Amcor Plc (AMCR) — Q2 2020 Earnings Call Transcript

Thank you. And welcome to Amcor's First Half Earnings Call. Good evening to those of you in the U.S., and good morning in Australia. Joining me on the call today is Ron Delia, Chief Executive Officer and Michael Casamento, Chief Financial Officer. At this time, I'll direct you to our website, amcor.com under the Investors section, where you'll find our press release and presentation which will be discussed on the call today. We'll also discuss non-GAAP financial measures as we talk about performance against combined comparative information. Reconciliations of these non-GAAP measures can be found in the press release and presentation on our website. Also, I’ll remind you that statements regarding future performance of the company made during this call are forward-looking and subject to certain risks and uncertainties. Actual results may differ from historical, expected or predicted results due to a variety of factors. Please refer to Amcor's SEC filings, including our statement on Form 10-K to review these factors. With that, I'll turn it over to Ron.

Thanks, Tracey. And thanks, everyone, for joining us to discuss Amcor's first half results for the 2020 financial year. As Tracey mentioned, with me here today is Michael Casamento, Amcor's Chief Financial Officer. And we'll begin with some brief prepared remarks and then open the line for Q&A. Let's start with Slide 3 in the presentation pack. Everything we do at Amcor starts with safety, and so safety is where we begin these calls as well. For some time now, our goal has been no injuries, and we're not there yet. But we continue to believe it's possible, and we see evidence of that with over 150 of our sites injury-free for six months or more. Our overall recordable case frequency rate for the half was 3.2 per million man hours worked. The rates related to Amcor business during that period was 2.1. We know from past experience that acquired businesses typically have higher numbers of injuries, and this is no different with Bemis. So our primary focus this year remains on aligning Amcor's safety practices across all of our sites, and on building on the progress we made in the first six months where we had a 6% reduction in injuries across the company. We look forward to providing updates throughout the year as we drive towards eliminating all injuries. Moving to the five key messages we have for today on Slide 4. First, we've had a good first half with the business delivering solid earnings growth and strong cash flow. Second, taking into account the good first half performance, organic growth expectations for the rest of the year and faster delivery of synergies, our outlook for constant currency EPS growth has improved to a range of 7% to 10% for the year. Third, integration of the Bemis business is progressing well, not only in relation to synergies but also in terms of the organic earnings growth delivered by the business, as well as the opportunities we see to leverage our customer value proposition, which has been improved as a result of the combination. Fourth, we're continuing to lead the way on sustainability. We're uniquely positioned, fully committed and taking action on multiple fronts. Finally, our market positions and our exposure to defensive consumer segments leave us very well positioned to continue generating consistent returns for shareholders, regardless of macroeconomic conditions. Slide 5 provides a summary of the first half results where we delivered strong overall earnings growth, synergies at a faster pace than we had initially expected. We returned a significant amount of cash to shareholders. Sales were generally consistent with what we saw in the first quarter. Sales revenue was down 1.4% in constant currency terms and excluding the negative impact related to the pass-through of lower input costs. Volumes grew modestly in our larger flexible packaging businesses in Europe and North America, and there was no volume impact on sales in Rigid packaging. However, sales were lower in Flexibles Latin America, and especially cartons. EBIT was up 4.4% in constant currency terms with 8% EBIT growth in the Flexibles segment, driven by mid-single-digit organic growth, plus synergy benefits of approximately $20 million. Earnings were lower in the Rigid Packaging segment as we highlighted would be the case on our first quarter earnings call. EPS increased by 11% in constant currency terms, and the Board declared a quarterly dividend of $0.115 per share. Free cash flow before dividends was strong, and we returned more than $600 million to shareholders through dividends and share repurchases during the half. Before handing over to Michael, who will cover financials in more detail, just a few words on the Bemis acquisition. First of all, the integration of the two businesses is progressing very well. The two legacy companies are functioning as one, and the excitement and the focus demonstrated by our employees has enabled the Flexibles business to simultaneously grow organically and to surpass the synergy targets we originally set for the first six months of the year. The response from customers has been very positive, given Amcor’s enhanced global value proposition, which includes a broader and more sustainable product offering. Now, in terms of synergies, we delivered $30 million overall in the first half, which was ahead of our initial expectations and are mainly coming from overhead reductions and procurement benefits. We've increased our guidance for the current fiscal year from $65 million to $80 million in synergies, and we feel very confident in our ability to deliver the full $180 million by the end of fiscal 2022. So the key takeaway today is that we feel very good about where we're at in terms of the integration and the delivery of synergies. I'll hand over to Michael, and then I'll come back and talk about some of Amcor’s longer-term opportunities.

