Amcor plc

Ladies and gentlemen, thanks for standing by and welcome to the AMCOR full year 2023 results call. I would now like to turn the call over to Tracy Whitehead, Head of Investor Relations. Please go ahead.

Thank you, Mandeep, and thanks everyone for joining AMCOR's fiscal 23 earnings call. Joining today is Ron D'Elia, our 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 investor section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we will 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. Reference can be made to AMCOR's SEC filings, 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. Over to you, Ron.

Thanks, Tracy, and thanks everyone for joining Michael and myself today to discuss AMCOR's fiscal 2023 and June quarter results. We'll begin with some prepared remarks, starting as we always do with safety on slide three. Safety is our most important value at AMCOR, and throughout fiscal 2023, we again made strong progress on our journey for continuous safety improvement across the company. Sixty-nine percent of our sites remained injury-free for at least 12 months, and we reduced injuries globally by 31%. While we're pleased with these results, ultimately, it's not just the number of injuries we're focused on, but also the severity of the injuries that do occur. Tragically, in June, a contractor's employee lost his life at our Pondicherry site in India after falling from a roof. We immediately conducted a detailed investigation, and we're deploying the learnings across all ANCOR sites with the goal of eliminating the risk of similar accidents in the future. We're relentlessly focused on safety globally, and this tragic incident is a stark reminder of the importance of those efforts. Moving to our key messages on slide four. First, Amcor delivered solid operating performance for the 2023 fiscal year. Adjusted EBIT was up 1%, and we returned $1.2 billion to shareholders through share purchases and our industry-leading dividend. Across the organization, our teams demonstrated agility by taking action to navigate highly challenging and volatile market dynamics characterized by ongoing inflation, softening consumer demand, and customer destocking, particularly in the second half of the fiscal year. Our ability to modestly grow adjusted EBIT under these circumstances was the result of proactive and decisive actions to effectively manage the areas under our control, which is our second key message. Our teams did an excellent job prioritizing pricing to recover increases in raw materials and general inflation. And as we entered the 2023 calendar year, we stepped up the intensity of our cost reduction efforts to drive productivity benefits. Additionally, we invested in structural initiatives, including strategic plant closures that will deliver meaningful cost savings in fiscal 24 and 25. Third, as a result of these comprehensive actions, AMCOR is well positioned to return to solid mid single digit earnings growth in the second half of fiscal 24, which also leaves us well placed to grow at our long term trend of high single digit rates thereafter. While we expect current market conditions to persist over the near term for the entire industry, we'll continue to recover inflation and are confident the benefits from our cost reduction and productivity initiatives will have a sustainable positive impact on earnings leverage. Additionally, we'll be cycling weaker volume comparatives in the second half, and the headwinds we've faced from the sale of our Russian plants and significantly higher interest expense are largely limited to the first half of fiscal 24. All these known benefits are largely within our control and underpin our expectation of a return to solid earnings growth in the second half without having to rely on a significant change in the demand environment. And finally, as we and the entire CPG industry continue to navigate a dynamic operating environment, Amcor remains laser focused on executing against our long-term growth and value creation strategy. We're well positioned as a recognized industry leader, and we continue to pursue opportunities to invest in our strong underlying business, particularly through innovation and sustainability initiatives in faster growing higher value markets. We're also actively pursuing value creating M&A, such as the deal announced last week to acquire Phoenix flexible packaging in the high-growth Indian market. And we're committed to returning cash to shareholders through a compelling and growing dividend and share repurchases. Moving to slide five for a summary of our financial results. Fiscal 23 and June quarter financial performance was well within our May guidance range, as proactive cost and price actions helped counter ongoing inflation and increasingly soft and more volatile volumes as we progressed through the year. Reported net sales for the year were up 1 percent, which includes an unfavorable currency impact of 3 percent and approximately $775 million of pricing to recover higher raw material costs. Organic sales were flat on a comparable constant currency basis as volumes were 3 percent lower, offsetting a price-mix benefit of around 3 percent. Full-year adjusted EBIT of 1.6 billion was up 1% on a comparable constant currency basis, benefiting from strong operating leverage in the first half of the year and accelerated cost actions in the second half. Adjusted EPS of 73.3 U.S. cents per share was down 2% on a comparable constant currency basis. For the June quarter, sales were down 5%. Positive price and mix of approximately 2% included recovery of $100 million of general inflation, and volumes were at the lower end of our expected range, down 7%. Last quarter, we referenced accelerated demand weakness in March and April, and this persisted broadly through the June quarter due to a combination of lower consumer demand and continued customer destocking, including in priority categories, which also impacted mix compared with last year. While earnings were in line with our guidance, the June quarter is historically MCOR's strongest of the year, making it more difficult to flex costs. As a result, weaker volumes had a more pronounced impact on earnings, and adjusted EBIT of $436 million was 7% lower than the prior year on a comparable basis. We continue to execute well in our capital allocation priorities, returning approximately $1.2 billion of cash to shareholders during the year through a combination of dividends, which the Board increased to 49 cents per share, and the repurchase of approximately 41 billion shares, or 3% of shares outstanding, for a total cost of $431 million. Since 2020, we've repurchased approximately 11% of our outstanding shares, and our industry-leading dividend currently yields around 5%. Our overall financial profile also remains robust, with return on average funds employed at 15.4%. Slide 6 highlights the proactive actions we continue to take to manage the areas under our control. We've been successful in pricing for inflation throughout the year, passing through a total of $1.1 billion to compensate for higher raw materials and general inflation, including labor, energy, and freight. We also delivered more than $200 million in annual cost savings through productivity initiatives, including a reduction of more than 1,200 full-time employees. And we're investing in structural initiatives that will deliver approximately $35 million in savings, primarily in the second half of fiscal 24, with an incremental $15 million benefit in fiscal 25. And importantly, we expect the benefits from these fiscal 23 cost actions and structural initiatives to have an ongoing favorable impact on earnings leverage. I'll turn it over now to Michael to cover more of the financials.

