Q1 2025 Earnings Transcript

Tracey Whitehead

Thanks, operator, and thank you, everyone, for joining Amcor's fiscal 2025 first quarter earnings call. Joining today is Peter Konieczny, Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Let me note a few items before I hand over. On our website, amcor.com, under the Investors section, you'll find today's press release and presentation, which will be discussed 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 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 then rejoin the queue if you have any additional questions or follow-ups. Over to you, PK.

Michael Casamento

Thank you, PK, and thanks to everyone joining us today. Starting with Slide 7 and a summary of our Q1 financial results. Our fiscal 2025 year is off to a very good start with broad-based improving customer demand across many end markets. Our teams continue to position Amcor to win with our customers, which resulted in our third consecutive quarter of sequential improvement in volumes. Overall volumes for the fiscal first quarter were up approximately 2% compared with 1% in Q4. As expected and called out in August, volumes remained weak in healthcare in North American beverage, which unfavorably impacted overall company volumes by approximately 2%. So across the balance of the business, overall volumes increased by 4% over the September quarter last year. Price/mix had an unfavorable impact on sales of approximately 3% primarily driven by continued destocking in higher-margin healthcare categories as expected and as noted on our August earnings call. First quarter adjusted earnings per share was in line with our expectations, coming in at $0.162 per share, which represents growth of 5% on a comparable constant currency basis. Adjusted EBIT grew by 3% compared with last year, and our teams continue to proactively manage costs well, helping drive operating leverage across the business. This resulted in another quarter of margin improvement with adjusted EBIT margin increasing by 50 basis points to 10.9%. Moving to our Flexible segment on Slide 8. Q1 volumes were up 3% compared with last year and improved modestly on a sequential basis, reflecting broad-based growth across most geographies and end markets. Net sales decreased by 1% on a comparable constant currency basis as widespread volume growth across the Flexibles business was offset by unfavorable price/mix of approximately 4%, again, primarily related to lower healthcare sales. As anticipated and discussed on last quarter's call, destocking in healthcare continued in North America and Europe in pharmaceuticals, and this resulted in a headwind of approximately 2% to overall segment volumes. We expect this destocking to abate by the end of calendar 2024. Across the balance of our Flexibles portfolio, volumes were up approximately 5%, reflecting solid customer demand across all regions and in many product categories. In North America and Europe, first quarter demand continued to improve for the second consecutive quarter. Volumes were up low to mid-single digits in both regions despite the negative impact of healthcare destocking. In emerging markets, our Asia Pacific and Latin American businesses also continued to deliver good volume growth at low to mid single-digit rates, supported by solid demand in China, India, Brazil and Peru. From a product category standpoint, meat, dairy, liquids and ready meals all delivered mid single-digit growth and single-serve coffee was up. In healthcare, medical return to modest growth. However, pharma volumes were down low-double digits compared with last year. Adjusted EBIT for the quarter of $329 million grew by 3% over last year on a comparable constant currency basis. Higher volumes, combined with strong cost performance led to another quarter of margin expansion, with adjusted EBIT margins up 40 basis points to 12.9%. Turning to Rigid Packaging on Slide 9. The Rigid business continues to advance its performance and the trajectory of overall segment volumes improved for the third consecutive quarter. The business delivered another quarter of earnings growth despite a 4% decline in overall volumes compared with last year. As expected, this was primarily driven by continued soft consumer and customer demand in the North American beverage business. Net sales were down 4% on a comparable constant currency basis, with price/mix relatively flat. In North America, beverage volumes were down high-single digits, consistent with our volume performance in the previous quarter despite a modest negative impact from the temporary closure of a couple of plants in the Southern Eastern United States toward the end of the quarter to help ensure our people remain safe from the impacts of Hurricane Helene. As anticipated entering the quarter, consumer demand remained muted in Amcor's key end markets and customer mix remained unfavorable. Latin American volumes were lower than last year, reflecting weaker customer demand in Argentina and Colombia, which was partly offset by growth in Mexico and the Caribbean. The Specialty Containers business delivered good growth in the dairy and nutrition categories with volumes down in healthcare due to destocking. From an earnings perspective, the business delivered another quarter of growth and margin expansion through an ongoing focus on cost reduction and productivity measures. Adjusted EBIT of $62 million in Q1 was up 2% on a comparable constant currency basis, with EBIT margin increasing by 60 basis points to 7.7%. And as announced earlier today, we reached an agreement to sell our 50% interest in the Bericap North America closures business to our joint venture partner for $122 million, which we will use to reduce debt. Although we've had a long and respectful relationship with Bericap over the past 27 years, at this juncture, we have chosen to unwind the joint venture due to differing views on near-term capital requirements and resulting returns. While Amcor continues to operate in the closure space, and it remains a category of interest, we are committed to maintaining our disciplined approach to capital allocation. Moving to cash on the balance sheet on Slide 10. Consistent with historical quarterly phasing, Q1 was a quarter of cash usage. Compared with last year, CapEx increased to support a number of important projects that will continue to drive our sustainability, innovation and growth agendas. Additionally, we increased raw material inventories to ensure we are ready to service improving volume trends. Leverage was a little higher than we were anticipating, given the impact of higher inventories and secondly, due to stronger euro spot rates toward the end of the quarter, which negatively impacted debt and subsequent leverage by 0.1x, which has since unwound. We expect leverage to reduce through the fiscal year and anticipate an improvement in the second quarter with an end point below prior year December, and we remain confident in meeting our expectation to exit fiscal 2025 with leverage at 3x or lower. During the quarter, we returned approximately $180 million in cash to shareholders through our quarterly dividend, and our Board has also increased the quarterly dividend per share by 2% to $0.1275. That brings me to the outlook on Slide 11. As PK mentioned, based on our good start to fiscal 2025, we are reaffirming our guidance for the fiscal year. For fiscal 2025, we continue to expect adjusted earnings to be in the range of $0.72 to $0.76 per share on a reported basis, representing comparable constant currency growth of 3% to 8%. Our performance through the first quarter further supports our expectations for strong growth in the underlying business for the year as we continue to build on our volume and earnings momentum. As we pointed out on our August call, it's important to remember that this guidance includes an EPS headwind of approximately 4% related to more normalized levels of incentive compensation based on our expectations for improved annual financial results. Excluding this incentive normalization, we expect growth from the underlying business in the high single to low double-digit range. We continue to assume overall volumes will increase in the low to mid single-digit range for the year with trading performance through October aligned with these expectations. Interest expense guidance remains between $290 million and $305 million, with an effective tax rate in the range of 19% to 20%. Looking at our fiscal second quarter, we expect adjusted EPS to be relatively in line with our first quarter performance. This means fiscal 2025 earnings phasing as outlined on our August earnings call, will be broadly aligned with the historical average of approximately 45% of earnings being delivered in the first half of the year and 55% in the second half, with the fourth quarter typically the strongest of the year. And finally, we are affirming our expectations to generate strong adjusted free cash flow in the range of $900 million to $1 billion for the year, supporting our confidence in exiting the year with the leverage back at 3x or lower, as I noted earlier. We are happy with our start to fiscal 2025 and look forward to the opportunities we have to accelerate our future growth. And with that, I'll hand back to PK.

