Amcor Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 13 speakers on the call.

Operator

Good afternoon. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amkor's First Half and Second Quarter twenty twenty four Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer thank you.

Operator

I would now like to turn the conference over to Tracey Whitehead, Head of Investor Relations. Tracey, you may begin your conference.

Speaker 1

Thank you, operator, and thank you everyone for joining Amkor's fiscal 2024 First Half and Second Quarter Earnings Call. Joining today is Ron D'Elia, our Chief Executive Officer and Michael Castimento, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amkor.com, under the Investors section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we'll also discuss non GAAP financial measures and related reconciliations can be found in 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 list several factors that could cause future results to be different than current estimates, and reference can be made to Amkor'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, With that, over to you, Ron.

Speaker 2

Thanks, Tracy, and thanks, everyone, for joining Michael and myself today to discuss Amkor's 2nd Quarter and First Half Results for Fiscal 'twenty four. We will begin with some prepared remarks before opening for Q and A. As seen on Slide 3, our focus on safety remains unwavering and our significant commitment to providing a safe and healthy work environment continues to be rewarded. 70% of our sites have been injury free for the past 12 months or longer and we have experienced a 17% reduction in injuries when compared to the first half fiscal 2023. Safety is deeply embedded in Amkor's culture and is the number one priority for our global teams.

Speaker 2

Turning to our key messages on Slide 4. First, our reported earnings per share for the second quarter and first half were modestly better than the expectations we set out in October and improved working capital performance helped drive a year over year increase of more than $100,000,000 in adjusted free cash flow. 2nd, our financial performance through the half was supported by strong and proactive focus on controlling costs. This helped us offset second quarter volumes that were a couple of percentage points lower than we anticipated. Our teams around the world continue to respond doing excellent job proactively taking further cost actions.

Speaker 2

3rd, our first half financial performance puts us on track to deliver against our full year guidance, Which we are again reaffirming today. Relative to the first half, we believe Q2 was the low point for earnings growth And we continue to expect the trajectory of adjusted EPS growth to improve through the second half of fiscal 'twenty four, including delivering mid single digit adjusted earnings growth Q4. Our confidence is supported by our improved earnings leverage as well as a number of known factors we will cover in more detail later that will benefit earnings through the second half of the fiscal year. Additionally, our volume trajectory has improved generally through January And this underpins our confidence that Q2 marked the low point for volumes. Finally, we remain confident in our long term growth and value creation strategy and in our ability to deliver a combination of strong earnings growth and a compelling and growing dividend.

Speaker 2

The strength of our market positions, execution capabilities and consistent capital Allocation Framework collectively continue to make a compelling investment case for Amcor. Moving to Slide 5 for a summary of our financial results. Organic sales on a comparable constant currency basis were down 8% for the half and 10% for the quarter. Price mix benefits were around 1% for the first half and flat in the second quarter, reflecting moderating inflation, 2nd quarter volumes were modestly lower than our October expectations with the main difference being an acceleration of destocking, especially in the month of December. 1st half and December quarter adjusted EBIT was $709,000,000 $352,000,000 respectively, modestly above our expectations.

Speaker 2

On a comparable constant currency basis, declines of approximately 6% in both periods reflect lower volumes, partly offset benefits related to decisive and proactive cost actions taken across our businesses in response to evolving market dynamics. In total, our actions reduced costs by more than $200,000,000 in the first half compared to last year, with a reduction of more than $130,000,000 achieved in the 2nd quarter. Adjusted EPS was $0.31 $3.0 0.157 dollars per share, respectively, also modestly above our earlier expectations. For both periods, this was down 10% on a comparable basis, Reflecting lower adjusted EBIT and the unfavorable impact of higher interest costs. Working capital improvement remains a focus shareholders in the first half through a combination of share repurchases and a growing dividend, which has increased to $0.125 per share.

Speaker 2

I'll turn it over now to Michael

Speaker 3

to provide some further color on the financials and our outlook. Thanks, Ron, and hello, everyone. Beginning with the Flexibles segment on slide 6, Year to date net sales on a comparable constant currency basis were 8% lower, which largely reflects weaker volumes. Volumes were down 9%, mainly due to lower market and customer demand and accelerated destocking. In North America, first half net sales declined at high single digit rates, driven by lower volumes in categories including meat, liquid beverage and healthcare, Which more than offset growth in the condiments, snacks and confectionery categories.

Speaker 3

In Europe, net sales declined at low double digit rates, driven by lower volumes, partly offset by price mix benefits. Volumes were lower in snacks, coffee, healthcare and in unconverted film and foil. This was partly offset by higher confectionery volumes. Across the Asian region, net sales were modestly higher than the prior year. Volume growth in Thailand, India and China helped offset lower volumes in the Southeast Asian Healthcare Business.

Speaker 3

In Latin America, net sales declined at high single digit rates, driven by lower volumes mainly in Chile and Mexico, partly offset by growth in Brazil. 1st half adjusted EBIT was 5% lower than last year on a comparable constant currency basis as a result of lower volumes, Partly offset by favorable price mix benefits and ongoing actions taken to lower costs, increase productivity, and strengthen operating cost performance. EBIT margin of 12.6% was comparable to prior year despite a 50 basis point unfavorable comparison related to the sale of our Russian business last year. For the December quarter, reported sales were down 9% on a comparable constant currency basis And price mix was relatively neutral compared with last year. Volumes were down 10% in the quarter, Reflecting continued soft market and customer demand.

