60% to 70% of it is the raw material. You then get into labor, which is around that 10% to 15% and then things like energy and freight. Where we really focused was around just managing the labor in the half, particularly Flexing downtime to match our customers, where they were down managing the overtime to take that out as well. So we if anything, we've recovered inflation.

Speaker 3

We talked about that the $160,000,000 but Within the performance in the half, we absolutely took some cost out. We haven't specified the exact amount, but Ron's point earlier, there was a few 100 heads as well from a direct labor standpoint that came out, as well as just generally managing and flexing that Cost in line with the demand.

Speaker 9

Thanks, Gus.

Operator

We'll take our next question from Kyle White with Deutsche Bank.

Speaker 10

Hey, thanks for taking the question. Just curious given the kind of customer elasticity That could drive volumes. And I understand it might be hard to give a general statement given your diversification within Flexibles. So I guess I'm most interested on hot fill and cold fill beverages Rigid packaging, but any details would be appreciated.

Speaker 2

Yes. Look, it's a good question. We have seen Some shifts in the consumer and some of that driven by actions that the brand owners have taken. In the beverage space and if we just focus on North America, Hello. Some of these points would hold in Latin America as well.

Speaker 2

But in the beverage space in North America, when the consumer is under pressure, They tend to revert to multipacks and smaller unit sizes, right? And so if they're Going to buy a soft drink, they're likely to buy it in a pack of 12 where the unit price is lower than buying it through the convenience store in the cold chain. So we have seen some of that. That's probably contributed to the softness, particularly on the cold fill side. I think we've seen some other examples in other In Europe, in the coffee segment, we've definitely seen soft volumes in the more premium end, in the single serve system sales and we've seen higher sales in the segments that are multi serve.

Speaker 2

So think about Capsules in a system versus ground coffee or instant coffee, the instant coffee is what's being pushed at the moment. So we are seeing a little bit of that sort of behavior. It's maybe just a different degree of emphasis across their product mix as they help the consumer through a high inflationary environment.

Speaker 10

Thanks. I'll turn it over.

Operator

We'll take our next question from Cameron MacDonald with ANP.

Speaker 11

Good morning, guys. Just a question for me. Just on coming at it a different way with regards to The outlook on the volumes and the demand environment, can you sort of delve into what the order cycle actually looks like Yes, with the particularly the products around FMCG and the comments made by customers versus and And how much visibility you've got on that order cycle. So obviously your products get put into their production facility and then it sits on a shelf And then they've got to sell it. So you get further visibility on what the customers are expecting.

Speaker 11

So have you got good visibility into the rest of the Q3 or can you see into the Q4 at this stage?

Speaker 2

The business is exposed really to consumer staples and fast moving consumer goods and healthcare. And Typically, we'll have visibility a few months out. Obviously, we have long we have planning discussions with our customers over a longer period of time. But As you get nearer and nearer, those discussions get more and more granular and you get more a greater degree of accuracy as you get closer. So I would say our degree Of forecast visibility extends a few months and that's about the extent of it.

Speaker 2

And right now, Those forecasts are moving around quite a bit and have been now for the last few months. The volatility has increased and the variability in forecast has increased. I think on the positive side, to the extent that there is any destocking that's gone on in our value chains, We would expect that to work itself through reasonably quickly. And in a matter of a quarter or 2, we should be through Whatever destocking needs to occur.

Speaker 11

Great. Thank you.

Operator

We'll take our next question from Richard Johnson with Jefferies.

Speaker 12

Thanks very much. Ron, I just got a question on strategy. Your shareholder value accretion model has sort of been at the forefront of your strategy or very much the foundation of your strategy For a very long time now. I'm conscious of the fact though that TSR has really struggled to keep pace with the value add in more recent years. And really my question is around the sort of long term numbers because you're about to lose the big benefit of Alcan in your 10 year numbers.

Speaker 12

I was just wondering how we should think about that, how you think about it and whether the model is still appropriate?

Speaker 2

Yes. Look, it's a good question, Richard. We certainly believe the model is still appropriate. If you go back and look over a 10 year period post the Alcan acquisition, which is about 13 years ago now. The last 10 years, we've been well above from an intrinsic perspective, Well above the 5% to 10% to 15% sort of shareholder value creation model that we talk about.

Speaker 2

We still believe the business will generate low single digit top line growth. It will convert that with operating leverage like we've seen in the first half. And then with the excess cash flows of the business, we're going to continue to acquire or buy back shares and continue to grow our dividend. So all up, we think the model still Still makes sense. It's held us in good stead and we'll continue to do so going forward.

Speaker 12

Great. Thanks. And just a quick one on Russia for Michael, if I may. It looks like you've booked, I think, off the top of my head, it's about $15,000,000 of cost related to Russia below the line in the quarter. Can I just Check whether that's correct?

Speaker 12

And secondly, what it might be. And thirdly, now you sold the business, there's no more to come below the line?

Speaker 3

So the loan line, Richard, we took a $215,000,000 gain obviously on the sale transaction and then There were some cost just in relation to transferring a business, Some of the crane costs still to just transfer equipment, etcetera, in that. As we look forward, you'll see the restructuring costs start to come through that will run through that line. But generally, The cost in relation to Russia are finished. Yes.