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Ghansham Panjabi with Baird. Your line is open.

Peter Konieczny

Thank you.

Peter Konieczny

That's a great question, Ghansham. And you're right, I believe that driving a better organic volume growth profile is probably the biggest opportunity the company has. And I'll give you a couple of soundbites where I think we need to work to facilitate that. The first one is really basic, if you want because you want to get the basics right, service quality, you want to be easy to do business with for the customers, which is one thing that we just need to continue to have an eye on. And I said in my prepared remarks, we can probably do better on that side or do even better. The second one is related to capabilities where – remember, we are essentially looking at Amcor at a commercial excellence program, which we brand value plus, which however, given our past has really been focused on driving mix and margins. And that was an excellent tool for a challenge that we had many years ago, and you know that, that was highly successful in delivering returns for us. I think we have an opportunity to expand, but not reinvent the program to expand the program to also include elements of organic volume growth and initiatives that go in that direction. And we have already started doing that. The other capability side that I would see is just leveraging better and more our incredible innovation capabilities. And very simply said, to a certain extent that comes down to just leveraging our product portfolio across the global markets, particularly in Flexibles. We have incredible success with certain products that we bring to certain categories in the marketplace. And we see opportunities to use those products also in other regions, other markets across the world. And that leverage opportunity, I think we want to go after more consistently in the organization that we've set that really helps us. And then you know that we have an innovation center network that we leverage more going forward because we've invested in it, and we have excellent customer contact already in those innovation centers. Then very quickly to just round it off, we have focus categories, our segment, our focus on those categories in terms of need going forward, probably we'll talk more about protein because we had dairy, healthcare, well, that's a bit of a holdback at this point in time, but we're seeing through that. This is a great category that will get back to growth and a couple of others that I can speak more to, if you want to know more and then we have the opportunity on the fiber side. So as I'm going through those points, you can see that we're pretty bolted around the initiatives. At the same time, they're broad, and we're setting them up to facilitate the organic growth side of things. So that was a long-winded answer to your first question. The second one was, do we see any opportunities to prune the portfolio, whatever. Look, I think that's always going to be on the agenda, but I'll tell you right now, I feel pretty good about the portfolio that we're working with across Flexibles and Rigid Packaging. So I don't see any immediate need to make any changes there.