Speaker 3

Destocking also continued through the quarter, accelerating in the month of December The business continued to take decisive cost actions, focusing on operating efficiencies, delivering procurement benefits, Limiting Discretionary Spend and Advancing Structural Cost Reduction Initiatives. This resulted in another quarter of strong performance, Partly offsetting weaker volumes with adjusted EBIT declining 5% on a comparable constant currency basis. Turning to rigid packaging on Slide 7, year to date net sales on a comparable constant currency basis were 8% lower with price mix contributing around 1%. Volumes were down 9% for the first half, with lower volumes in North America, partly offset by growth in Latin America. In North America, overall beverage volumes for the first half were 14% lower than last year, including a 13% reduction in hot filled beverage container volumes due to lower consumer and customer demand and elevated levels of destocking through the first half.

Speaker 3

In Latin America, volumes grew at mid single digit rates with new business wins in Brazil, Peru and Colombia, partly offsetting lower volumes in Mexico. Adjusted EBIT was 9% lower than last year on a comparable basis, reflecting lower volumes partly offset by price mix benefits and favorable cost performance. For the December quarter, net sales were also down 10% on a comparable constant currency basis. Price mix contributed around 2% And volumes were down 12% for the quarter, reflecting lower volumes in North America, partly offset by new business wins Driving Mid Single Digit Growth in Latin America. Overall, North American beverage volumes were 19% lower for the quarter, reflecting a high single digit decline from destocking as some of our customers took action to significantly reduce inventories in both hot fill and cold fill categories.

Speaker 3

Volumes were also impacted in the high single digit range by incrementally softer consumer and customer demand in Amkor's key end markets. In addition, we had net new business wins in the hot fill category, Which partly offset a loss in cold fill as we elected not to retain volumes that fell short of our profitability threshold. 2nd quarter adjusted EBIT declined by 12%, reflecting lower volumes, partly offset by benefits from continuing to proactively manage costs, including realizing labor savings by taking more plant shutdown days to better align capacity with market dynamics as well as driving procurement benefits. Moving to cash and the balance sheet on Slide 8, as Ron covered earlier, adjusted free cash flow for the half came in more than $100,000,000 ahead of last year with our teams continuing to make progress against our priority to reduce inventories And drive working capital improvements across the board. Our financial profile remains solid with leverage at 3.4 times, Broadly in line with the Q1 and where we expected it to be as we cycle through temporary increases in working capital and given trailing 12 month EBITDA now fully reflects divestiture of our Russian business.

Speaker 3

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

Speaker 3

We also expect a negative impact of approximately 6% from higher interest and tax expense, which takes into account estimate for full year net interest expense of between $315,000,000 to $330,000,000 which is modestly lower than where we were forecasting last quarter. Full year tax rate expectations are unchanged in the range of 18% to 20%. In relation to phasing, we believe that December quarter marks the low point in terms of Amkor's earnings growth and volume declines. January volumes have improved following heavy customer destocking in December. And while we expect market dynamics to remain volatile in the near term, Our volume trajectory is expected to continue to improve through the balance of the year.

Speaker 3

We anticipate Q3 volumes will be down in the mid single digit range and expects 4th quarter volume declines in the low single digit range. Taking into account offsetting benefits from cost reduction initiatives and a reduced headwind from higher interest costs compared with last year. We expect 3rd quarter adjusted EPS to be down mid single digits on a comparable constant currency basis. And for the Q4, we expect adjusted EPS to increase by mid single digits over the prior year. And Ron will talk through the factors that support this return to growth shortly.

Speaker 3

Adjusted free cash flow continues to trend better than last year as we expected and we are again reaffirming our guidance range of $850,000,000 to $950,000,000 for our fiscal 'twenty four year, which will be up to $100,000,000 higher compared with last year. Our plan to repurchase at least $70,000,000 of Amcor shares in 2024 is unchanged and we continue to pursue value creating M and A opportunities. With that, I will hand back

Speaker 2

to Ron. Thanks, Michael. Prior to opening the call to questions, I want to provide additional insights into our outlook for the balance of the year as call as a reminder of the key components comprising our longer term model for driving shareholder value. Looking first at the balance of fiscal 2024, As I referenced earlier and as highlighted on Slide 10, there are a number of key factors already known to us that give us confidence our earnings trajectory will improve through the second half quarterly outlook. 1st, the earnings headwind related to the sale of our business in Russia is now fully behind us, eliminating an unfavorable comparative that impacted reported earnings 18 months begins to abate as we move through the balance of the year.

Speaker 2

3rd, we have benefits from structural cost savings of $35,000,000 in the second half with an additional $15,000,000 to benefit fiscal 'twenty five. These savings are primarily related to plant closures as we optimize our global footprint. Financial results. And 4th, earnings leverage has improved due to our commitment to take proactive actions to align our cost structure with evolving market dynamics. This includes eliminating shifts to take out labor, reducing overtime, driving procurement and maintaining tight control of discretionary spend.

Speaker 2

In total, over the last 12 months, we've reduced headcount by more than 2,000 full time employees or approximately 5% of our workforce, with more than 1,000 of these reductions taken out in the first half of fiscal 'twenty four. From an earnings perspective, operating costs We are lower by more than $200,000,000 in the first half of fiscal 'twenty four compared with the prior period. And more than $100,000,000 of this cost reduction was delivered in the 2nd quarter, which is almost double the approximately $70,000,000 delivered in the Q1. The result has been and will continue to be improved earnings leverage, which we have achieved this financial year to date despite significantly lower volumes. As Michael mentioned, we are off to a better start in January and are confident Q2 marks the low point for earnings growth and volume declines and with our overall trajectory expected to improve as we move through the balance of the year.

Speaker 2

To sum up, we are confident the positive earnings impact from multiple known factors will drive improved momentum in the second half of fiscal 'twenty four, including delivering mid single digit earnings growth in our fiscal 4th quarter. Importantly, we are not assuming an improving consumer demand environment And we will continue to be proactive in taking actions to ensure our cost base and pricing strategies reflect market conditions. Moving to Slide 11, as we look beyond the second half of this fiscal year, these known factors will serve as important building blocks reporting a return to delivering against our shareholder value creation model through a combination of strong earnings growth and a compelling and growing dividend currently yielding 5%. The starting point in creating value will always be growing the business. And over the last 10 years, we have averaged 8% growth in adjusted earnings per share.

