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spk13: Ladies and gentlemen, thank you for standing by, and welcome to the AMCOR third quarter 2021 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 keypad. Please be advised today's conference is being recorded, and 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. Please go ahead.
spk00: Thank you, Operator, and I'd like to welcome everyone to AMCOR's third quarter earnings call for fiscal 21. Joining the call today from AMCOR's side is our Chief Executive Officer, Ron D'Elia, and Chief Financial Officer, Michael Casamento. At this time, I'll direct your attention to our website, amcor.com, under the investor section, where you'll find our press release and presentation, which we will discuss today. We'll also discuss non-GAAP financial measures and related reconciliations can be found in those documents on our website. As a reminder, the call today includes some forward-looking comments which remain subject to certain risks and uncertainties. Please refer to our SEC filings to review factors that could cause actual results to differ materially from what we're discussing today. With that, I'll hand over to Ron.
spk12: Thanks, Tracy, and thanks, everyone, for joining us today to discuss AMCOR's year-to-date results. Joining me on the line, as Tracy indicated, is Michael Casimeno, our Chief Financial Officer. And we'll begin with some prepared remarks and then open the line for Q&A. Starting with slide three, we begin every meeting at AMCOR with safety, so we'll start today with safety as well. And this year, our safety performance has been a real highlight. Across AMCOR, we've reduced the number of injuries by almost 30% in the first nine months of the year, and all of our business groups reported fewer injuries, with over half of our sites remaining injury-free for the last 12 months or more. And of course, over the last year, we've also been equally focused on keeping our co-workers healthy as well as safe. And as the COVID pandemic continues to present challenges in many countries, Maintaining our protocols and our vigilance remains a top priority for our teams around the world, who also understand the critical role we play in helping maintain availability of essential healthcare and food products. Given the continued challenges of navigating the pandemic, we're particularly pleased with our safety performance so far this year, and we remain confident that our objective of no injuries is in fact possible. Our key messages for today are set out on slide four. First, our year-to-date financial results have been strong and ahead of expectations, with organic momentum continuing through the year such that the March quarter has been our strongest thus far this year, despite the operating environment remaining dynamic and volatile, maybe even more so over the last few months. Our teams have navigated that volatility by demonstrating an exceptional ability to stay focused on the key business drivers within our control, to respond quickly as conditions change, and to execute to deliver results despite the circumstances. Second message here is that this strong performance translates into higher expectations for the 2021 fiscal year, and we've raised our outlook for full-year EPS growth to 14% to 15% on a constant currency basis. And third, we're actively investing in several growth initiatives, which illustrate the range of opportunities we have over the medium term to maintain a momentum. The strong result, increased guidance, and growth investment examples demonstrate the strength of our investment case, which I'll touch on briefly on slide five before turning to the results in more detail. The MCOR investment case is set out on slide five, and it's one we've shared a few times this year. We believe the investment case is as strong as ever, and this slide sets out the reasons why, including our global leadership positions, consistent growth from attractive end markets, a strong balance sheet, and significant annual cash flow of more than $1 billion and growing to fund growth investments and dividends. And lastly, momentum has been building, which you can see in our upgraded guidance, and we believe that will continue. Looking ahead into fiscal 22, we'd expect BPS growth to benefit from continued organic growth, additional synergies from the Bemis acquisition, a lower share count after the repurchases during FY20 and 21, and the value that will be created from the $300 to $400 million of free cash flow that will remain after CapEx and dividends. So the AMCOR investment case has not changed, and that's part of the message here today. Despite volatility in our operating environment, and maybe even more so because of that volatility, the AMCOR investment fundamentals remain very attractive and will continue to generate a total value of 10% to 15% each year across EPS growth and dividends. Slide six includes the actual outcomes of that investment case over the last decade. Over this period, we've always maintained an investment-grade capital structure. We've delivered consistent sales and profit growth, including margin expansion organically through multiple economic and commodity cycles, and we've consistently paid out a compelling dividend. And that growth and yield has been supported by best-in-class free cash flow conversion and return on invested capital, which have also contributed to strong total returns to shareholders as well. Organic growth has always been a key driver of our overall financial performance, and that will become increasingly evident going forward. Slide 7 highlights three of the key organic growth drivers for AMCOR. The starting point on the left is the set of growing end markets we serve around the world. Now, Amcor has substantial positions in several higher-growth, higher-value-add, more packaging-intensive segments like healthcare, protein, and premium coffee, or hot-filled beverage containers and barrier films. In each of these segments, market growth tends to track higher than average, and in each one, we have differentiated positions, scale positions, differentiated products, and global leverage opportunities. Second, emerging markets will also continue to be a key source of organic growth for Amcor. We've got a scale emerging markets portfolio with over $3 billion in annual sales from 27 profitable emerging market businesses where we benefit from leadership positions and differentiated capabilities and where we have a long history of profitable growth. And third, growth enabled by innovation, which is an area where we continue to differentiate ourselves from competition, and we're investing to extend that lead. All of our businesses go to market with world-class innovation and R&D capabilities, which are increasingly valued by our customers as they look for packaging to meet shifting consumer needs around the world, particularly around sustainability, which I'll come back to in a minute. We're also allocating capital and actively investing for growth in a number of areas, and slide eight shows two examples. First, the example on the left. Within a few weeks, we will expect to begin commissioning a major capacity expansion for one of our aluminum-based product segments at a flexible packaging plant in Switzerland. This investment will support the continued high growth of the premium coffee segment and is underwritten by a long-term supply agreement with a key customer. We've made a number of similar investments over the years and several recently, where we have real long-term partnerships with higher-growth customers who value the various ways Amcor can help them grow. In the other example on the right-hand side of the slide, in the last quarter, we began construction of a new greenfield plant in China to add capacity to our business in that high-growth market, where we already maintain a leadership position and healthy financial profile. The new state-of-the-art plant will be the largest in Amcor's China network and will start up by the end of calendar 2022 to support