Thanks Ron. Good morning, everyone. Starting with the Flexibles segment on Slide 7. Sales of 1.4% were lower than the prior period in constant currency terms and excluding a negative impact related to pass-through of our input costs. This reflects the continuation of the volume trends experienced in the first quarter, which Ron just mentioned. Adjusted EBIT was up 8% in constant currency terms and in addition to delivering synergy benefits, the base business performed very well with organic growth of 5%, driven by strong cost recovery across the businesses. Overall, we're really pleased with the way the Flexibles business performed, and we’re excited about the long-term opportunities for the newly combined business. In the last six months, we've secured a number of long-term commitments in North America based on the strength of Amcor’s enhanced value proposition, and we continue to improve the cost base in Latin America, as well as taking steps to reduce the complexity in that business. Turning to Rigid Packaging on Slide 8. Sales were down 1.6% compared to the prior period in constant currency terms after excluding a 2.4% favorable impact to revenue from passing on lower raw material costs, driven by an unfavorable product mix given the sales volumes were flat during the period. For the second quarter, we expect a comparison in constant currency terms, which was expected given the business cycle during the particularly strong comparing period. In North America, overall mix was unfavorable in both beverage and specialty containers, which also resulted in higher costs in some of our plants. This compares to the prior period, which benefited from exceptionally strong mix. Beverage volumes were flat compared with last year with the hot fill container volumes 4% higher, supported by market growth and share gains as a range of customers launch new products in PET format. In Latin America, volumes were 2% higher; however, earnings were lower than the prior period as mix was unfavorable, and the business benefited from the early recovery of cost inflation in Argentina in the second quarter of last year. Most importantly, for the Rigid Packaging business, we expect to return to profit growth in the second half of the year, which is taken into account in our full EPS guidance. On Slide 9, adjusted free cash flow of $310 million was in line with our expectations and keeps us on track to generate more than a billion dollars for the year. One of the consistent highlights for the business has been our working capital performance. And on a like-for-like basis, the working capital to sales ratio improved by 30 basis points in the half to 10.4%. We will maintain our focus in these areas to reduce this ratio further over time. Free cash flow and proceeds from assets divested to complete the Bemis acquisition enabled us to return more than $600 million in cash to shareholders during the half. Of this, $391 million was through dividend payments. Amcor has a strong track record of cash return through a competitive dividend, and it was great to enter the prestigious S&P 500 dividend aristocrats on February 1st this year. The remaining $223 million was returned by repurchasing nearly 22 million shares through to the end of December. We’re roughly halfway through the $500 million share buyback program that we announced in August of 2019, and we're on track to complete it by the end of June 2020. On Slide 10, we have provided some balance sheet highlights. In simple terms, the balance sheet remains strong with leverage at 2.9 times, and we continue to be in a very comfortable position with access to a diverse range of funding sources at very competitive rates. Combined with our ability to generate significant free cash flow, the balance sheet provides the flexibility and capacity to simultaneously invest in the core business, pay a compelling dividend, buy back shares, and grow through acquisitions. Finally, moving to our outlook on Slide 11. The business is delivering good first half results, and we mentioned building in relation to the delivery of synergy benefits and lower expectations for our interest costs. Our outlook for adjusted EPS increased to a range of 7% to 10% in constant currency terms. This is now inclusive of $80 million of pretax synergy assets, an increase of $15 million from previous guidance, and assumes net interest costs for the year will fall in the range of $210 million to $230 million, which is $20 million lower than previous guidance. Corporate costs, tax and cash flow were all in line with our expectations for the first half, and as a result, we have reconfirmed guidance to each of these metrics. All guidance is in constant currency terms and assuming average exchange rates for the first half of 2020 prevail for the balance of the year, currency headwinds would have an unfavorable impact on reported EPS of approximately $0.01 per share. So with that, I'll hand back over to Ron.

