Amcor plc

Good afternoon. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the AMCOR's first half and second quarter 2024 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 that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question again, press star one. Thank you. I would now like to turn the conference over to Tracy Whitehead, head of investor relations. Tracy, you may begin your conference.

Thank you, operator, and thank you everyone for joining AMCOR's fiscal 2024 first half and second quarter earnings call. Joining today is Ron Delea, our chief executive officer, and Michael Castamento, 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'll also discuss non-GAAP financial measures and related reconciliations can be found in that press release and the presentation. Remarkable 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 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. With that, over to you,

Ron. Thanks, Tracy. Thanks, everyone, for joining Michael and myself today to discuss AMCOR's second quarter and first half results for fiscal 24. We'll begin with some prepared remarks before opening Q&A. As seen on slide three, our focus on safety remains unwavering, and our significant commitment to providing a safe and healthy work environment continues to be rewarded. Safety is deeply embedded in AMCOR's culture and is the number one priority for our global teams. Turning to our key messages on slide four. First, our reported earnings per share for the second quarter and first half were modestly better than the expectations we set out in October, and improved working capital performance helped drive a -over-year increase of more than $100 million in adjusted free cash flow. Second, our financial performance through the half was supported by strong and proactive focus on controlling costs. This helped us offset second quarter volumes that were a couple of percentage points lower than we anticipated. Our teams around the world continue to respond, doing an excellent job proactively taking further cost actions. Third, our first half financial performance puts us on track to deliver against our full-year guidance, which we are again reaffirming today. Relative to the first half, we believe Q2 was the low point for earnings growth, and we continue to expect the trajectory of adjusted EPS growth to improve through the second half of fiscal 24, including delivering -single-digit adjusted earnings growth in the fourth quarter. Our confidence is supported by our improved earnings leverage, as well as a number of known factors we'll cover in more detail later that will benefit earnings through the second half of the fiscal year. Additionally, our volume trajectory has improved generally through January, and this underpins our confidence that Q2 marked the low point for volumes. Finally, we remain confident in our long-term growth and value creation strategy, and in our ability to deliver a combination of strong earnings growth and a compelling and growing dividend. The strength of our market positions, execution capabilities, and consistent capital allocation framework collectively continue to make a compelling investment case for Amcor. Moving to slide five for a summary of our financial results. Organic sales on a comparable cost and currency basis were down 8% for the half and 10% for the quarter. Price mix benefits were around 1% for the first half and flat in the second quarter, reflecting moderating inflation, which resulted in reduced pricing actions by our teams. Volumes were down 9% for the first half and down 10% for the December quarter. Second quarter volumes were modestly lower than our October expectations, with the main difference being an acceleration of the stocking, especially in the month of December. First half and December quarter adjusted EBIT was $709 and $352 million respectively, modestly above our expectations. On a comparable cost and currency basis, declines of approximately 6% in both periods reflect lower volumes, partly offset by benefits related to decisive and proactive cost actions taken across our businesses in response to evolving market dynamics. In total, our actions reduced costs by more than $200 million in the first half compared to last year, with a reduction of more than $130 million achieved in the second quarter. Adjusted EPS was $31.3 and $15.7 per share respectively, also modestly above our earlier expectations. For both periods, this was down 10% on a comparable basis, reflecting lower adjusted EBIT and the unfavorable impact of higher interest costs. Working capital improvement remains a focus and helped drive free cash flow for the first half well ahead of the same period last year and in line with our expectations. And we returned approximately $390 million of cash to shareholders in the first half through a combination of share repurchases and a growing dividend, which has increased to .12.5 per share. I'll turn it over now to Michael to provide some further color on the financials and our outlook. Thanks,

