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spk06: Good evening. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the AMCOR first quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you, Tracy Whitehead, Head of Investor Relations. You may begin your conference.
spk00: Thank you, Operator, and thank you, everyone, for joining AMCOR's Fiscal 2023 First Quarter Earnings Call. Joining today is Monsalia, Chief Executive Officer, and Michael Casamento, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amcor.com, under the Investors section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we'll also discuss non-GAAP financial measures and related reconciliations can be found in that press release and the presentation. Remarks will also include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause future results to be different than current estimates, and reference can be made to AMCOR's SEC filing including our statements on Form 10-K and 10-Q for further details. Please note that during the question and answer session, we request that you limit yourself to a single question and one follow-up, and then rejoin the queue if you have any additional questions. With that, over to you, Ron.
spk13: Okay. Thanks, Tracey. Thanks, everyone, for joining Michael and myself today to discuss AMCOR's first quarter financial results for fiscal 2023. We'll begin with some prepared remarks before opening for Q&A. And I'll start with slide three, which covers our first and most important value, which is safety. The first quarter showed continued progress on our long-term objective of eliminating injuries across our global operations. Our teams are doing a good job proactively identifying and addressing potential risks, and the results are evident with a further 31% reduction in the number of reported injuries globally compared to last year. This good work has also led to a solid increase in the number of our sites that have been injury-free for the past 12 months or more, which stood at 63% at the end of the quarter. Our top priority will always be the well-being of our 44,000 global employees and achieving our goal of zero injuries. Turning to our key messages for today on slide four. First message to leave you with is the business has delivered another strong quarterly result, highlighting the relative stability of our end markets our relentless focus on recovering higher raw material costs and staying ahead of inflation, and our proactive approach to driving costs out of the business in a volatile and challenging operating environment. The result was another quarter of strong operating leverage with 10% growth in adjusted earnings per share on a comparable constant currency basis. Second, we're confident in our ability to sustain solid organic earnings growth from the underlying business in fiscal 23. We've reaffirmed our guidance ranges for comparable constant currency EPS growth and free cash flow, while updating our reported EPS guidance to reflect further strengthening of the U.S. dollar. We assume the macroeconomic environment will remain challenging. However, our continued focus on sustainability, innovation, and higher growth, higher value-add segments, combined with our proactive approach to managing costs, supports our confidence in delivering against our expectations for the year. Third, our attention to sustainability is unwavering. We understand our role in supporting the circular economy, and we continue to improve the sustainability profile of our products. And finally, we want to leave you with a good understanding of why we're confident that Amcor's strong, resilient business will drive long-term shareholder value creation. Moving to some of the first quarter financial highlights on slide five, we've had a strong start to the year. On a constant currency basis, net sales growth was 15%. which includes approximately $400 million of price increases related to higher raw material costs. Excluding this pass-through impact, organic sales grew 3%. Both the flexibles and rigid segments generated price-mixed benefits and have done an excellent job recovering general inflation of approximately $75 million as a result of non-material costs increasing at double-digit rates. Overall volumes were marginally lower, reflecting somewhat softer and variable customer demand through the quarter. As I mentioned earlier, operating leverage was strong with solid top line growth and proactive delivery of cost efficiencies in both businesses, driving EBIT up 9% and adjusted earnings per share up 10%. We continue to expect to deliver strong cash returns to shareholders this fiscal year through approximately $400 million of share repurchases and a growing dividend which increased to 12.25 cents per share this quarter. And our financial profile remains strong, with return on average funds employed at 16.5%. We're pleased with our first quarter financial performance, and we'll now turn over to Michael to cover more of the specifics, including our fiscal 23 outlook. Michael?