Thanks, Ron, and hi, everyone. Beginning with the flexible segment on slide seven, fiscal 23 reported sales were in line with last year, which included recovery of higher raw material costs of approximately $515 million, accounting for 5% sales growth. Excluding the raw material impact and negative currency movements, sales grew 1% for the year, driven by price mix benefits of 4%, reflecting our ability as a continued price to recover inflation across all flexible business groups. This was partly offset by 30% lower volumes. And while volumes in all regions were impacted by slower demand and destocking, particularly in the second half of the year, our strategic focus on higher value priority categories continued to drive solid sales growth for the year. Volumes in the pharmaceutical and pet care categories were especially strong, helping to limit the impact of broad-based lower volumes in other categories. As Ron mentioned, throughout the year, the business did a good job aligning operating costs with challenging market conditions while pricing to recover inflation. This focus resulted in a 1% increase in adjusted EBIT for the year on a comparable constant currency basis. Margins remained strong at 12.8% despite 100 basis point dilution related to increased sales dollars from passing through higher material costs and general inflation. In terms of the fourth quarter, net sales on a comparable constant currency basis were down 5%, with positive price mix of 2% more than offset by a 7% decline in volume. This represents an accelerated volume decline compared with the March quarter and was a consistent trend across most regions. The greatest sequential declines continue to be seen in the North America and European markets, where overall June quarter volumes were lower by high single digits. consistent with software retail scanner data, and with categories such as premium coffee, protein, and healthcare also being incrementally impacted by customer destocking. Adjusted EBIT for the quarter of 387 million was 7% lower than the prior year on a comparable constant currency basis, reflecting the impact of lower volumes, unfavorable mix, and ongoing inflation, partly offset by benefits from continued pricing and cost action. Turning to rigid packaging on slide 8, fiscal 23 reported net sales were 4% higher than the same period last year, including approximately $260 million, or 8% of sales related to the pass-through of higher raw material costs. Organic sales declined 3%, reflecting 4% lower volumes, partly offset by a price-mix benefit of 1%. In North America, overall beverage volumes for the year were down 6%, Hot fill volumes were in line with the prior year as new business wins in key categories offset unfavorable consumer demand and customer destocking. In specialty containers, volumes were lower than last year, with growth in the healthcare, dairy and nutrition categories offset by weaker volumes in food, home and personal care. And in Latin America, volumes were down low single digits versus last year, which reflects challenging macroeconomic conditions across the region. Fiscal 23 adjusted EBIT was down 7% as strong earnings growth in the first half was more than offset by challenging market conditions that accelerated through the second half of the year. Adjusted EBIT margin of 7.5% includes an adverse impact of approximately 80 basis points from the increased sales dollars related to passing through higher raw material costs and general inflation. Looking at the June quarter, comparable constant currency net sales were down 4%. Price mixed benefits of 2% for more than offset by a 6% volume decline as lower consumer demand and customer destocking continue to impact the business, particularly in North America. On a comparable currency basis, adjusted EBIT for the quarter of $73 million was down $22 million against a strong comparative period. As Ron mentioned earlier, the June quarter is typically the seasonally strongest of the year, and together with volatility in customer order patterns, This limits the ability to fully flex costs. In an environment where production volumes are weaker, fixed cost absorption is also significantly lower, and the combination of these factors amplifies the impact on earnings. The team continue to manage the cost under their control well, with additional headcount reduction as the more plants shut down days, and we continue to focus on cost actions as we manage through this cycle of softer demand and destocking. Looking ahead to the September quarter, we do not anticipate market challenges to materially improve, which will have an unfavorable impact on earnings compared with the same quarter last year. Moving to cash and the balance sheet on slide nine. Our financial profile and investment grade balance sheet remain strong. Leverage at three times on a trailing 12-month MTA basis is modestly up from last year, but is aligned with our expectations given the softer demand of broad-based stocking through the supply chain. Adjusted free cash flow of $848 million was in line with our updated outlook, though below last year. This reduction mostly reflects lower accounts payable balances as we moderated our purchasing activities partly to reduce inventories but also in response to the soft demand environment. This is a timing impact which we expect will abate as we progress through fiscal 24 and whilst we have made good progress bringing down our inventory balances, with a reduction of more than $400 million from the peak levels in November 2022. We will continue to focus on reducing overall working capital to support increasing cash flow. Turning now to the outlook for fiscal 2024 on slide 10. For the 24 fiscal year, we expect adjusted EPS of approximately $0.67 to $0.71 per share. This includes expectations that organic growth from the underlying business will be in the plus or minus low single digit range, as volumes are expected to remain weak, particularly in the first half. Share repurchases will result in a benefit of approximately 2%, and currency translation is expected to add a further benefit of 2%, assuming current exchange rates prevail for the balance of the fiscal year. This is expected to be offset by a negative impact of approximately 3%, related to the sale of our three plants in Russia in December 2022, and a negative impact of approximately 6% from higher interest and tax expense. As US dollar and euro interest rates have continued to rise, we expect interest expense for fiscal 24 to be in the range of $320 to $340 million. In terms of cash flow, we expect to generate significant adjusted free cash flow in the range of $850 to $950 million in fiscal 24, which represents growth of up to $100 million over fiscal 2023. We have planned to repurchase at least $70 million of AMCOR shares in 2024, and we have been active on the acquisition front and will continue to pursue M&A opportunities. And as always, we'll evaluate our uses of cash as we progress through the year. Slide 11 shows that AMCOR has a long history of delivering solid and consistent earnings growth. and the phasing of the earnings across the year has also been relatively consistent year to year. For fiscal 24 it's important to call out that phasing of comparable earnings growth is not expected to align with historical trends. We do not expect the challenging market dynamics we've seen in the last two quarters to meaningfully improve in the near term and in the first half we assume mid to high single digit volume declines. Given this demand outlook and the unfavorable impact related to higher interest expense, which is expected to moderate in the second half, we anticipate adjusted EPS in the first half of fiscal 24 to be down in the high single digit to low double digit range on a comparable constant currency basis when compared to the prior year. While it's more difficult to predict consumer demand, we do expect customer inventories will have largely normalized by the time we enter the second half of the fiscal year. Additionally, we have a number of tailwinds in the second half, all of which are within our control, including the benefit of approximately $35 million from structural cost-saving initiatives building through the year, increased earnings leverage resulting from ongoing benefits from price and cost actions, a reduced interest headwind, and favourable prior year volume comparatives. The combination of these known factors supports our expectation that adjusted EPS grows mid single digits in the second half of fiscal 24 on a comparable constant currency basis. It also gives us confidence in resuming our long term trend of high single digit earnings growth shortly thereafter. It's also important to highlight here that we do not need to see a significant change in the demand environment to return to solid earnings growth in the second half and beyond. So in summary, We believe the current industry and ANCOR-specific challenges will primarily be limited to the 2023 calendar year. We remain laser-focused on doing all we can to mitigate the impacts of these challenging conditions while continuing to execute our long-term shareholder value creation strategy. And we expect a return to our historic high single-digit organic growth trajectory as we progress through calendar year 2024. So with that, I'll turn the call back to Ron to provide some longer-term comments.