Ron. Hello, everyone. Beginning with the flexible segment on slide six, -to-date net sales on a comparable constant currency basis were 8% lower, which largely reflects weaker volumes. Volumes were down 9%, mainly due to lower market and customer demand and accelerated de-stocking. In North America, first half net sales declined at high single-digit rates, driven by lower volumes in categories including meat, liquid beverage and health care, which more than offset growth in the condiments, snacks and confectionery categories. In Europe, net sales declined at low double-digit rates, driven by lower volumes, partly offset by price-mixed benefits. Volumes were lower in snacks, coffee, health care and in unconverted film and foil. This was partly offset by higher confectionery volumes. Across the Asian region, net sales were modestly higher than the prior year. Volume growth in Thailand, India and China helped offset lower volumes in the Southeast Asian health care business. In Latin America, net sales declined at high single-digit rates, driven by lower volumes mainly in Chile and Mexico, partly offset by growth in Brazil. First half adjusted EBIT was 5% lower than last year on a comparable constant currency basis, as a result of lower volumes, partly offset by favourable price-mixed benefits and ongoing actions taken to lower costs, increase productivity and strengthen operating cost performance. EBIT margin of .6% was comparable to prior year, despite a 50 basis point unfavourable comparison related to the sale of our Russian business last year. For the December quarter, reported sales were down 9% on a comparable constant currency basis, and price mix was relatively neutral compared with last year. Volumes were down 10% in the quarter, reflecting continued soft market and customer demand. Destocking also continued through the quarter, accelerating in the month of December, and was particularly impactful in health care where volumes were lower than last year by double digits. In response to market dynamics, the business continued to take decisive cost actions, focusing on operating efficiencies, delivering procurement benefits, limiting discretionary spend and advancing structural cost reduction initiatives. This resulted in another quarter of strong performance, partly offsetting weaker volumes, with adjusted EBIT declining 5% on a comparable constant currency basis. Turning to rigid packaging on slide 7, -to-date net sales on a comparable constant currency basis were 8% lower, with price mix contributing around 1%. Volumes were down 9% for the first half, with lower volumes in North America partly offset by growth in Latin America. In North America, overall beverage volumes for the first half were 14% lower than last year, including a 13% reduction in hot filled beverage container volumes, due to lower consumer and customer demand and elevated levels of destocking through the first half. In Latin America, volumes grew at mid-single digit rates, with new business wins in Brazil, Peru and Colombia partly offsetting lower volumes in Mexico. Adjusted EBIT was 9% lower than last year on a comparable basis, reflecting lower volumes partly offset by price mix benefits and favourable cost performance. For the December quarter, net sales were also down 10% on a comparable constant currency basis. Price mix contributed around 2%, and volumes were down 12% for the quarter, reflecting lower volumes in North America partly offset by new business wins, driving mid-single digit growth in Latin America. Overall, North American beverage volumes were 19% lower for the quarter, reflecting a high single digit decline from destocking, as some of our customers took action to significantly reduce inventories in both hot filled and cold filled categories. Volumes were also impacted in the high single digit range by incrementally softer consumer and customer demand in Amcourse key end markets. In addition, we had net new business wins in the hot filled category, which partly offset a loss in cold fill as we elected not to retain volumes that fell short of our profitability threshold. Second quarter adjusted EBIT declined by 12%, reflecting lower volumes partly offset by benefits from continuing to proactively manage costs, including realising labour savings by taking more plant shutdown days to better align capacity with market dynamics, as well as driving procurement benefits. Moving to cash in the balance sheet on slide 8. As Ron covered earlier, adjusted free cash flow for the half came in more than $100 million ahead of last year, with our teams continuing to make progress against our priority to reduce inventories and drive working capital improvements across the board. Our financial profile remains solid with leverage at 3.4 times, broadly in line with the first quarter and where we expected it to be as we cycle through temporary increases in working capital and given trailing 12 months, EBITDA now fully reflects the divestiture of our Russian business. Looking ahead, we continue to expect leverage will decrease to approximately three times at the end of our fiscal year, supported by seasonally stronger earnings and cash flow in the second half. This brings me to our outlook on slide 9. As Ron mentioned earlier, we are reaffirming our full year guidance for adjusted EPS of $0.67 to $0.71 per share. We continue to expect the underlying business to contribute organic earnings growth in the plus or minus low single digit range, with share repurchases adding a benefit of approximately 2% and favourable currency translation contributing a benefit of up to 2%. This is offset by a negative impact of approximately 3% related to the sale of our Russian business in December 22, the impact of which was all in the first half. We also expect a negative impact of approximately 6% from higher interest and tax expense, which takes into account our estimate for full year net interest expense of between $315 million to $330 million, which is modestly lower than where we were forecasting last quarter. Our full year tax rate expectations are unchanged in the range of 18 to 20%. In relation to phasing, we believe that December quarter marks the low point in terms of AMCOR's earnings growth and volume declines. January volumes have improved following heavy customer stocking in December, and while we expect market dynamics to remain volatile in the near term, our volume trajectory is expected to continue to improve through the balance of the year. We anticipate Q3 volumes will be down in the mid single digit range and expect fourth quarter volume declines in the low single digit range. Taking into account offsetting benefits from cost reduction initiatives and a reduced headwind from higher interest costs compared with last year, we expect third quarter adjusted EPS to be down mid single digits on a comparable constant currency basis, and for the fourth quarter we expect adjusted EPS to increase by mid single digits over the prior year, and Ron will talk through the factors that support this return to gross fueling. Adjusted pre-cash flow continues to trend better than last year as we expected, and we are again reaffirming our guidance range of $850 million to $950 million for our fiscal 24 year, which will be up to $100 million higher compared with last year. Our plan to repurchase at least $70 million of AMCOR shares in 2024 is unchanged, and we continue to pursue value creating M&A opportunities. With that, I'll hand back to Ron.