Thanks, Michael. Before we turn the call over to you for questions, we're going to lift out of the details for a few minutes and focus on the longer term. And Slide 12 recasts Amcor's strategy, which has not changed; we've described it many times before. We have actively managed our way through a focused portfolio of businesses in four product segments, and each of those businesses benefits from a small number of differentiated capabilities, which we call the Amcor way, providing real competitive advantage. Finally, our aspiration is to win four key stakeholders. For investors specifically, that means taking the strong cash flow we generate and deploying that in several ways to generate value, which I'll describe on the next slide. Slide 13 shows Amcor's capital allocation framework, and it provides a perspective on how we think about generating value for shareholders over time. Over the last six years, the outcome of allocating our cash and capital in this way has resulted in average value creation of about 4% per year through combined EPS growth and dividend yield. Looking forward over the next few years, at a time when uncertainty and volatility are high, we have clear visibility to controllable sources of value through continued organic growth and $180 million of cost synergies from the Bemis acquisition, along with continued strong cash flow to fund the compelling dividend and to complete the $500 million buyback we announced in August of last year. As we did in the first quarter, I want to touch on sustainability, which remains the most exciting organic growth opportunity we have at Amcor. We've been fully committed to making a positive difference here for several years now. In fact, we made our first public aspirations in January of 2018 over two years ago with our 2025 pledge and in August last year, we demonstrated that conviction again by committing another $50 million of investment to accelerate our sustainability agenda. Over the course of our journey, we've developed some particular points of view, which are outlined on Slide 15. Firstly, Amcor makes primary consumer packaging that actually touches and holds food and medicine, and other consumer products. As the world population and consumer needs grow, we believe there will always be a role for that type of packaging, primarily to reduce food waste, which is around 30% globally and contributes, by itself, 8% of global greenhouse gas emissions. Second, we know that consumers expect a lot from packaging, and they want packaging that works well, is lightweight, convenient, easy to use, cost-effective, great looking, and the list goes on. Now they have expectations that the packaging has a responsible end-of-life solution that doesn't result in more waste in the landfill or the ocean. The third point is, we believe that's possible and the way to get there is through responsible packaging. Lastly, and most importantly, Amcor is uniquely positioned and taking action on that front. When it comes to responsible consumer packaging and elimination of waste, we believe a total system solution is required across three elements. First, smart packaging design that takes into account environmental impacts throughout the product lifecycle, meaning packaging that's recyclable, reusable, or compostable, made from recycled materials, and that uses less material in the first place. The second factor is that the right waste management infrastructure needs to be in place, whether that's recycling, or composting facilities, or returnable systems. Finally, consumer participation is critical to properly dispose of packaging appropriately either by recycling, composting, or reusing. There are a couple of other important things we believe regarding responsible packaging. Responsible packaging does not equate to no plastic. In fact, our customers continue to use and believe in plastic because it provides great functionality, is fully recyclable, and is clearly advantaged compared to other packaging materials from an overall environmental footprint. The benefits of plastic relative to other materials will grow over time as waste management infrastructure increases and consumer participation grows as well. Amcor is uniquely positioned to create responsible packaging solutions starting with package design through our innovation capabilities. On Slide 17, Amcor is already offering customers a broad range of responsible packaging options to help them accelerate their own sustainability agendas, including packaging made from recycled or bio-based materials, packaging that's recyclable, reusable, or compostable, and lighter waste packaging that results in a lower carbon footprint. By making these products available, we're addressing the materials that go into the package, the environmental effects of manufacturing and distributing the product, as well as how the package will flow back into a circular economy rather than becoming waste. These options are available today in both flexible and rigid formats, and there's a continuous flow of new product introductions. In flexible packaging, recent examples include the first recyclable stand-up pouch for liquid products in Thailand, and a lighter weight recyclable tray with a recyclable barrier for protein applications, both of which you can see here on Slide 17. In Slide 18, we include examples in the Rigid packaging business, which includes converting existing products to 100% recycled PET, converting from other package formats to PET, and re-launches of iconic brands in the PET format. By evolving to these more responsible packaging options, Amcor will have reduced our annual consumption of virgin resins by more than 200,000 tons by 2025. In that process, we will have supported the development of an effective and more sustainable market for recycled resin by creating cumulative demands of more than a million tons over that time period. As the industry leader, we're actively sharing our expertise and perspectives, directly with consumers through our podcasts and social media channels, with customers through bilateral sustainability summits, and with participants across the entire supply chain through our partnership network. We've had strong long-term partnerships for some time now, and we'll add others to maximize our reach and impact. As a recent example, Amcor joined the World Economic Forum this year and had a seat at the table with leaders from the world's largest companies, many of whom are Amcor customers and suppliers. Contributing in discussions focused on redesigning the plastic’s value chain and the new plastic’s economy global commitment, two things became clear; one, we're fully aligned with our customers and suppliers in our perspectives and goals; and two, there's a shared determination to develop a waste-free future at pace. When we announced our 2025 pledge, we knew Amcor had the opportunity to make a positive impact on the world and to lead the industry through better packaging. We're more confident today than ever that Amcor is uniquely positioned to capture that opportunity and to deliver on our commitments. Summarized on Slide 20, we're pleased with our first half results and confident of delivering against the increased financial outlook we have for this year. Capitalizing on the value and potential of the Bemis acquisition is one of our top priorities, and that integration is going very well with momentum building every day. We're acting with confidence and conviction to drive change as we progress towards our 2025 sustainability goals. We're excited about the many other opportunities we have to drive long-term growth and maximize shareholder value. With that, we'll be happy to take questions.

