Amcor plc

Ladies and gentlemen, thank you for standing by, and welcome to the AMCOR Half-Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Tracy Whitehead, Head of Investor Relations. Please go ahead.

Thank you and welcome to Amcor's first-half earnings call. Greetings to those of you in the US and good morning in Australia. Joining me on the call today is Ron Delia, Chief Executive Officer and Michael Casamento, Chief Financial Officer. At this time, I'll direct you to our website, amcor.com, under the investor section where you'll find a press release and presentation which will be discussed on the call today. We'll also discuss non-GAAP financial measures as we talk about performance against combined comparative information. Reconciliations of these non-GAAP measures can be found in the press release and presentation on our website. Also, a reminder that statements regarding future performance of the company made during this call are forward-looking and subject to certain risks and uncertainties. Actual results may differ materially from historical expected or predicted results due to a variety of factors. Please refer to AMCO's SEC filings, including our statement on Form 10-K, to review these factors. With that, I'll turn it over to Ron.

Thanks, Tracy, and thanks, everyone, for joining us to discuss ANCOR's first half results for the 2020 financial year. As Tracy mentioned, with me here today is Michael Casimeno, ANCOR's chief financial officer, and we'll begin with some brief prepared remarks and then open the line for Q&A. Let's start with slide three in the presentation pack. Everything we do at ANCOR starts with safety, and so safety is where we begin these calls as well. For some time now, our role has been no injuries, and we're not there yet, but we continue to believe it's possible, and we see evidence of that with over 150 of our sites injury-free for six months or more, and our overall recordable case frequency rate for the half was 3.2 per million man-hours worked. The rate for the legacy AMCOR business during that period was 2.1, and we know from past experience that acquired businesses typically have higher numbers of injuries And this is no different with Bemis. So our primary focus this year remains on aligning Amcor safety practices across all of our sites and on building on the progress we made in the first six months where we had a 6% reduction in injuries across the company. We look forward to providing updates throughout the year as we drive towards eliminating all injuries. Moving to the five key messages we have for today on slide four. First, we've had a good first half with the business delivering solid earnings growth and strong cash flow. Second, taking into account the good first half performance, organic growth expectations for the rest of the year, and faster delivery of synergies, our outlook for constant currency EPS growth has improved to a range of 7% to 10% for the year. Third, integration of the Bemis business is progressing well, not only in relation to synergies, but also in terms of the organic earnings growth delivered by the business. as well as the opportunities we see to leverage our customer value proposition, which has been improved as a result of the combination. Fourth, we're continuing to lead the way at sustainability. We're uniquely positioned, fully committed, and taking action on multiple fronts. And then finally, our market positions and our exposure to defensive consumer segments leave us very well positioned to continue generating consistent returns for shareholders, regardless of macroeconomic conditions. Slide 5 provides a summary of the first half results where we delivered strong overall earnings growth, synergies at a faster pace than we had initially expected, and we returned a significant amount of cash to shareholders. Sales were generally consistent with what we saw in the first quarter. Sales revenue down 1.4% in constant currency terms and excluding the negative impact related to pass-through of lower input costs. Volumes grew modestly in our larger flexible packaging businesses in Europe and North America, and there was no volume impact on sales in rigid packaging. However, sales were lower in flexible Latin America, and especially cartons. EBIT was up 4.4% in constant currency terms, with 8% EBIT growth in the flexible segment, driven by mid-single-digit organic growth, plus synergy benefits of approximately $20 million. Earnings were lower in the rigid packaging segment, as we highlighted would be the case on our first quarter earnings call. EPS increased by 11% in constant currency terms, and the board declared a quarterly dividend of 11.5 cents per share. Pre-cash flow before dividends was strong, and we returned more than $600 million to shareholders through dividends and share repurchases during the half. Before handing over to Michael, who will cover the financials in some more detail, just a few words on the Bemis acquisition, looking at the next slide, slide six. First of all, the integration of the two businesses is progressing very well. The two legacy companies are functioning as one, and the excitement and the focus demonstrated by our employees has enabled the Flexibles business to simultaneously grow organically and to surpass the synergy targets we originally set for the first six months of the year. The response from customers has been very positive given ANCOR's enhanced global value proposition, which includes a broader and more sustainable product offering. Now, in terms of synergies, we delivered $30 million overall in the first half, which was ahead of our initial expectations and are mainly coming from overhead reductions and procurement benefits. We've increased our guidance for the current fiscal year from $65 million to $80 million in synergies, and we feel very confident in our ability to deliver the full $180 million by the end of fiscal 2022. The key takeaway today is that we feel very good about where we're at in terms of the integration and the delivery of strategies. I'll hand over to Michael now, and then I'll come back and talk about some of the, of course, longer-term opportunities.

