Amcor : 3Q24 transcript FINAL

Amcor Plc

2024 Third Quarter 2024 Year to date Results 5.30pm EST April, 30 / 7.30am AEDT May, 1 2024

Amcor Plc

Third Quarter 2024 Results

CORPORATE SPEAKERS:

Tracey Whitehead

Amcor Plc; Head of Investor Relations

Peter Konieczny

Amcor Plc; Interim Chief Executive Officer

Michael Casamento

Amcor Plc; Chief Financial Officer

PARTICIPANTS:

Ghansham Panjabi

Baird

Daniel Kang

CLSA

Adam Samuelson

Goldman Sachs

John Purtell

Macquarie

Richard Johnson

Jefferies

James Wilson

Jarden Australia

George Staphos

Bank of America

Brook Campbell-Crawford

Barrenjoey

Keith Chau

MST

Cameron McDonald

E&P

Anthony Longo

JPMorgan

Andrew Scott

Morgan Stanley

Amcor Plc

Third Quarter 2024 Results

PRESENTATION:

Tracey Whitehead

Thank you, Operator. Thank you, everyone, for joining Amcor's fiscal 2023 third quarter earnings call. Joining today is Peter Konieczny, Interim Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, a few items to note.

On our website, amcor.com, under the Investors section, you'll find today's press release and presentation, which we will discuss on this call.

Please be aware that we will also discuss non-GAAP financial measures and related reconciliations can be found in the 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 also be made Amcor's SEC filings including our statements on Form 10-K and 10-Q for further details. With that, over to you, P.K.

Peter Konieczny

Thank you, Tracey. Thank you, to all who have joined us for today's call. Prior to discussing our third quarter performance, I want to spend a few moments recognizing my predecessor, Ron Delia, and his many accomplishments at Amcor.

In the last few years alone, Ron led us through the transformational acquisition and integration of Bemis, the largest acquisition in the company's history, successfully and safely guided the business through a pandemic and made the difficult and correct decision to divest our business in Russia. And most recently, Ron directed our teams in navigating a particularly challenging economic period.

Now I will speak for the Board, our global management team and our employees around the world in thanking Ron for his leadership, guidance and dedication during his 18 years with Amcor and nine years as CEO. I've worked closely with Ron, our Board and the other members of our executive team over many years to help shape and execute our strategy, and I'm honored to take the leadership in an interim capacity at this time.

Today Amcor is the established industry leader in our key markets and geographies, has world- class talent and clearly differentiated commercial innovation capabilities, all providing us with multiple opportunities to capture high-value growth. Importantly, the business is also well positioned to continue benefiting from the proactive steps taken by our leaders across the company to align the cost base with recent challenging market conditions.

Amcor Plc

Third Quarter 2024 Results

The results of those decisive actions were again evident in our third quarter financial performance as we showed strong earnings leverage across the business. Third quarter year- over-year volume performance also improved on a sequential basis, and we expect this trend to continue driving stronger earnings growth as we close fiscal year 2024. My role right now is to ensure we stay focused and on track and that we capitalize on the strong position we are in to maintain momentum and further accelerate earnings growth. It is a team effort and will drive success. I'm surrounded and supported by credible leaders and talented team players throughout our organization.

As seen on Slide 3, my near-term priorities are simple. First, ensure Amcor continues to provide a safe and healthy work environment for our global workforce. Second, stay close to our key stakeholders including our employees and customers and finish our 2024 fiscal year strongly. After an improved third quarter performance, we are well positioned to do so, and we've raised our full year guidance today. Third, build on the momentum we have worked hard to deliver across the business. As we work through our planning cycle for fiscal 2025 set clear priorities to ensure our momentum continues. Fourth, provide stability for the business and keep our teams focused on delivering for all our stakeholders by reinforcing that. Our strategy has not changed, our agenda has not changed, and our priorities have not changed.

Moving to Amcor's Q3 performance, starting with safety on Slide 4. Our commitment to the health and safety of our teams remains our number one priority, and we continue to focus on providing a safe and healthy work environment. 72% of our sites have been injury-free for the past 12 months or longer, and we experienced a 19% reduction in injuries compared to the first nine months of fiscal 2023. Safety is deeply embedded in Amcor's culture and is a critical cornerstone of our success.

Turning to our key messages for today on Slide 5. First, outperformance in the underlying business resulted in adjusted earnings per share for the third quarter that exceeded the expectations we set out in February. Our Flexibles and Rigid Packaging segment each delivered adjusted EBIT growth, leading to Amcor returning to year-over-year earnings growth a quarter sooner than we anticipated. Improved working capital performance through the year also resulted in a year-to-date increase in adjusted free cash flow.