Thanks, Michael. Prior to opening the call to questions, I want to provide additional insights into our outlook for the balance of the year, as well as a reminder of the key components comprising our longer term model for driving shareholder value. Looking first at the balance of fiscal 24, as I referenced earlier and as highlighted on slide 10, there are a number of key factors already known to us that give us confidence our earnings trajectory will improve through the second half of the fiscal year. First, the earnings headwind related to the sale of our business in Russia is now fully behind us, eliminating an unfavorable comparative that impacted reported earnings throughout calendar 23. Second, while second half interest expense is expected to be higher than last year, the magnitude of the headwind from the rapid rate increases over the past 18 months begins to abate as we move through the balance of the year. Third, we have benefits from structural cost savings of $35 million in the second half, with an additional $15 million to benefit fiscal 25. These savings are primarily related to plant closures as we optimize our global footprint. And fourth, earnings leverage has improved due to our commitment to take proactive actions to align our cost structure with evolving market dynamics. This includes eliminating shifts to take out labor, reducing overtime, driving procurement, and maintaining tight control of discretionary spend. In total, over the last 12 months, we've reduced headcount by more than 2000 full time employees, or approximately 5% of our workforce, with more than 1000 of these reductions taken out in the first half of fiscal 24. From an earnings perspective, operating costs were lower by more than $200 million in the first half of fiscal 24 compared with the prior period. And more than $100 million of this cost reduction was delivered in the second quarter, which is almost double the approximately $70 million delivered in the first quarter. The result has been and will continue to be improved earnings leverage, which we've achieved this financial year to date despite significantly lower volumes. As Michael mentioned, we were off to a better start in January and are confident Q2 marks the low point for earnings growth and volume declines, and with our overall trajectory expected to improve as we move through the balance of the year. To sum up, we're confident the positive earnings impact from multiple known factors will drive improved momentum in the second half of fiscal 24, including delivering mid-single digit earnings growth in our fiscal fourth quarter. Importantly, we're not assuming an improving consumer demand environment, and we'll continue to be proactive in taking actions to ensure our cost base and pricing strategies reflect market conditions. Moving to slide 11, as we look beyond the second half of this fiscal year, these known factors will serve as important building blocks supporting a return to delivering against our shareholder value creation model through a combination of strong earnings growth and a compelling and growing dividend currently yielding 5%. The starting point in creating value will always be growing the business, and over the last 10 years, we've averaged 8% growth and adjusted earnings per share. As you can see on this slide, we have multiple drivers of margin of creative growth, each with significant upside opportunity over the longer term. We will also continue to enhance our ability to grow in these areas through stepping up capex over a multi-year period and executing on strategic M&A. As volumes normalize and improve, these generally faster growing and higher value growth areas will represent a larger proportion of sales becoming increasingly stronger contributors to earnings. And when we return to a more normalized volume growth environment, this combination of improved mix and the practice steps we've taken to optimize our cost base positions Amcor well to again deliver strong earnings growth in line with our long track record. To close on slide 12, we're executing well to deliver against the earnings and cash flow expectations we set coming into fiscal 24. Our teams are being proactive as market dynamics evolve and focusing on the controllables to take additional cost out where appropriate. We have line of sight to mid single digit earnings growth in Q4 and our commitment to our longer term growth and value creation strategy positions us well to deliver on our shareholder value creation model when the volume environment normalizes. Operator with those opening remarks, we're now ready to turn the line over to questions.

As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one. We also ask that you limit yourself to one question in one follow up and then re-queue. Your first question comes from the line of Gansham Punjabi from Baird. Please go ahead.

Hey guys, good day. I guess first off on the volume declines across the portfolio, which looks like it's about six quarters of negative U of E volumes at this point. Obviously, you're not the only ones, but there's been quite a bit of chatter from your customer side all the way down to retailers about increasing increased promotional spending. I'm just curious as to whether you're starting to see direct signs of that at this point. And if so, which categories food beverage, you know, consumer staples, etc.

Yeah, look, again, thanks for the question. Maybe I'll just mention the volume declines at a high level first and then come back to your question about signs of promotions or more aggressive commercial activity. On behalf of the customers. Firstly, you know, I think where there's overlap, we're not really seeing any differences compared to others. So that that would be the first thing I would say. I think our 10% total decline in the quarter is about 2% worse than we expected going into the quarter. So we weren't actually expecting a much different outcome. Things did track according to those original expectations in October and November where we were kind of declining high single digits. December we saw really accelerated the stocking, which accounted for the incremental softness. And which we more than offset to deliver to deliver the profit. So that's kind of the starting point. Now, January, as we've alluded to, was much better. We've seen improvement in most of our businesses versus H1. And it really underpins our view that that Q2 was the low point and it really underpins our Q3 and Q4 expectations. And maybe just to just to continue and round it out a bit in terms of unpacking the decline. Roughly by driver, roughly half of our 10% decline sort of mid single digits was related to market impacts. This is a combination of consumer demand, customer and segment mix. And roughly half or another mid single digit contribution was from de-stocking. And that's pretty much the same in both the flexibles and rigid packaging segments. By geography, emerging markets broadly flat. Asia up modestly, Latin America down modestly. But the developed markets is where we've been especially soft with Europe a little bit weaker versus North America. And another way to think about it, just to sort of close off here is of the 10% decline in the quarter. More than 50% of that decline comes from our global health care business, our North American beverage business, both of which have experienced the most significant de-stocking. So we've had a concentration of impact from those two parts of the business. On the other hand, there are categories growing in some regions, confectionary in North America and Europe, in condiments and cheese and coffee and North America and Latin America, beverage in Latin America. So there are places where the business is growing. Now to your point specifically about signs of promotional activity or changing pricing strategies, there is a lot of talk about that, as you rightly pointed out. We hear that from a lot of customers, both publicly and privately. And we're seeing a little bit of that start to take place in the marketplace. But to be honest, we haven't seen that as any kind of a tailwind yet for our volume performance. And our outlook doesn't infer, doesn't imply or doesn't assume that we're going to see any benefit from the market in the second half either. And so we'll sort of wait and see on whether or not the pendulum swings a bit between price and volume.

Okay, terrific. And just for my follow up on the health care de-stocking, is that just a function of having been de-stocked? You're seeing it now versus a little bit later than the other categories, or is there something unique to the timeline associated with the health care de-stocking?

