Amcor Plc (AMCR) — Q4 2021 Earnings Call Transcript

Thank you, operator. And thank you, everyone, for joining our full-year call for Fiscal 2021. Joining the call today is Ronald Delia, Chief Executive Officer, and Michael Casamento, Chief Financial Officer. At this time, I'll direct you to our website, amcor.com under the investor's section, where you will find our press release and presentation to be discussed on the call today. We will also discuss non-GAAP financial measures, and related reconciliations can be found in the press release and presentation on our website. Also, a reminder that the call today includes some forward-looking statements, which remain subject to certain risks and uncertainties. Please refer to Amcor's SEC filings, including statements on Form 10-K and 10-Q to review factors that could cause actual results to differ materially from what we're discussing today. During the question-and-answer session, we request that participants limit their questions to a maximum of two and then rejoin the queue for any follow-up. With that, I will turn it over to Ron.

Thanks Tracey and thanks to everyone for joining us to discuss Amcor's Fiscal 2021 full-year results. Joining me today is Michael Casamento, Amcor's Chief Financial Officer. We'll begin with some prepared remarks and then we'll open the line for Q&A. We start every meeting at Amcor with safety, and we'll begin on Slide 3. Safety is the first and most important of our values, and Amcor has been on a long-term journey towards our goal of no injuries. Our safety performance has shown continual improvement, including in the last 12 months where our performance has been a real highlight. Across Amcor, we reduced the number of injuries by almost 25% compared to last year. All of our businesses reported fewer injuries and over half of our sites have remained injury-free for at least 12 months. Through a year where the pandemic continued to present operational challenges in many countries, our focus on safety was unwavering, and we're incredibly grateful that our people remain engaged and focused on staying healthy as well as safe. We're proud of our safety performance, which we believe is the best in our industry and the progress we've made over the years. We're also convinced that our objective of no injuries is absolutely possible, and we continue striving towards that goal. We have four key messages today, which are set out on Slide 4. First, FY '21 was an outstanding year for Amcor on multiple dimensions. The operating environment remains highly dynamic, but our teams stayed fully focused on the key business drivers within our control, remained agile as conditions changed, and demonstrated exceptional execution and consistency all year. Financial results exceeded our expectations as the year progressed. We ended the year with momentum and we expect another strong year in fiscal '22, which is the second key message. The third, our recent performance is in many ways a result of the financial and strategic benefits from our 2019 acquisition of Bemis. Two years on, integration is now essentially complete. The financial benefits are ahead of our expectations and strategically we're better positioned than ever, with a stronger foundation for growth into the future. Lastly, we're capitalizing on that strong base by investing in a number of organic growth initiatives, which will help maintain our momentum beyond fiscal '22, and for the long term. Turning now to the financial highlights on slide 5, FY '21 was an exceptional year financially for Amcor, with record earnings and exceptional margin management, despite steep raw material cost increases and supply constraints, and momentum building throughout the year. Organic sales growth was 2%, and we exited the year in Q4 with sales 3% higher than the prior year. EBITDA growth was 8%, with both the flexibles and rigid packaging segments delivering strong results, growing in several higher-value end markets, and contributing to margin expansion. In Fiscal '21, Amcor's EBITDA margins increased by 60 basis points to reach 12.6% for the year, which is a new high, and an exceptional achievement in an environment where raw material price increases and supply disruptions required an intense focus on securing availability as well as managing price recovery. We estimate Bemis acquisition synergies were around $75 million, and as we close out the final integration activities, we expect to exceed the original synergy target by at least 10%. EPS increased 16% for the year, and with our guidance, we were able to continuously increase throughout the year. And free cash flow of $1.1 billion was at the top of our expected range. Return on capital or return on average funds employed finished well above 15%, at a time when our cost of capital is at an all-time low. Throughout the year, we returned $1.1 billion of cash to shareholders through share repurchases and higher dividends. The key message here is that the fundamentals of our business continue to strengthen, our teams around the world have demonstrated consistent focus on executing against our strategy, and as a result, we've delivered another year of outstanding financial performance with momentum continuing to build as we begin fiscal '22. I'll turn it over now to Michael to provide more detail on the financial results, and I'll finish up with some comments on growth and sustainability.