John Purtell

Good day, PK and Michael. Hope you are well and congrats, PK on the role. Just on Q1 volume growth, just confirming that sort of broadly where you thought it would be. So obviously, your Flexibles volumes are up 3%, which is the same as what we saw in Q4, but not an acceleration.

Operator

The next question is George Staphos with Bank of America. Your line is open.

Peter Konieczny

Yes. Thanks, George. Great question again. I'll try to keep it short, too because there's a lot of content here. Let me go backwards. First of all, we're acutely aware, obviously, of regulatory trends, and that would include the packaging waste regulation in Europe. And the general headline around that from our side is we're supportive. We're supportive of such regulation to the extent that it drives the circularity that we need in order to keep plastic waste out of the environment. So the regulation is good, and we are supportive of that. It is exactly in that context that we're developing product platforms like AmFiber, like AmPrima, and others that are essentially developed in order to comply with such regulation. And what they all have in common is that these products are more sustainable and they're recyclable. And you asked me to talk a little bit more about fiber also. Look, fiber in the context of what I just said, fits perfectly in because it is another sustainable packaging substrate which has one advantage at this point in time, it is recyclable at scale today. And whereas for plastic, we're building within the concept of circularity that recyclability, but it requires more investment into infrastructure and so on and so forth. And fiber that is already there. And therefore, the substrate fiber appeals to customers and consumers at this point in time. Now I will tell you that we need to keep in mind that fiber is a natural substrate and it's porous, it's full of holes, which is against the requirements that we have when we think about primary packaging, which is, to a large extent, about creating barrier properties in order to protect the food stuff that's inside. And therefore, fiber will always have a very limited range of applications across the board of what we're serving today. But where it fits it is a responsible packaging substrate. And as a company that is a responsible packaging company, we proactively explore the opportunities on that end. And therefore, we have developed the platform of AmFiber, a product that we have is the performance paper product, which actually differentiates us really well because we've been able to introduce barrier properties which makes that solution really attractive to certain applications. And the same essentially is true for AmPrima. It's a plastic-based product, but it's a recyclable plastic-based product, which therefore, is finding good pickup into the marketplace. But I will tell you, and that's my last comment in terms of dimensionalizing and it would have to probably come back to you. But I'd say we're working – we're pretty – AmPrima is a pretty sizable base at this point in time, and it continues to grow. The fiber substrate is growing, but off a smaller base. And we see more growth opportunities going forward in line with, first of all, our growth aspirations, but secondly, also with the responsibility that we feel for more sustainable structures.

James Wilson

Good morning, guys. Thanks for taking my question. Just on the Bericap unwind of the joint venture, are you able to talk us through: a, what the strategic rationale behind unwinding that joint venture was and also the implications that, that will then have for Rigid’s earnings going forward as well, please?

Michael Casamento

Yes. Thanks, PK. And James, just to dimensionalize it for you. I mean, on an annual basis, we consolidate the revenue and earnings of the joint venture sales-wise, about $190 million on an annual basis. So remembering this – this divestment will close at the end of December. So it's really a half year impact for FY2025. And from an EBIT standpoint, about $19 million, which both sit in the Rigid Packaging segment. From a net income perspective at an Amcor level, the group level, after taking out the minority interest, it's about an $8 million net income on an annualized basis. So again, you've got to take half of that for FY2025 and obviously, with the proceeds going to reduce net debt, we are going to see some interest benefit from that. So when you put the two of those together actually for 2025 and ongoing the impact of the net income line is very minor.