spk02: Thanks, Ron, and hello, everyone. Turning to our flexible segment performance on slide six, Our Flexibles business had another excellent quarter, with all business units delivering solid organic sales growth, while executing well on inflation recovery, cost initiatives and mix management. Net sales were up 6% on a reported basis, which includes recoveries of higher raw material costs of approximately $270 million, representing 10% of quarterly sales growth. The teams have continued to successfully manage the pass-through of higher raw material costs And as expected, the related price cost impact on earnings for the quarter was relatively neutral. Excluding the raw material impact, organic revenue growth of 3% was driven by favorable price mixed benefits of approximately 4%, partly offset by lower volumes. Some business units experienced lower demand in certain categories during the quarter. However, our broad market coverage and geographic diversification limited the overall volume impact. Sales across our combined priority segments grew high single digits for the quarter, with healthcare a particular standout, delivering strong sales and volume growth across every region. In our Asian business, overall volumes were higher than the prior year, despite lower volumes in China, which was impacted by ongoing COVID-related lockdowns. Adjusted EBIT was up 11% in comparable constant currency terms for the quarter, reflecting overall sales growth, price mix benefits and outstanding cost performance, including quick actions taken to flex the cost base in regions where the operating environment has been more challenged. Adjusted EBIT margin of 12.7% was comparable to last year, notwithstanding the 130 basis point dilution related to increased sales dollars associated with passing through high raw material costs. Turning to rigid packaging on slide 7, The key takeaway for RIDGIDS is the business delivered another quarter of solid sales and earnings growth. Reported sales were up 19%, which included the pass-through of high raw material costs of approximately $130 million, or 17% of sales. Excluding this pass-through, organic sales growth of 3% was driven by price mix benefits of 2% and volume growth of 1%. In North America, we had positive product mix in the beverage business, with hot fill volumes up 6%. reflecting growth across a range of categories including sports drinks, juices, and ready-to-drink teas. From an overall standpoint, beverage volumes were lower than last year, reflecting a decrease in lower-value cold fill and pre-formed volumes. In the specialty container business, volumes increased mid-single digits, led by strength in healthcare, dairy, and nutrition markets, And in Latin America, volumes were up high single digits with strong performance in key countries such as Argentina, Brazil and Mexico. Adjusted EBIT increased 7% on a comparable constant currency basis, driven by higher overall volumes, strong inflation recovery and continued solid operating and cost performance. EBIT margins were 7% and over the past several quarters have been negatively impacted by approximately 250 basis points. due to a sharp increase in resin pricing being passed through the sales line and significantly increasing sales dollars as a result. In terms of the balance sheet on slide 8, we continue to maintain a strong investment grade credit rating which provides us with flexibility to invest for growth and access to lower cost debt markets across key currencies. Leverage at the end of the quarter was three times and right in line with our expectations for this time of year given the seasonality of cash flow. And as we highlighted in August, free cash flow was lower than the same quarter last year as we expected. Our cash flow is typically weighted to the second half of the year. And in fiscal 2023, the seasonality will be more pronounced given higher raw material costs and the decision to increase inventory levels through last year to offset some of the volatility created by supply constraints. We have reaffirmed our four-year cash flow guidance with Crainge, which I'll come back to shortly. Notwithstanding the temporary increase in inventory levels, we remain highly focused on working capital performance, which is particularly critical in this inflationary environment, and we've maintained our 12-month average working capital sales ratio at 8%. In August, we announced an incremental investment in EPAC and the purchase of a Flexibles plant in the Czech Republic and funded both of those investments in the September quarter for a total of around US$100 million. And while we did not repurchase any shares during Q1, we continue to expect to allocate approximately $400 million towards share repurchases in fiscal 23. Turning now to AMCOR's outlook for fiscal 23 on slide 9. While we expect market conditions to remain challenging through 2023, we have had a strong start to the year and taking into account the relative stability of our end market exposures and our strong track record of consistent execution, we remain confident in our ability to deliver against the outlook we provided in August. We have reaffirmed our expectations for organic growth of 5% to 10% from the underlying business and a benefit of approximately 2% from share repurchases, while continuing to expect an impact from the following three non-operating items. Firstly, a negative impact of approximately 4% from higher interest expense after tax. Forward curve expectations have continued to move higher and interest expense is now expected to be in the range of $240 to $260. Net of our expectations for a slightly lower effective tax rate, we continue to expect a 4% headwind to EPS, as we noted in August. Second, an estimated 2% negative impact from the scale down and sale of our three plants in Russia, which we continue to expect in the second half of the fiscal year. And third, a negative currency translation impact of 5%, which is higher than the 2% we anticipated back in August due to the continued strengthening of the US dollar. As a result of this US dollar strengthening, we are updating our expectations for adjusted EPS on a reported basis to be 77 to 81 cents per share. In terms of cash flow, we continue to expect a seasonally stronger second half, and we have reaffirmed our adjusted free cash flow expectations to a range of approximately 1 to 1.1 billion. However, the stronger US dollar pushes our current expectation toward the lower end of the range. So in summary for me today, The business has delivered another strong quarter of organic sales and earnings growth as we remain focused on executing for our customers, managing margins and taking decisive actions to rapidly recover inflation while flexing our cost base. Our ability to successfully balance these priorities supports our confidence in delivering another year of solid underlying growth despite persistent market challenges. With that, I'll hand back to Ron.