Thanks, Ron. Good morning and good evening, everyone. I'll start with the flexible segment on Slide 6, which performed very well, delivering record sales, EBIT, and EBITDA margins for the year. Sales included recovery of higher raw material costs. As Ron mentioned earlier, these costs continued to move high during the quarter. Across the business, our proactive response included implementing price increases quickly. As a result, in the June quarter, net sales increased by more than $100 million, with the annual recovery run right reaching more than $500 million as we exited the year. From an earnings perspective and consistent with last quarter, the price cost impact has remained manageable given the diversity of materials we buy and the multiple regions in which we consume those materials. This is clearly evident in our margin performance, which continued expanding in Q4 and throughout the year. From a volume perspective, demand in many of our key high-value end markets has remained consistently strong, including meat, coffee, and pet food. However, this is being offset by double-digit declines in North American medical volumes and European pharmaceutical volumes, driven by fewer elective surgeries and lower prescription trends. Geographic volume growth has been relatively broad-based with good overall performance in emerging markets, while volume in North America was higher compared to the prior year. Along with Europe, this includes where large parts of our healthcare business are located, and growth in these regions is inclusive of our headwinds. Adjusted EBITDA is growing 9% in constant currency terms, mainly reflecting volume growth, exceptional margin management with expansion delivered every quarter, and around $65 million of cost synergy benefits related to the Bemis acquisition. Turning to rigid packaging on Slide 7. In summary, the business has continued to deliver outstanding results driven by increasing consumer demand in both North and Latin America. Sales growth included a 5% increase in volume and a 3% price-mix benefit, including higher pricing to recover the cost inflation in Latin America. In North America, annual beverage volumes were 8% higher than last year, and hot-fill container volumes were up 13%. This was driven by rising consumer demand through the year, resulting in capacity shortages and historically low inventory levels across the industry. The volume was particularly strong in hot-fill categories, including sports drinks, ready-to-drink tea, and juice. Year-to-date, specialty container volumes were higher than the prior period, with growing categories including spirits and the personal care segment, partly offset by lower volumes in the healthcare segment. Volumes in Latin America were 5% higher than last year, with first delivered in Brazil and Argentina in particular. EBIT growth of 8% reflects higher volumes and a favorable mix across the business, partly offset by higher labor and transportation costs in North America. These high costs were a direct result of capacity shortages and lower inventory throughout our network, which introduced supply chain inefficiencies in the short-term ahead of installing additional capacity. Rigid containers continue to be one of the world's preferred packaging formats as they are recyclable, resealable, and hygienic, and they have the lowest carbon footprint. As you see on the slide, this preference continues to be reflected over time with format share in a healthy growing market remaining consistent. Demand for recycled content is also rising rapidly, and our use of recycled resin has doubled over the last two years. Looking ahead, we expect this trend to accelerate further and are working with customers on a very active pipeline of new product launches, incorporating higher levels of recycled materials. Moving to Slide 8, adjusted free cash flow was $1.1 billion at the upper end of our expected range for the year, and we finished strongly. Compared to last year, free cash flow benefited from the higher flow-through of higher earnings. This was offset by $100 million adverse impacts from the timing of U.S. cash tax payments and a lower working capital benefit. Working capital has been an area we have been particularly focused on through the Bemis integration and is a real highlight. In total since 2019, approximately $250 million of working capital has been released. This has been a source of funds to cover synergy-related cash costs. Capital expenditure increased in the current year as we have stepped up our organic investments in high-growth segments and geographies. Looking ahead, we have a broad range of attractive investment opportunities and expect to increase the CapEx platform by 10% to 15% in fiscal '22. Our financial profile is solid with leverage of 2.7 times on a trailing 12-month EBITDA basis and is in line with our expectations. With strong annual cash flow and a strong balance sheet, the business has significant capacity and flexibility to invest in organic growth, execute M&A, as well as return a substantial amount of cash to shareholders. In Fiscal '21, total cash returns to shareholders in the form of dividends and share repurchases reached an impressive $1.1 billion. Turning to Slide 9 in our outlook for the 2022 Fiscal year, we expect comparable constant currency EPS growth of 7% to 11% for the full year. This excludes the effect of disposing businesses which impact comparability, along with an unfavorable currency impact of approximately 1 cent per share, assuming current exchange rates prevail for the remainder of the year. On a reported basis, this results in an EPS guidance range of approximately 79 cents to 81 cents per share. Free cash flow is expected to be $1.1 billion to $1.2 billion, up to 10% higher than fiscal 2021 EBITDA as we add in accelerating capital investments to support organic growth. Growing cash flow enables us to continue paying, compelling, and growing dividends, and allocating cash to share purchases, which we expect will be around $400 million in fiscal '22 while retaining the flexibility and funding acquisitive growth when needed. So, with that, I'll hand it back to Ron.