Thanks, Ron. Good morning, everyone. Starting with the flexible segment on slide seven, sales are 1.4% lower than the prior period in constant currency terms and excluding a negative impact related to the pass-through of lower input costs. This reflects a continuation of the vaulting trends experienced in the first quarter which Ron just mentioned. Adjusted EBIT was up 8% in currency terms and in addition to delivering synergy benefits, the base business performed very well with organic growth of 5% driven by strong cost performance across the businesses and benefit from the normal time lag in recovering more material costs. Overall we are really pleased with the way that Flexil's business is performing and we're excited about the long-term opportunities for the newly combined business. In the last six months, we've secured a number of long-term commitments in North America based on the strength of AMPL's enhanced value proposition, and we continue to improve the cost base in Latin America as well as taking steps to reduce the complexity in our business. Turning to rigid packaging on slide 8, sales were 1.6% lower than the prior period in constant currency terms after excluding a 2.4% unfavorable impact to revenue from passing on lower raw material costs. And this was driven by unfavorable product mix given the sales volumes were flat during the period. Earnings in the second quarter were lower in constant currency terms, which was expected, given the business cycle had a particularly strong comparative period. In North America, overall mix was unfavourable in both beverage and specialty containers, which also led to higher costs for some of our plants. This compares to the prior period, which benefited from exceptionally strong mix, where average volumes were flat compared with last year, with the hot fill container volumes 4% higher, supported by market growth and share gains as a range of customers launched new products in PET format. In Latin America, volumes were 2% higher, however earnings were lower than the prior period as mix was unfavourable and the business benefited from early recovery of cost inflation in Argentina in the second quarter of last year. Most importantly, for the rigid packaging business, we expect a return to proper growth in the second half of the year and this is taken into account in our full year EPS guidance. Adjusted free cash flow of $310 million was in line with our expectations and keeps us on track to generate more than a billion dollars for the year. One of the consistent highlights for the business has been our working capital performance. And on a like-for-like basis, the working capital to sales ratio has improved by 30 basis points in the half to 10.4%. And we will maintain our focus in this area to reduce this ratio further over time. Free cash flow and proceeds from assets divested to complete the Venus acquisition enabled us to return more than $600 million in cash for shareholders during the half. Of this, $391 million was through dividend payments. Amcor has a strong track record of cash returns through a competitive dividend and it was great to be added to the prestigious S&P 500 dividend aristocrats on February 3rd this year. The remaining $223 million was returned by repurchasing nearly $22 million in shares through to the end of December. We're roughly halfway through the $500 million share buyback program that we announced in August of 2019 and we're on track to complete it by the end of June 2020. On slide 10, we've provided some balance sheet highlights. In simple terms, the balance sheet remains strong with leverage of 2.9 times. and we continue to be in a very comfortable position with access to a diverse range of funding sources and very competitive rates. Combined with our ability to generate significant free cash flow, the balance sheet provides flexibility and capacity to simultaneously invest in the core business, pay a compelling dividend, buy back shares and grow through acquisitions. Finally, moving to our outlook on slide 11, the business has delivered a good first half result and with momentum building in relation to the delivery of synergy benefits and lower expectations for our interest costs. Our outlook for adjusted EPS has increased to a range of 7% to 10% in constant currency terms. This is now inclusive of $80 million of pre-tax synergy benefits, an increase of $15 million from previous guidance, and assumes net interest costs for the year will fall within a range of $210 to $230 million, which is $20 million lower than previous guidance. Corporate costs, tax and cash flow were all in line with our expectations from the first half, and as a result, we have reconfirmed guidance for each of the metrics. All guidance is in constant currency terms, and assuming average exchange rates for the first half of 2030 prevail for the balance of the year, currency headwinds would have an unfavorable impact to reported EPS of approximately one cent per share. So with that, I'll hand back over to Ron.