spk13: Okay, thanks, Michael. Before we open the call to questions, I'd like to cover some of the drivers that inform how we think about our growth over the longer term and are relevant for our fiscal 23 outlook as well. For several periods, we've highlighted multiple commercially-oriented drivers that have enabled us to deliver solid and sustainable organic earnings growth over the last three years. These drivers include opportunities in priority segments, emerging markets, and innovation, and they've not changed. And when combined with our ability to deliver continual cost improvements by leveraging our scale advantages and capabilities, these drivers give us the confidence we'll continue to consistently deliver solid organic earnings growth from the underlying business, even in the face of continued challenging and evolving macroeconomic conditions. Our focus on priority segments, including protein, healthcare, premium coffee, pet food, and hot-filled beverages, will continue to be a driver of growth and mixed benefits. With more than $4 billion in collective annual sales, we have leading positions in each of these large addressable markets that have been growing at higher than market rates for us historically. And over time, we expect they'll continue to grow at mid single digit rates with higher than average margins. As Michael mentioned, healthcare was a particular standout in the first quarter with strong growth across all regions. Emerging markets also continue to be a focus for AMCOR. We have a large-scale diversified emerging markets portfolio, which generates annual sales of more than $3 billion. And this is another source of organic growth. And over the long term, we expect these markets collectively will continue to grow at mid single-digit rates. In the last quarter, several emerging market countries delivered double-digit earnings growth, including India, Brazil, and Mexico. Innovation provides a third opportunity for us to drive growth and value, particularly as customers and consumers focus on the critical need for more sustainable high-performance packaging solutions. Amcor has industry-leading R&D and material science capabilities and expertise. And when coupled with our unmatched scale and geographic reach, these capabilities provide unique ongoing opportunities to develop differentiated products to meet the needs of our customers. For example, we're winning new business by taking fresh protein packaging solutions initially developed by the legacy Bemis business into the Asia-Pacific market. including modified atmosphere packaging solutions in China and the Ecotite high barrier recyclable films in Australia. And a cross-functional Amcor team came together to partner with Pfizer to develop packaging for their first commercial batches of Paxlovid in the U.S. market. Leveraging technology developed by our teams in Europe and our global footprint, we were able to start production of lidding and base material at the same time in five Amcor sites across five countries in order to fully meet Pfizer's requirements in one-third of the standard lead time. Looking ahead, the strategic choices we've made to focus on these organic growth drivers will guide how we prioritize investments back into the business. We see a wide range of attractive growth opportunities across each of these areas, and we're actively investing to sustain the organic growth momentum we've built over several years. Before closing, a few words on sustainability. Sustainability is fundamental to everything we do and is deeply embedded in AMCOR's strategy and risk management framework and the basic start within our own operations. Our 2022 sustainability report will be released in a few weeks and will highlight some of the important progress we've made through the year. This includes reaching a cumulative reduction in greenhouse gas emissions intensity of 35% since the launch of AMCOR's EnviroAction program in 2008. A critical journey will continue through our commitment to achieve net zero emissions by 2050. In addition to carbon related objectives, we maintain robust targets for reducing water and waste and achieve significant milestones during the year. A few weeks ago, we also released our first TCFD report highlighting the important work we're doing to help ensure we make the right decisions on climate and packaging sustainability. Turning to slide 12, we continue to make progress supporting the development of circular systems through the three pillars of our responsible packaging strategy, innovation, infrastructure, and consumer participation. Today, nearly 100% of our rigid and specialty carton packaging portfolios are fully recyclable. And in our flexible packaging segment, 83% of our product portfolio is designed to be recycled or has a recycle-ready option available for trial. In fiscal 22, We used more than 130,000 metric tons of PCR, up 30% from the prior year, and representing 6% of our total resin usage. And we're now building and increasing on our objectives with a new commitment that 30% of our total resin use will be recycled material by 2030. In one example to bring this focus, on recycled content to life, we've worked closely with Mondelez on the recent launch of packaging for several Cadbury dairy milk products, incorporating 30% food grade recycled content in both the UK and Australia. This is an important example of how a combination of strong relationships, differentiated capabilities, and a global footprint can translate into volume growth and mixed benefits for AMCOR. We've also continued to collaborate with others to support the development of recycling infrastructure. On October 12th, Amcor was the only packaging company to join 11 brand owners in the Consumer Goods Forum to publicly signal a commitment towards further increasing the use of recycled materials and packaging. Together, we expressed our common interest in purchasing commercial volumes of chemically recycled plastic and our support for the development of credible, safe, and environmentally sound chemical recycling infrastructure. Our sustainability journey is ongoing, and our long-term strategy is helping to create a responsible packaging industry for the benefit of AMCOR and its customers, but crucially for the environment as well. Turning to slide 13, we've built a strong foundation to deliver growth and value creation, and we've consistently executed well against our strategy. We don't expect to be immune to economic challenges and uncertainties. But we believe we're relatively well positioned with a defensive consumer staples and healthcare focused portfolio and multiple drivers of growth and cost productivity. And our consistently strong cash flow provides the ability to reinvest in the business, to pursue acquisitions or repurchase shares, and to grow the dividend, and positions us well to generate strong and consistent value for shareholders over the long term. In summary on slide 14, despite a continued challenging economic backdrop, we've had a strong start to the financial year. Our consistent execution has enabled us to deliver solid sales growth and excellent operating leverage, resulting in double-digit organic EPS growth. We're confident in our ability to deliver against our outlook for EPS growth and free cash flow, which we've reaffirmed today, and we're executing well to deliver long-term value for shareholders, including by making further progress against our sustainability agenda. We're ready to open the call for questions.
spk06: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and then rejoin the queue for any follow-up questions. Your first question comes from the line of Gansham Panjabi from Baird. Your line is open.
spk18: Thank you, operator. Good day, everybody. I guess first off, Ron, many consumer stapled customers of yours are aggressively raising prices and as a consequence are reporting weaker volumes along with destocking, which I assume is part of the reason your volumes were sluggish in both segments for the developed markets. How do you sort of see that dynamic evolving as we cycle more fully through into your fiscal year 23? I guess what are customers sharing with you in terms of their own outlook at this point for next year?