Thanks, Michael. I'll start with a few points to recap the Bemis acquisition on Slide 10. The all-stock acquisition of Bemis was completed in June 2019 and was the largest in Amcor's history. So, two years in now, our integration efforts are essentially complete and the outcomes are clearly exceeding our original expectations. Firstly, from a financial perspective, the transaction unlocked substantial value through the realization of cost and cash flow synergies, which have materially strengthened Amcor's financial profile. More specifically, based on our Fiscal '22 expectations over the 3-year period post-closing the acquisition, we will have outperformed the original cost synergy target of $180 million by at least 10%. As Michael mentioned, the cash released from working capital over the last two years funded the cash costs to achieve those synergies. Margins in our flexible segment will be more than 200 basis points higher than in fiscal 2019. EPS will be at least 35% higher, or at least $0.21 per share. We will have repurchased approximately 25% of the shares issued to fund the acquisition, and annual cash flow will be close to double Amcor's annual cash flow in the year prior to the acquisition. Strategically, Bemis was a perfect fit for Amcor. It was a pure-play entry into what was already the world's largest global flexible packaging business. Putting these two companies together created the only truly global flexible packaging platform able to serve multinational customers around the world, with an even stronger value proposition, especially in the most attractive end markets like healthcare and protein, where our participation has meaningfully increased. Amcor is now the clear Flexible Packaging leader in every major geography, with greater absolute and relative scale advantages. We have strengthened our talent and capabilities, particularly in R&D, so we can support large and small customers with the broadest range of innovative and sustainable packaging solutions. Today, as a result of the Bemis acquisition, we're better positioned than ever with a strong foundation for growth looking forward. With that stronger foundation, we have a range of organic growth drivers that we're investing behind, and on Slide 11, we've highlighted a few. First, an increasing percentage of our sales are coming from the most attractive, higher growth, higher value-add segments, where we have the best opportunities to differentiate, including healthcare and protein packaging and flexibles, and the hot-fill products segment in rigid packaging. Our Global Health Care business is approaching $2 billion in sales across medical device and pharmaceutical packaging, segments that require unique capabilities that are not easy to replicate. We're investing to add both capacity and capability with current projects underway in Malaysia and Ireland, to highlight two examples. In protein and meat packaging, we have a great opportunity to leverage our capabilities in high barrier films and our growing business in North America to the benefit of our other businesses around the world. In the hot-fill rigid packaging segment, we have extensive intellectual property and product design capabilities, and we partner with customers to help them drive growth through innovation. Given the sold-out environment we're in and the growth outlook, we're adding capacity across our North American plant network. The second organic growth driver we're highlighting today is our leading emerging markets portfolio with over $3 million in annual sales and a long history of profitable growth. Again, we're investing behind the emerging market opportunity, including in the new greenfield plant in China that we highlighted on our last call. Third, innovation and new product development will increasingly contribute to organic growth going forward. We've been investing in this area as well to extend our global innovation center network into Europe and China, through the recently announced partnership with Michigan State University School of Packaging. Finally, the number one organic growth driver for Amcor going forward, which cuts across the other three and really everything else we do, will be the increasing need for more sustainable packaging. We know there will always be a role for packaging for essential food and healthcare products. The ability to provide that packaging so that it meets all consumer needs and is more sustainable creates unique opportunities for growth. Slide 12 highlights sustainability a bit more, and as we take stock at the end of one financial year and start a new one, we are particularly pleased with the progress we are making to accelerate responsible packaging through advancements in package design, waste management infrastructure, and consumer participation. Examples of recent progress on package design demonstrate the breadth of our product range across substrates with packaging that uses less material overall and more recycled content, eliminates problematic materials, and has a better end-of-life profile. In terms of materials, our use of recycled resin in rigid packaging has almost doubled over the last few years, and we expect to almost double again over the next 12 to 18 months. We've also announced our new AmSky platform, which eliminates PVC and has the potential to transform the sustainability profile of healthcare packaging in particular. To improve end-of-life outcomes, we've commercialized several new recycle-ready product platforms, including the polymer-based AmLite and AmPrima, and the paper-based Matrix product ranges, and we've entered into a new partnership to extend our offering of compostable solutions. Demand is growing for these new products, and we'll be scaling up to capture the growth opportunity. Making progress on waste management infrastructure and consumer participation will be equally important, and both require close collaboration with others across the value chain. We stepped up that collaboration over the past year through our partnership network where Amcor is increasingly relied upon to shape and establish packaging design standards around the world, which commend infrastructure investment and consumer education to help keep packaging out of the environment. We'll talk more about our sustainability agenda following the publication of our annual sustainability report later this year. Slide 13 is a slide we shared late last year at our Investor briefing, but it remains relevant today. We believe the Amcor investment case is as strong now as ever, and we lay out the reasons in the slide. Several of the points have already been made, but in simple terms, we generated significant and growing free cash flow every year. In fiscal '22, that free cash flow will be up to $1.2 billion, and that cash flow will comfortably support reinvestment in the business, as well as M&A and regular share repurchases, driving strong EPS growth. In addition, we will continue to pay attractive and growing dividends. We also believe that momentum matters, and momentum has been building in Amcor, which is clear from our recent performance and outlook comments, and the expectations we have for our Fiscal '22 year. Finally, on Slide 14, a quick recap of our key messages from today, Amcor had an outstanding year in FY '21. We believe momentum is building, and we expect another strong year in FY '22. The Bemis integration is essentially complete, and we've summarized the outcomes today which have exceeded our expectations. Finally, we now look forward to capitalizing on a range of organic growth drivers, and we're investing in the business to make that happen. With that, Operator, we'll conclude our opening remarks and we'd like to open the line for questions.

Good evening. For the 2022 guidance, is there anything that you'd say about the cadence of earnings growth, whether you'd expect that to be more second-half weighted or first-half weighted, given you have a few moving prices with cost inflation and some volume comps that are maybe a bit unusual?

Again, we've given the full-year guidance that for you in that 7% to 11% typically, our business is weighted 45% first half, 55% second half. We haven't given particular guidance by quarter. But I think that range indicates we're expecting to be within that as we progress through the year.