Thanks, Michael. Before we turn the call over to you for questions, we're going to lift out of the details for a few minutes and focus on the longer term. In slide 12 recaps Amcor's strategy, which has not changed. We've described it many times before. We've actively managed our way to a focused portfolio of businesses in four product segments, and each of those businesses benefits from a small number of differentiated capabilities, which we call the Amcor way, and which provide real competitive advantage. And then finally, our aspiration is to win for four key stakeholders. And for investors specifically, winning means taking the strong cash flow we generate and deploying that in several ways to generate value. which I'll describe on the next slide. Slide 13. This is AMCOR's capital allocation framework, and it provides a perspective on how we think about generating value for shareholders over time. And over the last six years, the outcome of allocating our cash and capital in this way has resulted in average value creation of about 12% per year through combined EPS growth and dividend yield. And looking forward over the next few years, at a time when uncertainty and volatility are high, We have clear visibility to controllable sources of value through continued organic growth and $180 million of cost synergies from the Bemis acquisition, along with continued strong cash flow to fund a compelling dividend and to complete the $500 million buyback we announced in August of last year. As we did in the first quarter, I want to touch on sustainability, which remains the most exciting organic growth opportunity we have at Amcor. And it's not a new topic for us. We've been fully committed to making a positive difference here for several years now. In fact, made our first public aspirations in January of 2018, over two years ago, with our 2025 pledge. And in August last year, we demonstrated that conviction again by committing another $50 million of investment to accelerate our sustainability agenda. And over the course of our journey, we've developed some particular points of view, which are outlined on slide 15. Firstly, Amcor makes primary consumer packaging that actually touches and holds food and medicine and other consumer products. And as the world population and consumer needs grow, we believe there will always be a role for that type of packaging. First and foremost, to reduce food waste, which is around 30% globally, and contributes by itself 8% of global greenhouse gas emissions. Second, we know that consumers have come to expect a lot from packaging, and they want packaging that works well, is lightweight, convenient, easy to use, cost-effective, great-looking, and the list goes on. And now they have expectations that the packaging has a responsible end-of-life solution as well that doesn't result in more waste in landfill or the ocean. And the third point is we believe that's possible, and the way to get there is through responsible packaging. And lastly, and most importantly, Amcor is uniquely positioned in taking action on that front. When it comes to responsible consumer packaging and elimination of waste, we believe a total system solution is required across three elements. First, smart packaging design that takes into account environmental impacts throughout the product lifecycle. And that means packaging that's recyclable, reusable, or compostable, made from recycled materials, and that uses less material in the first place. Second, the right waste management infrastructure needs to be in place, whether that's recycling or composting facilities or returnable systems. And finally, consumer participation is critical to properly dispose of packaging in an appropriate way, either by recycling or composting or, in fact, reusing. There are a couple of other important things we believe when it comes to responsible packaging. Responsible packaging also does not mean no plastic. In fact, our customers continue to use and believe in plastic because it provides great functionality, it's fully recyclable, and it's clearly advantaged versus other packaging materials from an overall environmental footprint. and the benefits of plastic relative to other materials will grow over time as waste management infrastructure increases and consumer participation grows as well. When it comes to making responsible packaging a reality, MCOR is uniquely positioned, starting with package design through our innovation capabilities. On slide 17, I think it's evident MCOR is already offering customers a broad range of responsible packaging options to help them accelerate their own sustainability agendas including packaging made from recycled or bio-based materials, packaging that's recyclable, reusable, or compostable, and, of course, lighter-weight packaging that results in a lower carbon footprint. In making these products available, we're addressing the materials that go into the package, the environmental effects of manufacturing and distributing the product, as well as how the package will flow back into a circular economy rather than becoming waste. And these options are available today in both flexible and rigid formats, and there's a continuous flow of new product introductions. In flexible packaging, recent examples include the first recyclable stand-up pouch for liquid products in Thailand, which is also a multilayer material, multilayer structure, and a lighter weight recyclable tray with a recyclable barrier for protein applications, both of which you can see here on slide 17. And slide 18 includes examples in the rigid packaging business, which includes converting existing products to 100% recycled PET, converting from other package formats to PET, and relaunches of iconic brands in the PET format. And by evolving to these more responsible packaging options, Amcor will have reduced our annual consumption of virgin resins by more than 200,000 tons by 2025. And in that process of doing so, we will have supported the development of an effective and more sustainable market for recycled resin by creating cumulative demand of more than a million tons over that time period. And finally, as the industry leader, we're actively sharing our expertise and perspectives directly with consumers through our podcasts and social media channels, with customers through bilateral sustainability summits, and with participants across the entire supply chain through our partnership network. We've had a number of strong long-term partnerships for some time now, and we'll add others to maximize our reach and impact. As a recent example, Amcor joined the World Economic Forum this year, and had a seat at the table with leaders from the world's largest companies, many of whom are Amcor customers and suppliers. And by contributing in a number of the sessions, which were focused on redesign of the plastics value chain and the new plastics economy global commitment, two things became even more clear. One, we're fully aligned with our customers and our suppliers and our perspectives and our goals. And two, there's a shared determination to develop a waste-free future and to do that with pace. When we announced our 2025 pledge, we knew Amcor had the opportunity to make a positive impact on the world and to lead the industry through better packaging. And we're more confident today than ever that Amcor is uniquely positioned to capture that opportunity and to deliver on our commitments. To summarize on slide 20, we're pleased with our first half results and confident of delivering against the increased financial outlook we have for this year. Capitalizing on the value and the potential of Bemis acquisition is one of our top priorities, and that integration is going very well with momentum building every day. We're acting with confidence and conviction to drive change as we progress towards our 2025 sustainability goals, and we're excited about the many other opportunities we have to drive long-term growth and maximize shareholder value.

With that, we'll be happy to take questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone. Your first question comes from Anthony Pettinari with Citi. Please go ahead. Your line is open.

Good morning, Mark, and good afternoon. You know, you raised the full year guidance, I think, by about a half a cent at the middle of the range, and I think the benefit from the higher synergies and lower interest cost expenses may be a bit more than that, if my math is right. I'm just wondering, when you think about organic EPS growth, you know, has anything changed versus, you know, three months ago, and how do you think just generally about, you know, upside or downside to the four-year guidance for the remainder of the year?

Yeah, thanks, Anthony.