Thanks, Michael. Turning to our long-term commentary, slide 12 highlights our strategic areas for investment where we see faster-growing, higher-value opportunities to drive sustainable growth. On prior calls, we've covered opportunities in healthcare and in M&A, and today I'll take a few minutes to talk about protein and the opportunities we see to deliver strong growth in the high-value protein category. Moving to slide 13, the protein category for AMCOR includes packaging solutions for processed and fresh beef, pork, poultry and seafood. We like this category because it's a large addressable market which historically has grown globally at attractive rates driven mainly by an increasing percentage of the world's population able to afford to add protein to their diet. We also like the fact that there are many ways to differentiate and add value for customers since protein packaging requires specialized, more sophisticated and increasingly more sustainable solutions to preserve and protect these premium products. AMCOR's unique product offerings have enabled us to successfully grow our participation in the meat category over several years. Annual revenue from the sale of processed and fresh meat packaging now exceeds $1 billion. While inflationary impacts are currently creating challenging market conditions, looking forward, there are several reasons we believe AMCOR can drive growth at a mid-single-digit CAGR over the medium term with margins accretive to our overall average. First, AMCOR is well positioned with a comprehensive product portfolio for processed and fresh meat applications. Underpinning our development of better products are strong capabilities and significant investments in innovation, sustainability, and technical service. These are critical in an industry that relies on durable, high barrier solutions to preserve shelf life while providing convenience for the consumer in environmentally friendly formats. Second, we have a strong presence in North America, but our global scale and reach enables us to leverage our R&D network and installed capacity to transfer technical and process knowledge across regions as we actively pursue global growth opportunities. And third, there's a unique go-to-market model in some parts of the world where equipment purchases drive the subsequent sales of packaging films and technical services. Our recent acquisition of Moda positions us well because we're now able to provide a wholly-owned, turn-key equipment solution aligned with this model, where efficiency and the ability to automate are some of the highest priorities for customers. With the recent investments to enhance our offering and go-to-market strategy, we're well-positioned to grow in this high-value market, and we're excited with the many opportunities to firmly establish Amcor as a preferred provider of fresh and processed meat packaging solutions globally. Just want to spend a minute on sustainability on slide 14. We continue to make excellent progress supporting the development of circular systems through the three pillars of our responsible packaging strategy, package design, waste management infrastructure, and consumer participation. And we've made significant advancements on the innovation and design front by developing more sustainable packaging solutions and increasing our use of recycled materials. We'll provide a more detailed update in our sustainability report, which is expected to be published in October. And we've continued to collaborate with other industry leaders in various ways across the value chain to help support the development of the infrastructure required for a circular economy. For example, in May, Amcor, Delterra, P&G, and Mars formed a strategic partnership to help reduce plastic waste in the Global South by providing access to waste management and recycling systems and by enhancing consumer education. We're also partnering with Lycella and Mondelez to help promote a circular economy by bringing on stream one of Australia's first chemical recycling facilities. This is an exciting development in a market where MCOR's portfolio of recycle ready flexible packaging solutions is already well above 90% and will provide local access to food grade recycled material. So in closing on slide 15, our teams are doing a good job navigating challenging industry dynamics by continuing to recover inflation and proactively taking actions to align costs with market conditions. We're confident in our long-term growth strategy. We have good visibility to factors well within our control that will see us returning to earnings growth aligned with our historic performance and our shareholder value creation model. And operator, with those opening comments, we're now ready to open the line for questions.

Thank you. The floor is now open for your questions. To ask a question this time, please press star 1 on your telephone keypad. If at any point you'd like to withdraw from the queue, please press star 1 again. You will be provided the opportunity to ask one question and one further follow-up question. We'll now take a moment to compile our roster. Our first question comes from the line of Gansham Punjabi from Baird. Please go ahead.