Speaker 2

As you can see on this slide, we have multiple drivers of margin accretive growth, each with significant upside opportunity over the longer term. We will also continue to enhance our ability to grow in these areas through stepping up CapEx over a multiyear period and executing on strategic M and A. As volumes normalize and improve, these generally faster growing and higher value growth areas will represent a larger proportion of sales, becoming increasingly stronger contributors to earnings. And when we return to a more normalized volume growth environment, this combination of improved mix And the practice steps we have taken to optimize our cost base positions Amkor well to again deliver strong earnings growth in line with our long track record. To close on Slide 12, we're executing well to deliver against the earnings and cash flow expectations we set coming into fiscal 'twenty four.

Speaker 2

Our teams are being proactive as market dynamics evolve and focusing on the controllables to take additional cost out where appropriate. We have line of sight to mid single digit earnings growth in Q4 and our commitment to our longer term growth and value creation strategy positions us well to deliver on our shareholder value creation model

Operator

Your first question comes from the line of Ghansham Panjabi from Baird. Please go ahead.

Speaker 4

Hey, guys. Good day. I guess, first off on the volume declines across the portfolio, which looks like it's about 6 quarters of negative year over year volumes at this point. Obviously, you're not the only ones, but there's been quite a bit of chatter from your customer set all the way down to retailers about Increased promotional spending. Just curious as to whether you're starting to see direct signs of that at this point?

Speaker 4

And if so, which categories, food, beverage, consumer staples, etcetera.

Speaker 2

Yes. Look, again, thanks for the question. Maybe I'll just mention the volume declines at a high level first and then come back to your question about signs of promotions or more aggressive commercial activity on behalf of the customers. Firstly, I think where there's overlap, we're not really seeing any differences compared to others. So that would be the first thing I would say.

Speaker 2

I think our 10% total decline in the quarter is about 2% worse than we expected going into the quarter. So we weren't actually expecting a much outcome. Things did track according to those original expectations in October November where we were kind of declining high single digits. December, we saw really accelerated destocking, which accounted for the incremental softness and which we more than offset to deliver the profit. So that's Starting point.

Speaker 2

Now January, as we have alluded to, was much better. We have seen improvement in most of our businesses versus H1. And it really underpins our view that Q2 was the low point and it really underpins our Q3 and Q4 expectations. And maybe just to continue and round it out a bit in terms of unpacking the decline, Roughly by driver, roughly half of our 10% decline, sort of mid single digits was related to market impacts. This is a combination of consumer demand, customer and segment mix and roughly half or another mid single digit contribution was from destocking And that's pretty much the same in both the Flexibles and Rigid Packaging segments.

Speaker 2

By geography, emerging markets, broadly flat, Asia up modestly, Latin America down modestly, but the developed markets is where we have been especially soft with Europe a little bit weaker versus North America. And another way to think about it, just to sort of close off here is, of the 10% decline in the quarter, More than 50% of that decline comes from our Global Healthcare business and our North American Beverage business, both of which Have experienced the most significant destocking. So we have had a concentration of impact from those two parts of the business. On the other hand, There are categories growing in some regions, confectionery in North America and Europe, in condiments and cheese and coffee and North America and Latin America, beverage in Latin America. So there are places where the business is growing.

Speaker 2

Now to your point specifically about signs of promotional activity or changing pricing strategies, There is a lot of talk about that as you rightly pointed out. We hear that from a lot of customers, both publicly and privately, And we are seeing a little bit of that start to take place in the marketplace. But to be honest, we haven't seen that as any kind of a tailwind yet for our volume performance. And our outlook doesn't infer, doesn't imply or doesn't assume that we are going to see any benefit from the market In the second half either. And so, we will sort of wait and see on whether or not the pendulum swings a bit between price and volume.

Speaker 4

Okay, terrific. And just for my follow-up on that, on the healthcare destocking, is that just a function of having been destock. You are seeing it now versus a little bit later than the other categories or is this something unique to The timeline associated with the healthcare destocking.

Speaker 2

Yes. Look, I think it is a bit unique. It's really the markets have been soft, But the healthcare weakness is really a story of destocking and it's been significant in both medical device packaging and pharmaceutical packaging and it's been pervasive and consistent around the world. This destocking in healthcare, it's really a multiyear story. It's been a multi year journey here for healthcare, which is ironic because it's been one of the most consistent businesses we have had for a long period of time and we would expected returns to that level of consistency.

Speaker 2

But over the last several years, we going back to even COVID where we had really constrained demand, then very strong demand on reopening, but severe supply constraints, severe supply constraints and raw material shortages on things Ranging from specialty foils and resins and papers. So coming out of what would have been our fiscal 2022, Which led really to customers building stocks to ensure supply during our fiscal '23 and we had extraordinary volume in fiscal 'twenty three as a result of customers really buttressing their supply chains and derisking their supply chains by building up stock. Now we have customers sitting on substantial inventories of a range of products from medical gloves to device packaging, pharmaceutical packaging, etcetera. And we started to see destocking which It actually really started in Q1. We flagged it last quarter, but accelerated significantly in Q2 and we would expect that it's likely to continue Certainly through Q3 and possibly into Q4.

Speaker 2

So it is a bit later stage. I think in some other categories, we've seen signs that there might be That destocking has abated and we're closer to the end in the beginning. I think on healthcare, it's been a later stage story.

Operator

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

Speaker 5

Good day, Ron. Good day, Michael. Just a quick one on the cost savings. So in the face of the volume declines that you did see throughout the first half and particularly that last quarter. And I do take your comments on January thereafter.