spk13: Yeah, look, thanks. I mean, it's a tough environment out there, as you alluded to. We had flat volumes basically across the business, and relative to many who've reported, that actually feels like outperformance, believe it or not. Things definitely slowed down through the quarter. Certainly through the month of September, things got a bit softer in Europe and North America in particular. I think it's a function of the two things you mentioned. One is Obviously, there is a bit of inventory built up in the supply chain in certain segments. And I think we'll see that come out relatively quickly, given that this is fast moving consumer goods that we're talking about. So we don't expect that any inventory impacts on volumes will be long lasting. But I do believe there is some extra inventory in the supply chain. And then secondly, the cumulative effect of inflation on the consumer, which eventually will lead to some elasticity. And I think you're hearing that from brand owners. We're hearing directly from them. And I think they're publicly commenting on, elasticity is maybe being less than expected, but still, there is elasticity in many of the categories that we're supplying into. So we have a pretty modest expectation for volumes from here for the rest of the fiscal year. Michael will talk more about that, I'm sure. But our guidance includes a range of outcomes, and a part of that range is where we end up on volumes.
spk18: Okay, terrific. And then in previous quarters, you've called out, you know, limitations on certain residents as it relates to availability and all sorts of disruptions and force majeures. Can you just give us an update on that dynamic and some of the volume you've given up in the past as you internalize production and focus on higher mix? Is there an opportunity now to go and recapture that share for the rest of your fiscal year?
spk13: Yeah. Well, look, I think as far as availability goes, the raw material availability picture has improved. I wouldn't say that we're completely supplied, but certainly the constraints that we face through much of fiscal 22, many of those have abated. We're down to a much shorter list of constrained raw materials. It probably held back sales more modestly in the first quarter than it impacted us in fiscal 22, but certainly the situation is improving. As far as recovery of lost sales, I think in these segments, it's very difficult to expect lost sales to be reclaimed from one period to the next. Again, these are fast-moving consumer goods, and if a sale is missed in one period, it's unlikely the consumer goes back and double purchases in a future quarter. So I think we've got to look forward at this stage.
spk06: Your next question comes from a line of George Staffos from Bank of America. Your line is open.
spk14: Thanks very much, everybody. Good day. Thanks for the details. Ron, sticking with this topic that Gansham teed up, can you talk about, to the extent possible, what your customers are saying where they're seeing the most negative effect from inflation on demand? And in particular, what are you seeing in the protein markets lately? You talk broadly, as you normally do, in terms of being a priority area. What are you seeing real-time in terms of that market in the first quarter?
spk13: Yeah, look, I think, you know, from the first part of your question about where is the demand, I guess, the most elastic, where we're seeing it soften the most, I would answer the question more geographically than at the segment level. I think, firstly, I would say our healthcare volumes globally have been very, very strong. So that's the other side of the discussion is that healthcare has remained very robust, particularly pharmaceutical packaging. And that's been true everywhere. I think as it relates to food, beverage packaging, home and personal care to some extent. Where we've seen the most softness has been in the developed markets in Western Europe and in North America. Presumably, you know, that's where the inflation is biting the most. I mean, we've got actually at the moment more modest inflation in some of the emerging market countries we're participating in. So really where we've seen the most softness and the increasing softness has been in North America and Western Europe. And then I guess I would also add China. to that list, but we believe that the China softness is primarily a result of the COVID-related lockdowns. We believe that based on the patterns across the global footprint or the national footprint we have in China. So I'd answer the question from a geographical perspective more than a segment perspective. And then as it relates to protein, protein is a high-priority segment for us without question. It's an attractive segment for a lot of reasons, a lot of innovation in that space. in particular around the films and materials. And we had a flattish quarter globally across the protein space. So that's not what you'd expect, and it's not what we've experienced over the last several years. We would expect mid-to-high single-digit growth in that segment, and we were more or less flat for the quarter.
spk14: Thanks, Ron. And my follow-on, just as we peer into the beverage business, you saw very good trends in your higher margin areas, which would be sort of counterintuitive with a consumer being pinched by inflation relative to what would be the lower margin areas, which were actually weaker. If you could talk to that, that would be great. Thanks, and good luck in the quarter.
spk13: Yeah, thanks, George. No, it's a good observation, and it's a good insight. I would agree with your insight there that, generally speaking, the hot-fill space is a space where there are more premium beverages available being sold. A lot of that goes through the convenience channel. I think what we're seeing there to some extent is a function of our customer mix. It's a function of new product introductions. Some segments actually held up pretty well through the quarter as whole segments, ready to drink teas, sports drinks to some extent, some of the hot filled juices. But I also think it's 90 days. And I think in a 90-day period, you have distortions that relate to inventories and different customer performance. So I'm not sure I would read too much into that other than our hot fill volumes have continued to grow at attractive rates. And it's one of the reasons we've prioritized that segment.
spk06: Your next question comes from a line of Jacob Kakarnas from Jordan, Australia. Your line is open.
spk16: Hi, Ron. Hi, Michael. Michael, can I just get you to give us a sense of where that inventory is at at the moment in both a units and value perspective? Just noting, obviously, it continues to build alongside the inflation. Just want to get a sense of how clean that might be given the volume outlook that we've just spoken to.