Yeah, look, I think it is a bit unique. It's really, the markets have been soft, but the health care weakness is really a story of de-stocking. And it's been significant in both medical device packaging and pharmaceutical packaging. And it's been pervasive and consistent around the world. This de-stocking in health care, it's really a multi-year story. It's been a multi-year journey here for health care, which is ironic because it's been one of the most consistent businesses we've had for a long period of time. And we would expect that it returns to that level of consistency. But over the last several years, we, going back to even COVID, where we had really constrained demand, then very strong demand on reopening, but severe supply constraints, severe supply constraints and raw material shortages on things ranging from specialty foils and resins and papers. So coming out of what would have been our fiscal 22, which led really to customers building stocks to ensure supply during our fiscal 23. And we had extraordinary volume in fiscal 23 as a result of customers really buttressing their supply chains and de-risking their supply chains by building up stock. Now we have customers sitting on substantial inventories of a range of products from medical gloves to device packaging, pharmaceutical packaging, etc. And we started to see de-stocking, which actually really started in Q1. We flagged it last quarter, but accelerated significantly in Q2. And we would expect that it's likely to continue, certainly through Q3 and possibly into Q4. So

it

is a bit later stage. I think in some other categories, we've seen signs that there might be, that de-stocking has abated and we're closer to the end of the beginning. I think in

healthcare, it's been a later stage story.

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

Good day, Ryan. Good day, Michael. Just a quick one on the cost savings. So in the face of the volume declines that you did see throughout the first half and particularly that last quarter, and I do take your comments on January thereafter, but I just want to get a sense as to what the outlook looks like for cost savings going forward and how you're still going to manage that declining volume environment with margin growth. I know what you have tabled thus far, but is there anything over and above that that you can achieve?

Yeah, sure. I'll take that one, Anthony. So look, on the cost out, there's two things that we're really doing here. So the first is in response to the soft and underlying volume demand. So on that front, we've clearly taken proactive and aggressive approaches to the cost flexing and really focusing down on productivity gains and discretionary spend. So for the first half, we took out more than $200 million in cost in relation to that, and it accelerated through the half. In the first quarter, it was about $70 million. In the second quarter, kind of $130 million. And we're achieving that by taking out and really flexing the cost base in relation to the volume and demand environment. So we're able to take out entire shifts. We're able to take out labour, reduce overtime. We're driving the procurement benefits, particularly in this low demand environment and really tightening up on discretionary spend. So that will continue as we continue to flex through the volumes. But obviously, as volumes improve, some of that cost, and it's difficult to say, but some of that cost will go back in as we build the shift patterns up. But we wouldn't expect that to be linear. I think you'll see us have better leverage there as we work through the second half because of the way we've learned to operate with some of that lower cost and improve the efficiencies there. So that's really on the operating cost side. And then secondly, we are taking costs out structurally. So in parallel, we're advancing the structural cost reduction initiatives that we've talked about on the back of the divested Russia earnings. That's mainly plant closures, and it's around up to 10 across the globe and in both segments. To date, we've announced seven closures and two restructures. And recently, actually, two to three of those plants have closed. So we did start to see a little bit of benefit from that program as we exited the first half. But we're right on track to deliver the $35 million benefit in the second half from that program and then a further $15 million in FY25. So really, that's the approach we've taken to the cost out agenda. And part of it's structural and part of it's

ongoing. Thanks, Michael.

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

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

Look, it's difficult to say, as I just mentioned. What I can tell you is that things like procurement, there'll be permanent savings. The operating costs out that we've taken out of the fixed base will be permanent. And the structural program is obviously permanent. Cost savings that come out of the business. On the flexing of the cost base, again, it's really dependent on the volume. We think we're much more efficient today. We've been able to proactively act to take labor out of the business overall versus prior year. We've taken nearly 2000 heads out of the business and about a thousand since June. So in total, that's about 5% of the workforce. As the volumes come back online, as I mentioned, we will have to increase some of that, but it's not going to be linear. And we will manage that really tightly. And we feel we've got good leverage out of that today and we are more efficient. And so you'll see us continue to get leverage as we move forward. And really, that's going to contribute to the long-term margin benefits that we've typically gained of 20 to 30 basis points a year in our business. So you should see that continue to contribute to that on the longer term.

Okay, got it. And appreciate all the color on that and on the volumes. But I guess you said volumes kind of came in lower than you were anticipating. So what ultimately gives you comfort in the guidance for the year? Is it really that cost out component and some of the other factors you talked to?

Yeah, look, it's a couple of things. Firstly, on volumes, we're not anticipating any rebound in the consumer or any big improvements in the market. But we do expect that the stocking will abate as we work our way through the half. I mean, certainly a portion of the stocking that we saw in December was certainly year end. Optimization, that's not going to repeat, right? We do believe we're going to see continued destocking in health care and North American beverage. But for the other categories, we're starting to see some evidence that the destocking is abating. So that's one thing. January also was much better. So we had much better January relative to the first half from a volume perspective. And so we feel like we feel pretty confident in underwriting the volume assumptions for the rest of the year. And then in terms of the profit, as Michael alluded to, we're going to continue that. We've got a number of known benefits, which I ravelled through in the opening remarks. But it starts with better operating leverage because we've gotten a lot of costs out of the business. And as volume comes back, we're not going to add that cost back one for one. Plus the build up and the momentum on the structural cost side, which again, will build through the second half with the benefits from plant closures and the like. So, you know, several things that give us confidence in improving trajectory of earnings through the second half, but none of them have to do with a real dramatic improvement at the consumer level.