Speaker 6

But I

Speaker 5

just want to get a sense as to what the outlook Looks like further cost savings going forward and how you're still going to manage that declining volume environment with margin growth. I don't know what you have tabled Thus far, but is there anything over and above that that you can achieve?

Speaker 3

Yes, Sean. I'll take that one, Anthony. So Look, on the cost out, there's 2 things that we're really doing here. So the first is in response to the softened underlying volume demand. So on that front, we've clearly taken proactive and aggressive approaches to the cost flexing and really focusing down on productivity gains and discretionary spend.

Speaker 3

So for the first half, we took out more than 200 $1,000,000 in cost in relation to that, and it accelerated through the half. In the first quarter, it was about $70,000,000 in the second quarter, $130,000,000 And we're achieving that by taking out and really flexing the cost base in relation to the volume and demand environment. So we're able to take out entire shifts, We're able to take out labor, reduce overtime. We're driving the procurement benefits, particularly in this low demand environment And really tightening up on discretionary spend. So, there's that will continue as we continue to flex through the volumes.

Speaker 3

But obviously as volumes improve, some of that cost and it's difficult to say, but some of that cost will go back in as we build the shift patterns up. But we wouldn't expect that to be linear. I think you'll see us have better leverage there as we work through the second half because of the way we We've learned to operate with some of that lower cost and improve the efficiencies there. So that's really on the operating cost side. And then secondly, we are taking costs out structurally.

Speaker 3

So in parallel, we're advancing the structural cost reduction initiatives that we've talked about on the back of the divested Russia earnings. That's mainly plant closures and it's around up to 10 across the globe and in both segments. To date, we've announced 7 closures and 2 restructures. And recently, actually, 2 to 3 of those plants have closed. So we did start to see a little bit of benefit from that program, as we exited the first half, But we're right on track to deliver the $35,000,000 benefit in the second half from that program and then a further $15,000,000 in FY 2025.

Speaker 3

So really that's the approach we've taken to the cost out agenda and part of it's structural and part of it's ongoing.

Speaker 5

Thanks, Michael.

Operator

Your next question comes from the line of George Staphos from Bank of America. Please go ahead.

Speaker 7

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

Speaker 3

Look, it's difficult to say, as I just mentioned. What I can tell you is that things like procurement there, they'll be permanent savings. The operating cost out that we've taken out of the fixed base will be permanent And the structural program is obviously permanent, cost savings that come out of the business. On the flexing of the cost base, Again, it's really dependent on the volume. We think we're much more efficient today.

Speaker 3

We've been able to proactively act To take labor out of the business overall versus prior year, we've taken nearly 2,000 heads out of the business and about 1,000 Since June, so in total, that's about 5% of the workforce. As the volumes come back online, as I mentioned, we will Have to increase some of that, but it's not going to be linear. And we will manage that really tightly and we feel we've got good leverage out of that today and we are more efficient and so you will see us continue to get leverage as we move forward in that. And really that's going to contribute to the long term margin benefits that we've typically gained of 20 to 30 basis points a year in our business. So you should see that continue to contribute to that on the longer term.

Speaker 7

Okay, got it. And appreciate all the And on the volumes, but I guess you said volumes kind of came in lower than you were anticipating. So what ultimately gives you comfort in the guidance Q4. Is it really that cost out component and some of

Speaker 8

the other factors you talked to?

Speaker 2

Yes. Look, it's a couple of things. Firstly, on volumes, We are not anticipating any rebound in the consumer or any big improvements at the market, but we do expect that destocking Will abate as we work our way through the half. I mean, certainly a portion of the destocking that we saw in December With certainly year end optimization, that's not going to repeat, Right. We do believe we are going to see continued destocking in healthcare and North American beverage.

Speaker 2

But for the other categories, we are starting to see Some evidence that the destocking is abating. So that's one thing. January also was much better. So we had much better January relative to the first half from a volume perspective. And so we feel pretty confident in underwriting the growth of the volume assumptions for the rest of the year.

Speaker 2

And then in terms of the profit, As Michael alluded to, we are going to continue that. We have got a number of known benefits which I rattled through in the opening remarks. But It starts with better operating leverage because we have gotten a lot of cost out of the business and as volume comes back, we are not going to add that cost Back one for 1, plus the buildup and the momentum on the structural cost side, which again will build through the second half with the benefits from plant closures And the like. So several things that give us confidence in improving trajectory of earnings through the second half, but none of them have to do with a real dramatic improvement at the consumer level.

Operator

Your next question comes from the line of Sam Seo from Citi. Please go ahead.

Speaker 8

Good morning, guys. Thanks for taking the question. Look, you talked about some of your volumes coming in modestly below expectations. I'm just Thinking about your balance sheet, and not saying it's going to happen, but just trying to get a feel of what kind of 4th quarter volumes would leave you outside of your range

Speaker 2

Sam, are you still there?

Speaker 8

Yes. Can you hear me?

Speaker 2

Yes. You broke up there for a second. You broke up right at the important part of your question, which is about 4th quarter volumes.

Speaker 8

Yes. Just trying to get a feel of What kind of Q4 volumes there would leave you outside of your range at the full year assuming all other things equal?

Speaker 3

You mean the guidance range of 67 to 71, is that right, Ben?

Speaker 8

No, no, the 3 times leverage.

Speaker 2

Okay. So look, we are confident in the cash flow trajectory of the business in the second half. So we are going to be delevering from here. We will be At approximately 3 times at the end of June, we are pretty comfortable that That's the path we are on here. In terms of volumes, the expectation for volumes that underwrites the EBIT growth in the second half or the EBITDA delivery in the second half is for a mid single digit decline in the 3rd quarter and a low single digit decline in the 4th quarter.