Hey, guys. Good day. You mentioned that volumes for the first half of fiscal year 24 will be down mid to high single digits on a year-over-year basis. I think Michael mentioned that. But what are you assuming at this point for fiscal year 24 in context of the 3 percent decline that you reported in fiscal year 23?

Yeah, so look, we're setting the business up to assume that the current market conditions essentially continue through the first half. So we're expecting the first half to look a bit like the fourth quarter with volumes down mid to high single digits. That's continued softening of demand and continued destocking pretty broadly across the geographies and segments that we participate in. But the second half, we're expecting more normal rates of volumes, more like flat to low single digits. And that's really just assumes no more destocking and the fact that we'll be cycling easier comps. So we're not making any big improvement in demand. And so all up, that would see volumes for the full year down sort of flat to down mid-single digits. That's the sort of midpoint of our guidance range would see us down kind of low single digits for the full 12 months.

Got it. That's helpful. And then in terms of the destocking, you know, maybe you can just give us some insight as to, you know, the micro nuances between the major regions you have exposure to and the categories that first started to see destocking. Are you starting to see any sort of green shoots, if you will?

Yeah, look, the destocking has been relatively broad and we've been at it now. We've been living with it for a couple of quarters. The earliest categories where we started to see some signs of excess inventory in the system were those that were impacted the most acutely by the supply chain challenges over the last 12 to 18 months. So we've seen destocking in the meat space. We've seen it in the premium coffee space in particular. More recently, in the fourth quarter, we started to see a little bit of destocking in the medical packaging space. And then certainly in North America, in the beverage part of our rigid packaging business, we've seen pretty pronounced destocking at a point, at a seasonal high point in the year. Now, we don't have a crystal ball, but we do anticipate that the destocking will be largely behind us by the time we exit this calendar year. And certainly, it will have a less meaningful impact as we head into calendar 24. If you think about it, our volumes for the quarter were down 7%. We would estimate that about two-thirds of That volume decline is the market and our customer performance. And the remaining one-third is we would attribute to destocking. So certainly as we move forward and destocking starts to abate through the rest of this calendar year, certainly that will have less of a negative headwind on our growth rates going forward.

Our next question comes from the line of George Stathos from Bank of America.

Please go ahead.

Hi, good day, everybody. Hope you're doing well. Thanks for the details. I guess the first question, thanks for having me on, is just a quick one on net interest. And I know qualitatively what you said, higher global rates, foreign exchange and the like, but the step up even from the fourth quarter rate, which was 70 million, so 280 million run rate to the, I think you're saying 320 to 340, for fiscal 24 is pretty steep. And so is there anything specific we should be understanding in terms of what's behind that, Michael? Yeah, sure.

Look, I think, you know, overall interest rates have continued to rise, you know, from this time last year all through the year. So we will be lapping, you know, higher rates as we exit. You know, using Q4 as a proxy is not the best quarter to use as a proxy for interest because that's our highest cash flow quarter, obviously. So, you know, our interest expense is lower in that quarter typically, you know, in comparison to the rest of the quarters as the cash flow comes through. So that's really, you know, what we see. We are lapping some higher interest just by the way the rates increased as the year progressed. And, you know, there may be one or two further rate increases that we've factored into the range. So that's where we get to that 320 to 340 range.

Understood. That's helpful, Michael. And, Ron, back to demand and the consumer. To the extent that Amcor produces, you know, high value, high quality packaging products, for, you know, maybe one could argue, sure, they're staples, but more like affordable luxuries, if you will, you know, premium coffee, protein, premium pet. You know, I think we've talked about it in the past, but do you think there's maybe a little bit more of a negative effect for your customers and therefore for you, given the environment we've been going through with inflation? You know, why, why not? And are you seeing any signs at all from your customers now asking you to somehow find cost reductions, give back, so that they in turn can maybe be a little bit more competitive at retail and drive their volume. Thank you.

Yeah, look, George, I think that we still believe the portfolio is really defensive, and the categories are, for the most part, consumer staples. Now, there are subsegments within segments where things might be a little bit more discretionary because of the premium attached to things like single-serve coffee systems or some of the premium pet food. But overall, across the portfolio, we still believe these categories are defensive. They've proven that out over a number of economic cycles. But I think that we've got a dislocation here that we haven't seen in 40 years around inflation. And we convince ourselves of the defensiveness of the portfolio at large by looking at the scanner data. And you know, it's very broad-based, the weakness, in particular in Europe and in North America and the food business, where you see mid-single-digit declines. And, you know, I think generally speaking, others who've reported publicly have experienced the same sort of volume effects that we have. So, you know, I think, yes, we do aspire to play at the high ends of the market, and many of our products are at the premium end. But generally, we're in staple segments that

you know, we'll grow consistently through economic cycles. Our next question comes from a line of Brooke Campbell from Baron Joey. Please go ahead.

Yeah, good evening. Thanks for taking my question. Just one on the buyback. Obviously, there's $70 million left on the existing program, but what's the thinking about potentially a new program at some point through FY24? Is that the priority once you get through the 70 million or are you leaving some cash flow there for M&A or is the priority to sort of pay down some debt and reduce that leverage ratio? Thanks.