Operator

Next is Mike Roxland with Truist Securities. Your line is open.

Peter Konieczny

Thanks, Mike.

Michael Casamento

I'll start on that one, Mike. I think your observations are correct in the near term. I mean, obviously, the last couple of years, there's been a bit of a disconnect, particularly when you think about raw materials going through the topline, inflation going through the topline, then the impact of lower volumes, the cost-out agenda. So if you go back over time for Amcor over a long period of time, that 20 to 30 basis point algorithm works for us. It's been pretty consistent, but it can vary and fluctuate over the cycle. As we look forward, we still feel pretty confident around that algorithm. We’re consistently driving efficiency through the business, managing our cost base really tightly, and we can flex the cost base on volume demand. And it's not linear necessarily. So if cost comes down, volumes come off, we can pull the cost down. It doesn't necessarily go back up at the same rate. I think as we look over a long period of time, the mix management, the portfolio really drive that consistency through. And PK touched on some of the new product innovation, the sustainable structures, they all have different margin profiles as we look forward. So from where I sit, I think it's still a good algorithm from where we are. And we kind of stand by that as we look forward. But it will vary from time to time depending on the cycle we're in.

Daniel Kang

Good morning, everyone and congrats again to PK. Just a question on the addition of dairy and liquids into the focus categories. Can you just talk us through the opportunity here where you see Amcor currently sits in these categories and your realistic sort of medium-term targets?

Operator

Next is Sam Seow with Citi. Your line is open.

Michael Casamento

Yes. Thanks, Sam. It's a good question. Look, I agree. Firstly, with leverage at 3x, we would say that's the peak. And it's a little higher than we were expecting in Q1 – what we would expect to see. And truly, it's for a couple of reasons. Firstly, as I mentioned in my remarks, we saw some spike in spot FX rates for euro that were higher than we were expecting at the end of the September quarter, which have since come back. And that had an impact of just the calculation 0.1 on leverage for the quarter. And as I said, that's unwound since then. Secondly, we did build additional inventory, particularly of raw materials in the quarter. And this was really on the back of a couple of things. Firstly, we are seeing strong demand signals, and PK touched on a little particularly in Q2. We've seen, over the last three quarters, sequential improvement in volume. And that demand signal continues into Q2. And we really don't want to miss any opportunity to service our customers on that basis. So the teams have been out there and increasing inventory, probably a little more conservative. But also the other thing that we have seen is a little bit of supply chain disruption and some tremors in the market, particularly around port strikes, a little bit of impact coming out of the Middle East as well. So it was pretty reasonable for the teams to take a little bit of a conservative view on there, just to make sure we've got the right inventory in place, the raw materials there to be able to convert as we work our way through the stronger demand. So if you put those two things aside, leverage would have been at 3.3x, pretty well aligned with prior year, and about right where we would have expected it to be for this time of year. But that said, it's higher than we like. And as we look forward, we've got a clear plan to work it down. We reaffirmed the full-year cash flow guidance today, that $900 million to $1 billion. And we have confidence in that, particularly as we work our way through the inventories and we see the higher volumes come through. Obviously, we're also paying down debt with the Bericap proceeds. So the disposal proceeds, which come in, in December. So we are going to see leverage come down through the year, and it's actually going to start in Q2. And we expect leverage will be lower than it was prior year in Q2. We'll see the improvement there. And then as we have really strong confidence in the balance of the year to come back to 3x or below as we exit the year in June 2025.

Brook Campbell-Crawford

Good morning. Thanks for taking my question. Just with respect to this focus on stronger organic growth. Previously, the business has always talked about low single-digit topline growth organically. What's the new target for this, if you can provide a bit of a range of what you're thinking about? And I guess, I'm more focused beyond the near term, given, I guess, volumes in Flexibles are still 6% below pre-COVID levels. So once you kind of catch up on that period of underperformance, what do you think the steady-state sort of medium-term topline should be? Thanks.

Operator

Next is Cameron McDonald with E&P. Your line is open.