Second, as I mentioned earlier, our third quarter volume trajectory improved significantly on a sequential basis as destocking abated across most end markets, and we experienced higher customer demand in several of our businesses.

While this is clearly an encouraging and positive trend, our teams remain highly focused on continuing to control costs, and this helped us deliver a third consecutive quarter of improved earnings leverage and a return to earnings growth.

Amcor Plc

Third Quarter 2024 Results

Third, our March quarter financial performance and expected further momentum in our fourth quarter gives us the confidence to increase our full year adjusted EPS guidance range to 68.5 to 71 cents per share and reaffirm our guidance for adjusted free cash flow between $850 million and $950 million for the fiscal year.

We believe we have turned the corner after a challenging calendar 2023, and we expect our sequential volume and earnings growth trajectories will continue to improve, which is supported by the demand trends experienced across the business in the first weeks of April.

Finally, we remain confident in our capital allocation framework and strategy for long-term growth. We believe the strength of our market positions, our opportunities for investment and our execution capabilities, along with our commitment to a compelling and growing dividend, make a convincing investment case for Amcor.

Moving to Slide six for a summary of our financial results. The first nine months of fiscal 2024 continued to reflect significant benefits from our proactive cost actions. Three consecutive quarters of strong operating leverage helped offset the unfavorable impact of 7% lower year-to- date sales, leading to a decline in adjusted EBIT of 3%.

We believe we've reached an inflection point in the trajectory of earnings and volumes with our Q3 results, and we are pleased with our financial results in the March quarter. Better-than- anticipated demand trends and continued strong cost performance resulted in EBIT and earnings per share ahead of our expectations entering the quarter. The underlying business saw a return to profit growth in the third quarter with adjusted EBIT up 3% compared with last year. Volume trends improved as the broad-based destocking experienced in the December quarter abated and customer demand strengthened.

Our teams also continue to focus on cost reduction and productivity initiatives and delivered another quarter of outstanding results with approximately $130 million in total cost savings including approximately $15 million of benefit from structural cost initiatives. These benefits, combined with improving volume trends, resulted in another quarter of improved earnings leverage. Interest and tax expense were modestly higher than the prior year, in line with our expectations and adjusted earnings per share of 17.8 cents, grew by 1%. Q3 net sales were down 6% on a comparable constant currency basis, which primarily reflects overall volumes 4% lower than the prior year. This is predominantly related to expected ongoing weakness including further destocking in healthcare categories and in the North American beverage business, which collectively represent approximately 30% of Amcor's total sales.

Across the remaining 70% of our business, overall net volumes were relatively flat with last year, a significant improvement compared with the December quarter and the business delivered volume growth across several categories and geographies.

Amcor Plc

Third Quarter 2024 Results

Outside of healthcare, we believe destocking is now largely behind us. Price/mix for Q3 had an unfavorable impact on sales of approximately 3%, which is a result of greater volume declines in high-margin healthcare categories, which we anticipated and called out last quarter.

We continue to return significant cash to shareholders through a compelling and growing dividend and share repurchases, which totaled approximately $570 million through the first nine months of the year. I'll turn it over to Michael now to provide some further color on the financials and our outlook.

Michael Casamento

Thanks, PK, and hello, everyone. Beginning with the Flexibles segment on Slide seven and focusing on our Q3 performance. Net sales for Q3 were down 6%, reflecting an unfavorable pricing impact of 4% and a 2% decline in overall volumes, which was a significant improvement of 8% points compared with the December quarter.

As we anticipated and called out last quarter, volumes for healthcare products remained weak and destocking continued, particularly in North America and Europe.

In total, healthcare volumes were down double digits, and this had an unfavorable impact of approximately 3% on overall segment volumes, and was the primary driver of the 4% unfavorable mix in the quarter. Across the balance of our Flexibles portfolio, net volumes grew approximately 1% in the quarter, with growth in several end markets including meat, pet food, cheese and unconverted film foil, and we also saw growth across a number of emerging markets.

Across North America and Europe, third quarter net sales declined at high-single-digit rates unfavourably impacted by mid-single digit lower volumes and unfavourable price/mix related to declines in healthcare categories. Excluding healthcare, across these two regions we saw mid- single-digit volume growth in cheese and a strong sequential improvement in meat and pet care volumes, which were flat and up low single digits for the quarter, respectively. Across the Asian region, net sales were modestly higher than the prior year. China grew volumes for the third consecutive quarter and volume growth in Thailand, India and the Philippines also helped offset lower volumes in South East Asian healthcare business.