Okay. And then you obviously have a large global footprint. Is it possible to say how the Delta variant has impacted demand, if at all, across the regions that you operate in, and is there anything sort of anticipated in Fiscal '22 guidance from that perspective?

Yeah Anthony, first of all, it's all incorporated in our guidance; our outlook on the top line is our starting point for the outlook in the forecast for coming year. It's really early to say; I think we would say that consumption and our demand, other than in healthcare, has more or less normalized over the last several months, notwithstanding the pickup in positive test results that are coming from the Delta variant. So, at this stage, we haven't really seen any kind of dislocation resulting from COVID in the near term here.

Okay. That's helpful. I'll turn it over.

Hi, good evening. This is actually Matt Krueger sitting in for Ghansham. I just wanted to start out with, given several moving pieces, including some unusual volume comps and things like that. Can you outline what your budgeting volume growth by segment and/or by region might look like for fiscal '22? And then just given that we're halfway through August already, can you talk about how the sales in key segments or end markets are trending to kick off the year here?

Looked at typically, we'd expect low-single-digit growth from the top line, I mean, that's what you saw this year, and if you look at the history, that's typically what we see. So, I think if we can give you any more detail now, I think low-single-digit is where we would point to.

I think also if you look back over time, we have typically grown kind of mid-to-high single-digits in emerging markets and kind of low-single-digits in developed markets, which is consistent with consumption patterns in those different parts of the world. From an end-market perspective, we are pleased with the performance in some of the higher value-added segments. where we’re really pushing; typically, protein, pet food, coffee, and that would likely be at the top of that list, but obviously, we're in a bit of a blip because of COVID at the moment. But that's how we think about getting to that low single-digit expectation over time on the top line.

Great. That's helpful. And then I just wanted to shift over to the raw material environment. Can you talk a bit about what type of headwind you experienced from higher raw material costs and potentially raw material shortages during the latest quarter and full year of 2021, along with how those raw material trends are likely to impact your business as we move into 2022? Any detail on if you had issues procuring materials or if there was any downtime taken because of lack of supply would be helpful as well?

Yes, alright. I'll take that one. The first thing is, as you know, in the standard industry, we pass through raw material pricing to customers on a contractual basis, so it's a timing issue more than anything on that front. The other point about Amcor, obviously, we have a broad and diverse range of raw materials and consumption around the globe, so you've got to take that into account. As you look at our number through the year. And then, of course, we built capabilities over many years of getting that raw material pass-through. So, from where we sit today, we're pleased with how we dealt with some of the price spikes in '21. As we've said in the remarks, we have covered over $100 million in flexibles in Q4 alone and exited the year on an annualized basis at about $500 million in those price increases and more to come. The price lag costs were manageable as it was in Q3. We haven't called that out specifically, and really the evidence around that is through our margins. So, you can see that our margins continued to expand in Q4, in fact expanding in every quarter throughout the year. So, when we put all that together, we're pleased with how we've managed that front. Our teams have really built capability in that space to ensure that we get that price pass-through efficiently.

As for the outlook in terms of the commodities — as Michael said, we are pretty diversified, so it's always a little bit of a mixed bag, but generally speaking, we see things moderating and possibly the increases abating over the next quarter or two. As you pointed out, Matt, the availability of certain materials is probably the bigger issue potentially. At the moment we have not taken any downtime to answer your question specifically, but there are certain materials, particularly some specialty grades that are in short supply and are on allocation. That has caused some disruption and consumes a lot of management time just to ensure that we are getting access. I think we've done a good job of that by virtue of the scale and relationships we have in the breadth of the supply base we have, but that isn't as big an issue as the price inflation.

Great, that's helpful. That's it for me. Thanks.

Okay.

Yes. Hi, Ron, Michael, thanks for taking my questions. So, the first thing I wanted to understand, as we think about that 7% to 9% EPS growth for next year: what are the key drivers of that besides the buybacks and the synergies? How should we think about it by segment and if it's more price cost recovery-driven or volume-driven? Things like that.

Sorry, I can start. Salvator — I mean, if you think about the growth descent until 11%, you're going to see around mid-single-digit from an organic standpoint as the first point. And then you've still got some benefits from the buyback to come through as always, more organically. So, there's probably 1-2% there that's going to come through. And then obviously, we've got some synergies left to go, which will be low single-digit. So that kind of explains to you the make-up of the guidance. To get to the upper end, we'd see some better revenue in the topline, perhaps a stronger recovery in healthcare. On the opposite end of the range, there may be some further raw material headwinds that could drive the lower end of our range, but that's really the make-up of the components in that guidance.

Okay, great. And then I'm not sure if I missed it but do you have any outlook regarding some other items, components of your EPS or free cash flow guidance, like interest expense, CPS, working capital expectations, and also cash boosts that you exclude from your adjusted free cash flow guidance?