a range of global and local customers, primarily in the food and personal care segments. And turning to slide nine, last week we announced a corporate venture type investment in EPAC, a relatively new startup in the flexible packaging space who has leveraged technology and a unique business model to grow to $100 million in sales in just over four years. As excited as we are to work with EPAC, the key point of this slide is to make clear our intentions to do more with regard to open innovation and corporate venturing generally, so that we can complement our internal innovation capabilities with great external ideas from all around the world. We're looking forward to exploring opportunities across new packaging products, processes, and business models, and we'll be much more systematic and purposeful in this area. And moving to slide 10. It remains very clear to us that our best and most exciting opportunity for growth and differentiation will come from the development of more sustainable packaging. More sustainable packaging means responsible packaging, starting with better package design. And on that dimension, which needs to take into account the full product lifecycle, there's no one better positioned in the industry than Amcor, and we're demonstrating that with a steady stream of new product platforms and launches around the world. Waste management and consumer participation will be equally important, and both require close collaboration with others across our value chain. And AMCOR has been actively partnering with others in both areas to drive scalable solutions and real impact, and I'll describe some of the progress we're making on the next slide. The KitKat example on the left is a great one because it demonstrates the potential for Amcor to use chemically recycled resin in food-grade flexible packaging, and it also highlights the level of collaboration that's possible across the full value chain to make it happen, in this case, in Australia. In the middle is AmSky, which is a breakthrough innovation launched by Amcor just last week. Now, Amcor created the world's first recycle-ready thermal form blister packaging by eliminating PVC without compromising functionality or the consumer experience. And AmSky is an exciting development which has the potential to transform the sustainability profile of healthcare packaging, particularly for solid-dose pharmaceuticals, but it also highlights the potential to eliminate PVC in other packaging segments as well. The example on the right-hand side of the slide is another one that brings to life the concept of responsible packaging with a real example in practice, in this case in the UK. The supermarket rollout of this rice product in a recycle-ready, microwavable pouch made with Amcor's HeatFlex technology coincided with a number of UK retailers announcing in-store trials to collect and recycle flexible packaging. And this one demonstrates that responsible packaging design enabled by AMCOR can catalyze change and motivate progress on the waste management and consumer participation requirements as well. And finally, in March, AMCOR also took an executive committee role in the Alliance to End Plastic Waste, a group whose mission is fully aligned with our vision for responsible packaging through design, infrastructure, innovation, and consumer participation. Turning now to a summary of our results on slide 12, the business has delivered strong year-to-date earnings growth with EPS up 16% on a comparable constant currency basis. And of that EPS growth, 7% was organic. As overall demand for our products has remained healthy and combined with outstanding execution has resulted in organic growth continuing to build each quarter. 6% of the EPS growth comes from incremental Bemis acquisition synergies, which have reached $55 million so far this fiscal year. We continue to progress ahead of initial expectations and we're well positioned to deliver at least $180 million of synergies by the end of fiscal 22. And the remaining 3% EPS growth reflects benefits from share repurchases in fiscal 20 and 21. Free cash flow and the balance sheet continue to be strong and in line with our expectations, and we've returned more than $850 million so far this year of cash to shareholders through higher dividends and share buybacks. So the key message here is that we're executing very well, building momentum, delivering strong growth and cash returns to shareholders. With that, I'll hand over to Michael to provide some further detail.
spk01: Thanks, Ron, and hi, everyone. So starting with the flexible segment on slide 13, Overall sales were 1% higher than the prior year, and this was all driven by higher volumes. Demand has remained relatively broad-based, with growth in North America, Latin America and the Asia-Pacific regions, while Europe was in line with last year. Through the last nine months, we've consistently seen solid growth across a broad range of end markets, including in high-value end markets like protein, coffee, cheese and pet foods. And this has been partly offset by lower healthcare volumes driven by fewer elective surgeries and lower prescription trends, which began back in the June quarter of 2020. Adjusted EBIT has grown 9% in constant currency terms and margins expanded by 110 basis points, reflecting volume growth, $45 million of cost synergy benefits and strong cost performance and management. It's worth noting here that increases in raw materials have remained manageable. given the diversity of the materials we buy and the multiple reasons in which we consume those materials, combined with the strong commercial capabilities that we have built for over a decade as part of the AMCOR way. The business also continues to extract the financial and strategic benefits from the Bemis acquisition, which is covered on slide 14. We acquired a high-quality, well-invested business, which has delivered consistent earnings growth since the date of the acquisition. In terms of cost synergies, our teams have done a great job of delivering benefits from overhead reduction, procurement, and by optimizing our footprint. Year to date, we've delivered 55 million in benefits, and we continue to expect this will increase to approximately 70 million for the full year. At the end of fiscal 2021, cumulative benefits will have reached 150 million, and we expect to deliver at least 180 million of total cost synergies by the end of fiscal 22. It's also exciting to see examples of collaboration across the regions as we leverage our capabilities and differentiated product offering to support customer growth. For instance, our business in China, Australia and Brazil have all secured differentiated packaging for protein and pet food applications from other ANCOR regions across the globe. There are many examples like this and more in the pipeline to come through. Turning to rigid packaging on slide 15, In summary, the business has continued to deliver outstanding results, driven by strong consumer demand. Sales growth included a 4% increase in volume, as well as a 3% price mixed benefit, including higher pricing to recover cost inflation in Latin America. In North America, year-to-date beverage volumes are 7% higher than last year, and hot-fill container volumes are up 13%. We've seen another quarter of strong consumer demand for PET packaged beverages, particularly in hot-filled categories including juice, ready-to-drink tea and sports drinks. This strong demand has filled capacity across our network and reflects higher consumer demand, innovative brand extensions and new product launches and formats. Year-to-date specialty container volumes were higher than the prior period, with growth in certain categories including spirits, personal care and home cleaning. And volumes in Latin America were also 2% higher than last year, with growth delivered in Brazil, Central America and Argentina. The EBIT growth of 9% reflects higher volumes and favourable mix across the business,
spk13: Pardon the interruption. Mr. Casamendo's line is disconnected.