Yeah thanks Brooke, appreciate the question. Look I think you know if you look at what we've done over the last couple of years you know we've brought back over a billion dollars of shares and in addition to that you know we've certainly started to get back on the M&A um uh approach as well so we've done three deals this year and and uh in 23 and also announced another deal just recently um we're planning to do the 70 million um you know this year so we'll close out that buyback um you know and i think if you think about our capital allocation um approach i mean clearly the priority is to invest back in the business through the capex uh for organic growth which you know we've stepped that up over the years and we'll continue to do that this this year you know, we grew the CapEx and we'll have a similar amount as we head into 24, taking into account the demand environment. Next, you know, we obviously pay the dividend and then, you know, and that grows over time. And then we've got, you know, three or 400 million left over for, you know, ideally to put the work at M&A or buyback. And so, you know, if you think about the last couple of years, you know, we've certainly covered that that capital allocation on the buyback side and now putting a little bit more into M&A. So, you know, we've got 70 million in the outlook for 24. As always, we'll continue to model the cash flow as we work through the year and, you know, we'll get back to you if that changes.

Thanks. And just a question on Nespresso. Your customer there seems pretty keen to move product into, I guess, fibre compostable pods. Could you just confirm if you have the capability and products to perhaps offer that format as well, given, I guess, you've got already a lot of capital put into those plants that are co-located, I believe. If that's the way that that customer goes, can you sort of participate and offer a different format? Thanks.

Yeah, look, we have a broad offering of fiber-based options for a number of different categories. And so, you know, I think we're going to be well covered as products move between substrates, whether it's aluminum to plastic or plastic to fiber or whichever direction the segment evolves. But I would say that that is a niche at the moment. It's about expanding the pie. Not every consumer will be willing or capable or interested in composting. And we know, as well as our customer, that the sustainability profile of the aluminum capsule is as attractive as any. It's a product, it's a capsule that can be made with 100% recycled aluminum and can be recycled over and over again. And there's been a lot of investment in the recycling loop for that particular format.

So, you know, we're not concerned about the long-term viability of that format.

Our next question comes from the line of Cameron McDonald from A&P. Please go ahead.

Good morning, guys. Can I just ask a question around that destocking that you're talking about? And my understanding is also that not only are we getting destocking and consumer weakness, but we're also seeing down trading from sort of more premium products to more home brand type products. Is that having an impact on the packaging demand

Profile as well and and the you know, the either the price or margin that you generate You know from from that premium product in in more of the home brand space Yeah, look thanks for the question it's it's a different story in North America from Europe so that the private label Private label in general has picked up a few percentage points of share broadly across the European market it's been It's just slightly now ahead of where the share for private label was in 2019. In North America, we're still not quite back to the share that private label had in 2019 at large. And ultimately, as products or as sales migrate to private label from branded or vice versa, we're pretty well exposed. And so we've got a reasonably broad participation in the store brand side of the business. such that those share shifts are not really going to have a material impact on our volumes. And, you know, the packaging is essentially the same. That's part of the private label formula. And so, you know, from a margin profile perspective or a differentiation perspective, you know, we're sort of indifferent.

Okay, great. And just going back to the previous question on sustainability of packaging, there seems to also be a move to potentially be fiber-based and alternative packaging for beverages. What work are you doing around that, please?

We have a pretty extensive platform that we call AmFiber, which is fiber-based packaging for a range of product categories. We see the opportunity, particularly in the confectionery space, to move from plastic-based products to fiber-based products, culinary, so formats like spices and food additives. So our work on the fiber side is pretty extensive. There's a little less activity in the beverage space, to be quite honest. But generally speaking, AmpFiber is a big platform for us, and we're optimistic about the growth outlook.

Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead.

Yes, thank you. Good evening, everyone. I guess the first question is something about the quarter and then moving into 2024. I wanted to ask a question about MIX. I look at it in the flexible segment. MIX is still a 2% positive contributor in the quarter, less than it had been earlier in the year, but still positive year-on-year, though I look at kind of some of the parts of Flexibles that I've historically thought had contributed to that mix in terms of healthcare and protein and PET and premium coffee, and those all were down kind of consistent with the overall segment volumetrically. So, just help us maybe dissect kind of what's happening in mix and kind of where you see that trending through fiscal 24.

Yeah, look, we had unfavorable mix in both segments in the fourth quarter, and you pointed out the reasons why. I mean, some of the categories that you would expect to be positive contributors to mix were softer in the fourth quarter, meat in particular, pet care even slowed a bit in the fourth quarter, as did medical. What you're referring to is price and mix together, and I think you've got to bear in mind that we're still experiencing reasonably high levels of inflation, and we still have been and continue to be actively pricing to recover inflation. So for the fiscal year, we priced up about $1.1 billion between raw materials and general inflation, about $300 to $340 million of that was general inflation. And so you're seeing price and mix combined.

So you've got positive price offset by $500.

Okay, that's really helpful. And if I could just follow up on your kind of the move or the focus on proteins and the investments in equipment. I mean, you've got some pretty large incumbents when you think about that market, especially on the fresh meat side with equipment. I mean, what do you think the business needs to do to scale and grow more significantly there where You do have a competitor who has a pretty significant incumbent market position.

Yeah, look, that's clear. And most of our markets are pretty competitive, including that one. What we needed as a starting point was a full system offering, which we didn't have. And so the Moda acquisition allows us to offer the primary packaging equipment. It will allow us to offer technical services and parts And that all combines with what we believe is industry-leading film technology, including in that space. And the films in the protein space are amongst the most demanding of any that we produce. If you think about the functional requirements for meat packaging, there's obviously a barrier that's required to preserve shelf life. There also tends to be the need for puncture resistance. You've got to run these packages through the lines, the packaging lines at high speeds so that the processing requirement is quite high. And we believe we've got some advantage film technology and the ability to now go to market with a full solution, including equipment and aftermarket service just completes the puzzle for us. So we're really excited about the market. It's also one that, you know, we can leverage over a global footprint. And it really represents a pretty visible revenue synergy from the Bemis acquisition of several years ago now. So we're excited about it. And look, every segment is competitive, and we just have to compete and earn the business, obviously. But we're pretty optimistic we'll be able to do that.