So yes. We've said the adjusted cash flow is going to be $1.1 billion to $1.2 billion. Again, a range there, which — depending on the earnings, we hope that Working Capital could potentially move around depending on headwinds to raw materials, but that's the key items there. We haven't called out specifically interest in tax. I think you can expect that they'd be similar to where we are this year, if there was something unusual to call out there, we'd mention that for you. Obviously, we're going to have higher earnings, so the tax absolute will be higher, but otherwise, within that range. We're looking to invest more in the CapEx front, as I spoke to in my notes, and that's really to support organic growth into the future in several opportunities that we've got on hand today.

Okay, great. Thank you very much.

Hey, thanks for taking the question. Wanted to focus on rigid packaging for my first question. Hot-fill volumes continue to see nice growth here. Can you provide a bit more detail on what exactly is driving this? Is it still at-home consumption with some of the large multipacks growing or is it really just being driven by the new product introductions and innovation that you're seeing in that market?

It's a good question because it's across the category. Hot-fill containers are typically used in ready-to-drink teas or certain premium segments of the juice market, and of course, isotonic drinks. Those categories collectively are growing pretty rapidly, and most of the participants and brand owners in those categories are enjoying that growth. It's a combination of the drivers you mentioned, Kyle: increased distribution and availability in multi-pack formats. There is probably a bit more at-home consumption, but there are also a lot of new product launches and a lot of rejuvenation of legacy brands, and just extensions or introductions of new ones. There's a lot happening in that space oriented towards healthier and better-for-you types of line extensions or new products. This segment is growing strongly and essentially in a sold-out environment.

Got it. That's helpful. And then on flexibles and healthcare packaging, given it's a higher value product for you or mix for you. What's the update there? Are you seeing a recovery in that end market, or has it been dulled now, recently with rising COVID cases and the inflation rates we’re seeing?

I think it seems to have stabilized a bit. I'm not sure we're ready to call it a trend, but these segments, the predominant subsegments would be medical device packaging and pharma packaging. We're more weighted toward pharmaceuticals in Europe and a little bit more weighted toward medical in North America. These segments typically grow at mid-single digits and have for several decades, offering great differentiation and therefore good margins. I'm not sure we’re ready to say that we've turned the corner; we see evidence that things may be stabilizing a bit, notwithstanding the recent spike in cases. Hospitalizations have not followed suit. So, I think we would hope that as we work our way through the fiscal year, that's an area that builds momentum through the four quarters of FY '22.

Got it. Appreciate the details and good luck in the next fiscal year.

Thanks.

Thank you. Ron, just wanted to step back and ask a bigger picture question. It's great to see your ability to offset raw materials in these periods. Just wanted to understand how you say that ability has changed with the Bemis acquisition. Obviously, it’s like the thousand-pound gorilla brought that scaling and purchasing power. Has that fundamentally changed your ability to manage your recent input and other input costs?

It's an interesting question. There are a couple of things that have changed. What Bemis would have brought is just greater diversification in the buy. We got bigger, obviously, and that helps. The relationships we have with the big suppliers are not unlike the relationships we have with big multinational customers; it matters to be big on a global basis. There's a lot of discussion about these regional markets versus global markets, but ultimately, we have some significant global relationships and it's helpful. So, Bemis brought us scale and further diversification in our spend, which I'm sure has helped. The other factor is, as you know, with every cyclical peak, I think we get better and better in terms of internal processes and capabilities to measure what's happening and then take action to mitigate it. So, it's probably a combination of Bemis and maybe just getting further down the experience curve that helps us through this cycle.

Understood. And I have told you for a while that this is a question that you probably get too often, but to what extent should we view the comments around the buyback as a reflection on a lack of attractive opportunities in the acquisition market?

Look, I don't think you should see it as an either/or. What you're seeing with this result — we've been talking about the cash fixed business for a long time, and going into our fiscal year with a line of sight to excess cash flow, even after continuing to fund the dividend and actually fund more CapEx. As Michael pointed out, CapEx will pick up again in FY '22. Even after those two allocations of cash, the business will generate a substantial amount left over. We go into the year with an expectation that we will have to reuse that excess cash for buying back shares. If there is an acquisition that pops up, we will not hesitate to either suspend the buyback or find the funding, which we would comfortably be able to do. So, it's, I think it's an 'and' Andrew, it's not an 'or'.

Very helpful. Thank you.

Thanks.

Hi. Yes. Thank you. Good evening or good morning, everyone. I may be following up on that last question and your response, Ron. Just thinking on the M&A front, if you think about the kind of growth potential beyond Fiscal '22, obviously, there are some more Bemis synergies that you're capturing and annualizing as you roll into your Fiscal '22 outlook. The size and scale of that being this opportunity was fairly unique and probably not going to be easy to replicate. I'm just trying to think about the ability or the confidence that you have to drive inorganic growth, and especially not just to buy the businesses, but to extract value from them at scale moving forward where it might be harder to find businesses of Bemis's size moving forward?

Look, it's a really good question at this point in time because we were absolutely resolute and focused on making the Bemis deal a success. We know there's still a little bit to do, but it's essentially complete, which is why we provided a bit of a wrap-up today. You're right, from a pure-play perspective, there's not another $6 billion to $7 billion deal out there that we feel compelled to chase outside our product segment mix because we think there's ample growth in the segments we are in. Generally speaking, if we look back over the last 10 years or so, the company has been quite acquisitive. We've had a good track record of bringing synergies out on the cost side, in particular, getting some product benefits as well, so we'll continue to do that. There's no shortage of medium-size deals in the packaging space, as you can see every week there's another deal announced, and we’re in the deal flow which means we have the option to look at them when they come up.