Speaker 2

There's a bit of there's a range around that and the impact on EBITDA and then therefore on leverage is pretty broad. So we don't anticipate volumes being a major driver of us not getting to approximately 3 turns at the end of June.

Speaker 8

Okay. Thanks for that. And I guess just following on, I mean, looking forward, generally, you have lower cash flow in the first half due to seasonality. I think If you do finish at that 3 turns, like your guidance, would you expect to be outside of your range again in first half 'twenty five? Is that the new norm now going forward?

Speaker 3

Look, I think just to answer your question on that front, if you take where we are right now at this particular point in time, it's a pretty unique Point in time because there's 2 factors that are really impacting the leverage right now. We're at 3.4 times, which is right where we expected to be At this time of the year in this situation, it's really driven by the divestment of the Russia business. So we're now fully lapping 12 months earnings out of the business from that. So from here, we don't lap that anymore. We head more into more normal earnings trajectory and growth.

Speaker 3

And that's about 2 0.2 turns off the leverage. And then the second point is really around elevated working capital levels. We have been carrying elevated working capital levels over the last kind of 12 to 18 months. We've started to work our way through that. And the teams have done a good job in the last 12 months of inventory where we've taken inventory out of the system about $500,000,000 And that certainly contributed to the cash flow improvement in the first half of this year where we're $100,000,000 ahead of prior year already.

Speaker 3

We are still being impacted. We're not getting the full benefit of that inventory reduction because our payables are much lower. So in this environment Where we've seen demand softness and destocking, clearly our purchases are well down And in turn, our payables are down. So probably we've still got another sort of $200,000,000 to work through from a cash flow improvement on the back of working capital. And we're really targeting a working capital to sales range of in between that 8% to 9% working capital to sales.

Speaker 3

And right now, we're at 9.8% on a trailing 12 month basis. So when you put those two items together, Leverage at this time of year would normally be in the more of the 3 times range. And typically in the second half, the seasonality would take kind of a quarter turn off the leverage, so it would get us back into that 2.5 to 3 times range. So, as we look forward, That's where we would expect to be in a more normal base, but as I said, we're in a little bit of a unique period of time and from here, we do expect improvement.

Operator

Your next question comes from the line of Adam Samuelson from Goldman Sachs. Please go ahead.

Speaker 7

Yes. Thank you. Good morning, everyone, or evening, I should say.

Speaker 2

Hi, Adam.

Speaker 3

Hi. So I guess the first question just going on

Speaker 7

the volume side and just about some of the end markets and Ron you gave some good color in the prepared remarks. One of the areas where Amkor has been investing More aggressively has been in the protein space. Can you talk about kind of incremental business wins that you're actually achieving there Relative to maybe some end markets that are still pretty challenged on the red meat side, certainly in North America and how much you can kind of grow in spite of that and take market share in that opportunity?

Speaker 2

Well, yes, it's a good question. And I mean, you are right, the market has been challenged. And so if we think about meat across the flexibles businesses, It's been a mixed story. We have had meat declining in North America through the half. There is soft market.

Speaker 2

There is destocking in the meat space as well. But we have seen that stabilize more recently. So that would be one of those categories where We are not calling an end to the destocking cycle, but we certainly see signs that it's stabilizing a bit. Similarly in Europe, we have seen a bit of a stabilization in meat volumes in the last couple of months. And in Latin America, we started to see growth as well.

Speaker 2

So I think meat is, as a general category globally, meat is one that feels like is coming out the other end Of the packaging cycle, at least for us or at least there's some green shoots that give us some reasons for optimism, would be the first point. Certainly, as we exited January as well, that would be the case. I think the second part of your question is a bigger picture question and I think it's going to be a little bit longer dated, Which is around our aspirations to win share in this space. You are aware that we made an equipment purchase of a machinery company Less than 12 months ago, which should be a part of that total system solution that we are going to go to market with. And we are optimistic that we have got The right consumables, the right film structures and the right technical service staff to support the equipment offering and we think over time that's going to be a winning combination and we will take share, not just in North America, but around the world.

Speaker 2

There is not any evidence I can point to yet of that, Adam, because the near term dynamics are well and truly overcompensating for any modest share pickup that we might be enjoying.

Speaker 3

Okay. I appreciate that color.

Speaker 7

And if I ask just a quick follow-up. You do have a business and presence in Argentina, both For flexibles and rigid on the beverage side. I think you strip out all the inflation accounting for the deval, But you talked about the volume environment in Argentina and how you're thinking about that over the next couple of quarters given what what I would imagine is a pretty challenged consumer environment.

Speaker 2

Yes. Look, Michael can talk about maybe the accounting that you referenced, but from just a business perspective, First thing I would say is, we have been in Argentina for since the mid-90s, so over 30 years. It's a business that's about 2% of sales And about 2% of EBIT and we have 5 plants there actually across the 2 segments as you alluded to and having been there for 30 odd years, we have been there through multiple economic cycles and crises, I guess. And the business is relatively local and we have maintained total control over the business. So it's It's still a business that's functioning more or less normally.

Speaker 2

But in terms of how we manage it, we continue to drive localization. It's essentially a local business. Already there is no exports, but to the extent there is anything imported by way of raw materials, we are continuing to drive more localization of the key inputs. Most importantly, probably, we continue to price ahead of inflation. It's always been a hallmark of that business in that country and continues to be.

Speaker 2

And then we continue to focus on cost because our expectations are that demand will continue to slow as consumers adjust to the new macroeconomic realities in that country. So that's a little bit about the business and how we manage it. Michael, do you want to talk a bit about the accounting, Adam? Yes, yes.