Look, we feel really good about the first half. I think that point's been clear, and so we increased our guidance for the year, as you pointed out. I think, you know, what I would remind you is it is a range. You know, we've given a range, again today, of 7% to 10% in constant currency terms, up from 5% to 10%. And what that suggests is that we feel pretty good about the full year. I don't think we see anything markedly changing about the business organically or otherwise in the second half. You know, if we think about where the opportunities may come from to hit the high end of that range, obviously better top-line growth would help. maybe a more favorable raw material environment, and certainly continued acceleration of synergy benefits would help us get there. And obviously on the inverse, the inverse would be true as we think about the bottom of the range, although I think what we can take away from today is that, you know, we've minimized the downside risk on the financial year, which is why we've raised the bottom end of the EPS growth range.

Got it. Got it. And then just switching gears, you know, are you seeing or do you anticipate any impact from the coronavirus disruptions? And can you just maybe remind us, you know, Amcor's footprint in China and any regions that are impacted?

Yeah, look, it's an evolving topic.

Obviously, it changes by the day. But just to contextualize it, Amcor's got a big flexible packaging business in China. We have about 12 plants. spread across the country, although none in the Hubei province, which was the epicenter of the virus. We got about 3,000 people, and it represents roughly 4% of sales. So it's a big, important business for us. Firstly, and most importantly, as far as we know, as of today, none of our employees have been stricken by the virus. Our plants are actually all operating. which is great. Many operated right through the New Year period because we're supplying healthcare products. Others came back online last week and this week. You know, they're not all running at full tilt because we don't have all the employees back, and our customers are not all operating. But our businesses are functioning. Now, the impact on the business in the second half will remain to be seen. Obviously, we didn't have any impact in the first half. Any impact on the business would be in front of us, And while it's an important business for us and it's going to be a real big part of our story going forward, it's not overly material in the grand scheme of ANCOR. It's about 4% of sales as I said.

Great. That's very helpful.

I'll turn it over. Your next question comes from Grandsham Panjabi with Baird. Please go ahead. Your line is open.

Hey, guys. Good day to you all. First off, on the comments of the long-term commitments secured in North American Flexibles, can you just give us more color on this dynamic? You know, is this incremental business or is it purely just extending contract terms? And if it's incremental, how should we think about layering this in as it relates to the next, you know, few quarters?

Yeah. Look, it's a good pickup because we feel really good about that. I mean, it's one of the highlights of the integration so far has been the customer reaction. You know, as we talked about, this is a deal that should be exciting for customers. It should not be threatening in any way because there's not a great degree of overlap in similar regions with similar products around the world. So I think the customers are rightly seeing it as a complementary combination of two companies, and that's manifesting itself in the number of commitments which we highlighted today. I think what I would say is it's a combination of business that's being locked down and secured – with a little bit of incremental share of wallet gain at some of these customers. I wouldn't think that there's a material impact that needs to be layered in because we're talking about, you know, four or five deals with customers, all of whom are important, but out of hundreds and, in fact, thousands of customers in this business. So, you know, I think what it says to us is that, you know, we're avoiding any substantial negative synergies, and if anything, we're getting some, let's say, positive revenue benefits in the form of locking up business and maybe picking up a little incremental share over time.

Okay, that's helpful, Ryan. And just, you know, in terms of EBIT for flexible, it looks like it was up about 38 million for the first half versus the previous first half, 20 of which was from synergies. And so, if there are many 18 million, how much of it came from the timing lag you referenced of, you know, raw material cost recovery?

Well, we had about 5 million in the first quarter. We had a similar type number in the second quarter. So all up, we had about 5% organic growth. Part of that would have been from the raw material lag or the recovery, I guess you could say, of the raw materials. But we're pretty happy with the organic growth of 5% generally.

And will that continue into the second half, the way you see it right now?

Look, it remains to be seen. You know, I think the – Case of raw material movements is relatively benign overall if you look across the global portfolio of spend. You might have a little bit of a benefit in the quarter that we're in, but beyond that, it's difficult for us to say.

It looks more benign than anything. Thanks so much.

Next question comes from Larry Gandler with Credit Suisse. Please go ahead. Your line is open.

Hi, Ron. Just a question on North America, following on to that. The statement here says North America volumes grew in high-value protein. First question is, did volumes in North America overall grow? And one of the things that challenges, I think, us analysts is the external data is showing some pretty weak food and personal care volume performance in North America. Just wondering if you could talk about where you guys may be Picking up pockets of growth, you mentioned a few here. So first question is, did overall volumes grow? And two, can you talk about where you're capturing that growth?

Yeah. Look, first, simple answer to your first question, yes. Volumes grew overall both in North America and in Europe, which is really pleasing because those are our two engines in Flexibles, right? Those are two big businesses. neither of which are in dynamic growth markets, as you pointed out. So, if we can get a little bit of growth through volume in those businesses, it's good to see. So, absolute volume grew in both North America and Europe. In fact, in similar end markets in both regions, protein, healthcare, liquid products, which are coming out of cans and into big pouches, particularly in the back of food service outlets, coffee, pet care. So a number of the higher value-add segments, we're seeing good growth. Look, generally, if you were to aggregate the whole FMCG space, I think it's no surprise that volumes grow generally with population, maybe 1% or 2%. And then you have all kinds of mixed impacts in there between different types of customers and different types of segments. I don't think that's going to change much from period to period. And then it's up to us to migrate our mix towards the higher value-add part of that overall space.