Okay. And then maybe just following on the discussion on growth investments. Can you give me a little color on some of the capacity adds within the growth CapEx? I think I heard a $500 million number referenced earlier, so 100 million, 150 million or so of growth capital, just where that's being directed and, more broadly, is meeting with some of the responsible packaging's investment opportunities something that you think may be greater uses of capital moving forward?

Yeah. It's a good question. We are going to be stepping up. It will be about 4% of sales, which we think is a reasonable number to expect us to deploy each year. We did a bit lower than that because we have been focused on integrating Bemis, but we will be at about 4%, which means another bit of a step up next year, which is incorporated into the free cash flow guidance that Michael described. Anecdotally, some of the places where we are deploying cash, I highlighted a few; we're putting some capacity in the hospital space in North America—excellent use of capital, particularly when it's on-site, co-located within customer premises. We're investing in the medical space — medical device packaging in Malaysia and in Ireland. We have some capacity we're going to put in Malaysia for a certain product category that we typically export out of North America or Europe and we're going to localize that, which opens up just a whole other set of growth options for us. In Ireland, we're going to get into a product line in medicine that we hadn’t been in before. From our sustainability perspective, we made several announcements over the last 6 to 12 months in new products. We’ve talked about platforms like AmLite, which is recyclable, or ready to be recycled retort pouch, which is unique, and the demand has been outstanding. This product is sold out before it’s even hitting the market, and we’re going to add capacity in Europe for that. Those are just some examples, which all fit within that roughly 4% of sales number that’s embedded in our free cash flow guidance.

All right. I appreciate the call; I’ll pass it on. Thank you.

Thanks very much. Hi, guys, congratulations on the end of the year, and I appreciate the rundown and the presentation today. Ron, I want to segue off that last question and maybe go to Slide 12. If you could, for us, quantify or categorize the packages like AmLite, like the PVC film, free films, how much revenue do you think you're doing right now in terms of the responsible packaging product suite that you're offering your customers right now? And what do you think that's drawing at? If you could put any numbers around that. Relatedly, is this scenario that could get— I mean, the answer will be yes, obviously, but where you really think there is an opportunity for acquisitions to improve your performance here, you really don't need acquisitions; you've got the best technology in the market so a couple of questions to start?

Yeah, let me answer the second part first. We do believe we have the best technology in the marketplace. We are also humble enough to realize we don't have all the good ideas out there. So, if there’s an acquisition that would add to our product portfolio, we would absolutely do it. We're going to be much more active in the corporate venturing space. It's also one of the drivers of the investment with Michigan State. Regarding the sales into what we might describe as more sustainable packaging, if we think about it through the lens of what’s recyclable, or just take that lens; we’re not suggesting that’s the only answer here, but that tends to be the most readily available end-of-life solution. We’ve got three broad segments, two of which are fully recyclable. Everything we produce and sell in rigid packaging is recyclable; everything we make in the carton segment is recyclable. That leaves the flexible segment. In that space, right now of the sales in the flexible packaging segment, about 60-odd% of what we’re selling today is designed to be recycled. There’s probably another 75% of our sales that could be. So, there’s 10% to 15% that could convert, which would just require customers to adopt a different structure. We have additional platforms like AmLite, AmLite Matrix, and like AmPrima, which helps to move those numbers up in steps. None of them will move that needle on those metrics in a material way in a given year, but over time, the percentage of our flexibles that are recyclable will start to increase as those products are taken up. I’ll stop there, but we are acknowledging that's not the end of the story. We’ve got the waste management infrastructure, and the consumer has to participate as well too, but as far as the package design, that’s about where we’re at.

Okay, Ron, I appreciate that. And then coming back to the fourth quarter, and I recognize obviously Amcor likes to focus on the year-to-date results and the year results. You had a good performance. It looked like in flexibles, there was a deceleration, naturally a decline calling in the low single-digit range in flexibles. Was that just purely healthcare and the continued weak end markets for you this year? Did anything else slow down for you at the end of the year as we're getting and going into Fiscal '22? Thanks, and good luck in the Quarter.

Yeah, thanks, George. I mean, that's basically it's the same story that we have in flexibles all year; it’s healthcare. Healthcare is a sizable business, so think about it as between $1.5 billion and $2 billion in sales within that flexible portfolio, and the big North America Medical business and European pharmaceutical business is down double-digits. That took a couple of percentage points off of what you would expect from a growth perspective. They generally should be growing mid-single-digits and they were down double-digits, so that takes a meaningful hit off the overall segment growth.

Thank you, Ron.

Thanks, George.

Thank you very much. Good morning, everybody. Ron, our first question I just wanted to ask about organic growth in the Flexibles division. If I look at this over the last two years and absolute dollar change, all the growth comes from cost or efficiency lines. In fact, the mix of volume and price is negative. So that's obviously very impressive. My question is how sustainable is that?