Speaker 3

Just on the accounting there, Adam, you referred to, obviously Argentina has been delineated a hyperinflation economy since 2018. Consistently, since that time, we've been if there's been a devaluation, obviously that impacts the monetary assets on hand and that's being treated as NSI. We this quarter, there was a change of government Clearly and in December, we saw a 55% devaluation. And you see the charge of $34,000,000 To the P and L in the quarter in the SI bucket and that's really the outcome of that on our monetary assets only. And that followed Q1 where there was a 20 percent devaluation.

Speaker 3

So really that's the treatment of the accounting has been consistent all the way through since the 2018 approach.

Operator

Your next question comes from the line of Richard Johnson from Jefferies. Please go ahead.

Speaker 9

Thanks very much. Ron, I just wanted to ask a question about rigid packaging and how you're thinking about the business now strategically. I was just trying to remember whether I've seen volume declines in the December quarter in the past anything like that we saw in the December quarter, Particularly in hot fill, and that's even if you adjust out destocking. So just interested to get your view on how you think the business is placed at the moment.

Speaker 2

Well, yes. Listen, Richard, you don't remember seeing volume declines at that level because you haven't seen them at that level. I mean, that's just the reality of it. It's a business that's, Yes. It's been a good business for a long period of time.

Speaker 2

It suffered really from a volume perspective from the same drivers as the rest of the company, right. Although with higher impacts. So we have had market impacts that we would say attributed to a high single digit decline in volumes. That's inclusive of consumer demand down kind of low to mid single digits in some segments that are important to us, maybe down some more, some customers lagging the market, and that all wraps up to kind of a high single digit impact on volumes for both North American Beverage at Large and Hot Fill, specifically that we would attribute to market impacts. Then The bigger impact actually for us in the quarter was the destocking.

Speaker 2

And the destocking is really being driven by a couple of things here, Which are working in opposite directions. First is that traditionally in this business, you'd have some inventory pre build In what is our fiscal second and fiscal third quarters in advance of the high season, the beverage season in North America, there is Historically, a bit of inventory buildup. That's not happening this year. So there is no pre build this year. And at the same time, we have some customers, some big customers with very, very aggressive inventory reduction targets.

Speaker 2

So rather than building, we are reducing. And there was a significant acceleration in that activity to reduce inventories in the month of December, Which ultimately led to a high single digit impact in North American beverage at large, but a high teens impact in hot fill. And while we saw some modest improvement in January, we do believe that we are going to continue to see a destocking impact In the Q3. So that's really what's gone on there. That's unprecedented.

Speaker 2

We still believe in the business. The business is well positioned In terms of its market stature, it operates in a reasonably well structured market. It has world leading technology. Its footprint is reasonably optimized. We are taking a couple of small plants out as part of the restructuring program, but it's reasonably well optimized And it needs to just weather the storm and that's on the beverage side.

Speaker 2

And then let's not forget that outside of beverage, We have a reasonably sized specialty container business which looks and feels almost like a flexibles business because of its end market exposure And that business has room to grow. And Latin America also continues to be a very good business, including in the first half and in the second quarter where we saw volume growth on new business wins in Latin America too. So it's a portfolio of businesses. At its core, it's a beverage business in North America that gets a lot of attention, but we shouldn't forget about the other parts as well.

Operator

Your next question comes from the line of Brook Campbell from Berenjoey. Please go ahead.

Speaker 8

Yes, good evening. Thanks for taking my question. Can you just confirm what the level of volume growth or decline was in January. And then as a follow-up to that, is it not a risk here that you sort of extrapolate January volumes For the rest of the quarter, when perhaps there was a benefit in Jan because customers effectively delayed orders in December and push it into January. Therefore, January might not be a good indicator for the rest of the quarter.

Speaker 8

That's the question.

Speaker 2

Yes. Look, we won't give a number on January other than to say it was an improvement over December And an improvement not everywhere, but in most parts of our business. We did have some parts of the business even that grew modestly. So that's probably as much as I would say in terms Trying to dimension January. I understand the nature of your question, particularly the second part, as to whether or not we are being overly I am optimistic on the back of 1 month.

Speaker 2

It is 1 month and we are well aware that it's 1 month. We are flagging that we will see continued destocking impacts In healthcare globally and in North America beverage that no matter what happened in January, we know will be the case Certainly in Q3 and potentially into Q4. And we are also not banking on any improvement in the consumer. So I think that we are being relatively conservative and not reading too much into 1 month, but it is a month and it does suggest as we sort of expected that the low point for us from a volume point of view and earnings growth as well was the 2nd quarter.

Operator

Your next question comes from the line of Jacob Karkonis from Jarden Australia. Please go ahead.

Speaker 10

Hi, Ron. Hi, Michael. Just want to build on Brook's question there though. Obviously, December was significantly weak. So January improvement might not necessarily move you guys back to increase.

Speaker 10

I just want to square some of the commentary still where you're saying That you'll see a mid single digit volume decline in the 3rd quarter and then low single digit in the 4th quarter. Can you just help us The commentary around the January improvement, is that relative to the negative or the decline that you saw through the month of December specifically?

Speaker 2

Yes. It's relative to the performance in the whole first half and in the second quarter and in December. So when we start we're talking about improvements in January In most parts of the business, that's relative to the first half. That's the first part. I think the other thing to keep in mind is, as we work our way through The balance of the fiscal year, a couple of things will also underpin those growth assumptions that we have outlined.

Speaker 2

One is that we do expect outside of healthcare and North American Beverage, we do expect the year end destocking that we saw in December to not repeat And some continued abatement or continued destocking runoff or reduction In much of the rest of the business. That's the first thing. And the second thing is, particularly as we get to the Q4, the prior period comp gets a little bit easier. Our volume challenges really started in Q4 of last fiscal year. And so as we get to Q4 this year, we've got the benefit of a comparative period, which wasn't so strong.