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

Morning, guys. Thanks for taking the question. If you talked about some of your volumes coming in modestly below expectations and just thinking about your balance sheet and not tell you it's going to happen, but just trying to get a feel of what kind of fourth quarter volumes would leave you outside of your range

at

the full year, assuming all

other things equal. Sam, are you still there? Yeah, can you hear me?

Yes,

you broke up

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

Yeah, just trying to get a feel of what kind of fourth quarter volumes there would leave you outside of your range at the full year, assuming all other things equal.

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

No, no, that's three times leverage.

Ah, okay. So look, we're confident in the cash flow trajectory of the business in the second half. So we're going to be, you know, delevering from here will be at approximately three times at the end of June. And, you know, we're pretty comfortable that that's the path we're on here. In terms of volumes, the expectation for volumes that underwrites the EBIT growth in the second half or the EBITDA delivery in the second half is for a mid-single digit decline in the third quarter and a low single digit decline in the fourth quarter. So there's a bit of, there's a range around that and the impact on EBITDA and then therefore on leverage, you know, is pretty broad. So we don't anticipate volumes being a major driver of us not getting to approximately three turns at the end of June.

Okay, thanks for that. And I guess just following on, I mean, looking forward, generally you have, you know, lower cash flow in the first half due to seasonality. I think if you do finish at that three turns, like your guidance, would you expect to be outside of your range again in first half 25? Is that the new norm now going forward?

Look, I think just to answer your question on that front, if you take where we are right now at this particular point in time, it's a pretty unique point in time because there's two factors that are really impacting the leverage right now. You know, we're at 3.4 times, which is right where we expect it to be at this time of the year in this situation. And it's really driven by the divestment of the Russia business. So we're now fully lapping 12 months earnings out of the business from that. So from here, we don't laugh at that anymore. We head more into more normal earnings trajectory and growth. And that's about 2.2 turns off the leverage. And then the second point is really around elevated working capital levels. So, you know, we have been carrying elevated working capital levels over the last kind of 12 to 18 months. We've started to work our way through that. And, you know, the teams have done a good job in the last 12 months of inventory where we've taken inventory out of the system about $500 million. And that's certainly contributed to the cash flow improvement in the first half of this year where we're $100 million ahead of prior year already. We are still being impacted. We're not getting the full benefit of that inventory reduction because our payables are much lower. So in this environment where we've seen demand softness and de-stocking, you know, clearly our purchases are well down and in turn our payables are down. So, you know, we've still got another sort of $200 million to work through from a cash flow improvement on the back of working capital. And we're really targeting a working capital to sales range of in between that 8 to 9% working capital to sales. And right now we're at .8% on a trailing 12 month basis. So, you know, when you put those two items together, you know, leverage at this time of year would normally be in the more the three times range. And typically in the second half, the seasonality would take kind of a quarter turn off the leverage. So it would get us back into that two and a half to three times range. So, you know, as we look forward, that's where we would expect to be in a more normal base. But as I said, we're in a little bit of a unique period of time. And from here, we do expect improvement.

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

Yes, thank you. Good morning, everyone. Or evening, I should say. Hi, Adam. Hi, so I guess the first question just going on on the volume side and just thinking about some of the end markets and Ron, you gave some some good color in the prepared remarks. One of the areas where Amcor has been investing more aggressively has been in the protein space. Can you talk about kind of incremental business wins that you're you're actually achieving there relative to maybe some end markets that are still pretty pretty challenged on the on the red meat side, certainly in North America and how much you can kind of grow in spite of that and take market share in that opportunity?

Well, yeah, it's a good question. And you're I mean, you're right. The market's been challenged. And so if we think about meat across the flexible businesses, you know, it's been a mixed story. We've had meat declining in North America through the half. There's a stock market. There's the stocking in the meat space as well. But we've seen that stabilized more recently. So that would be one of those categories where we're not calling an end to the stocking cycle. But we certainly see signs that it's stabilizing a bit. Similarly in Europe, we've seen a bit of a stabilization in meat volumes in the last couple of months. And in Latin America, we started to see some growth as well. So I think meat is as a general category globally. Meat is one that feels like is coming out the other end of the packaging cycle, at least for us, or at least there's some green shoots that give us some some reasons for optimism would be the first point. And certainly, as we exited January as well, that would be the case. I think the second part of your question is a bigger picture question. And I think it's going to be a little bit longer dated, which is around our aspirations to win share in this space. You're aware that we made an equipment purchase of a machinery company less than 12 months ago, which would be a part of that total system solution that we're going to go to market with. And we're optimistic that we've got the right consumables, the right film structures, and the right technical service staff to support the equipment offering. And we think over time, that's going to be a winning combination and we'll take share, not just in North America, but around the world. There's not any evidence I can point to yet of that, Adam, because the near term dynamics are well and truly overcompensating for any modest share pickup that we might be enjoying.