With regards to your customer mix, are you picking up volume at the small end of town, or are the large customers also contributing to your volume growth?

It's a little bit of both. You know, it's a little bit of both. In some of the segments I just mentioned, those are driven, some of that growth is driven more by the larger customers. We also see some of the larger customers in certain discrete segments. I can think of dairy or cheese as one where some of the larger customers are losing share but we know that we're picking up the share that they're losing at retail with some of their smaller competitors. So it's a combination. Obviously, the big engine in these businesses is the MNCs, but the incremental growth is disproportionately coming from the smaller companies that we're also serving.

Okay, excellent. And last question for me, perhaps for Mike on the finance side. Looking at the cash flow target, a billion dollars – Here it is, $1 billion adjusted free cash flow, maybe less $100 million for one-off, so call it $900 million. That's a big jump in the second half. And same thing with the free cash flow after dividends going from minus $81 to $300 to $400 million. When you look at the line items above in that slide, nine, are you anticipating significant reductions in some of those items like interest and tax and CapEx? and maybe even comment on working capital, how that's going to evolve into the second half.

Yeah, Larry, good question. Typically, our cash flow is much stronger in the second half, and we deal with our higher earnings in the second half, so there's some seasonality there. We expect there'll be some working capital improvements. As we've seen in the first half, that will continue to flow in the second. So, generally speaking, that's the normal trend we see, and that's what we expect for the second half. more around the seasonality.

Okay, so simply seasonality earnings and working capital will get you to that $900 million.

Yep, correct. Okay, thanks.

Our next question comes from John Patel with Macquarie. Please go ahead. Your line is open.

Good morning, guys. How are you? Hey, John.

Just had a couple of questions. Just in terms of rigids obviously flagging second half improvement there. Appreciate the sort of comps movement but in terms of what's driving that, are you getting some restructuring cost benefits flowing through and are the likes of Pepsi recapturing share, is that part of this too?

Yeah, it's a good question, John. I mean, we did flag, we had growth in the first quarter, first of all, and we're pretty pleased with the first quarter. We did flag that the second quarter would be tough, which has a lot more to do with last year than this year. You know, we're okay with this year's performance. It's really cycling a pretty difficult 90-day period when you look at it on that sort of basis versus last year. It's a combination of things. Last year in North America, we had a particularly strong mix, not just in product segments, because We obviously had half-filled growth again this year, but with our customer mix and, to some extent, our end markets in specialty containers. And in Latin America, we had a better mix outcome last year. We also had an early recovery of inflation in Argentina last year, which benefited. So those two things really made it a difficult 90-day comparative period in Q2 for rigids. But we do expect the business to get back to growth in the second half from a profit perspective. You know, the good thing is that volumes have continued to be robust, so overall volumes were pretty much flat with hot till going up 4.5%. Latin America, we had a couple of percentage points of growth too. So now it's just about profit conversion and cycling a better comparative period in the second half, which we expect will lead to profit growth.

Got it. Thank you. And just a second question. Look, in terms of sustainability impacts in this result, it appears relatively steady state, but In terms of where you're seeing the benefits in this result and also where you're seeing the negative impacts, I know you've called out, continue to call out North American water, but where you're seeing the positives and negatives, I think, you know, perhaps in this result and looking forward.

Yeah, look, John, I think it's becoming more and more of an opportunity for us as we get into it further. So I would say that we don't see any negatives in the result at all. In fact, The positives that you can take out of the result related to our sustainability agenda would come from some of the comments we made about the customer commitments. You know, the reason that we've re-upped with most of these customers that we referred to, and someone asked about earlier, is largely because of our shared sustainability agendas and our innovation developments. The customers are more inclined to want to work with us now than ever before, and not just because of the FEMA's acquisition and the bigger footprint, but also because we're completely aligned on the innovation required for sustainability. I think the other thing that we highlighted today is there's been a number of new product launches in PET and plastic, which suggests to us that the format's alive and well, and customers are doubling down on that format more than anything. And I guess the third thing, which I don't know if it's in our materials, but over the last six months, there has been an increasingly balanced dialogue externally, including some very supportive comments from our customers who have been very supportive of plastic packaging generally and its role in reducing greenhouse gases and reducing food waste. And then in PET in particular, we've had basically the two major brand owners come out in very fairly strong language support the PET format. So, you know, I'd say, John, if you took the six-month view, No negative impacts at all, but two or three real positive indicators, maybe not financial, but generally about the environment. Great.

Thanks, Rob. Thanks.

Your next question comes from Debbie Jones with Deutsche Bank. Please go ahead. Your line is open.