spk12: I don't know if it's disconnected, Operator. Just give us a second here. We'll see if we can get him back on. Operator, I'll pick it up from here. It's Ron Lilly. I'll just pick up from where Michael left off. Michael was just summarizing the rigid container story, rigid packaging segment. Sorry about that for those on the line. I think he was just updating on the specialty container volumes, which were higher than the prior period with growth in a number of categories, and then volumes in Latin America 2% higher than last year with growth, particularly in Brazil, Central America, and Argentina. EBIT growth in the segment of 9% reflects that higher volume and favorable mix across the business, partially offset by higher labor costs and transportation costs as well. Rigid containers has rapidly become evident the preference for rigid containers, given their recyclability, lightweight, resealability, and hygiene profile, as well as having the lowest carbon footprint. And the business has continued to benefit from these trends. doubled the use of PCR post-consumer recycled resin over the last two years, even while navigating the pandemic. And we continue to launch new products made of 100% PCR. In fact, today, almost all of our sites in North America are converting PCR along with virgin resin. Move on to slide 16. Adjusted free cash flow of $360 million was in line with prior year. However, this includes approximately $50 million of U.S. cash tax payments deferred under the CARES Act in the Q4 of FY20. Excluding that timing variance, adjusted free cash flow is approximately 10% higher than last year and is in line with our expectations. Our financial profile is solid. Leverage is at three times on a trailing 12-month EBITDA basis, and this is lower than last year and in line with what we'd expect at the end of the March quarter given the seasonality of the cash flows in the business. So with strong annual cash flow and a strong balance sheet, the business has significant capacity to invest as well as to return a substantial amount of cash to shareholders as we have this year already through a growing dividend and further share repurchases. And in fact, in nine months so far this year, we've returned over $850 million to shareholders. Turning to slide 17, which is the outlook slide, you'll find the latest view here, which is a revised or an increased outlook for the year. The continued strong performance of the business and the organic momentum that has been building gives us the confidence to raise our 2021 four-year guidance. We expect constant currency EPS growth of 14% to 15% for the full year, which is comparable to and higher than the 10% to 14% guidance provided in February and includes an unfavorable EPS impact from businesses we've disposed of over the last 12 months of approximately 1%. So to be clear, the constant currency EPS growth for this year would have been 15% to 16% had the disposals not occurred. In terms of cash flow, we continue to expect adjusted free cash flow between $1 billion and $1.1 billion U.S. dollars. In closing today on slide 18, AMCOR has delivered a strong result ahead of expectations, and organic momentum has continued. This has translated into higher expectations for the full year, and we've raised our outlook for fiscal 21. We're actively investing in the future, and these investments, along with strong execution, will enable continued momentum and reinforce our belief that the AMCOR investment case has never been stronger. Operator, with that, we finish our opening remarks, and we're happy to open the line for questions. Thank you.
spk13: So just as a reminder, in order to ask a question, you will need to press star 1 on your telephone keypad if you wish to withdraw a question. It's the pound key. In the interest of time, we'd like to remind participants to limit their questions to two and then rejoin the queue for any follow-ups. Your first question will come from George Staffos of Bank of America. Please go ahead.
spk02: Hi. Thanks for taking my question. How are you, Ron? Hey, George. Hey, two questions, both really around volume. I guess first off, you know, it seems like, you know, every week we get another press release from Amcor. This is a high-class problem. in terms of another new product, is there a way you could give us some form of a vitality index or some approximation, you know, how much of your sales right now or volumes are coming from products that, you know, you hadn't, you know, created, produced, you know, two years ago, three years ago, whatever timeframe you want to use. That's question number one. And then question number two, recognizing you prefer to look at things on a year-to-date basis, yearly basis. When we do some reverse engineering of the press releases. It looks, this quarter versus last quarter, it looks like flexible saw a little bit of a slowdown. Bonds might have been flat to slightly down. Can you give us some perspective in terms of what was happening in the third quarter by market and some key products? Thank you.
spk12: Yeah, good questions, George. Look, on the volatility index, it's not a measure that we use pervasively inside the company i mean i think the what we're we're really focused on is launching products that are commercialized commercializable and will have take up in the market and then tracking the sales of each of those none of which are material to the group per se but we think it's important to continue to demonstrate the vitality of our innovation pipeline because ultimately that will contribute to the positive mix and the positive margin that we want to drive in the business. And so the ultimate vitality index for us is the margin expansion that we've generated period after period after period for well over 10 years now. That's the vitality index, because what it says is that each new product that we sell today is a higher margin product than the unit it's replacing from prior periods. So that's maybe the roundabout way of answering your first question. On Q3, we'll talk about Q3. I mean, we do tend to focus on the full year to try to orient the conversation to the longer term. But that being said, the third quarter was our strongest quarter of the year on a number of dimensions. We had increasing organic momentum, profit momentum across both rigids and flexibles and we're really pleased with the execution because the environment in the third quarter, fiscal third quarter for us from an operating perspective was probably as difficult as it's been so far this year. As it relates to the sales side of things, Yeah, I mean, look, I think these businesses, both rigid and flexibles, will generate low single-digit growth over the long term. I think that's roughly where we've been, where we were through six months. That's likely where we'll be at the end of the fiscal year. The 90-day period that was Q3 was a little bit softer in flexibles, particularly because of the weakness, the ongoing weakness in the medical device packaging and pharmaceutical packaging. But more or less, we're consistent with our long-term trends in both businesses for this fiscal year at sort of low single digits.
spk13: Okay. Thank you. Our next question will come from Kansan Punjabi of Baird. Please go ahead.
spk07: Thank you. Hi, Ron. Hi, everybody. I guess, you know, Ron, just kind of following up on George's question in terms of, you know, the cadence of volumes as we look ahead. Some CPG companies, as they reported, have talked about an abrupt sort of shift in terms of volumes as you cycle through tougher calms from a year ago. Mobility in certain parts of the world is starting to increase in North America, for example. So can you just sort of give us a real-time pulse as to what you're seeing so far in your 4Q and then how exactly you expect volumes to sort of evolve over the next two to three quarters?
spk12: Yeah, look, good question. I mean, last year at this time, we would have been describing pretty much a neutral impact from COVID, and that carried through then to the fourth quarter of FY20, and that's pretty much been our experience. And that's because of the geographic diversity of the business. Last year, our Q3 would have seen a real strong negative impact in Asia, particularly in China, which is a business that generates a lot of growth for us. And we would have seen softness in other parts of the business compensating for some of the better sales that in North America in the month of March last year, as an example. The net of all that last year wasn't really much. And so as we think about cycling comps this year, including the result that we're reporting today, there's really not much in it in terms of variation period to period related to COVID. And that's the perspective that I would offer looking forward as well. Our Q4, as I said, to respond to George's question, it will be back at the end of this fiscal year and will be in the low single digits, which is where we would expect to be on any given year. So it's not the sexiest answer I could give you, but it's the reality of the diversified portfolio that we're operating.