Our next question comes from the line of Sam Xiao from Citibank. Please go ahead.

Good morning. Paul, thanks for taking my question. Just I wanted to follow up on some earlier comments that you've got limited volume growth in the second half of 24 kind of growth expectations. So just to confirm, you're saying if volume growth does come back, you'd expect upside that mid-single to high-single digits in the second half?

Yeah, we're not banking on a much improved demand picture. We think it's more prudent for us to set the business up to assume that, you know, volumes are going to be challenged through the year. So, for the first half of the year, we're expecting volumes to continue to be down mid single digits, mid to high single digits. Second half of the year, we would expect volumes to be flat, to maybe up low single digits. And we believe that's possible without much of an improvement in the underlying demand profile because we're pretty confident that we'll be through the other end of the destocking cycle by the time we get to calendar year of 2024. So yeah, there's no expectation of a dramatic improvement in the overall demand environment that's baked into our guidance.

Thanks, that's helpful. And just a follow-up on potential volume growth looking through the year, it looks like rigid. With a first decline followed by flexibles, as we think about potential and is it logical to expect RIDGIDS to come back quicker than Flexibles or is there something you'd call out there?

Look, we would expect the volume trajectory to be roughly comparable. Now RIDGIDS has got another seasonally strong quarter to get through and we're not expecting the business to be all the way back from a demand perspective in the fiscal first quarter. In fact, we expect continued softness and continued destocking in the North American beverage business in particular. But generally speaking, if we take a 12-month view, our expectation is that the volume trajectory would be similar across the two segments. And look, as you pointed out, this is the swing factor in our guidance range. So to the extent that the volume picture improves, that would be a driver of us getting to the higher end of our range or beyond. We're just not setting the business up to expect that. We're taking the cost actions that you'd expect us to take, and we're going to be really prudent before we anticipate demand coming back.

Our next question comes from Daniel Kang from CLSA.

Please go ahead.

Good morning, everyone. First one maybe to Mike. just in regards to your FY24 guidance. Can you talk us through your assumptions and maybe expectations on price mix and any input cost tailwinds?

Yeah, sure. I think, you know, if I take the raw material side first, you know, we experienced in Q4, you saw raw materials pretty well across the board come down in that mid-single-digit range after... after a pretty benign Q3. And in Q4, we just saw a modest tailwind as we're still cycling through the higher inventories and also reduced purchases. So as we look forward on the raw material side, what we see into the first quarter really is a pretty benign environment, basically flat raw material, maybe slightly down, but that would translate into a relatively modest tailwind. in the first quarter you know after that you know we'll we'll see where things go on the raw material side look on the price mix will continue to will continue to you know price for inflation you know so as we've said in the remarks throughout you know we expect to continue along the price and cost initiatives that we've already been taking so you know inflation albeit we're still expecting inflation, perhaps maybe at slightly lower levels than we've been experiencing, but, you know, we will continue to see inflation as we work through 24. So, you know, we'd expect to see some price to offset that, as well as cost. And then on the mixed side, look, I think, you know, initially we would expect, you know, some negative mix, really, as we saw in Q4, which we touched on the call already today. So, you know, things like health care, pet food, coffee, et cetera, as we're just cycling some stronger comparatives on that front, we would expect mix to be perhaps a negative, particularly as we start the year.

Our next question comes from Richard Johnson from Jefferies.

Please go ahead.

Thanks very much. Ron, one of the things we're hearing quite consistently now from a lot of your major customers is some very significant SKU rationalization programs that they're having. In particular, I believe I'm right in saying that Unilever are taking their SKUs down by 25%, which is a huge number. I was just interested in getting your opinion on what that means, if anything, for yourselves.

Yeah, look, it's maybe not as pervasive as it might seem from some of the public comments. But to the extent that SKUs can get rationalized, it's generally a good thing for us. There's two things going on. There is a bit of SKU rationalization. The other thing that's happening is the continued evolution towards more sustainable formats and more sustainable SKUs. And I think SKUs have proliferated across all the categories that we service. You think about the variety of the store shelf, certainly here in the U.S., it's really been explosive growth over a long period of time in the number of SKUs that are available. So anything that simplifies the business and takes out unnecessary or non-value-adding complexity is generally a good thing. And then at the same time, helping that process along by introducing more sustainable formats is also advantageous to us too. So I think we're in lockstep with the customers that you probably have in mind and on that journey or both of those journeys at the same time.

That's helpful, thanks. And then just finally, you referred to your volume pressures being more skewed to developed rather than emerging markets, which of course is perfectly understandable. I was just interested if we get a bit more detail on on where you sit in EM, because others, and there are reports that there's been significant down trading in emerging markets as well, away from multinationals to local brands in particular, and that obviously for many large packaging companies or global packaging companies, that might be unhelpful. So I'm just trying to get a sense of why you may have outperformed in EM relative to others, thanks.

Yeah, look, it's a good question. It feels more like the underperformance in the DMs relative to the EMs is the thing that's not easy to understand. I mean, we saw volume declines in Europe and North America, kind of high single digits in the fourth quarter. Again, entirely consistent with what others have reported and the scanner data, et cetera. But the EM business has held up. But we had... Volumes in Asia, in the emerging part of Asia, basically flat in the quarter. Latin America was down mid-single digits. So both of those regions had better volume performance than the two big developed markets. Look, I don't know. I think we have a pretty compelling value proposition in emerging markets, generally, as an innovation leader and a sustainability leader. And then our participation in our customer mix generally looks like the market. So if I take a business like China, we actually have more of our sales to local customers than to multinationals. And basically that reflects the market shares of those respective customer groups.