You raised the full year guidance, I think by about half a cent at the middle of the range. I think the benefit from the higher synergies and lower interest cost expenses may be a bit more than that if my math is right. I'm just wondering when you think about organic EPS growth. Has anything changed versus three months ago? And how do you think, just generally, about upside or downside to the full year guidance for the remainder of the year?

We feel really good about the first half. I think that point has been clear, and so we increased our guidance for the year, as you pointed out. I think what I would remind you is it is a range. We've given a range again today of 7% to 10% in constant currency terms, up from 5% to 10%. What that suggests is that we feel pretty good about the full year. I don't think we see anything markedly changing about the business organically or otherwise in the second half. If we think about where the opportunities may come from to hit the high end of that range, obviously, better top-line growth would help, maybe a more favorable raw material environment, and certainly, continued acceleration of synergy benefits would help us to get there. Obviously, the inverse would be true as we think about the bottom of the range. Although, I think what you can take away from today is that we've minimized the downside risk on the financial year, which is why we've raised the bottom end of the EPS growth range.

And then just switching gears, are you seeing or do you anticipate any impact from the coronavirus disruptions? Can you just maybe remind us of Amcor's footprint in China and any regions that are impacted?

Yes, it's an evolving topic. Obviously, it changes day by day. But just to contextualize it, Amcor has a big flexible packaging business in China. We have about 12 plants spread across the country, although none in the Hebei province, which was the epicenter of the virus. We have about 3,000 people and it represents roughly 4% of sales. So it's a big important business for us. Firstly and most importantly, as far as we know, as of today, none of our employees have been stricken by the virus. Our plants are actually all operating, which is great. Many operated right through the New Year period because we're supplying health care products. Others came back online last week and this week. They're not all running at full capacity, as we don't have all the employees back and our customers are not all operating, but our businesses are functioning. Now the impact on the business in the second half will remain to be seen. Obviously, we didn't have any impact in the first half. Any impact on the business would be in front of us. While it's an important business for us and it's going to be a significant part of our story going forward, it's not ultimately material in the grand scheme of Amcor's about 4% of sales, as I said.

I guess, first off on the comments of the long-term commitment secured in North American Flexibles. Can you just give us more color on this dynamic? Is this incremental business or is it purely just extending contract terms? And if it's incremental, how should we think about layering this in as it relates to the next few quarters?

Yes, it's a good pickup because we feel really good about that. I mean, one of the highlights of the integration so far has been the customer reaction. You know as we talked about, this is a deal that should be exciting for customers. It should not be threatening in any way, because there’s not a great degree of overlap in similar regions with similar products around the world. I think the customers are rightly seeing it as a complimentary combination of two companies. That’s manifesting itself in a number of commitments, which we highlighted today. I think what I would say is it's a combination of business that's been locked down and secured with a little bit of incremental share of wallet gain at some of these customers. I wouldn't think that there’s a material impact that needs to be layered in, because we're talking about four or five deals with customers, all of whom are important but out of hundreds and in fact thousands of customers in this business. What it says to us is that we are avoiding any substantial negative synergies. And if anything, we're getting some, let’s say, positive revenue benefits in the form of locking up business and maybe picking up a little incremental share over time.

And just in terms of EBIT for Flexibles, it looks like it was up about $38 million for the first half versus the previous first half, plenty of which was from synergy. And so of the remaining $18 million, how much of it came from the timing lag you referenced of raw material cost recovery?

We had about $5 million in the first quarter. We had a similar type number in the second quarter. All told, we had about $10 million of timing benefits from raw material cost recovery. But we're pretty happy with the organic growth of 5% generally.

And will that continue into the second half the way you see it right now?