Hi. Thanks for taking my question. First, I wanted to see if you could get some more detail about fixing the cost space in Latin America. You know, what do you still need to do there? And then is that really the only thing that you're focused on to get business to where you want it to be, or are there other things?

Debbie, the last part of your question I missed. The first part was about the cost base in Latin America and whether there's anything else we need to do there, and you tailed off at the end there. Can you repeat the end of the question, please?

It was basically what you just said, you know, is that it, or are there other things that you might need to address in the region as well?

Yeah, this relates to the flexibles business in Latin America, and in particular the legacy BMS business, which we flag a few times now. First of all, what we are doing, well, let's set the context first. So before the acquisition closed, the business wasn't performing at a very high level in the quarter or two before it closed. It had deteriorated a bit, lost some sales, and ended up in the fiscal fourth quarter last year losing money, which we flagged. So we got a hold of the business in mid-June last year, and the first thing that happened was we took a lot of costs out, and we've taken the headcount way down. We're looking at the footprint. as well. So those actions were taken very early on. And the business is improving from a profit perspective with each month. So it's absolutely improved quarter over quarter. It's actually improving month over month from a profit perspective, despite the fact that the sales take longer to regenerate. It always takes a lot longer to regain sales than it does to lose them. And so in addition to the cost actions we've taken, we're working hard on getting the top line back to where it can and should be and has been in the past. So that would be the other thing. And then the third thing I would point out is we probably flagged this before, but it's a fairly complicated portfolio as we see it. We try to keep things even more focused and more simple. And that business functions, when I said the business, the legacy BEMIS business in particular, in a number of segments that we haven't historically been in. And so we're taking a close look at that as well. We took one step in the first half. We sold out of a joint venture we had to produce two laminates in Brazil. It's a small business. Good business, very good business, but just not one that we're in anywhere else in the world. And so we saw that of that JV as a step towards simplifying that portfolio a little bit further. So it's combination cost and getting the top line going again and making sure we're focused from a portfolio perspective.

Okay, thanks. That's helpful. And then my second question, I'm not really sure if it's something you can answer, but I'm curious on the target for less virgin resin, the 200,000 tons, by 2025. What is that implication for you in terms of volume and mix if you've hit that? Is this just people cycling into this type of recycled resin versus virgin, or do you plan on acquiring new customers? And then on that, just below it, on slide 18, the effective market of 1 million tons, out of curiosity, where – does that come from? How do you identify what that market is and kind of regionally or by end market, what is the accessible market there?

Yeah, I'm glad you asked about it because it's an important topic and we should spend a little more time on it. So, this is all about the rigid plastic space in North America in particular and Latin America. So, in the Americas where we make rigid containers out of PET primarily, that's what we're referring to there. And as far as the reduction of virgin resin 200,000 tons a year. You know, that's the house number based on the current glide path. We are actually kind of hitting an inflection point now where we're seeing the percentage of recycled material that we're processing pretty much double this year. And assuming we kind of continue at that new level, we'd be reducing our virgin resin by about 200,000 tons a year. Now, I think it's fairly conservative. There's no reason for us to be... anything other than conservative in that number, but I think it's more likely that we'll end up using more over time rather than less. But nevertheless, we're on a glide path to see us replace 200,000 tons of virgin resin with recycled PET over the next five or six years. And in so doing, and that's with existing customers as well as just the normal mix of business that we have today. And that's just where we're at. As we do that, over that five or six year period, we will have been out in the market sourcing that 200,000 tons plus of recycled material over five or six years, that's still remaining tons of cumulative demand. And we think that's going to be important because it helps underwrite the much needed investment that's required to not only fund waste management infrastructure, but also to fund the processing capacity that will be required to actually convert recovery bottles into post-consumer recycled resin. And so we're just flagging that You know, one role we can play here is as a demand creator and will be active in that market for those who are seeking to invest and deploy capital in that space.

Your next question comes from Brian McGuire with Goldman Sachs. Please go ahead. Your line is open.

Good morning or good afternoon, depending on where you guys are. Just wanted to piggyback on that last question and your response there, Ron. Just interested to see over the last couple of months what progress you've seen in the supply chain along the waste collection and processing side that's going to lead to an increase in RPET supply. I see you and a lot of others have targets to use a lot more recycled PET in the next couple of years, and a lot of the companies have made commitments to buy it. Just wondering if you've seen the infrastructure already start to be put into place to actually make that supply available for you.

You know, Brian, it's a good question, and that is the challenge, right? I mean, everyone's got it. Great aspirations and expectations, but now the capital and the infrastructure has to follow. I think it's hard to assess over a short period of time. I think generally the momentum is there. I think you see that momentum in the form of increased commitments. You see companies like Amcor talking about our willingness and readiness to buy every pound of recycled material we can get our hands on. You can see the big brand owners making similar comments. You can see Coke and Pepsi teaming up to launch an initiative called Every Bottle Back, which is helping on the front end to drive collection. You see Nestle making public commitments about putting money behind buying recycled materials. So I think it's coming. I don't know that we could point to specific investments over the last 90 days that would meaningfully move the needle on supply, but I think all the momentum is headed in the right direction, and all the components of of what's going to be required are falling into place.