spk07: Understood. And then for my second question on raw materials, your favorite question, I'm sure. So with the reflation dynamics that we saw in the U.S. coming into this year and then winter storm Uri, just give us a sense as to how you're navigating pricing in context of just significant cost inflation on the resident side plus logistics, et cetera. And what's different, if anything, post-VMIS in terms of how your commercial guys are tackling higher cost inflation?
spk12: Yeah, look, it's a good question. It's obviously a key topic of this period. First thing I would say is that this isn't new, right? These are commodity cycles that we experience every few years. If we look back over the last 10 years or so, it's probably maybe the third or fourth real pronounced spike that we've seen in our input costs. And so it's not new. It's something you deal with periodically. And the way we navigate it is with lots of rigor and lots of precision. And I would say that that rigor and that precision improves every time we go through one of these cycles. And I think that whether it's the shortening the pass-through lags on contracts, whether it's expanding the coverage of the materials that are subject to rise and fall mechanisms, um you know and like i just think we get better at it with each year um and i can go back to each of those cyclical peaks over the last decade and kind of point to things that we've learned and that we've added to the toolkit so that the next time you know the experience is is less impactful and i think that's what we're seeing now we're not really obviously warring a headwind like everyone else but it's not material enough to um you know to to distort the results and it's certainly not holding back our expectations for the fiscal year I think with Bemis, maybe Bemis is a segue into another dimension to this question, which is the diversification of our spend, which only got further enhanced or further diversified with the Bemis acquisition. So obviously, if we take the two business segments, you've got rigid packaging, which is largely PET-based, which operates on a much tighter lag. It's an easier administrative process, if you will, because it's really primarily one material. So when we talk about lags in Amcor's businesses, it's primarily in flexibles. And in flexibles, it's also important to remember that about 60%, or maybe I'll say it the other way, about 40% of what we buy in the flexible segment is not polymer-based. It's aluminum, it's fiber, and it's other things. So the spend from a commodity perspective is pretty well diversified. And then particularly in polymers, the other 60%. That's really split. It's split across four geographic regions, and it's split across grades. And so the netting of that, the portfolio effect of that, again, with the addition of the emits, which is $4 billion out of the $9 billion of sales in that segment, just creates more of a portfolio effect or a dampening or a leveling effect. So we're more, to summarize it, we're better at this, and our portfolio is better positioned to withstand these kind of cyclical spikes. Perfect. Thanks, Ron.
spk13: Our next question will come from Richard Johnson of Jefferies. Please go ahead.
spk06: Thank you very much. Ron, sorry, just to continue on with your commentary on raw material price lags, I'm just trying to understand properly what the impact of or what the lag is when you think about what the impact on your revenue line has been of low raw material prices. And it's the same for the group as it is with flexibles. I mean, that's been negative really right through 20 and into 21. And if you assume that nearly all raw materials really started to turn back up midway through last year, it looks like the impact on your revenue line continued to be negative for nine further months. I mean, is it that simple or how should we think about the lag?
spk12: Look, I think the way to think about the lag is that in flexibles, it's roughly a quarter. You know, there's probably an average in there that's somewhere between three and four months, but it's close enough. And that hasn't really changed over time. I mean, I think with the addition of the BMIS portfolio, you know, that part of the equation hasn't really changed much. I think we have to remember there were times over the last, Nine or 12 months, I think, was the period you referenced where raw materials also went down in some parts of the world. So I wouldn't read too much into the – I think it would be very difficult to bridge back the commodity charts with the raw material impact on the revenue line, which is why we just break it out for you. Our measure of organic sales growth excludes the impact, positive or negative, of commodity prices.
spk06: Yeah, absolutely. But that's always been negative for quite some time now. Anyway, that's helpful. Thank you. And then just secondly, on sustainability, I'd be interested in your view on what's going on in France at the moment. Obviously, their single-use plastic legislation passed a big hurdle overnight. And I'm particularly interested around what they're thinking about doing in supermarkets with compulsory refill stations and the like. I mean, is that something we should be worried about longer term?
spk12: no look i mean i think consumer consciousness is rising everywhere and and that's a good thing because ultimately we need the consumer to participate and um you know in countries like france and others in europe that have various forms of legislation um in place uh all of that is is supportive to the infrastructure funding that's required whether it's composting infrastructure, recycling infrastructure, et cetera. So none of that is necessarily a bad thing. I think on the reusable side of things, you know, I'm not sure that's an AMCOR issue per se, particularly in France, but the consumer behavioral shift required for reuse at scale is just not something we've seen anywhere in the world yet. It doesn't mean it won't happen, but I think that's a big ask. of the consumer at this stage, you know, quite frankly, when we're trying to get them to recycle or compost.
spk06: David, that's very helpful. Thanks. I appreciate it.
spk13: Thanks. Your next question will come from Anthony Panaria of Citi. Please go ahead.
spk12: Good afternoon. Ron, when you first gave fiscal 21 guidance last year, I think you guided to 5 to 10 percent EPS growth and the 1 to 1.1 billion in pre-cash flow.
spk04: And you've now raised the EPS guide a couple times. I think you're basically double the original guide at the midpoint in terms of EPS growth. And the free cash flow is still that sort of 1 to 1.1 billion.
spk12: And I understand it's not a huge delta, but is there any kind of like working capital impact from resin that maybe you get back in fiscal 22, or is there something on the CapEx side?
spk11: Just wondering how we should think about you being maybe at the low end or the high end of that free cash flow guide.
spk12: Yeah, no, it's a good question. Michael's actually back, so we'll let him tackle that one.
spk01: Yeah, hi, can you hear me there? Yep. Yep. Yep, perfect. No, yeah, look, you're quite right. The guidance has increased through the year, and we're still talking about a cash flow range of $1 to $1.1 billion. You know, we think... we'll be at the upper end of that range. But that said, you know, clearly the raw material escalation will have some impact on working capital as we just cycle through those increases and get them out into the marketplace. So, really, that's the reason why we're sticking with the 1.1 to 1.1. You know, it's basically that point. You know, as I said, we think we can get to the upper end, but, you know, let's wait and see what happens with any further... raw material movements. But that's really the simple answer. Okay. Okay. That's helpful.