spk02: Yeah, no problem, Jake. As we said, I think we were expecting or we have been holding higher inventory levels or building higher inventory levels really as a a contingency against the supply constraints that we've been experiencing for the last 12 months. We guided back in August that we didn't expect that to come out of the system in Q1, which it didn't, and we saw cash outflow as a result of that. As we look forward, we'd expect into Q2 things are going to stabilize, and then as we head into H2, we should start to see inventories come off out of the system. And it's a combination of both volumes and value. I'd say the split, if I look year over year, it's probably 40% relates to volume and 60% is relating to the higher prices year on year. So as we look forward to the end of June, part of our cash flow guidance includes a pretty neutral position in terms of working capital. Year over year. So we're expecting working capital to be relatively flat versus the prior year where we had an outflow of $150 million. And that's largely on the back of that reversal in the inventory side in that helping us guide to that $1 to $1.1 billion in cash flow.
spk11: Thank you both.
spk10: Your next question comes from the line of Keith Chow from MST Marquis.
spk06: Your line is open.
spk03: Good day, gentlemen. Thanks for taking my question. The first one, even for Rod or Michael, could you be a bit more explicit about the raw materials benefit that you may receive given you're coming off a price-cost lag neutral scenario in the first quarter? Just wondering if you can help us quantify what the potential benefit could be for the remainder of the year. And given there could be potential benefits, does that imply the volume outlook is probably more for more softness. And again, if you could be more explicit as to what the volume direction is and quantum for the full year, what your expectations are, that would be fantastic. Thank you.
spk13: Yeah, Keith, I'll touch on volume and then Michael can talk about the raw material side. I think to be very plain spoken about it, we do expect soft volumes the rest of the year. I mean, I think that's the cautious, more conservative approach to take. I think you can tell By the operating leverage we got in the first quarter, we've been really proactive at getting after cost. Cost performance in the operations in both segments was really strong in the first quarter and will continue to be strong. And that's because we expect a pretty soft volume environment, which I think is very consistent with what everyone else in our value chain is experiencing as well. But maybe on the raw material side? Yeah.
spk02: So on the raw material side, Keith, as you know, throughout FY22, we pretty much, over the last two years really, we pretty much had a manageable headwind on the price-cost lag in recovering raw material. As we exited FY22, we were getting to a more neutral position. And in Q1, we were relatively neutral, as we called out. As we look forward into Q2, we are expecting a modest tailwind on raw materials. As you know, we buy a basket of raw materials across the globe, and so they can move at different times. But based on what we see today, we'd expect some tailwind in Q2. And as we look further out into the year, it's a really volatile environment and difficult to say. But in terms of our guidance, the 5% to 10% underlying performance, that takes into account a range of factors around the raw material pricing. you know, to get to the upper end, that would mean raw materials come off faster and we get a bigger tailwind as we head into the second half. You know, at the lower end of the range, obviously raw materials spike again. But, you know, we'll see how things turn out as we head into Q3.
spk03: Michael, can I just quickly follow on with that? So you've got inventories from a volume perspective quite significantly higher than 40% of the total uplifts. If you're winding back those inventories going into the balance of the year, what type of operating inefficiencies are we likely to see, given you've had a period of actually efficiency benefit as you've ramped up inventories? Should we expect a margin impact as you wind back those inventories?
spk10: Well, a lot of the inventory is raw material inventory. Yeah, it's raw material, Kate's thought. So in that respect, I mean, it's going to flow through, get passed through to the customer.
spk06: Understood.
spk10: Thanks very much.
spk06: Your next question comes from a line of Kyle White from Deutsche Bank. Your line is open.
spk05: Hey, good morning. Thanks for taking the question. I wanted to go to the beverage volumes down in North America. I know it may be a little bit difficult to say, but do you think that's a function of some of the destocking that we've been talking about? Or is that more longer-lasting volume weakness with customers choosing value over volume and the inflationary pressures impacting consumer demand?
spk13: Oh, look, it'd be really hard to read anything into the last 90 days. That's long-term, to be honest, Kyle. I think there's been so much volatility, and the volumes through the quarter were quite volatile. So I think there's a bit of destocking in there. I think I'm sure that when the dust settles, we'll see some shift towards volume over value or towards big packs. I mean, I think that's likely if we hit a real soft economic patch. But I think in the first 90 days, it's a function of inventories in the chain. It's customer mix. It's a number of different factors.
spk05: Got it. And you touched on it a little bit earlier, but I think the volume challenge in the fast-moving goods space, it's understood. But can you touch on what you're seeing in the healthcare space more specifically and how that trended through the quarter? And do you anticipate any challenges to volumes here from some of the economic challenges as well as the inflationary environment we have?
spk13: Yeah, look, I think healthcare was a real powerhouse for us in the quarter, and it was very consistent through the quarter. So we had high single-digit volume growth across the global healthcare business. And that was consistent by month, and it was consistent by region, and we would expect that to continue. I think you might recall that this segment is a mid-single-digit grower for us over a long period of time. We had a little bit of a rough patch during COVID when there were less elective procedures and medical procedures, less prescriptions written, et cetera. I think we're sort of back to roughly where we were pre-COVID. And, you know, we would expect that business to continue to grow. We've put some investments into place, which we've yet to really see the benefits of, but that will also help propel the volumes going forward. We've got a new healthcare plant in Southeast Asia. We've got an extension of a facility in Ireland. There's a number of film assets we've put into that business. and we expect that those will help power the business going forward.