And just a question on the outlook. I think previously you talked about DNA being similar to CapEx in the kind of $450 million range. It looks like after stripping out the amortization from deals, it was only $96 million in 2Q and kind of ran just a little bit north of $200 million in the first half. Just wondering if that $450 is still a good number for the year or if it's maybe going to be coming in a little bit lower than what you thought initially.

Yeah, no, I'll take that one. Look, yeah, typically we would spend CapEx kind of in line with appreciation, so around that $450 mark. We were a little behind that in the first half, you know, just slightly behind. I think that's pretty typical when you're doing an integration of the size that we're doing with Bemis. You know, we expect that, you know, we're going to be there or thereabouts by the full year. At this stage, it might be slightly low, but that's what you should expect to see.

Okay, and then this last one for me, just trying to kind of bridge from the first half EBITDA to the second half outlook. You know, I think EBITDA was 9-11 in the first half. It sounds like maybe 10 million of that was some timing benefits that may not recover or recur in the second half. So, you know, maybe 900 million is the starting point. Let's think to pick up 20 million for EBITDA. increased synergy capture and then seasonality seems like it may be at $50 million or so. So is that directionally about right? Something that's kind of high $900s in EBITDA for the back half of the year?

Yeah, Brian, look, we're giving our guidance on an EPS basis. I mean, you can get there a lot of different ways. I think the key for us is that, you know, we're going to get to 7% to 10% constant currency EPS for the year.

Okay, got it. I appreciate it. Thanks, guys.

Thanks. Your next question comes from Richard Johnson with Jefferies. Please go ahead. Your line is open.

Thanks very much. Ron, just returning to the commentary you made around the long-term contracts you signed in Flexibles in North America, I was just trying to put that in the context of all the longer-term arrangements that Bemis themselves had put in place prior to you acquiring the business which I seem to remember involved pretty significant price incentives. So I'm just sort of trying to understand how I should think about what you've done relative to what they've done. Is it completely separate or is it sort of one and the same thing as part of the same process?

No, it's separate. I mean, look, the business has thousands of customers and dozens of large FMCG customers to go with the thousands of small customers it has. Any contracts that were in place when we bought the business are still in place. We're just Referring to positive momentum that we've had with customers where there is a contract, let's say that's up, where that matures, where we've made really good progress in terms of just re-upping that business, none of which are material on an individual basis. In fact, they're probably not material in aggregate, other than to suggest that the momentum is very positive on the commercial side of the business.

Got it. That's helpful. Thank you. And then just on raw materials, I was hoping you might be able to give me a feel for what the – I'll begin by non-rigids. what the contribution in the first half was from your restructuring program.

Not a whole lot in the first half, as we flagged. We've got $20 to $25 million of total benefits going to come through that program. We had about 10 so far. We didn't do much at the end of the last fiscal year that would have benefited the first six months of this fiscal year. We're going to get back on with several plant closures later this calendar year, which will deliver the remaining 10 to 15. benefits that we expect.

Okay. And then just to confirm that your plant closures net-net don't result in any overall capacity reduction in the system that you've got in North America. Is that right?

Not in any meaningful way. I mean, there might be on the margin in certain types of products, but that's not really the intention. The intention is to lower the fixed cost base, the structural cost base, and to consolidate essentially similar and, in fact, growing volumes in fewer number of facilities. Right.

Okay. Thank you. Now, I just want to reconcile what you're doing with your business, which obviously makes perfect sense, with the commentary you get out of the beverage can producers who are all in full expansion mode and adding capacity seemingly where they can. In fact, they're sold out. So I'm just trying to sort of understand – you know, the sort of sense that you or the color you put to your growth opportunities in that business when you're effectively taking out capacity and they're growing very aggressively?

No, Richard, just to clarify, I think I just said that we're not taking out capacity. We're reducing the number of plants. No.

We're retiring older assets and putting the assets in the capacity in a smaller number of factories, but Look, our business is expecting to grow. It has been growing. If we take a step back around the package formats and the mix and what's happening there, particularly in cans, we see an overall liquid beverage market, non-alcoholic beverage market, growing about 2%. This is just based on scanner data, so it's not anything proprietary. We see the market growing about 2% in the back half of the calendar year, which lines up with our fiscal year. We see the PTA. a portion of that market also growing at 2%, and we would see can volume growing at about 3%. So what it says to us is that plastic format continues to grow, at least with market. Cans have grown well as well, and there's enough growth for both. I think where the can growth has been extraordinary has been in the alcoholic space, and I think the industry data would suggest as much in beer in particular and hard seltzers and things like that. there's been outstanding growth. But that's not a part of the market that we've been participating in or are interested in.