spk04: And then you saw strong, rigid volumes in the quarter. I think hot-filled volumes were up double digits. And I think you indicated on the flexible side for next quarter, there wasn't necessarily much in the way of a big COVID benefit when we look at the year-over-year comp. If I got that right, does that also apply to rigids? And just, you know, if the U.S. economy reopens, how should we think about the positives and the negatives for rigid on kind of a year-over-year comp basis?
spk12: Yeah, look, I think you're right to call it the trends. I mean, the business hasn't had much of an impact. I mean, I know we've sort of sounded a bit like a broken record on that point because we don't have a whole lot of exposure to the food service side. But the place where we have a little bit of exposure is the convenience channel in Rigids where you saw some softer sales at times last year. The offset to that has been the healthcare segment. The two just about met. And so, you know, again, I think somebody else asked the question earlier and I made the comment, as far as trying to find a comp and whether it's a negative or a positive, there's just not a whole lot in it. So I think you're going to see volume growth at the end of the year that's consistent with our long-term averages. We're having, obviously, a pretty good year in ridges with positive mix on the hot fill side. But that's really driven by just the consumer demand in some of the hot fill sport drink, juice, and tea segments more than anything else.
spk02: Okay. That's helpful. I'll turn it over.
spk13: Thanks. Our next question will come from Salvatore Tiano of Seaport. Please go ahead.
spk08: Yes, hi. Thanks for taking my questions. Firstly, I wanted to see a little bit with your fiscal 2022 starting in less than two months from now. How should we think about the earnings bridge, some big key items, key buckets for EBITDA? And I know you have additional daily synergies. There's going to be acquisition from buybacks, but any other things we should consider as we look into the next fiscal year?
spk12: Look, actually, I think you described the main elements in the bridge. You know, I think – and there's no secret here. We pretty much lay it out there each quarter. The business will generate organic growth kind of mid-single digits, you know, 3% to 4%. You know, I think, as you've heard us say a few times, the momentum organically in the business has accelerated, actually, this year. So, you know, you can make your own assumption around that piece. The Bemis synergies, we're saying we're going to end up this year at about $70 million. We got $80 million last year, and we're on track to get at least $180, so you can make your own assumption about what the increment might be next year. And then we purchased shares this year, which will add to the base for next year. And then the other thing that – you know, we don't want to make sure people don't lose sight of is this business will generate a lot of cash and will generate well over a billion dollars of cash again next year, which will result in three to $400 million left over after CapEx and after dividends. And we'll do something with that. You know, and that's been our track record. We've been active acquirers over the years and we've also been active share repurchases over the years, and so you should assume that some productive use for the benefit of shareholders will come out of that extra cash.
spk08: Perfect. And touching back exactly on potential opportunities for M&A, what are you seeing on the pipeline? What's your view on the multiples out there? Any specific areas that you're targeting? And I guess on the reverse side, You know, I think we, after Beams especially, people are spending less and less time, you know, focusing on your folding carting business. Does this continue to fit into your strategy going forward?
spk12: Yeah. Well, let me answer the first part, and then I'll come back to Fulton Gardens. Look, we're going to be active acquirers. There's no question about it. We've done about 30 deals over the last 10 years, and I hope we do at least that number over the next 10 years. That'll be part of our playbook. This is an industry where, even despite leadership positions across our portfolio, there's still lots of bullpen opportunities across FlexWolves. and uh and in rigids and then there's some areas that we'd like to double down on or that represent bigger opportunities for us i mean obviously flexibles in asia um we have a business that's uh well over a billion dollars in sales but the market opportunity is enormous so hopefully we can supplement our growth there with m a uh as one example probably another one would be uh in the rigid packaging space outside of beverage um we've got a big business growing uh growing well organically but you know can we can we supplement that with further m a we certainly hope so so those would be a couple of examples but there's of course there's there's bolt-on opportunities across the board uh and we really hope to be active Look, on folding cartons, it's a business that's about 8% of sales in Amcor. It's the industry leader in what it does because it's a very specialized type of folding carton. High graphic intensity and shapes and tactile features as well. So it's sort of the high end. It's not cereal boxes per se. So it's a high margin business that generates a lot of cash. And it's pretty core to our Flexibles perimeter because it's essentially a printing and converting business. And industrially, it looks exactly like our Flexibles businesses. In fact, some of the equipment is actually the same. So it's everybody's core as everything else, and it's got a great financial profile. It's obviously got a different top-line profile than the rest of the company, but from a return on capital and cash perspective, it's about as good as it gets.
spk13: Perfect. Thank you very much. Your next question will come from Adam Samuelson of Goldman Sachs. Please go ahead.
spk12: Yes, thanks. Good afternoon.
spk09: Good morning, everyone. Hi there, Adam. Hi.
spk03: So I guess the first question, just thinking about kind of business trajectory, I was hoping you could maybe give us a bit of a split by geography in terms of what regions, especially EM versus developed markets and especially talked about some of the volume kind of weakness in healthcare and any sense on kind of when do comps ease their visibility to business activity kind of picking up, especially in the U.S.
spk11: where getting past the worst of COVID, it seems.
spk12: Yeah, well, look, healthcare is a good long-term grower. I mean, that's a business that would have been, you know, disproportionately accretive to growth for a long period of time. And it's a medical device business, and it's a pharmaceutical business. And both of those have fantastic financial characteristics, including growth in excess of, you know, more traditional FMCG growth. And that will come back. There's no question about that. And I think we're seeing signs of life in the developed markets in particular, which were the hardest hit through COVID. So we operate that business globally. And in particular, it's big in Europe and North America, as you'd expect. And those are the areas where the COVID impacts, the reduced elective surgeries, the lower prescription rates had a particular bite. So that's obviously, I think we're coming out the other end of that. And hopefully over the next couple of quarters, we start to see that normalized. And normalized in that sense means it's accretive to growth. You know, that's been the big impact, really. The rest of it is the rest of the portfolio will continue to grow, you know, low single digits. The comp issue is sort of less meaningful everywhere else in the company except for the negative impacts from the healthcare dynamics that I just referred to.