Okay, I appreciate that, Keller. And if I ask just a quick follow up, you do have a business and a presence in Argentina, both for Flexibles and Rigids on the beverage side. I just wanted to know, I think you strip out all the inflation accounting for the deval, but you talked about the volume environment in Argentina and how you're thinking about that over the next couple quarters, given what I would imagine is a pretty challenged consumer environment.

Yeah, look, Michael can talk about maybe the accounting that you referenced, but from just a business perspective, first thing I would say is we've been in Argentina for just the mid 90s, so over 30 years. It's a business that's about 2% of sales and about 2% of EBIT. And we have five plants there, actually, across the two segments, as you alluded to. And having been there for 30 odd years, we've been there through multiple economic cycles and crises, I guess. And the business is relatively local, and we have maintained total control over the business, so it's still a business that's functioning more or less normally. But in terms of how we manage it, we continue to drive localization. It's essentially a local business already. There's no exports, but to the extent there's anything imported by way of raw materials, we're continuing to drive more localization of the key inputs. Most importantly, probably, we continue to price ahead of inflation. It's always been a hallmark of that business in that country and continues to be. And then we continue to focus on cost because our expectations are that demand will continue to slow as consumers adjust to the new macroeconomic realities in that country. So that's a little bit about the business and how we manage it. Michael, do you want to talk a bit about the accounting, Adam? Yeah, yeah. Just

on the accounting there, Adam, you referred to, obviously, Argentina's been designated a hyperinflation economy since 2018. So consistently since that time, if there's been a devaluation, then we see that impacts the monetary assets on hand. And that's been treated as an aside. This quarter, there was a change of government, clearly, and in December we saw a 55% devaluation. And you see the chart of $34 million to the P&L in the quarter in the SI bucket. And that's really the outcome of that on our monetary assets only. And that followed Q1 where there was a 20% devaluation. So really that's the treatment of the accounting has been consistent all the way through since the 2018 approach.

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

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

Well, yeah. Listen, Richard, you don't remember seeing volume declines at that level because you haven't seen them at that level. I mean, that's just the reality of it. It's a business that's, you know, it's been a good business for a long period of time. It's suffered really from a volume perspective from the same drivers as the rest of the company, right? So, you know, high, although with higher impacts. So we've had market impacts that we would say attributed to a high single digit decline in volumes. That's inclusive of customer demand down kind of low to mid single digits in some segments that are important to us. Maybe down some more, some customers lagging the market. And that all wraps up to kind of a high single digit impact on volumes for both North American beverage at large and Hotsville specifically that we would attribute to market impacts. Then the bigger impact actually for us in the quarter was the destocking. And the destocking is really being driven by a couple of things here which are working in opposite directions. First is that traditionally in this business you'd have some inventory pre-build in what is our fiscal second and fiscal third quarters in advance of the high season, the beverage season in North America. There's historically a bit of inventory buildup. That's not happening this year. So there's no pre-build this year. And at the same time we have some customers, some big customers with very, very aggressive inventory reduction targets. So rather than building, we're reducing. And there was a significant acceleration in that activity to reduce inventories in the month of December, which ultimately led to a high single digit impact in North American beverage at large, but a high teens impact in Hotsville. And while we saw some modest improvement in January, we do believe that we're going to continue to see a destocking impact in the third quarter. So that's really what's gone on there. That's unprecedented. We still believe in the business. The business is well positioned in terms of its market stature. It operates in a reasonably well structured market. It has world leading technology. Its footprint is reasonably optimized. We are taking a couple of small plants out as part of the restructuring program, but it's reasonably well optimized. And it needs to just weather the storm. And that's on the beverage side. And then, you know, let's not forget that outside of beverage, we have a reasonably sized specialty container business, which looks and feels almost like a flexibles business because of its end market exposure. And that business has room to grow. And Latin America also continues to be a very good business, including in the first half and the second quarter where we saw volume growth. New business wins in Latin America too. So it's a portfolio of businesses at its core. It's a beverage business in North America that gets a lot of attention, but we shouldn't forget about the other parts as well.

Your next question comes from the line of Brooke Campbell from Bear and Joey. Please go ahead.

Yeah, good evening. Thanks for taking my question. Can you just confirm

what the level of volume growth or decline was in January? And then as a follow up to that, is it not a risk here that you sort of extrapolate January volumes for the rest of the quarter when perhaps there was a benefit in Jan because customers effectively delayed orders in December and pushed it into January. So, is January therefore, January might not be a good indicator for the rest of the quarter? That's the question, thanks.

Yeah, look, we won't give a number on January other than to say it was an improvement over December. And an improvement not everywhere, but in most parts of our business. We did have some parts of the business even that grew modestly. So that's probably as much as I would say in terms of trying to dimension January. I understand the nature of your question, particularly the second part as to whether or not we're being overly optimistic on the back of one month. It is one month and we're well aware that it's one month. We are flagging that we will see continued destocking impacts in healthcare globally and in North America beverage. And we're also not banking on any improvement in the consumer. So, I think that we're being relatively conservative and not reading too much into one month, but it is a month. And it does suggest as we sort of expected that the low point for us from a volume point of view and earnings

growth as well was the second quarter.

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

Hi, Ron. Hi, Michael. I just want to build on Brooke's question there though. Obviously, December was significantly weak. So, January improvement might not necessarily move you guys back to increase. I just want to square some of the commentary still where you're saying that you'll see a mid-single digit volume decline in the third quarter and then low single digit in the fourth quarter. Can you just help us? The commentary around the January improvement, is that relative to the negative or the decline that you saw through the month of December specifically?