Michael Casamento

Yes. So Cameron, look, that's just the program that we put in place to take some cost out of the business and restructure in certain parts as a result of disposing the Russian business to try and offset part of the disposed earnings. So we announced the program 18 months ago or so, and we've been working our way through that. We've announced seven plant closures, four plant restructures. In total, we were looking to spend, cash-wise, about $170 million. We're most of the way through that program now, and we're still seeing just a little bit of cost come through. But that's – you're also seeing the benefits of that program come through. We said that we would deliver about a $50 million annualized benefit in FY2024. We got $35 million of that. We've got a further $5 million or so in Q1 2025. So we're well on track to deliver those benefits for that program, and it's pretty much done by the end of calendar 2024.

Nathan Reilly

Thanks for taking my call or question I should say. Just in relation to the underlying group volume growth of 4%, excluding health care and beverage, relative to some of the European and U.S., Canada and some of the key end markets which have been quite patchy, that volume growth looks quite solid. So I'm just wondering if you can give us a little bit of an update just in terms of how you're seeing the state of the consumer across your key end markets in both the U.S. and Europe, please?

Operator

Our last question comes from George at Bank of America. Your line is open.

Peter Konieczny

Yes, George, that's really two questions. And as you said, they're not related. Yes, exactly. So – but, okay, let go backwards. So first of all, on the ARP, so Rigid Packaging. Look, we've been speaking a lot about the volumes. But what I haven't said yet is – and what you will see when you go through the numbers, is that the business has returned to earnings growth over the last couple of quarters. Actually, since the beginning of this calendar year, they've come back with earnings growth, which means that, despite the environment that they're operating in, they are being able to adjust their cost structures and their capacities to a level where they are turning out better profitability, which is something that we appreciate. The team is doing a great job. At the same time, we're all sitting here and waiting for the market to give us a bit more tailwind. And when that comes on the back of the efficiency that we've now created in the business, we'll see better improvement and better numbers, definitely better numbers, and we're looking for those. So we can't wait for that to happen on the profit side and also on the topline side. Now you're asking me, when is that going to happen? That really depends on the consumer. The consumer is still sort of held back on the categories that we serve. It is a very discretionary category mix that we're serving with the isotonics, with the ready-to-drink teas, or the juices. There's different ways of hydration. And while inflation may have come down, the consumer is just shocked by the prices on the shelf. And that's sort of the way how we explain currently the consumer behavior. So that needs to turn around. That will get us better volumes. And then we'll see definitely better topline and bottom line on the Rigid side. So that sort of is my answer to that part of the question. The other – the first part was, I think, geared towards innovation. And you're asking how to understand the questions. We need to gear up on innovation. Let me just, first of all, maybe correct the perception. I never wanted to say that we are behind in our capabilities on innovation. We're not. I think we are one of the leading companies in our space with our innovation capabilities. And I'm not just saying that because I feel that, I'm saying that on the back of the feedback that we get from our customers. And they're very impressed with what we can do. And I'd take the opportunity on this call for those of my team that are actually listening in, in the innovation space. You guys are doing a great job. Congratulations. But of course, we want more. And we have made investments in the innovation centers across the world. And we have invested in one in China. The latest one has just opened the doors a couple of months ago in Ghent in Belgium, in Europe, and we have a couple of satellites. And we just want to see the returns. I want to see the returns on that investment, and we're seeing that. Customers are coming in. We have a great process that we call Catalyst, where we sit down with the customers and we do innovation. And we shocked and amazed them with the things that we can do. So that's one. And the other one is really just around the leverage piece. It is part of the innovation. I'm not asking to do some rocket science here, which I think our people can do. What I'm saying right now is take the products that are successful to one market, and help introduce them in other markets where we have demand for the same products. It's as simple as that. And that's product leverage, and we have great opportunities to do that. So those were the two comments that I was trying to make on the innovation side, and I hope that's a little more clear. Thank you.

Peter Konieczny

Yes. Look, thanks for the interest in the company and for dialing in. Great questions. I mean, you're essentially asking the questions that we're asking ourselves here. I just want to say one more time, we feel pretty good about where we're at, particularly with the volumes coming back. That's really important for us. And as we see that trickle through, we'll definitely see that also translate to the bottom line. And we're looking at a solid year. So at this point in time, we are fully reaffirming our guidance for the full-year, and we feel we're in a good spot. Thank you very much.