spk07: Okay. That's helpful. And then just to follow up on the EPAC acquisition,
spk12: which got the framing of it was different, and then you called it a corporate venture investment. But can you talk about kind of what your real plans are for that business, and is there a real opportunity to gain some penetration with faster-growing small and medium-sized customers that you struggle to reach today? Yeah, well, look, I think the framing is intentional, so I'll talk about EPEC in a second, but the key point to take away here is that we're going to be much more purposeful and systematic in tapping into external ideas of all types. We believe and we have conviction that we have differentiated R&D capabilities in the company But we're not naive enough to think we've got all the great ideas out there. So that's really the headline message is that we're open for business if there's a great idea that somebody wants to help developing or wants to come talk to us about. EPAC is a corporate venturing type investment. It's a minority stake in a business that is essentially a startup. It's about a four-year-old business. Fantastic business. Really exciting. It's a flexible packaging business, in essence, and it's gone really from zero to about $100 million in sales in four years. It's got about 15 sites. Most of them are in the U.S. I think there's a couple outside the U.S. And we're really excited to learn from it, quite frankly. So the first objective is to learn and kind of leave it alone. And what we hope to learn is in a few areas. One is the commercial approach, which as you point out, is geared towards smaller enterprises, and it leverages short runs, quick turnarounds, and also high quality. So that is a commercial learning opportunity for Amcor. I think industrially the business is enabled by digital printing and some other kind of neat industrial aspects inside the four walls of a plant, which are also interesting to us. And then the third thing, you know, honestly, is how does a business grow from zero to 100 million in four years? And I think there's a hell of a lot we can learn, like any big company, from a startup and how that happens from a managerial and organizational perspective as well. So we're going to leave it alone a little bit, Adam, in the first instance. Not a little bit. We're going to leave it alone, and we're going to watch and listen and learn and then watch the space. I think you'll see. you know, different manifestations of those learnings benefit AMCOR for many years to come.
spk01: Okay, I appreciate that call. I'll pass it on. Thank you. Thanks.
spk13: Our next question will come from Larry Gambler of Credit Suisse. Please go ahead.
spk04: Hey, Ron. Hey, Michael. I also had a question about EPAC and raw materials. I might as well continue the EPAC conversation. Zero to $100 million in sales in four years, that's, as you say, incredible. What does it say about the size of that market? Can you give us some color about how big that small customer market is and really what the opportunity is?
spk12: Well, look, I think it says that it's pretty damn big. I don't know that we'd even size it. I think it's, you know, that's primarily a U.S. figure that I gave you, and so you can compound that when you think about, you know, the other parts of the world. So, look, I think it's really big. What I don't know at this stage is just, you know, of that bridge from zero to 100, how much of that is, you know, new business with new customers of that type versus how much of it is the growth of those customers as they continue to outgrow, you know, the big multinational FMCG players. But both are important. But, you know, direct answer to your question, Larry, I'm not sure we could really size it per se.
spk04: Okay. Let me ask it a different way. When you look at EPAC, do you have any similar customers or is it a completely different market than where Bemis and Amcor is hitting in the U.S.? ?
spk12: Well, we certainly have customers like that in the rigid space. In some respects, you've heard us talk about our regional business unit. In some respects, we created our own version of EPAC about five or six years ago in rigids for exactly that purpose. Look, in flexibles, I would say I'm sure we have customers of that type, but I'm not sure we've been all that purposeful and systematic about attacking that part of the market, and that's where the real opportunity comes from.
spk04: Okay. And then on raw materials, Ron, you described the situation as manageable. As I talk to investors and characterize Amcor, we talk about it as safety, quality, the Amcor way. When it comes to managing raw materials, I know pass-through is one of your mechanisms, and that also characterizes Amcor. But Can you give us some anecdotes about Amcor's raw material procurement? I remember perhaps in the last or two resin spikes ago, I think Amcor was bringing resin into the U.S. from Asia in a unique fashion, which others were not doing. So maybe you can call out some anecdotes on how you're beating the high raw material costs through procurement and raw material management.
spk12: I will, but let me just make one thing really clear. Like, the convention in the industry is that the raw material fluctuations are passed through to the marketplace. And so this is really the conversation about the lag or the P&L impact of changes in raw material prices is really about the commercial side of the business and the commercial capabilities of, first of all, measuring what those changes are and then executing price increases to recover those costs. So that's the... That's the absolute key point here. And I think we have, I think, a pretty special approach in doing that, which goes all the way back, firstly, to understanding the profit of each order and each customer and each product. So I can talk more about that, but that's the commercial side. On the procurement side, which I treat as a slightly different dimension, I think our procurement capabilities have evolved over the years. I think as we've gotten bigger, we've added people, we've added expertise, we've added IT systems. Our buy is broad. I think the fact that we're now a bigger buyer in the U.S. gives us visibility into the dynamics in this market that maybe we always had in Europe and didn't have as well in the U.S. As regional as the market can be at times, it absolutely has elements of a global market as well. So I think all those things contribute.
spk04: Okay.
spk13: Thanks, Ron. Thanks, Larry. Your next question will come from Mark Wilde of Bank of Montreal. Please go ahead.
spk10: Good afternoon, Mike. Good afternoon, Ron. Hi there. Ron, I wondered with COVID, Are you even drawn into more conversations with your customers about automation and automation of the packing process as part of the packaging?
spk12: Yeah, I mean, look, automation has always been important, and it's always been important from a productivity perspective, you know, I think for obvious reasons in terms of labor cost reductions. So that's always been there. I think what's added is What's been accretive to that discussion now is the hygiene factor, right? And obviously meat packing gets a lot of attention. There are other segments as well where you've got a lot of people in a confined space, you know, and that creates a health risk that none of us appreciated 12 months ago. So the short answer is absolutely. And, you know, we think we have some unique product offerings that will help support that over the journey.
spk10: Yeah, I just, you know, I remember about four or five years ago, Bemis was, you know, talking about a flat film technology to use in fresh meat that would replace kind of three-sided bags, which got to be stuffed manually.
spk12: Are you seeing pickup there? Yeah, well, you're on it. I mean, that's the differentiation, right? There's two ways to pack fresh meat. Really simply stated, there's a film technology. a continuous process using film, and then there's bags, which obviously is a bit more labor-intensive. So we think we have some good products to offer in both, but our film technology we would, you know, put up there with anybody. So, yes, we would expect to see an acceleration in that space.
spk10: Okay. And then just as a follow-up, you mentioned the use of PCR PET in a number of your North American whiskey containers. Just trying to get a sense of, you know, what percent of the mix post-consumer PET would be at this point for you in North America?