Speaker 10

Just one more for Michael, if I can. Just on the net interest guidance, obviously, a little bit lower than where you were guiding to initially. How much of that's the movements in forward curves and expectations for rate Or interest rate declines or cash rate declines in the U. S. Through the balance of the year, please?

Speaker 3

Yes, sure. So we you saw that we bought our guidance Slightly down from kind of a range of 320 for interest, 320 to 340 down to kind of 316 to 330. That's really all on the back of the forward curves. And the interest rate hike would appear to have been reached its peak now and potentially You might see one rate reduction late in our fiscal year, but really that's the slight improvement is really on the back of that forward curve and after tax, it's a pretty minimal impact on the full year guidance.

Operator

Your next question comes from the line of Cameron McDonald from E&P. Please go ahead.

Speaker 3

Good morning, guys. Questions for me, just in terms of Well, the tax rate and then the capital structure. So, the tax rate is sitting sort of around Under 19%. And where what jurisdictions are you getting a tax benefit from given The corporate tax rate in most of your jurisdictions is in excess of certainly of that number, but in excess of sort of 20. Yes, look, I think we operate across a broad range of countries Globally.

Speaker 3

And in addition to that, the mix of earnings can be different In every geography and location and then the overall underlying performance of the business Can change. So when you wrap that all up for our business, we're guiding to 18% to 20% tax rate. We've typically been around that 20% range for a long period of time. So It's really just the combination of the earnings, the country mix, and the underlying performance of the business.

Speaker 2

And the differences in deductibility of Different expenses by jurisdiction, right, which then obviously you have to factor in addition to the headline tax rates In those jurisdictions.

Speaker 3

Okay. Thank you. And then just in terms of the capital structure and your comments earlier about the balance sheet and the leverage. Part of our investment thesis has been EPS growth, a big chunk of that has been undertaken through share buybacks. What's the sort of leverage ratio that we should be expecting before we would start to see A discussion around the buyback being reimplemented.

Speaker 3

Do we have to get back down to sort of the mid-2s? I think the last time you had Buyback active with sort of 2.7 times leverage.

Speaker 2

Well, listen, we've bought back, Remember, it's buybacks and M and A is the way we think about the discretionary cash flow for the business. And we bought back Over the last we will have bought back over 3 fiscal years and acquired to the tune of about 1,200,000,000 dollars. So we will have done over $1,000,000,000 in buybacks and we will have invested somewhere close to $200,000,000 in investments and acquisitions. So that's essentially 3 years of discretionary cash that's been invested in the business. It's a little bit lumpy.

Speaker 2

It's not exactly even over the 3 year period, but that's been what we have done. I think from a leverage range perspective, more often than not, we are going to be between 2.5x and 3x. Obviously, we are comfortable being above that, particularly When there is good reasons for it as there is at the moment. And we will be continuing to evaluate capital management or buyback opportunities in conjunction with M and A opportunities on a go forward basis and that includes now.

Operator

Your next question comes from the line of Mike Roxlin from Truist Securities. Please go ahead.

Speaker 11

Thank you, Ron, Michael, Tracy and David for taking my questions. Actually just one question because a lot of material already was covered here. Quickly on just protein packaging, Ron. I know it was discussed earlier in response to a question and we discussed it at, I think, last quarter. Can you just describe whether there are any nuances in your business, maybe around equipment, for instance, that

Speaker 8

would make you unable to team

Speaker 2

with some of the with

Speaker 11

the larger players in the industry or some of the or some of your larger peers. I know you intentionally participating In different parts of the market to avoid going head on with some of the larger players. And just lastly, where do you think this where would you like this business to be On a revenue basis, let's say, in 5 years or 10 years?

Speaker 2

Yes. Look, it's a great question. The biggest challenge we have at the moment is just the lack of installed base. So there's a massive installed base that's got a lot of legacy behind it And in the industry as of given the way the industry has evolved over several decades. And from an equipment perspective, we are, Well, firstly, I would say we're more open source.

Speaker 2

We bought Moda, obviously, so we We are prioritizing motor equipment, but we are more agnostic to the actual equipment installation and we think we have got great films. And the primary basis of competition here, we think ultimately will be on the film and that's what we That's what we are aspiring to do, is to grow the film business enabled and facilitated with a full service offering, which includes not only the machinery, but technical service that is so important in this industry to the customers to help them optimize their operations. So it's really a total system solution that we are going to go to market with now and we are starting to go to market with really for the first time. And as far as how big can the business get and what are our aspirations for it, I mean, look, I'm not going to I mentioned it here. It's a big important business for us already.

Speaker 2

It's a tough time to be asking We are a lot out of the business as it weathers some of the destocking and some of the softness in the general beef cycle in particular Or Meet cycle, I should say. But it's a business that we have aspirations to grow at sort of mid to high single digits and at good margins for the foreseeable future.

Operator

Your next question comes from the line of John Purtell from Macquarie. Please go ahead.

Speaker 12

Good day, Ron and Michael. Hope you're well. Just a couple of questions, please. In terms of your second half EPS guide, previously it was up For the second half up mid single digit in constant currency, I think you mentioned Q3 EPS down mid single digit Your expectation in Q4 up in single digits. So it looks like the Q3 guide is weaker.

Speaker 12

Is that reflecting a lower volume starting point?

Speaker 3

Look, overall, John, I guess we'd say we've actually held our guidance. So and We you're quite right. We've guided to volumes mid single digit down in Q3 and EPS down mid single digit. And then Q4, We're expecting trajectory to improve through the half and the volumes down low single digit. And just on the back Some of the things that Ron touched on earlier and also the earnings trajectory of our business typically and the seasonality in Q4 is our biggest quarter.