Yeah, absolutely. I completely agree. And then just finally on sustainability, I would just be interested to get your view on if you look at the consumer packaging industry across the entire value chain, I mean, what part of that chain actually holds the key to solving this issue? you know, right from raw material producers through to the converter to the customer and particularly the supermarkets as well. And the reason I ask the question is, you know, if you think about the numbers that Nestle are talking about, they're obviously very significantly higher than the numbers or investment they're making in this process than the converters are doing. So I'm just trying to understand, you know, when you stand back and look at the problem in its entirety or look at the issue or the solution in its entirety, Now, who really holds the key? Is it the customer or is it actually the raw material producer?

I actually think it's an equal parts converter, brand owner, waste management provider, be that a regulator or private enterprise, a consumer. So I actually think it's... I actually think it's in equal parts of those three. I think it's less about the retailers and probably a little less about the raw material suppliers. I think it's more about those other actors. And I think that's why we feel really good about our position, because ultimately you need a combination of materials and you need other functionality designed into packaging, which no raw material supplier provides today and we don't envision in the future will provide. So the converter has a critical, critical role there. I think the brand owner has a role in – making sure things move quickly and with the right set of trade-offs in mind. I mean, these products are not going to be cheaper initially, and the brand owners are going to have to kind of live with that in the early days. Waste management infrastructure is mission critical because it's not in place everywhere, and it's a fragmented landscape depending on the jurisdiction we were to focus on. And then I don't think we can underestimate the role of the consumer because, Whether the answer here is recycling or even reusing or composting, the consumers have to do something different than what they've been doing and what they do today. You know, they're going to have to make use of their compost facility or their reuse system or their recycling. And that's not an insignificant shift. So I genuinely believe it's equal parts, those four parts, equal contribution from those four parts of the value chain.

Right, great. Thank you. That's very helpful. Sorry, excuse my ignorance, but can I just clarify, do you have any formal sort of cooperative agreements with any of your key customers to develop? The reason I ask the question, and you may well do, is that I just don't know what they are, whereas I do know and your customers talk very loudly about the arrangements and development projects they've got with raw material producers and reusable packaging systems and so on and so forth. So it's very easy to find those out. So outside of NGOs, is there anything in particular you can point to that would help us sort of understand what the converter is doing in conjunction with their customers?

Well, look, the clearest manifestation is the new products we launch. Those don't come by our own activity in isolation. We do have several what are called joint business development agreements or joint product development agreements with customers that are typically separate from commercial contracts where you've got almost like a product development contract, if you will, in a number of segments. In fact, across our entire business, we don't have all the customer names associated with those. but that's where the innovation and the new product development comes from that leads to the examples that we've highlighted today and have highlighted before.

Wonderful. Thanks, Ron. I really appreciate all the time. Thank you very much. Thanks, Richard.

Your next question comes from Scott Lyle with Remore Equity Research. Please go ahead. Your line is open.

Hi. Thank you very much. I was hoping to ask some specific questions around the sustainability slides, Ron. On slide 17... you've shown a recyclable stand-up pouch. In the context of that pouch being multi-layer and all of that, how do you define recyclability in this respect, please?

Yeah, it's a good point. It's a good pickup that it's a multi-layer of materials because recyclable doesn't have to mean single-layer or monolayer. And in this particular case, it's a combination of different polyolefin materials that are brought together to provide the functionality that's required for this home care product line, which is seventh generation. It's, I think, a laundry detergent that's pictured here. As far as the definition of recyclability, there are industry standards out there that are facilitated and being developed by NGOs, and particularly the Ellen MacArthur Foundation, which is the leading authority on this space, and has gotten signatures from 450 companies behind what's called the New Plastics Economy Global Commitment. around certain definitions, and so there is a specific definition of what means recyclable. It has to be recycled today someplace at scale, and this particular product would meet that definition.

Okay, so that was where I was really getting to with the recyclability at scale. I had thought they'd talked about also at scale in the market. Are you comfortable in, I think you said Thailand, is that recyclable in Thailand?

I don't know that it is recyclable in Thailand, but the definition at this stage is recyclable at scale in an industrial scale, because the infrastructure has to be developed in different parts of the world. And so it's also a guide to what the infrastructure agenda should be in different markets around the world. Yep.

Yep, okay, I agree with that. And then a quick question on your next slide, on 18, which you clarified the less virgin resin and what you want to signal as your demand creation. Sorry, can you just concern for me how much of your virgin resin in North American ridges that would represent, please?

Yeah, look, I don't think we break it out publicly. We're one of the larger buyers.

But are you getting up to a material proportion, I guess? Like you said, a material proportion, the $200,000.

Yes, let me help a little bit there. This year, we're going to exit the financial year. converting more than 10% of the resin in our rigid packaging, in our PET resin in our rigid packaging business will be recycled resin. So that's why I referred earlier to an inflection point. We're accelerating at a very rapid pace the proportion of the resin we convert as recycled. And this year we're going to exit at over 10%.

Okay, great. Thank you. That's all I had.

If there are no further questions at this time, I'll turn the call back to management for closing remarks.

Okay, thanks, everyone, for joining us today and on the call there, operator. Thank you. This concludes today's conference call. Thank you very much for joining. You may now disconnect.