Yeah, it's relative to the performance in the whole first half and in the second quarter and in December. So, when we're talking about improvements in January in most parts of the business, that's relative to the first half. That's the first part. I think the other thing to keep in mind is as we work our way through the balance of the fiscal year, a couple of things will also underpin those assumptions that we've outlined. One is that we do expect outside of healthcare and North American beverage, we do expect the year-end destocking that we saw in December to not repeat and some continued abatement or continued destocking runoff or reduction in much of the rest of the business. That's the first thing. And the second thing is particularly as we get to the fourth quarter, the prior period comp gets a little bit easier. Our volume challenges really started in Q4 of last fiscal year. And so, as we get to Q4 this year, we've got the benefit of a comparative period which wasn't so strong.

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

Yeah, sure. So, you saw that we brought our guidance just slightly down from kind of a range of 320 for interest, 320 to 340 down to kind of 315 to 330. That's really all on the back of the forward curves. And the interest rate hike would appear to have reached its peak now and potentially you might see one rate reduction late in our fiscal year. But really that's the slight improvement is really on the back of that forward curve. And after tax it's a pretty minimal impact on the four-year guidance.

Your next question comes from the line of Cameron McDonald from ENP. Please go ahead.

Good morning guys. Question from Matt just in terms of the tax rate and then the capital structure. So, the tax rate is sitting sort of around under 19% and what jurisdictions are you getting a tax benefit from given the corporate tax rate in most of your jurisdictions is in excess of certainly of that number but in excess of

20? Yeah, look, I think we operate across a broad range

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

And the differences in deductibility of different expenses by jurisdiction, right, which then obviously you have

to factor in in addition to the headline tax rates in those jurisdictions.

Okay, thank you. And then just in terms of the capital structure and, you know, the comments earlier about the balance sheet and the leverage, you know, part of our investment thesis has been, you know, APS growth, a big chunk of that has been, you know, undertaken through share buybacks. What's the sort of leverage ratio that we should be expecting, you know, before we would start to see a discussion around the buyback being re-implemented? Is it, do we have to get back down to sort of, you know, the NIT2s, I think the last time you had a buyback active was sort of 2.7 times leverage?

Well,

listen, we've bought

back, remember it's buybacks and M&A is the way we think about the discretionary cash flow for the business. And we've bought back over the last, we will have bought back over three fiscal years and acquired to the tune of about $1.2 billion. So we will have done over a billion dollars in buybacks and we will have invested somewhere close to $200 million in investments and acquisitions. So that's essentially three years of discretionary cash that's been invested in the business. You know, it's a little bit lumpy. It's not exactly even over the three-year period, but that's been what we've done. You know, I think from a leverage range perspective, more often than not, we're going to be between two and a half and three times. Obviously, you know, we're comfortable being above that, particularly when there's good reasons for it as there is at the moment. And, you know, we'll be continuing to evaluate capital management or buyback opportunities in conjunction with M&A opportunities on a go-forward basis and that includes now.

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

Thank you, Ron, Michael, Tracy, and Dana for taking my questions. Actually, just one question because a lot of material already was covered here. Quickly on just protein packaging, Ron, I know it was discussed earlier in response to a question that we discussed at, I think, last quarter. Can you describe whether there are any nuances in your business, maybe around equipment, for instance, that would make you unable to compete with some of the larger players in the industry or some of your larger peers? I know you intentionally participating in different parts of the market to avoid going head on with some of the larger players. And lastly, where would you like this business to be on a revenue basis, let's say in five years or ten years?

Yeah, look, it's a great question. The biggest challenge we have at the moment is just the lack of installed base. So there's a massive installed base that's got a lot of legacy behind it in the industry given the way the industry has evolved over several decades. And from an equipment perspective, you know, we're, well, firstly, I would say we're more open source. We've bought Moda, obviously, so we're prioritizing Moda equipment, but we're more agnostic to the actual equipment installation. And we think we've got great films. And, you know, the primary basis of competition here, we think ultimately will be on the film. And that's what we're aspiring to do is to grow the film business enabled and facilitated with a full service offering, which includes not only the machinery, but the technical service that is so important in this industry to the customers to help them optimize their operations. So it's really a total system solution that we're going to go to market with now and we're starting to go to market with really for the first time. And as far as how big can the business get and what our aspirations for it, I mean, look, I'm not going to dimension it here. It's a big important business for us already. You know, it's a tough time to be asking for a lot out of the business as it weathers some of the de-stocking and some of the softness in the general beef cycle in particular, or meat cycle, I should say. But it's a business that we have aspirations to grow it sort of mid to high single digits and at good margins for the foreseeable future.

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

G'day Ron and Michael. Hope you're well. Just a couple of questions please. In terms of your second half EPS guide, previously it was up for the second half up mid single digit and constant currency. I think you mentioned Q3 EPS down mid single digit re-expectation and Q4 up in single digits. So it looks like the Q3 guide is weaker. Is that reflecting a lower volume starting point?

Look, overall, John, I guess we'd say we actually held our guidance.