spk06: Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.
spk07: Thanks. Good evening, everyone. I guess I wanted to ask, just to be clear, in the 5% to 10% organic EBIT growth for fiscal 23, what are the assumed volumes um in in that in that range and i guess associated with that um the strong mix um and non-resin price that you generated in the flexible system um in the quarter uh just do you see that level of mix potentially persisting through the year uh especially as raw material availability starts to improve which i believe had constrained or had created a mixed benefit for you because you were prioritizing certain market segments last year. Thank you.
spk02: Yeah. Thanks, Adam, for the question. Look, in terms of our guidance, obviously, we've got a range of outcomes in the five to 10. I mean, the base assumption is that volumes are going to be fairly modest. We're not expecting any major volume growth. Clearly, in the first quarter, we were flat and market conditions are pretty tight and tough out there. You know, where we are focused, obviously, is, you know, continuing to drive the business to recover inflation and the raw material costs and actively taking costs out of the business, which also supported the result in the quarter as well as strong mix through continued innovation and mixed management driving the focus segments and the like. So, you know, in that 5% to 10%, you know, clearly there's a range of outcomes. If we do better on the volume side in some of the focus segments, then we'll potentially... have better mix and end at the higher end of the range. You know, if you see more recessionary impacts and softer consumer demand, then that could drive us to the lower end of the range. Obviously, raw material prices I touched on earlier can impact as well. So, you know, inflation is the other big one. We did well in the quarter to recover inflation through price and mix. You know, and we are expecting more inflation as we head through the year and expect to recover that. But that's another factor that could drive, you know, a range of outcomes in that guidance.
spk10: All right, I'll pass it on. Thank you.
spk06: Your next question comes from a line of Daniel Chang from CLSA. Your line is open.
spk08: Good morning, all. So just a question on the Russian process. Can you talk us through how it's progressing? I noticed that some of your peers have achieved a better outcome than expected.
spk13: Well, look, we're trying to exit in an orderly way. You know, just for context, we have three factories in Russia. Collectively, they've generated about 2% or 3% of sales over the last several years, about 4% to 5% of EBIT. We announced in August that we're pursuing the sale of those three factories. We said at the time we're going to pursue an orderly exit, meaning that we're going to look to preserve value for shareholders as well. So we're running what to the extent you could call it a typical – M&A process in that environment. That's what we're doing. And there's been a reasonable degree of interest. So we're still optimistic the process will run its course and complete sometime in the second half of this fiscal year.
spk08: Great, Ron. And the proceeds would just go to debt repayment, I'm presuming?
spk13: Yeah, look, I think we'll... deal with that when the time comes. I mean, we are repurchasing shares this year. We've spent about $100 million in the first quarter on acquisitions. We'll continue to look for further acquisitions. So I think we'll see where we get to. But as a general rule, we're not of the view that paying down debt is going to be a very value-creating use of cash right at the moment, even with interest rates elevated from where they were a year ago.
spk06: Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.
spk04: Good afternoon. Just following up on Dan's question, can you talk about ability and willingness to pursue M&A in fiscal 23 in what's probably going to be a tougher macro environment? You had a peer that announced a large acquisition today. And then in that context, maybe you could talk a little bit more about EPAC.
spk13: Yeah, well, look, I'd say the ability and the willingness are both high. But, you know, it always takes two to tango in an M&A situation. And, you know, we're actively pursuing deals. I mean, that's part of our formula and has been for a long time. We think there are good bolt-on opportunities across our portfolio. You know, I think what I would say is you can safely assume that anything that's in the market, in the packaging space, or at least in our segments, you know, we're having a look at and a close look at. So the appetite's there, the willingness is there, the balance sheet and cash flow are there. We're pretty clear on our strategy in terms of the segments we want to grow in, the geographies we want to grow in. So we'd like to try to be active. You know, in some respects, a tough macroeconomic backdrop might not be the worst context, the worst setting for us. You know, if you go back over a number of years, we've tended to be more active when asset prices were more modest or at least more in line with long-term trends. And we're going to remain disciplined and actually hope that's the case in this cycle. EPAC, just quickly on EPAC, it's more of a corporate venturing type investment. So we've got a minority stake. We've put some more money into it, but it's still a minority position in a startup relatively new startup called EPAC, which has been around about five or six years. It's a digitally enabled flexible packaging company. They essentially rely on digital printing. The whole process is digitized and it's a really exciting opportunity. It's a business that's targeting small and actually micro customers with quick lead times and very responsive service model and has been growing really almost by triple digits. over the last five or six years. So we're pretty excited about that business.
spk10: Okay, that's very helpful. I'll turn it over. Thank you.
spk06: Your next question comes from a line of Richard Johnson from Jefferies. Your line is open.