Look, it remains to be seen. I think the pace of raw material movements is relatively benign overall if you look across the global portfolio of spend, and you might have a little bit of a benefit in the quarter that we're in. But beyond that, it's difficult for us to say; it looks more benign than anything.

Ron, just a question on North America following up on that. The statement here says North America volumes grew in high-value protein. First question is, did volumes in North America overall grow? And one of the things that challenges, I think, us analysts is the external data is showing some pretty weak food and personal care volume performance in North America. Just wondering if you could talk about where you guys maybe picking up pockets of growth. You mentioned a few here. So first question is, did overall volumes grow? And two, can you talk about where you're capturing that growth?

First, simple answer to your first question is yes. Volumes grew overall in both North America and in Europe, which is really pleasing because those are our two engines in Flexibles. Those are two big businesses, neither of which are in dynamic growth markets as you pointed out. If we can get a little bit of growth through volume in those businesses, it's good to see; so absolute volume grew in both North America and Europe. In fact, in similar end markets in both regions, protein, healthcare, liquid products, especially in the back of food service outlets, coffee, and pet care. So a number of higher value-add segments are seeing good growth. Generally, if you were to aggregate the whole FMCG space, I think it's no surprise that volumes grow generally with population, maybe 1% or 2%, and then you have all kinds of mixed impacts in there between different types of customers in different types of segments. I don't think that's going to change much from period to period. And then it’s up to us to migrate our mix towards the higher value-add part of that overall space.

With regard to your customer mix, are you picking up volume at the small end of town or are the large customers also contributing to your volume growth?

It's a little bit of both. In some of the segments I just mentioned, those are driven more by the larger customers. We also see some of the larger customers in certain discrete segments; I can think of dairy or cheese is one where some of the larger customers are losing share. But we know that we're picking up the share that they're losing at retail with some of their smaller competitors. So it's a combination. Obviously, the big engine in these businesses is the MNCs, but the incremental growth is disproportionately coming from the smaller companies that we're also serving.

And last question from me, perhaps for Mike on the finance side. Looking at the cash flow target, a $1 billion adjusted free cash flow, maybe less $100 million for one-off, so call it $900 million, that's a big jump in the second half. Same thing with the free cash flow after dividends going from minus $81 million, to $300 million to $400 million. When you look at the line items above in Slide 9, are you anticipating significant reductions in some of those items like interest and tax and CapEx, and maybe even comment on working capital, how that's going to evolve into the second half?

Typically, our cash flow is much stronger in the second half, and we do get higher rates in the second half, so there’s seasonality there. We expect there will be some working capital improvements as we’re standing in the first half that will continue to flow into the second. So generally speaking, that's the normal trend we see and that's what we expect in the second half, more around seasonality.

So simply seasonality earnings and working capital will get you to that $900 million?

Yes, correct.

Just had a couple of questions, just in terms of Rigid, obviously, flagging second half improvement there. I appreciate the sort of comps movement. But in terms of what's driving that, you’re getting some restructuring cost benefit flowing through and the likes of Pepsi recapturing share? Is that part of this too?

It's a good question, John. We did flag that we had growth in the first quarter, first of all, and we were pleased with the first quarter. We did flag that the second quarter would be tough, which has a lot more to do with last year than this year. We're okay with this year's performance. It's really cycling a pretty difficult 90-day period when you look at it on that sort of basis versus last year. It's a combination of things. Last year in North America, we had particularly strong mix, not just in product segments because we obviously have had hot fill growth again this year, but with our customer mix and to some extent our end markets in specialty containers. In Latin America, we had a better mix of outcome last year. We also had an early recovery of inflation in Argentina last year, which benefited us. Those two factors really made it a difficult 90-day comparative period in Q2 for Rigid. But we do expect the business to get back to growth in the second half from a profit perspective. The good thing is that volumes have continued to be robust, so overall volumes were pretty much flat with hot fill going up 4.5%. Latin America saw a couple of percentage points of growth as well. So now it's just about profit conversion and cycling a better competitive period in the second half, which we expect will lead to profit growth.

And just second question, in terms of sustainability impacts in this result, it appears relatively steady state, but in terms of where you're seeing the benefits in this result and also where you're seeing the negative impacts? I know you've called out, continue to call out North American order. But where are you seeing the positives and negatives, I think perhaps in this result and looking forward?