In Latin America, the business delivered good volume growth in Brazil, Mexico and Peru. Q3 adjusted EBIT of $358 million, was 5% higher than last year on a comparable constant currency basis. Strong cost performance through the quarter including from restructuring initiatives, combined with broadly improving demand trends, led to another quarter of strong earnings leverage, and EBIT margins increased by 170 basis points to 13.8%.

Amcor Plc

Third Quarter 2024 Results

Turning to Rigid Packaging on Slide 8. Q3 net sales were 8% lower on a comparable constant currency basis, mainly reflecting lower volumes. While overall volumes were down 8% for the quarter, this represents a meaningful improvement over the December quarter.

In North America, overall beverage volumes continue to be impacted by soft consumer and customer demand in Amcor's key end markets, along with some lingering destocking. Total beverage volumes were down 11%, improving sequentially from the 19% decline we experienced in December quarter, which was impacted by significantly more destocking. Latin America volumes were in line with last year with growth in Brazil and Colombia, offset by weaker demand in Argentina.

We are pleased to see the Rigid Packaging business return to earnings growth, with adjusted third quarter EBIT up modestly over last year. Strong earnings leverage resulting from a continued focus on cost reduction and productivity measures and the realization of benefits from restructuring initiatives more than offset lower volumes, leading to an 80 basis point increase in EBIT margins to 8.7% for the quarter.

Moving to cash and the balance sheet on Slide 9. Adjusted free cash flow for the first nine months was approximately $100 million ahead of last year, mainly driven by improved working capital performance and successfully reducing inventory levels for the fifth consecutive quarter. Leverage at 3.4x is broadly in line with the first half and within the range of expected outcomes for the third quarter.

As a reminder, the business is cycling through temporary increases in working capital, and trailing 12-month EBITDA remains at lower than historic levels, reflecting the divestiture of our Russian business in December 2022.

Looking ahead, we continue to expect leverage will decrease to approximately 3x at the end of our fiscal year, supported by seasonally stronger earnings and cash flow in our fiscal fourth quarter. This brings me to our outlook on Slide 10.

As PK noted earlier, we are raising our full year guidance for adjusted EPS to 68.5 to 71 cents per share to reflect our performance in the underlying business in the third quarter and our expectation that volumes will continue to improve through the balance of the year.

We also remain focused on controlling costs and expect to deliver further savings in Q4 including from our structural initiatives.

For fiscal 2024, we continue to expect the underlying business to contribute organic earnings growth in the plus/minus low single-digit range with share repurchases adding a benefit of approximately 2% and favorable currency translation contributing a benefit of up to 2%. This is

Amcor Plc

Third Quarter 2024 Results

offset by negative impact of approximately 3% related to the sale of our Russian business in December 2022. The impact of which was all in the first half.

We also expect a negative impact of up to 6% from higher interest and tax expense, which takes into account our updated estimate for the full year net interest expense of between $310 million to $320 million.

We are confident we will build on our third quarter performance, and adjusted earnings per share for the fourth quarter is expected to grow over last year by mid-single digits on a comparable constant currency basis.

Overall volumes in the fourth quarter are expected to be down in the low single-digit range, primarily due to ongoing destocking in healthcare categories and continued weak consumer and customer demand in North America beverage. We expect the volume improvement we experienced in the third quarter to continue as we progress through the fourth quarter, which will position us well as we enter fiscal 2025. We have also reaffirmed our guidance range for adjusted free cash flow of $850 million to $950 million for the year. So with that, I'll hand back to PK.

Peter Konieczny

Thank you, Michael. In closing, on Slide 11, our Q3 financial results, guidance for the balance of the fiscal year, and our expectation that we will continue to build earnings momentum in fiscal 2025 will highlight that Amcor is a very well-positioned business. Amcor's industry leadership across the globe is well established.

Our differentiated innovation capabilities are assisting the world's best known brands and smaller companies in achieving their objectives to protect, preserve and promote their products while enabling them to meet the sustainability commitments they have made to their stakeholders.

Amcor's talented employees around the world are capitalizing on growth opportunities in priority categories, emerging markets and through sustainable offerings while also continuing to closely focus on cost controls. We're confident we will continue to see positive momentum given the actions we have taken and continue to take across our operations to invest in growth, reduce cost and improve productivity.