spk17: Thanks very much. Just a question on Russia, if I may, please. I noticed you've got a 90-odd million restructuring program related to the sale of the three plants. Just intuitively, that feels like a very high number. I was just wondering if you could help me understand what's behind it.
spk02: Richard, that was just the impairment that we took back in June 30 year end when we noted the asset as held for sale. So we had to impair the asset to an estimated book value, market value. And so that was the adjustment for that one.
spk17: Yeah, but if you break down that $200 million, Michael, you talk about $62 million and restructuring costs with a further $30 million to go this year. So it's really that bit that I'm trying to understand what that is.
spk02: Right. Well, part of that was we obviously got to close the Ukraine and close that piece out and then to relocate part of the business out of Russia, right-size the footprint in Europe and also... SD&A restructuring as well to help to mitigate the lost earnings from the Russian business, which we feel that we're taking a lot of action in that front to help recover some of that 4% to 5% in EBIT that we're going to end up losing as a result of the sale.
spk17: That's helpful. And while you're on the line, just on the interest charge, very helpful guidance you're giving. Thank you. I was just trying to get a sense of what that number would be on a constant FX basis.
spk02: It's pretty similar, Richard. It's not a material movement on that front.
spk06: And your next question comes from a line of Mark Wall from BMO. Your line is open.
spk09: Thanks. Michael, along the same lines, what's your breakout, just fixed and floating on the debt?
spk02: Yeah, look, the fixed and floating piece – at the end of September was 50-50, fixed and floating. Since that time, we have taken some fixed rate swaps, and so today we stand around about 65% fixed versus 35% floating. Okay.
spk09: All right.
spk10: And then, Ron, I'm just curious, what would you say the three biggest challenges are for you at the moment? I think...
spk13: Making sure that the teams stay focused on trying to drive growth in the segments that we've nominated as areas we want to grow. And at the same time, being out there and really aggressively focusing on recovering inflation. I think that's the key. I think there's one other one I'll come to. But I think generally speaking, we're trying to do two things at the same time, which you could consider to be contradictory. We're trying to grow the business and generate momentum on the top line. And we feel like we've never had more tools at our disposal to do that. And we're investing more CapEx and more R&D, et cetera, et cetera. But at the same time, we've got to be out front of inflation. And so just trying to manage that message internally and managing the balance between those two things is the real challenge. And then the second thing is there's just been a lot of exogenous factors out in the operating environment over the last several years, starting with the pandemic and then the supply chain disruptions. And then in the parts of the business impacted by the Russia-Ukraine conflict, there's just been a lot of different exogenous factors out there. And so we just want to make sure people have energy and they're renewed and they're pumped up and fired up to come to work every day. I think that's not an insignificant challenge when there's so many different things being thrown at them that really have nothing to do with the base business of selling packaging.
spk10: And your next question comes from the line of Larry Gandler from Credit Suisse.
spk06: Your line is open.
spk01: Hi, guys. Thanks for taking my questions. Just in terms of your cash flow guidance, do you need to take further price increases from here to expand that tail end of price-cost lag?
spk02: Look, Larry, obviously you're cycling through a kind of 12-month period, so there will be still some further increase in pricing on the raw material side. We'll see how that plays out into the second half, but I would still be expecting some further increase as we roll through the year.
spk01: That's further price increases that you guys take as opposed to cost increases, just to be clear. Yes. Okay. I don't know, Mike or Ron, if you could just talk to the pet food category, maybe in Europe and U.S., you know, how that played out over the last quarter and maybe recent trends.
spk13: Yeah, look, it's been a solid segment for us in terms of growth and margin as the pet food segment generally has premiumized or humanized. You'll hear the two words used to describe that segment. You know, we transitioned over many number of years from primarily dry pet food in bulk to essentially almost single serve pet food in smaller pouches. And we've benefited a lot from the increased packaging intensity in that segment. This is increasing sustainability requirements of that sort of packaging. And one of our innovation platforms, Amlite, is directed squarely at that segment in partnership with some of our big customers. So it's a pretty exciting space and there's a lot of innovation brought to the market both by the brand owners and by us as a packaging supplier. And it's been a mid-single-digit sort of growth segment for us. The first quarter, quite frankly, was flat. We were pretty much flat globally. The Russian Eastern European sales were soft. We had some growth offsetting that elsewhere. So all up, we were more or less flat for the quarter. But we don't see any signs or cause for concern around the secular market. trends that have made it such an attractive segment going forward.
spk06: Your next question comes from a line of Nathan Riley from UBS. Your line is open.
spk15: Hey, Ron. Quick one. Are you achieving any manufacturing efficiencies in the plants just as raw material availability starts to improve? some of those supply chain challenges start to stabilize. I'd also appreciate a bit of color on labor, just in terms of cost and availability and just an idea of how that's all washing through your organic growth guidance.