John, I think it's becoming more and more of an opportunity for us as we get into it further. So I would say that we don't see any negatives in the result at all. In fact, the positives that you can take out of the result related to our sustainability agenda would come from some of the comments we made about the customer commitments. The reason that we've re-engaged with most of these customers we referred to earlier is largely because of our shared sustainability agendas and our innovation developments. Customers are more inclined to want to work with us now than ever before. Not just because of the Bemis acquisition and the bigger footprint, but also because we're completely aligned on the innovation required for sustainability. The other thing that we highlighted today is that there have been a number of new product launches in PET and plastic, which suggests to us that the format is alive and well and customers are doubling down on that format more than anything. The third thing, which I don't know if it’s in our materials is that over the last six months, there has been an increasingly balanced dialogue externally, including some very supportive comments from our customers who have been very supportive of plastic packaging generally and its role in reducing greenhouse gases and food waste. In PET in particular, we've had two major brand owners come out in very, fairly vocally, strong support of the PET format. So I’d say, John, if you took the six-month view no negative impacts at all, but two or three real positive indicators, maybe not financial, but generally speaking, about the environment we’re in.

First, I wanted to get more details about what needs to be done to fix the cost base in Latin America. What else do you need to address there? Is that your only focus to achieve your goals, or are there other aspects you are considering?

Debbie, the last part of your question I missed. The first part was about the cost base in Latin America and whether there's anything else that we need to do there. Can you repeat the end of the question, please?

It was basically what you just said. Is that it, or are there other things that you might still address in the region as well?

Yes, this relates to the Flexibles business in Latin America, particularly the legacy Bemis business, which we've flagged a few times now. First of all, let's set the context. So before the acquisition closed, the business was performing at a very high level in the quarter or two before it closed, but it had deteriorated a bit, losing some sales and ended up in the fiscal fourth quarter last year losing money, which we've flagged. After we took over the business in mid-June last year, the first thing that happened was we took a lot of costs out, and we've taken headcount down significantly. We're looking at the footprint as well. Those actions were taken very early on. The business is improving from a profit perspective with each month. So it’s absolutely improved quarter-over-quarter, actually improving month-over-month from a profit perspective. Despite the fact that pre-sales take longer to regenerate, it always takes longer to regain sales than it does to lose them. In addition to the cost actions we've taken, we're working hard on getting the top line back to where it can and should be and has been in the past. So that would be the other thing. The third thing I would flag is that it’s a fairly complicated portfolio as we see it. We're trying to keep things even more focused and simpler. And that business functions, when I say the business, the legacy Bemis business, has a number of segments that we haven't historically been in. We're taking a close look at that as well. We took one step in the first half. We sold out of a joint venture we had producing tube laminates in Brazil, which is a small business. It's a good business, but one we're not in anywhere else in the world. So we sold out of that JV as a step towards simplifying that portfolio.

And then my second question, not really sure if it's something you can answer. But I'm curious about the target for less virgin resin, the 200,000 tons by 2025. What is the implication for you in terms of volume and mix if you hit that? Is this just people cycling into this type of recycled resin versus virgin, or do you plan on acquiring new customers? Also on that, just below it’d be on Slide 18, the effect of the market of 1 million tons. Out of curiosity, where does that come from? How do you identify what that market is? And kind of regionally or by end market, what is the addressable market there?

Yes, and I'm glad you asked about it, because it's an important topic that deserves a little more time. This is all about the rigid plastics space in North America and Latin America. In the Americas, where we make rigid containers out of PET primarily, that’s what we're referring to there. As for the reduction of virgin resin by 200,000 tons a year, that's the house number based on the current glide path. We're actually kind of hitting an inflection point now where we're seeing the percentage of recycled material that we're processing is pretty much double this year. Assuming we continue at that new level, we'd be reducing our virgin resin by about 200,000 tons a year. Now I think it's fairly conservative. There's no reason for us to be anything other than conservative in that number. But I think it's more likely that we’ll be using more over time rather than less. Regardless, we're on a glide path to see us replace 200,000 tons of virgin resin with recycled PET over the next five or six years. And that's with existing customers, as well as just the normal mix of business that we have today, and that's just where we're at. As we do that over that five or six-year period, we will have been out in the market sourcing that 200,000 tons plus of recycled material, and over five or six years, that's over a million tons of cumulative demand. We think that’s important because it helps underwrite the investment that's required for waste management infrastructure and processing capacity necessary to convert recovery bottles into post-consumer recycled resin. We see our role as being a demand creator, and we'll be active in that market for those who seek to invest and deploy capital in that space.