spk12: Yeah, I'm glad you asked because we're pretty excited about this. I mean, it's almost becoming pervasive. So we're going to exit this year in North America converting about 10% of our resin as post-consumer recycled material. So 10% of what we convert in North America will be PCR. In terms of absolute pounds, that's a doubling of the amount of pounds we were converting two years ago. And that's despite the pandemic. And the pandemic has actually slowed down that trajectory. We probably would be at a higher level than 10% had it not been for some of the disruptions in the supply chain from the pandemic. And it's also pretty exciting that many of the new SKUs that we launch, and we've got a lot of new product examples scattered throughout our materials today, many of them are made with 100% PCR. And it's almost like electronic vehicles to some extent. We're not launching a lot of new products in PET that aren't leveraging PCR to some extent, and many of them are 100% PCR. So I think what you're seeing, right, kind of we're in the middle of a migration to a different industry convention, which says, you know, there's no reason you can't continue to reuse this material over and over and over again.
spk10: Is the supply of PCR the limiter, or is it just getting the consumer goods companies prized?
spk12: It's a little bit of both. I think right now we're adequately supplied, and I would say the market is creating the right level of demand. We all project out at some point in the near to medium term where we could have a supply constraint. But that's absent other factors that will increase supply, things like deposit legislation expanding beyond 10 states in the U.S., things like consumer education. You may have seen the Every Bottle Back campaign that A number of the beverage companies are co-sponsoring. So, you know, absent big increases in supply, we could be tight in the next couple of years. I do think there will be big increases in supply, however. So I think this trend will continue. I think it will accelerate, quite frankly. I think we get through the pandemic, any concerns around hygiene, any cessations of collection schemes will end and we'll start collecting again. And I think that 10% number that we're going to end this year at will be much higher, you know, 12, 24 months from now.
spk10: Okay, that's really helpful, Ron. Thank you.
spk12: Thanks, Mark.
spk13: Our next question will come from Brooke Campbell Crawford of JPMorgan. Please go ahead.
spk05: Yeah, good morning. Thanks, Ron and Michael. Just had a couple of follow-up questions on the corporate venture side of things. Just wondering if you'd consider pre-committing a dollar amount to an internal fund of some sort, or... Is it just really opportunistic investments sort of made at the head office level? That's the first question. And then the follow-up would be, would you consider investing in raw material processing or recycling assets on that side of things, the sort of evolving technologies on the raw material side?
spk12: Yeah, look, two good questions, two discussions that are always ongoing inside AMCOR. On the corporate venturing side, we are getting more systematic, as I said. Part of that is including a couple of staff who will be full-time focused on this. You know, whether or not we're going to communicate a number remains to be seen. We probably will. We'll allocate a certain portion of capital every year towards investments of that type, but, you know, it won't be material, I can tell you that, in the grand scheme of um you know the capital uh budget that we have each year or the the free cash flow that the business generates but um we think a purposeful amount of investing on a regular basis will help you know help us make sure that we're tapped into the best ideas out there so i would say brooke watch the space on this one we'll we'll there'll be more to be uh more to be said on this topic um on the investments in the recycling uh part of the value chain Look, never say never. We prefer not to put big licks of capital into parts of the value chain that are not necessarily areas we can be differentiated and unique in. We would prefer to be a demand catalyst and a source of demand for others who might put their capital in those spaces because it's more aligned with what they do. And then the other way that we hope to influence infrastructure development is through some of the collaborations and partnerships that we've entered into. And we announced recently that we've signed up with this Alliance to End Plastic Waste, which is not a new entity, but one that we stayed close to for a couple of years. And they're really encouraged by the progress that that group's making, particularly on the waste management side. So we're hopeful that we can influence that part of the responsible packaging equation without allocating substantial amounts of capital.
spk05: Honestly, thanks. And one quick one for Michael. Just on the corporate cost line, in the nine months, about $18 million increase in corporate costs if we sort of put synergies to one side. I think we'll just provide a few examples of what's driven the step up there and is any of it worn off in nature so that we might see it unwind in FY22?
spk01: Basically, Brooke, the corporate cost increase is $8 million a day. You're counting synergies there. There's puts and takes against that. But, you know, if we just think about that, half of the $8 million is FX. So we have unfavorable FX in that. And we've talked about some insurance claims, higher insurance claims that we've had and insurance costs that we've had year to date. So, you know, they're really the two key areas behind the increase. You know, as we look forward, you know, I'd say that they're probably going to roll through the year end and that's going to be about the increase versus prior year at year end. So, really, that's it. You're not seeing any major movements in the cost... albeit we are investing in things like sustainability, you know, and innovation in those areas. So, you know, we'll continue to invest in that space as well.
spk13: OK, so thanks. Next question will come from Keith Cho of MST. Michael, please go ahead.
spk11: Oh, hi there, Ron and Michael. First of all, Ron, just following up on Arden's question previously on raw materials, I think in the disclosure it talked about an unfavourable impact on revenues in the nine months, but certainly as raw material prices have increased, then the impact on sales should be favourable within the third quarter of FY21. So just wondering if you could narrow it down just to give us a sense of whether raw material is favourable did contribute favourably to sales, and whether there was indeed an impact or not in the third quarter, and whether, as we look into the fourth quarter of fiscal year 21 and the initial quarters of the next financial year, whether there will be any impact from raw materials?
spk10: Yeah, I mean, absolutely.
spk12: The short answer is yes. So, in the third quarter, In the flexible segment you'll see a positive impact from ROS and I would suspect that will be the case in the fourth quarter as well.
spk11: Any guesses as to what the magnitude could be or not material enough to be concerned about?
spk12: Not material enough to be concerned about because also as we report the numbers we're always referring in the first instance to organic. and so we're stripping out that impact, but I'm answering your question directly, and there will be a positive impact in reported sales from passing through higher raw material costs.
spk11: Okay, thanks, Ron. And then the second one, it seems like the business is becoming significantly more comfortable with the Venus assets, certainly an upgrade coming through for Synergies, if not today, Venus soft upgrade, then something further in the future. Can you give us a sense of whether that will be driven through the cost line or whether you're starting to see some revenue synergy start to come through for business?
spk12: Yeah, Michael might just comment on the cost side, and then I'll talk about the commercial benefits.