spk13: Yeah, look, it's a good question. We're really pleased with the plant performance. So firstly, in terms of the availability of the inputs, as I noted earlier, the raw material availability has improved. There are still some specialty materials that are in short supply, and I think that's going to continue for a while. But many of the constraints and bottlenecks we're dealing with over the last 12 to 18 months have abated. So that situation has improved. And generally speaking, the labor availability has improved across the network. Certainly this time last year, or even the earlier part of calendar 22, we had some real labor challenges, especially in North America and in Europe as COVID spikes rolled through those regions, that seems to be behind us at the moment. And we've not had real labor constraints for some time. So I think from a factor availability or input availability, the plants have been able to run more unencumbered. And then I think as far as the productivity and the efficiencies, we're really pleased. We think that's one of the highlights of the first quarter. If you look at our 9% EBIT growth, we'd say probably about a third of that came from price and mix, but two-thirds of it came from the cost performance in the plants. And so, you know, that's where we got the operating leverage to turn really flat volumes, actually modestly down volumes into 10% EPS growth. So we're pretty pleased with the way the plants are performing, and it's important because we're going to need them going forward.
spk10: Okay. Thanks, Matt. Thank you.
spk06: Your next question comes from the line of Brooke Campbell Crawford from Barenjoy. Your line is open.
spk19: Yeah, thanks for allowing the question. Just to follow up on an earlier comment around the restructuring in Europe, are you able just to confirm, is the plan actually to close plants in Europe going forward, or is this provision that was taken, I guess, three months ago now more relating to
spk13: and the closure of russia and you're not actually planning to close plants in europe yeah look just to put some context in that as i said the russian business is about four to five percent of global ebit within europe it's obviously a much higher percentage so we've got an obligate we're going to sell that business and we're going to lose those earnings we've got an obligation to try to protect the income statement and and generate profit where we can and so we're going to do we're going to take some cost out we're going to right size the part of the business that was most directly affected. So some of that cost is related, as Michael said, to just the transition of of winding down operations in the Ukraine and migrating certain business out of the Russian plants that can be repatriated into other plants in the European network. That will that's part of where that cost is going. There'll be some overhead reductions because we'll be operating a smaller business and there may be a plant closure to to be but we haven't come to that conclusion yet.
spk19: Okay, great. Great, thanks. And I guess the free cash flow guidance this year is unchanged, but what's the expectations at this point for the cash significant items that, of course, sort of falls outside of that $1 billion guidance range?
spk02: Yeah, look, it's a relatively smaller amount, maybe $20 to $30 billion. It's not significant.
spk06: And your next question comes from the line of John Patel from Macquarie. Your line is open.
spk12: Good afternoon, Ron and Michael. How are you?
spk13: Hey, John.
spk12: Just picking up on a couple of the recent questions. Coming back to you mentioned sort of protein volumes were flat in the quarter and pet foods are flat as well and coffee was back a little bit. I appreciate it's only a quarter, but was that sort of, you know, de-stocking driving that sort of flatness or is there, you know, I know you sort of haven't seen or haven't caught out a sort of material COVID benefit overall in recent years, but we have seen obviously strong coffee and pet food volumes over the last couple of years. There was a little bit of a cycling effect there from that, just trying to sort of understand that a bit more.
spk13: You know, it's really hard to say. The only segment where you... feel like there's more inventory and maybe got a little bit of a bump in hindsight is the coffee space. You know, we do primarily our coffee business now is primarily single serve and systems, coffee systems, which this is more intuitive or hypothesis than it is borne out by facts, but intuitively more at home consumption, more people at home would have driven more at home consumption of of single-serve coffee and coffee system sales, pods and the like. And so we may be seeing a little bit of the unwind of that. But I think the more important thing is that long-term, these segments, the secular tailwinds that relate to greater packaging intensity to provide the consumer the convenience and functionality that they're now used to. And so we continue to be bullish on these segments over the medium to longer term.
spk12: Thanks, Ron. And look, in terms of the final question, sorry, I'm going to ask probably two and one here. But in terms of if we do see consumers trade down, you know, AMCOR's exposure to big brands versus home brands. I mean, historically, you've had a pretty balanced exposure. So, you know, you pick up, you know, some home brand spend if that indeed does transition. And so the second part is, you know, we've talked obviously a lot about sustainability products in recent years. I mean, are we now at a point where you're starting to see those new products really move the needle and make a material contribution to price and mix?
spk13: Yeah, look, on the private label versus branded mix, our mix kind of looks like the market. I think you have to get to the segment level, and certain segments have much higher penetration of private label than others, and our mix kind of reflects that. And so I would say there's not a whole lot there there in terms of you know, what the impact will be as consumers shift potentially to private label from branded goods. On the sustainability platforms, look, we are starting to see some traction. You know, the sales are in the tens of millions of dollars now, which, you know, is growing off a low base. So this is sales of the platforms that we've talked about before, the Amprima and Amfiber and Amlite and Sky. So we're starting to get there. I think it's just all part of the formula of continually driving mix benefits and margin expansion off of the organic volumes of the business.
spk06: Ladies and gentlemen, this concludes our question and answer session. I will now turn the call back over to Ron Delia for some closing remarks.
spk13: Okay, thanks, Operator. Thanks very much for your interest in AMCOR today. We feel like we had a good strong start to the fiscal year, and we're maintaining our expectations for the performance of the base business for the rest of fiscal 23, and we'll look forward to continue to provide updates along the way. Thanks very much. And with that, Operator, we'll end the call.
spk06: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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