Just wanted to piggyback on that last question and your response there, Ron. Just interested to see over the last couple of months, what progress you've seen in the supply chain along the waste collection and processing side, that's going to lead to an increase in PET supply. A lot of companies have commitments to buy it; I'm just wondering if you've seen the infrastructure already start to be put into place to make that supply available for you.

Brian, it's a good question; that is the challenge. I mean, everyone’s got great aspirations and expectations, but the capital and the infrastructure has to follow. I think it's hard to assess over a short period of time. The momentum is there; you see that momentum in the form of increased commitments. You see companies like Amcor expressing our willingness and readiness to buy every pound of recycled material we can get our hands on. You see the big brand owners making similar commitments, like Coke and Pepsi teaming up to launch initiatives like Every Bottle Back, which is helping on the front end to drive collections. You see Nestle making public commitments about putting money behind buying recycled material, so I think it’s coming. I don't know that we could point to specific investments over the last 90 days that would meaningfully move the needle on supply. But all the momentum is headed in the right direction, and all the components of what's going to be required are falling into place.

And just a question on the outlook. I think previously you talked about D&A being similar to CapEx in the kind of $450 million range. It looks like after stripping out the amortization from deals, it was only $96 million in Q2 and ran just a little bit north of $200 million in the first half. Just wondering if that $450 million is still a good number for the year, or if it's maybe going to be coming in a little bit lower than what you thought initially?

Typically, we would spend CapEx kind of in line with depreciation, so around that $450 million mark. We were a little behind that in the first half, just slightly. I think that's typical when you're doing an integration of the size that we’re experiencing with payments. We expect to be in that range by the full year. At this stage, it might be slightly low, but that's what you should expect to see.

And then just last one for me, just trying to bridge from the first half EBITDA to the second half outlook. I think the EBITDA was $911 million in the first half, it sounds like maybe $10 million of that was some timing benefits that may not recur in the second half. So maybe $900 million is the starting point if we could pick up $20 million for increased synergy capture, then seasonality seems like it maybe adds $50 million or so. Is that directionally about right, something in the kind of high $900 million range in EBITDA through the back half of the year?

Brian, we're giving our guidance on an EPS basis. I mean, you can get there in a lot of different ways. The key for us is that we're going to get to 7% to 10% constant currency EPS for the year.

Ron, just returning to the commentary you made around the long-term contracts you signed in Flexibles in North America. I was just trying to put that in the context of all the longer-term arrangements that Bemis themselves had put in place prior to you acquiring the business, which I seem to remember involved pretty significant price incentives. I'm trying to understand how I should think about what you've done relative to what they have done. Is it completely separate, or is it sort of one and the same, part of the same process?

No, it's separate. I mean, look, the business has thousands of customers and dozens of large FMCG customers to go with thousands of small customers. Any contracts that were in place when we bought the business are still in place. We're just referring to positive momentum that we've had with customers where there is a contract that's maturing where we've made really good progress in terms of just re-upping that business. None of which are material on an individual basis. In fact, they're probably not material in aggregate other than to suggest that the momentum is very positive on the commercial side of the business.

And then just on raw material, I was hoping you might be able to give me a feel for how what the, on Rigids, what the contribution in the first half was from your restructuring program?

Not a whole lot in the first half as we flagged. We've got $20 million to $25 million of total benefits coming through that program. We had about $10 million so far. We didn't do much at the end of the last fiscal year that would have benefited the first six months of this fiscal year. We're going to get back on with several plant closures later this calendar year, which will deliver the remaining $10 million to $15 million benefits that we expect.

And then just to confirm that your plant closures net, do not result in any overall capacity reduction in the system that you've got in North America. Is that right?

Not in any meaningful way. There might be a slight margin in certain types of products, but that's not really the intention. The intention is to lower the fixed cost base, the structural cost base, and consolidate growing volumes in a smaller number of facilities.

I want to clarify what you're doing with your business, which clearly makes sense, alongside the common challenges faced by beverage can producers who are expanding and increasing their capacity significantly. However, they are currently sold out. I'm seeking to understand how your growth opportunities in that business align with the fact that you are effectively reducing capacity while they are competing very aggressively.