So, and we, you know, you're quite right. We've guided to volumes mid single digit down in Q3 and EPS down mid single digit and then Q4, you know, we're expecting trajectory to improve through the half on the volumes, volumes down low single digit. And, you know, just on the back of some of the things that Ron touched on earlier and also, you know, the earnings trajectory of our business, typically in the seasonality in Q4 is our biggest quarter. You know, that's why we're expecting mid single digit EPS growth in Q4. So really not a lot of change. I guess what we have seen is that the volume trajectory is perhaps a little softer than we'd previously anticipated. And that was really on the back of that de-stocking, particularly in health care and North America beverage where we're expecting that to continue through Q3 and perhaps into Q4. We are offsetting that with continued cost out and we have confidence in the underlying performance of the business with the structural initiatives that we've put in place and touched on already getting $35 million in the second half, the ongoing cost agenda and discretionary spend management. So, you know, not a lot of change really to our guidance overall. I think we perhaps we did a little better in H1, but generally speaking, we're holding the range and we feel pretty good about the drivers behind it to deliver that, you know, the 67 to 71 cent range.

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

Yeah, look, I mean, the best proxy is probably the scanner data that, you know, we look at and I'm sure you look at as well. I mean, we still see a generally soft consumer environment. And, you know, that's true across the staples that we're supplying packaging for. We still see in the US, you know, general scan data, which, you know, obviously there's a lot of nuance that you need to unpack, but generally speaking, you know, kind of low single digit declines in the calendar fourth quarter that's just passed. Europe may be modestly better overall, but at a sub segment level, you still see lots of softness and lots of modest declines. You see some evidence of of down trading in some some parts of the business. You see on the margin, maybe some modest shifts and that wouldn't I wouldn't make too much into this, but you see some modest shifts in some categories like pet food and maybe even in coffee where you might see different different formats doing better. We certainly see it. We believe we see it in the beverage business, you know, in the case of carbonated soft drinks where we know that the value pack, you know, is historically been the can if you're going to buy 12 or 24 cans or units of a soft drink, you're likely to buy it in a can and that is continued. So I think generally, John, the consumer environment is pretty soft. You know, there's some reasons, you know, for potential optimism if the brand owners toggle the dial a little bit between price recovery and maximizing volume, but we are absolutely not baking that into our assumptions on volumes going forward. That will take as nice to have if it happens.

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

Morning everyone. So you spoke about protein turning a corner in January. Can you just elaborate on how you're seeing stock levels and the potential for an end in these stocking in other product categories?

Yeah, look, I think as it relates to the trend and the stocking from here, I sort of break it down in a couple of couple of buckets. You know, firstly, we'd say the really pronounced end of year de-stocking that we saw in December. You know, we don't expect we'll repeat with the exception or that we don't expect we'll continue with the exception of globally in health care and in North American beverage. We know that in those two segments for different reasons, we've mostly covered, we're going to see continued de-stocking certainly through Q3 and likely into Q4. So we're not expecting a big bounce back there. Other than those two segments, you know, other places where there was really accelerated de-stocking in December, we're not expecting to see a repeat of. And so therefore, you know, on a general basis, we would we would expect that we're going to start to come out the other end of this inventory cycle that we've been weathering for the last several quarters. We see some signs of that. Already I mentioned meat as one place that seems to have stabilized, you know, premium coffee in Europe is another. So there are some there are some reasons for optimism, but again, we're not we're not getting ahead of ourselves here. And we recognize we have two important parts of the business, you know, in health care and beverage, which are going to continue to to go through some more de-stocking from here.

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

Hi, Vigents. Just an extension of Daniel's question on de-stocking and part of my ignorance, but how can you actually tell what is de-stocking? What is underlying volume trend? Can you specifically quantify that with data that you're seeing internally or is it based on discussions you're having with customers, a bit of an approximation internally? Can you just give me a sense of how you work out what is underlying consumer weakness? What is de-stocking? What is cyclical? What is structural?

Yeah, look, it's part art and part science. So firstly, there's a lot of discussions with customers. And you remember in some parts of the business, we're even co-located with customers. So there's a high degree of customer intimacy across the business. And the starting point is the discussions and the joint planning dialogue that we have with our customers around the world. So that's arguably the most important input. But then we also try to triangulate with data. And what do we look at? We look at things like in categories where there is scanner data, which is not the case across our portfolio, certainly not in health care, but in food and home and personal care and places where there's good retail scanner data. We take a close look at that. We also look at the scanner results for individual customers, individual companies, and try to determine if there's any difference between the overall market performance and the performance of our specific customers. And then we look at our volumes and try to triangulate between those three data points to see what's the difference. So that's the first thing we look at is if there's sell-through or not, and whether or not we're seeing an inventory drawdown or buildup. So it's an approximation, but it's a reasonably informed approximation, both with input from the customer directly as well as

data and quantitative inputs.

Okay, thanks, Ron. That's great. And then just a quick follow up on the point in January, and I appreciate it's only a month. But when you talked about an improvement, are you talking about a positive growth comp in January or less bad January versus the last six months? Thank you.

Yeah, look, we're talking about it relative to the first half. So it's a little bit of both, but generally speaking, we're talking about the comparison to the first half. And so we're not talking about we've had we had some parts of the business that grew, but we're not talking about general growth across the board. What we're talking about is, you know, a general improvement relative to

the first half and certainly the second quarter.

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

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

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