As I mentioned at the beginning of the call my role right now is to ensure we stay focused and on track and that we capitalize on the strong position we are in to maintain momentum and further accelerate earnings growth. The continued safety of our people goal will always be at the top of Amcor's agenda. But a very close second for me right now is to keep our teams focused on delivering for all our stakeholders by reinforcing that our strategy, our agenda and our priorities have not changed.

Amcor Plc

Third Quarter 2024 Results

Our Q3 volume trajectory and financial performance underscores our confidence in stronger earnings growth momentum as the challenges we faced in calendar 2023 are put further behind us. We have raised our full year EPS guidance, and we anticipate delivering mid-single-digit earnings growth in Q4. Our performance in the first few weeks of April supports this expectation. Our commitments to our longer-term growth and value creation strategy gives us line of sight to a return to growth in line with our shareholder value creation model.

Operator, we're now ready to turn the line over to questions.

Operator Your first question comes from the line of Ghansham Panjabi of Baird.

Ghansham Panjabi

I guess first off, it just sounds like volume surprised you to the upside during your third quarter. Do you think that's just a function of 2Q coming in lower than forecast just given aggressive year-end inventory destocking by your customers?

Do you think this is more of a sustainable improvement that you're going to build upon as you look out to your fiscal year 2025?

Peter Konieczny

Yes. Thanks. It's a great question. There's a couple of things to take away here from the discussion of the quarter. The first one really is that volumes improved. The second one is that we had great cost performance. The third one is that we believe the momentum carries over into the Q4. But let me get back to the volume question.

So, significant improvement sequentially on volumes from the second to the third quarter. To remind ourselves, second quarter, we were down 10%. Third quarter, we were coming in 4% down versus prior year.

When you look at the 4% that we were down, it pretty much equally split between two drivers. That's the market impacts, and by that, I mean consumer demand and our exposure to categories and customers. Then the second one is destocking. So that made up the 4% decline.

Another way to look at that is the 4% decline was pretty much all driven by destocking in healthcare and North American beverage. That also means that the balance of the portfolio ended up being pretty flat.

We're pretty much pleased with this outcome because when you think about it, healthcare and North American beverage is about 30% of our business, that means the balance of the portfolio, 70% came in flat.

Amcor Plc

Third Quarter 2024 Results

Now when I take a step back and we look at the third quarter volume performance, there's a few things that we take away. The first one is, we saw a bit of unwind of a very strong destocking in the December month. When we discussed the second quarter, we talked about a pretty strong January, and there was a bit of a question mark around how much of that performance was driven by unwind of the December month. As we left Q2 behind us, we can confirm that the volumes in January and also February, to a certain extent, benefited from a bit of an unwind in an unusually low December month. So that was the first one.

The second thing that we've seen is that our customers performed better. We talked about that also in the last quarter. The background here is that customers, particularly large customers, are talking more, and responding more towards turning the dial a bit towards a better balance between volumes and margins. So we've seen that come through.

Then the third one is pretty much what we expected to a certain extent that the destocking would abate., and that pretty much happened with the exception of healthcare and some lingering destocking in North American beverage. So, that's pretty much the discussion of the third quarter.

But as I have the floor on volumes, let me just make two more comments and breaking it down into the segments here because I think the color is important. In Flexibles, we came from being 10% down in the second quarter to being 2% down in the third quarter. Again the customer performance drove improved market impact performance and then the destocking significantly abated. When you look at the Flexibles segment, it was all made up by the healthcare impact in terms of the decline, the balance of the portfolio is flat to even slightly up.

Then just one more comment on Rigid and then I'll stop. Rigid went from 12% down in the second quarter to 8% down in the third quarter, so also an improvement. We continue to see a soft market, but the destocking has significantly abated in Rigids also. So across the board, really, really good improvement. When you think back to what I discussed, there's components that we believe to be sustainable, no question. That relates to one, further abatement of the destocking and second, to good customer performance that we believe we will continue to see.

Operator Your next question comes from the line of Daniel Kang of CLSA.

Daniel Kang

Just a question on healthcare. You mentioned healthcare continued to fall double digits in 3Q, which from memory sounds quite similar to the December quarter. Can you comment on whether there was any sequential improvement in 3Q?

And just from the visibility of customer stock levels and given the comps that you should be working with going forward, is it reasonable to expect that first half fiscal year 2025 to show some improvement in healthcare