No, Richard, just to clarify. I think I just said that we're not taking out capacity; rather, we do see a number of plants that will be closing. No, we’re retiring older assets and putting the assets and the capacity in a smaller number of factories. But our business is expecting to grow, and it has been growing. If we take a step back around the package formats and the mix and what's happening there, particularly in cans, we see an overall liquid beverage market, non-alcoholic beverage market growing about 2% based on scanner data, so it's not anything proprietary. We see the market growing about 2% in the back half of the calendar year, which lines up with our fiscal year. We expect the PET portion of that market to also grow at 2%. We would see canned volume growing at about 3%. What it says to us is that the plastic format continues to grow at least with the market. Cans, have grown well as well, and there's enough growth for both. I think where the can growth has been extraordinary is in the alcoholic space. Industry data would suggest this is true, particularly with beer, hard seltzers, and other such products. It’s been outstanding growth. But that's not a part of the market that we've been participating in or are interested in. And then just finally on sustainability, I was interested to get your view on, if you look at the consumer packaging industry across the entire value chain. I mean, what part of that chain actually holds the key to solving this issue from raw material producers through to converters to customers and particularly the seasonal markets as well? The reason I asked the question is that if you think about the numbers that Nestle had talking about, they’re obviously significantly higher than the numbers or investment they’re making in this process compared to what the converters are doing. I actually think it's equal parts converter, brand owner, waste management provider, be that a regulator or private enterprise, and consumer participation. So I genuinely believe it's equal contributions from those four parts of the value chain. I think we feel really good about our position, because ultimately you need a combination of materials and you need other functionality design into packaging, which no raw material supplier provides today and we don’t envision doing so in the future. So the converter has a critical role there; the brand owner has a role in ensuring things move quickly with the right tradeoffs in mind. These products are not going to be cheaper initially, and brand owners will have to live with that in the early days. Waste management infrastructure is mission-critical, because it's not in place everywhere and it's a fragmented landscape depending on the jurisdiction we choose to focus on. I don't think we can underestimate the role of the consumer, because whether the answer here is recycling, or even reusing or composting, consumers must do something different than what they've been doing and what they've been today. They must make use of their compost facility, or their reuse system, or their recycling. That’s a significant shift. So I genuinely believe it’s equal parts each of those four stakeholders.

Do you have any formal sort of corporate agreements with any of your key customers to develop particular products? The reason I ask is that I don't know what they are, whereas I do know and your customers talk very loudly about the arrangements and development project cycle of material producers and reusable packaging systems and so on. So it's easy to find those out. So I’d thought of NGOs. Is there anything specific you can point to that would help us sort of understand what the converter is doing in conjunction with any customers?

Well, the clearest manifestation is in the new products we launched; those don’t come through our own activity in isolation. We do have several joint business development agreements or joint product development agreements with customers that are typically separate from commercial contracts where you’ve got almost like a product development contract in a number of segments. In fact, across our entire business, we do have customer names associated with those. That’s where the innovation and new product development comes from that leads to the examples that we've highlighted today and kind of highlighted before.

I have some specific questions around the sustainability slides, Ron. On Slide 17, you've shown a recyclable stand-up pouch in the context of that pouch being multilayer and all of that. How do you define recyclability in this respect, please?

Yes, it's a good observation that the materials are multilayer because recyclability does not need to be limited to single or monolayer designs. In this case, it involves a combination of different polyolefin materials designed to deliver the necessary functionality for this home care product line, specifically the laundry detergent shown here. Regarding the definition of recyclability, there are industry standards created by NGOs, particularly by the Ellen MacArthur Foundation, which is a leading authority in this area and has the endorsement of 450 companies under the new plastics economy global commitment concerning specific definitions. There is a clear definition of recyclability: it must be able to be recycled at scale somewhere today, and this product meets that criteria.

So that was where I was getting to regarding recyclability at scale. I thought they mentioned that it is also applicable at scale in the market. Are you comfortable confirming if it's recyclable in Thailand?

I don't know that it is recyclable in Thailand. But the definition at this stage is recyclable at an industrial scale, because the infrastructure has to be developed in different parts of the world. It also serves as a guide to what the infrastructure agenda should be in different markets around the world.

And then a quick question on your next slide, which you clarified the less virgin resin and what you want to signal as your demand creation. Can you just confirm for me how much of your virgin resin in North American Rigid that would represent, please?

I don't think we break it out publicly. We're one of the larger buyers; nevertheless, we're on a glide path to reduce our virgin resin in our Rigid Packaging business. This year, we're going to exit the financial year converting more than 10% of the resin in our Rigid Packaging business to recycled resin, which is why I referred earlier to an inflection point. We're accelerating at a rapid pace the proportion of the resin we convert as recycled, and this year, we're going to exit at over 10%.

Okay. Thanks everyone for joining us today.