Look, I mean, Richard, you followed the Company for a long time. The top-line sales are growing kind of low single-digits, actually about 2% for a long period of time. That being said with that level of growth, we've been expanding margins for over a decade. The flexibles margins have increased over 14% from where they were 10 years ago or so, so I think that gives us some comfort that at that level of relatively modest top-line growth, which mirrors the end-markets we supply, we're continuing to grow profit and expand margins.

Okay, thank you. And then secondly, could you just run through the performance of the carton business in '21, particularly by region? I'm interested to know; get an understanding of what volumes you're doing. Thanks.

Yeah, with the carton business, which is about 8% or 9% of sales, had a very good year. The business had a good year on profit. The profit was up, great job managing costs. The volume performance is probably a little bit ahead of the long-term trend. That business from a volume perspective is likely to be flat to declining on a single-digit. Last year, it was close to flat on a volume perspective too. By region, we start to get into some smaller parts of the business, but the bigger parts of Europe and the Americas would mirror the trends that I just described.

Glad, thanks very much.

Well, good evening, Ron and Michael.

Hey, John, how are you?

Just had a couple of questions. Look, the first one, Ron this is in relation to the new growth initiatives. Can you remind us what your return targets are on that incremental growth campaigns? So, as you had growth targets in the past, have they changed, perhaps or not? The second question for Michael, in terms of that free cash flow of $1.1 billion, what was the drag if any from raw materials and higher costs leading to the impact on that?

Hey John. Yeah, I’ll take that one. In terms of returns on CapEx, we really haven’t changed the model there. It’s a cash investment; we expect a 20% return on those as a minimum, and that’s typically what we work towards, so no real change there over the term. With respect to working capital, we saw some high movements during the period and some high receivables as we started to flush that through the system. The offset was payables. From a year-end perspective, it wasn’t a meaningful impact, but there’s probably still a little bit of that to flow through the system, and it’s more of a timing issue than anything. In cash flow that we saw at the year-end, we were pleased with where we ended; it was a strong performance, and we had a good finish to the year on the back of the continued focus in working capital, particularly around areas like overdue receivables. We’ve had a strong performance there across the board. Generally, inventory management has been strong, and we continue to manage with our suppliers.

Got it. Thanks a lot.

Hi there. I wanted to ask about your sourcing of recycled resin. You're clearly sourcing enough to double your usage, and then I think you said you're going to double it again over the next 18 months. We hear from other companies that it's actually quite difficult to source the amount of recycled resin that they would like to. What do you think that Amcor is doing differently?

Well listen, it's becoming more and more important, obviously, to our customers. A lot of what we use, maybe just to mention the numbers, so across Amcor, rigid packaging would be the place where we're using the most recycled resin. We exited FY '21, converting about 10% recycled resin out of the total that we convert. That number is growing in absolute tons as you referred to, but it’s also growing at a percentage of the resin that we convert. In that space, we are clearly the biggest buyer out there. We have been actively sourcing both from new entrants into the recycled resin space, as well as some of the virgin resin providers that have gotten into PCR. It's a pretty broad book that we’re buying across. In flexibles, it’s a bit more challenging when you’re trying to source polyolefins, and that's still pretty nascent. A lot of the material that we’re using for flexible packaging is coming from food-grade materials, milk and water jugs, and things, which are in scarce supply. That will change over time, and chemical recycling will be a contributor too— we’re active in more than half a dozen different pilots and feasibility projects on chemical recycling around the world, which will be part of the mix too. So, I’d say watch this space, but we’ve been able to satisfy our demand so far.

Great, that's very helpful. Thank you. And then my other question, you've talked about exceeding the synergy target by at least 10%. Maybe you could just give a little more detail on where you're doing better than anticipated just so we could get a little more granular around that at least 10% number.

Yeah. So, the original number was $180 million, and that’s the number that we’re going to buy back 10% or at least 10%. We talked at the time of the deal about three big sources: first G&A, overhead reductions. We estimated that would be about 40%. That’s more or less track and probably a little bit ahead of that number, but it’s been in line. Procurement, we said would be another 40%, that’s more or less in line. The footprint at the time of the deal we thought might be 20%. We found more footprint opportunities than we anticipated. More of the outperformance proportionately will come from footprint, which means plant closures. So, if you stand back from it, it's mostly the footprint plant closure side and a little bit on G&A; that's the source of the outperformance.

Great. Thank you very much.

Thanks, everybody. Good day. A couple of questions. My first question is, if I can do by way of example, the question is, what are the top three opportunities to create organic earnings over the next three years, call it FY '25? Here is an example of what I'm asking for: In Asia, you guys might be under skewing in terms of your overall market share in medical and pharma packaging relative to your market share in other parts of the world. So, when you look at the size of the Asian market in medical packaging, is that an initiative Amcor might undertake, and how would they do it to grow out its earnings over the next three years? You might not look at its geography; you might look at maybe pet food across the world. So, can you dimensionalize those top three initiatives? Trying to look past short-term earnings.