Operator

We'll take our next question from Brook Campbell Crawford with Berenjoy.

Speaker 13

Yes, thanks for taking my question. Just on CapEx, looks like a lighter CapEx quarter, the December quarter looks like it's about $94,000,000 Can you just remind us, I guess, What the expectations are for the full year? I think at the last result, it was $550,000,000 to $600,000,000 of CapEx was the expectation. So Just an update on that one would be great. And any reasons for the lighter investment period in the December quarter?

Speaker 13

Thanks.

Speaker 3

Yes, sure. In terms of the half,

Speaker 2

we're

Speaker 3

in around that $250,000,000 There's a bit of FX in there as well versus Prior year, so versus prior year, we're running about 3% or 4% ahead. For the full year, the number of 550 to 600 still in the range of outcomes. We're likely to be kind of that 5% to 10% ahead of prior year and we've got we Continue to invest in the focus segments and the innovation platforms, which is where we've been focused on that investment. So no real change on the CapEx outlook, That's a little lower than where we were at 3 months ago, but pretty similar.

Speaker 13

Thanks. And a follow-up, if I could, just around capital and the M and A strategy. Ron, if you wouldn't mind just and reminding us of the M and A strategy as it is today and has it changed at all over the last couple of years. I guess I asked just because More recent investments seem to be focused on sort of fiber paper type smaller deals like Pulpak and the one in China. You seem to be becoming a bit more substrate agnostic, but just an update really on your M and A strategy will be fantastic.

Speaker 13

Thanks.

Speaker 2

Yes. Well, look, I mean, we are a substrate agnostic. That's been true of the company throughout its history. In fact, about 25% of what we do It's either fiber or aluminum. But as far as M and A goes, no change.

Speaker 2

I mean, we think there's going to be good bolt on opportunities across the portfolio. You can see some examples this year with this healthcare acquisition in China of MDK. Michael referred earlier to plant we bought in the Czech Republic earlier in the year to bolster our Eastern European footprint. So we think there'll be deals like that. I mean those are the deals that are out there Many of the companies in our space are small and so we've got to be comfortable bolting on small businesses to Our footprint that will be part of the mix.

Speaker 2

And then where we can supplement the portfolio, we would like to do that too. I mean certainly In the priority segments that we've nominated, we'd like to continue to grow, healthcare being the one we've talked more about today. In rigid, Obviously, the hot fill space is one that we have a strong position in, but outside of beverage, there are opportunities for us to continue to grow as well. So there's a number of areas where We think the portfolio could be bolstered, but there'll be bolt on opportunities across the Flexibles and Rigids segment. So no change to note.

Operator

We'll take our next question from Ben Kariadis with NST.

Speaker 3

Hi, guys. Just wondering if you are able to give any insight into what the interest rate impulse could be in FY 2024? And also with tax, I note that there was a lower rate in the period, but wondering what we should expect for the balance of FY 2023 and what we should consider to be a more normalized rate. Look, I mean, if you think about interest and tax together this year, From a full year guidance standpoint, we've called out they're going to be a headwind of around 4%. And tax, We've called out is going to be more in that 18% to 19% range and that's really on the back of the mix of Earnings and particularly where our interest expense is, which is in higher cost, higher tax cost countries.

Speaker 3

But when you put that together with the interest increase, that's more than offset by the increase in interest. So for this year, 4%, we haven't called out any guidance for FY 2024 at this stage. But obviously in the first half depending on where interest rates go, there could be some Wind that we're yet to see where that ends up. So at this stage, I'll we'll come back to you on that one. We'll

Operator

take a follow-up question from Jon Purtell with Macquarie.

Speaker 5

Good day again. Just a quick follow-up. Michael, just on the raw material Aside, you obviously saw a modest benefit there in the Q2. I mean, it looks like the raw math indices have retraced Fair way. So the question is what have you baked into guidance because it looks like there should be a pretty material raw material benefit in that second half.

Speaker 3

Yes, looks on you're right. As we mentioned in, we started to see some modest benefit in Q2 from raw materials as they've come down. Obviously, we're still holding higher inventories. So they're working their way through the system, which you're still going to see some impact from in Q3 as we work those down. We're expecting guidance, raw materials right now, they're pretty benign across remembering we buy a broad basket of Materials across broad geographies.

Speaker 3

So when we see that pretty benign outlook for raw materials, so in Q3, we're again expecting Some modest tailwind from the raw material side. Beyond that, it's really going to depend on what happens to the raw materials and quickly we can get the inventory out of the system also linked to the demand environment, John, as well. So clearly, if And demand improves and we get stronger than we get stronger demand and inventories will come down faster. You might get a little High tailwind, the opposite is true. If demand stays soft if demand is softer and we can't get the inventory out of system as quickly then that will impact.

Speaker 3

But The guidance has a range of outcomes built into it and that's all factored into the guidance range at this stage.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back over to Ron Delia for any closing remarks.

Speaker 2

Okay. Look, we would just like to thank everybody for their interest in Amkor. Operator, we feel like we've had a very strong first half and we're Looking forward to closing off another strong year for the company for fiscal 2023. So we'll close the call there. Thanks very much.

Operator

And that concludes today's presentation. Thank you for your participation and you may now disconnect.

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