Speaker 3

That's why we're expecting mid single digit EPS growth in Q4. So Really not a lot of change. I guess what we have seen is that the volume trajectory is perhaps a little softer than we previously anticipated and that was really on of that destocking, particularly in healthcare and North America beverage, where we're expecting that to continue through Q3 and perhaps into Q4. We are offsetting that with continued cost out, and we have confidence In the underlying performance of the business with the structural initiatives that we've put in place and touched on already, getting 35,000,000 In the second half, the ongoing cost agenda, and discretionary spend management. So not a lot of change really to our guidance overall.

Speaker 3

I think Perhaps we did a little better in H1, but generally speaking, we're holding the range and we feel pretty good about the drivers behind it to deliver that The $0.67 to $0.71 range.

Speaker 12

Thank you. And just the second one, just be interested in what you're seeing from the tumor. Obviously, elasticity of demand has been an ongoing factor and it looks like the FMCG companies are still pushing price.

Speaker 2

Yes. Look, I mean, the best proxy is probably the scanner data that we look at and I'm sure Look at as well. I mean, we still see a generally soft consumer environment and that's true across the staples that we are supplying packaging for. You still C in the U. S.

Speaker 2

General scan data, which obviously there's a lot of nuance that you need to unpack. But generally speaking, kind of low single digit declines in the calendar Q4 that's just passed. Europe may be modestly better overall, but at a sub segment level, you still see lots of softness and lots of modest declines. You see some evidence of down trading in some parts of the business. You see, on the margin maybe some modest shifts and I wouldn't I wouldn't make too much into this, but you see some modest shifts in some categories like pet food and maybe even in coffee where you might see different formats Doing better.

Speaker 2

We certainly see it. We believe we see it in the beverage business. In the case of carbonated soft Drinks where we know that the value pack has historically been the can. If you're going to buy 12 or 24 cans or units of a soft You are likely to buy it in a can and that is continued. So I think generally, John, the consumer environment is pretty soft.

Speaker 2

There are some reasons for potential optimism if the brand owners toggle the dial a little bit between price recovery and maximizing volume, but we are absolutely not baking that into our assumptions on volumes going forward. But that will take As nice to have if it happens.

Operator

Your next question comes from the line of Daniel Kang from CLSA. Please go ahead.

Speaker 3

Good morning, everyone. So you

Speaker 2

spoke about protein turning a corner in January. Can you just elaborate on how you're seeing stock levels and the potential for

Speaker 8

an end in destocking in other product categories?

Speaker 2

Yes. Look, I think as it relates to the trend on destocking from here, I would sort of break it down in a couple of buckets. Firstly, we would say the really pronounced end of year destocking that we saw in December, We don't expect we will repeat with the exception or that we don't expect we will continue with the exception of globally in healthcare and in North American Beverage. We know that in those two segments for different reasons we have mostly covered, we are going to see continued destocking, Certainly through Q3 and likely into Q4. So we are not expecting a big bounce back there.

Speaker 2

Other than those two segments, Other places where there is really accelerated destocking in December, we are not expecting to see a repeat of. And so therefore, on a general basis, we would expect that We are going to start to come out the other end of this inventory cycle that we have been weathering for the last several quarters. We see some signs of that. Already I mentioned meat as one place that seems to have stabilized. Premium coffee in Europe is another.

Speaker 2

So there are some reasons for optimism, but again we are not getting ahead of ourselves here and we recognize we have 2 important parts business in healthcare and beverage, which are going to continue to go through some more destocking from here.

Operator

Your next question comes from the line of Keith Chow from MST Marquis. Please go ahead.

Speaker 6

Hi there, gents. Just an extension of Daniel's question on destocking. Part of my ignorance, but How can you actually tell what is destocking? What is underlying volume trend? Can you specifically quantify that With data that you're seeing internally or is it based on discussions you're having with customers, a bit of an approximation internally?

Speaker 8

Can Can you just give me

Speaker 6

a sense of how you work out what is underlying consumer weakness, what is destocking, what

Speaker 5

is cyclical, what is structural?

Speaker 2

Yes. Look, it's part art and part science. So firstly, there's a lot of discussions with customers. And remember, in some parts of the business, where even co located with customers. So there is a high degree of customer intimacy across the business and the starting point is the discussions and the joint planning dialogue that we have with our customers around the world.

Speaker 2

So that's arguably the most important input. But then we also try to triangulate with data. And What do we look at? We look at things like in categories where there is scanner data, which is not the case across our portfolio, Certainly not in healthcare, but in food and home and personal care and places where there is good retail scanner data. We take a close look at that.

Speaker 2

We also look at the scanner results for individual customers, individual companies and try to determine if there's any difference between The overall market performance and the performance of our specific customers and then we look at our volumes and try to triangulate between those three data points To see what's the difference? Is there no if there's sell through or not And whether or not we are seeing an inventory drawdown or buildup. So it's like it's an approximation, but it's a reasonably informed approximation both With input from the customer directly as well as data and quantitative inputs.

Speaker 6

Okay. Thanks, Ron. That's great color. And then just a quick follow-up on the point in January, and I appreciate it's only a month. When you talked about an improvement, are you talking about a positive growth comp in January or less bad January versus the last 6 months.

Speaker 6

Thank you.

Speaker 2

Yes. Look, we're talking about it relative to the first half. So it's a little bit of both. But generally speaking, we are talking about the comparison to the first half. And so So we are not talking about we have had some parts of the business that grew, but we are not talking about general growth across the board.

Speaker 2

What we are talking about is general improvement relative to the first half and certainly the second quarter.

Operator

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

Speaker 2

Thanks, Thanks, operator, and thanks, everyone, for joining the call today. We're, as you can hopefully pick up, pretty optimistic about our second half. We believe that the Q2 was the low point for us in terms of volumes and earnings growth and the business will build momentum from here. So thank you for your interest in Amkor And we'll speak to you next quarter.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Amcor Q2 2024
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