So I think we're well balanced for the differential growth rates that you're referring to. And Next question comes from the line of John Purtell from Macquarie. Please go ahead. Good evening, Michael. How are you? Hey, John. Hey, John.

Just had a couple of questions. Just first one for Michael. Just in terms of interest expense, what percentage is fixed and floating now, and are you looking to fix more to essentially kind of lock in your interest expense?

Yeah, look, John, so traditionally we've been in that 50-50 fixed floating mix, but more recently, so over 23 and looking into 24, we're more 70-30. So, you know, we take a bit of the volatility out of the mix there on that front. So, you know, that's where we sit today on that 70-30 range fixed floating.

I see that as pretty stable.

Yeah.

And thank you. And just the second question, Ron, on acquisitions. Are you seeing more opportunities now that fit your criteria? Obviously, valuations are generally coming down. And will you sort of naturally play at the smaller to medium end? Obviously, we saw Constantia recently sold to private equity.

Yeah, look, we have been more active. So we've done four deals in the last 12 months. They were all of the small variety and single plant deals. So the first comment I would make is, yes, there are more things that seem to be coming to market. I mean, we went through a period of pretty pronounced market dislocation through COVID and then the supply chain constraints and now some softer volumes. But I think sellers are more likely to bring things to market now than they would have been, let's say, two years ago. So the pipeline is relatively robust, and we've been able to convert four small deals in the last 12 months. The second part of your question about the size really just reflects the nature of the participants in our space. You know, there's just by number, you know, I have a lot more smaller single plant businesses than there are, you know, large multi, you know, multibillion dollar businesses like the one that you mentioned. So I think just generally you're going to see us execute more smaller deals. Doesn't mean for a second that we would not love to deploy bigger amounts of capital. So, you know, we would be on the lookout for, for medium and larger size deals as well.

I just think by the law of numbers will suggest that most of the deals will be the smaller variety. Our next question comes from the line of Nathan Riley from UBS. Please go ahead. Your line is open. Please go ahead. Hey, morning guys, evening guys.

Question about just the cost out program and how much flexibility you might have around that, just in terms of whether that destocking trend continues a little bit longer than I guess what you've currently forecast, how much flexibility you might have just to sort of go a little bit harder around the cost base?

Yeah, look, we're getting after it pretty good, would be the first thing I would say. So we're going after it reasonably hard. You have to remember also that the business has been optimized through the last several years. I mean, through the Bemis integration, we took a number of plants out of the network. A couple of years before that, we took a few out of the Rigids network as well. So the business is reasonably well optimized. But that being said, there's more opportunity. And we've announced three and a half plant closures Already, there'll be more to come. And if demand remains depressed, then there is the opportunity to do a little bit more. Although I would also point out that the ultimate path to value creation for the company is to grow. And we want to make sure that we've got the productive assets available when demand normalizes. We don't see any of the demand challenges that we're experiencing right at the moment. We don't see a secular We believe this is a cycle, and we believe it's an inflation-induced cycle, and that volumes will return. And, I mean, certainly the destocking impact will abate. But we do preserve the flexibility here. If we need to go after it harder on the cost side, we certainly will do that.

Okay, thank you. And I guess just following through in terms of, you know, historically you've managed cost inflation quite well. But I guess, you know, and I'm talking about the general cost inflation in terms of being able to pass that through to customers with higher pricing. But, you know, in a period that's characterized by a high level of destocking and lower demand, can you give us an update on how you're going just in terms of recovering, you know, the general cost inflation and just around that, maybe just a comment around, you know, just how that sort of inflation has been trending recently?

Yeah, well, as far as the trend, I think we are starting to see inflation moderate. I'm not sure that we're seeing prices fall anywhere, but we're seeing the rate of increase certainly decline across most of the cost buckets. I'd say labor is still increasing kind of mid-single digits. We still have higher energy costs than we had a couple of years ago. Freight might be one area where we've seen some declines off of the peaks. So it's still a real fact of life, number one. Number two, I think we have been pretty successful in pricing to recover. We remain kind of fully recovered, if you will. Last year, the general inflation running through the business was over $300 million, and we offset that with price. We'll expect to continue to do that as we go into fiscal 24. We also reset prices with new contracts. is you expect that probably two-thirds of the business is contracted, maybe three-quarters of the business is contracted. You know, the average duration is two to three years, maybe four years. So every year you're turning over a portion of the revenue base and having an opportunity to reset pricing to reflect the current dynamics and the current inflation conditions. So it remains a fact of life, but I certainly feel like we're coming out the other end of the inflationary cycle.

Our next question comes from the line of James Wilson from Jardin, Australia. Please go ahead.

Good evening, guys. I was just wondering if you could give us maybe a little bit more colour, firstly, on how your inventory and working capital management's progressing, heading into 24.

Yeah, sure, I can take that one there.