spk01: Yeah, no, look, so on the cost side, as we said, we feel really good about where we are. I mean, the integration's gone exceptionally well. You know, we've been able to generate the synergies from the G&A side, from the procurement, and more recently we're starting to get impact on the footprint side. You know, and as Ron commented earlier, we got $80 million last year. We're at $55 million year-to-date this year and we'll end up, you know, approximately $70 by year-end. So as we exit the year, you know, we will have captured $150 million and we'll be, you know, at least able to catch the $180 and we've got clear line of sight, you know, around the projects that are still to come to deliver that extra synergy benefit next year. So, you know, as we get more and more through the timeframe, we feel more increasingly confident around that delivery. So, you know, we're right on track to deliver at least 180.
spk12: Yeah, and then just briefly on the commercial side, I would say more broadly, I mean, I think there's examples of of product transfers going in both directions, you know, and we've called out a few examples. I wouldn't describe them as material yet, but we've got some products going from the North American business into A and Z. I think we've got an example on bagel cheese, individual wrap slices. That's a good example of leveraging a structure from the U.S. legacy business into A and Z. We've got some examples going the other way from our New Zealand dairy film business going to the U.S. market. So I think you'll see more and more of that. It's a really interesting and complementary mix of segment participation that the businesses have had historically. If I look in North America, the big positions in protein and hard cheese, processed cheese that we acquired are absolutely additive for our portfolio in Europe. And then the pet food and coffee positions that we've had in Europe historically are, you know, completely new and additive to the Bemis, the legacy Bemis platform in North America. So I think we'll see more and more of that. I think our way to probably describe that will be through examples as much as anything else. But I think we're starting to see it already.
spk13: Great.
spk12: Thanks very much.
spk13: Our next question will come from Kyle White of Deutsche Bank. Please go ahead.
spk09: Okay. Thanks for taking the question. On the severe weather this quarter, was there any meaningful impact to earnings from this event outside of the raw material inflation that you saw?
spk12: Yeah, I mean, I wouldn't say material, but definitely impacts. I mean, we, like everyone else, were struggling to get raw materials at times. You know, some of the businesses that were most dependent on specific materials out of specific plastic plants, you know, were a bit constrained. So we had all of that and more. I mean, it was a really difficult quarter, which is why we're particularly proud that it was our best profit quarter of the year. Not to mention the fact that in certain parts of the world, we're dealing with continued impacts from COVID. In Latin America, India, the businesses are wearing extra costs and certainly extra complexity and management time and attention to keep everybody healthy. So we're not calling anything out as material, Kyle, but there's no question that the business had a headwind.
spk09: in the quarter from all those exogenous factors yeah thank you i know it's a bit early but given the uh greenfield plant your reference on slide eight in china should we anticipate not taking capex next year or will it be kind of similar to to this year's level i take that one look i think um you know we we typically would spend three and a half four percent of sales on capex um you know last year
spk01: being the first year after an acquisition like BMS was a little lower than that. So we were around the $400 million mark. I think this year, this FY20 will finish the year probably about 10% higher than that. And, you know, as we look forward, we can manage these investments of this kind. We've done them before, you know, within our CapEx spend. And you should expect that, you know, the CapEx is going to be somewhere around 3.5% to 4% of sales. So, you know, probably getting closer to $500 million as we move forward. And, you know, we're... really pleased with these types of investments because they generate growth and they get good returns. And, you know, they really help us support our customer base as well. So, you know, we're quite pleased to be able to invest in these activities.
spk09: Sounds good. Thank you.
spk13: Our next question will come from John Purtell of Macquarie. Please go ahead.
spk03: G'day, Ron and Michael. Sorry, just another one on raw materials, obviously a popular theme here. But we go back to fiscal 18. I mean, emerging markets seem to be in particular an area that we saw an extended lag of up to six months. You seem to be flagging a shorter lag this time. So I know you sort of alluded to it, but just trying to understand what dynamics have changed there.
spk12: Yeah, I mean, it's a good pickup, John. You've watched the company for a long time, and as I said, I alluded to in my answer earlier, I think we've improved. We improve with each commodity spike, and we improve not just when ROs are going up, but I think each year. And so, if I contrast where is the company today with where were we in 2018, when I also would have said we're reasonably good at this, I think that the base capabilities are more pervasive around the company. the Asian business, the Latin American business are closer in sophistication and maturity at passing through raw materials. You know, they're almost indecipherable from maybe the legacy European business. You know, that would be the key. If I look back at the 2018 cycle, that would be the key legacy of that. If I go back to the one before, you know, we got much more sophisticated about aluminum when the spike in aluminum occurred in sort of 2011-12. So each of them, you know, each opportunity for learning is capitalized on, and I think our capabilities are just continuing to evolve.
spk03: Thank you. And this is the final one. We've seen large increases in aluminium and inks and solvents prices. Is the pass-through lag or pass-through and, you know, recovery mechanisms similar to resins?
spk12: Yeah, yes. The short answer is yes. I think that we have good contractual coverage. For contracted customers, we absolutely have coverage over those commodities. And the pass-through mechanisms function, for all intents and purposes, the same way. Thank you. Okay, thanks.
spk13: Our next question will come from Nathan Riley of UBS.
spk11: Please go ahead. Hey Ron, just a question coming through on plant capacity and utilisation. Can you give us a bit of an update on where you are on those factors at the moment? Notwithstanding the fact you've flagged some growth opportunities, but are there any areas around the network where you might be a touch constrained and are there some opportunities to grow with customers in some of those areas of the network?
spk12: Yeah, look, it's a very good question. The one standout area is in the hot fill space in containers in North America. I think, you know, without question, the network is maxed out. You know, it's a segment that has grown steadily over a five- or six-year period at about 3% a year, but obviously has had a much better run over the last several quarters. And so without question, that part of of our footprint is capacity-constrained at the moment. Now, that won't last forever. Obviously, we'll put the capacity in place that's necessary to capitalize on that growth, but that's the one that stands out. Other than that, you know, the supply-demand balance is manageable, but as Michael alluded to a couple of questions ago, we do hope to deploy some more capital and get back up towards that 4% of sales number to capitalize on the growth opportunities that we see.
spk09: Perfect. Thank you.
spk13: That's all the time we have for questions today. I'll now turn the call back over to the presenters for closing remarks.
spk12: Okay. Thank you, Operator, and thanks, everyone, for joining the call today, for your interest in ANCOR, and for your questions. We'll close the call now. Thanks very much.
spk13: This concludes today's conference call. Thank you very much for joining. You may now disconnect.
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