You know, look, we were obviously building inventory this time last year, and that was back on, you know, there were supply constraints in the marketplace. a lot of different activity happening and we certainly built inventory during that period as well as putting through, over the last two years, put $3 billion roughly through the top line in terms of price to recover raw material and inflation. So both of those factors have impacted working capital. But from November, we really worked down our inventory levels. And from the peak in November, we've taken nearly $400 million out and 200 of that was just in Q4. We haven't seen the full benefit of that really come through from a cash flow standpoint yet because at the same time in this, particularly in the second half of the year, we've seen a much lower payables position. So although our inventory has come down kind of point to point over the year around $200 million, our payables have also actually come down about $500 million. So now if you look at our working capital performance during the year, we had a cash outflow of around $230 million. Really, that's the payables impact. So as we've seen the lower demand signals, we've started to reduce our purchasing in addition to that taking inventory out of the system. And so we did see a negative impact on working capital as a cash outflow in the year. You know, as we look forward, you know, we've still got work to do on the inventory side, and we'll continue to focus on that. And, you know, I think the payable side will start to normalize as we work through some of this softer demand. So as we work through 24, certainly not anticipating a cash outflow at the level that we had in FY23. And, you know, we'd hope to be able to get to a more neutral position by the year end. You know, from a working capital sales standpoint, we're about 9.5%. With capital sales at the moment, typically we would be more in the 8% to 9% range. So I think we've certainly got some opportunities there as well as you look forward over the next couple of years.

And guys, just in terms of how much of that is sort of baked into your free cash flow guidance for next year, am I right in seeing that as sort of a buffer on the downside or is that potentially already baked into what you've come out with today as guidance?

Yeah, so the cash flow guidance for 24 is $850 million to $950 million. So it's a $100 million range, which is really the working capital range in there. So at the midpoint, probably still going to see a little bit of cash outflow. But we've obviously got some opportunity to do better than that.

And that's really the working capital is the key factor there.

Our next question comes from the line of Scott Ryle from Rimmer. Please go ahead.

Hi, thank you very much. Hopefully I'm on to quite quick questions. I was wondering if you could comment on what you've seen in terms of the changes of your customers in terms of their price expectations around responsible, sustainable packaging, please, and the willingness to pay a premium, I guess, over virgin products. How that's changed over the last 12 months, that's what I'm asking. Sorry.

Yeah, look, I don't know that it's changed much. I mean, I think customers understand that there's more value to be ascribed to a product that's got a better sustainability profile. And I think consumers understand that as well. It's another element of functionality that is now expected in consumer products. And that is the environmental profile is at least neutral, if not positive. overall. And there's value associated with that. And so, you know, most of these products do have a premium. There's also the scale curve that we need to work through. We're introducing new products and like any new product with less volume and less scale benefits, it typically tends to start out at a higher price point. It'll evolve over time. But I think as brand owners look to meet their own commitments and you take the full, range of different costs, including regulatory costs into consideration, the more sustainable products offer higher value and therefore they tend to carry a bit higher price, particularly at the outset.

Okay, great. Thank you. And then secondly, I just wanted to ask a bit more about the Lychella plant in Australia. And just for a bit more detail, am I right, firstly, that you've invested directly in Lychella? Can you just give us a few stage gates or timings around when that plant will come into operation? And I guess thirdly, just discuss in the US market where we've got a lot of advanced recycling facilities being built or already built, they tend to be linked with one of the major petrochemical companies. How do you think about the risk around using effectively this solution with a startup place?

Yeah, look, there's a lot there, and it's a pretty exciting project, so I'm glad you asked. I mean, the investment we've made, firstly, I would just make sure it's clear it's a modest investment, several million dollars. It's in the single digits of millions of dollars. You know, we're co-investing with Mondelez, and we're investing in Lycella as the technology provider for this particular plant that's going to be built in the western suburbs of Melbourne and Altona. You know, we're pretty excited because it will bring recycled content, chemically recycled material to the Australian market with local production, which is great because the collection of soft plastics as they're referred to in Australia through the red cycle program needs an outlet. This plant will be a perfect outlet for the recycled plastics that are collected. then the brand owners in australia are differentiating and and are really advocates for more sustainable packaging including packaging made with recycled content so you know there's a there's a captive supply of the primary input which is waste plastic and there's a captive market which is the brand owner and the australian consumer looking for more sustainable packaging so we're really excited about this in terms of stage gates um you know look it's it's a it's a pretty expensive build, as you'd imagine. The site's been selected. There's a chance that the plant could be operational by the end of calendar 24, but it's really an 18- to 24-month project.

Our final question comes from the line of George Stappos from Bank of America.

Please go ahead.

Hi. Thanks for taking the follow-on, guys. Ron, I was asking earlier, just Are you seeing any signs from your customers at all as they're trying to find ways to stimulate growth? Maybe they're considering more promotional activity at the request of their customers that they're now coming back to their packaging suppliers and looking for your and other companies' support, perhaps with givebacks, cost reductions, productivity. What's happening there, if anything, on that front? Thanks, and good luck in the quarter.

Yeah, thanks, George. Look, you know, others have talked about potentially increased promotional activity. We really haven't seen much of that of any great consequence. I mean, you see it a little bit more in the beverage space in the summer season, but really, I mean, and there are pockets of promotions here and there, but nothing that's pervasive enough that we would point to that's got a material impact on our volume outlook. I mean, it'd be great if it happens. That would be upside. We're certainly not banking on, you know, increased promotional activity leading to higher volumes for Amcor. If it happens, as I said, it'd be great. And the pricing dynamic is, as we've discussed on this call, I mean, there's continued inflation recovery that's necessary. And while it's moderating, it's still a fact of life that we've got to recover, you know, continued inflation through our cost base. And that's what we're busy doing.

Very good. Thanks very much. Thank you. I would now like to turn the call over to Ron Delia for closing remarks.

Please go ahead.

Thanks, Operator, and thanks for everyone's interest in AMCOR and for joining our call today. We appreciate it, and we'll speak to you at the end of the first quarter, and we'll end the call there. Thank you.

Ladies and gentlemen, this does conclude our