Yeah. It’s a good question. I mean, you picked on one; I’m not sure it makes the top three, but I’m going to elevate up on the top three: but the medical point, certainly, we are actually doing that now, and that’s the investment in Malaysia I referred to where we’re putting capacity in that part of the world that enables us to be much nimbler and more responsive to local market demand, which is substantial. If I zoom out and I try to think thematically, one thing that comes to mind is broadening our participation in some of the higher value-add segments, where we are deepening in one region. Pet food, coffee, protein; these are segments we have strong positions in, but it’s uneven so we might be strong in Europe in one, and a little weaker in North America. Evening out that participation is going to be a big source of organic growth. As a region as a whole, I would say Asia, particularly China and India. I would probably elevate up from medical and just say generally in the places we're choosing to play in those high-growth Asian emerging markets, that would make the list. I probably wouldn’t rule out rigid packaging in North America, particularly as we continue to expand the healthcare—sorry, the hospital franchise we have and grow in the Specialty Container space where there is technology and differentiation, but also share opportunities.

Okay. I look forward to scoping those out maybe in the near future. And my second question pertains to Alliance to End Plastic Waste.

Yes.

Excuse the criticism, but it feels like a bit of greenwashing here. I impose taking this executive committee position, and when you get on the website for Alliance to End Plastic Waste, first of all, there's no set of accounts and it's supposedly an organization that's well-capitalized, but when you look at the projects, I think there was a project in India where they put some sort of filter in a river that ends up getting stolen. There are a couple of projects like in India and Africa where it's highly manual-intensive, doesn't require auto capital of collecting waste. This is an organization that’s backed by billions, and the projects seem very small. I'm just wondering where you want to take that organization? Because as you say, we need the waste management to make a structure, particularly in emerging markets. I've always hoped that that was going to be the organization that would drive it.

I think it's a finishing observation. I would say that all the different partnerships and organizations that we’re part of have catalyzed the most actual funding by a long shot. I take on board some of these projects that have been launched are smaller. To contextualize it, it’s also important to understand this is a new organization. It was started a couple of years ago and as soon as it stepped up with full-time management, the pandemic slowed things down, but there is more capital committed by the executive committee than anything else we’re associated with. It's real money; we write the check.

And that's what scares me; there are just no such accounts that we've seen anywhere.

Like any NGO, Larry, sometimes industry associations are not always this transparent, but the money that the participants are putting into that organization will crystallize and catalyze action. There are good examples; the project stopping in Indonesia is a good pilot. There’s one in the U.S. now called First Star, it’s small, and I think as the initiative gains steam, we will have bigger, bolder projects to point to. But for the early days, I'm pleased with the way it's distributing its resources.

Okay, good. Thanks for that, Ron.

Okay. Thanks, Larry.

Hey, Ron, it’s pretty clear that you are signaling the completion of the Bemis integration, which gives you the bandwidth to pursue some of those smaller bolt-on M&A opportunities. Just given we haven't seen you too active in that space for the last few years, can you just remind us of your bolt-on M&A investment criteria? Just in terms of return metrics, but also where you’d be comfortable taking leverage to. Where are you seeing the most attractive M&A opportunities right now?

I would say across our portfolio there are going to be opportunities pretty much throughout the business. If I had to put a priority list together, I would say flexibles to reinforce some of the higher value end-market segments that we're participating in or in Asia would be near the top of the list. I think in rigid packaging, the specialty space in North America outside of beverage would be high on the list. Returns are always going to be important. The Company is now generating a15% return on capital, so we need to be at that metric as we think about investments. From a leverage perspective, I wouldn't give you a number other than to say we are going to be an investment-grade company—we always have been and are committed to that—but within that dimension, we have ample capacity. If you think about the EBITDA now, the business is over $2 billion. One turn makes for a lot of firepower for M&A. So, there’s no constraint there.

Excellent. Thank you.

Thanks.

Good evening, Ron and Michael. I have a couple of follow-up questions regarding the adjusted free cash flow guidance. I understand your point about the increase in CapEx, but it seems like the low end of your guidance range is probably not realistic, and it might be trending more toward the higher end. Can you provide us with additional details on where you currently see yourselves within that net range, considering the various factors at play?

The range is there. It's a reason why the range is $1.1 billion to $1.2 billion. Obviously, factored in that is the earnings guidance range. We’ve given a range; it’s 7% to 11%, depending on where we end up in that range. We will drive the cash flow as well. The other key component is really working capital movement. As I said earlier, we’ve had some raw material increases which we manage fairly well into the end of '21; that can be a factor as we head into '22. There can be some movement there to the upside or the downside. That said, we’ve managed working capital really well. We had the last two years taking cash out on that front. As we move forward, we think that’s kind of stable. You can expect too much more to come out of working capital; it will be relatively stable.

Okay. Thank you. And then just a second question, and forgive me if I've missed this one, but I think there were labor and transport costs called out for the rigid packaging business in part due to the volume growth you're seeing within that business in North America. Is there an expectation for those labor and transportation costs to ease in the coming periods?

The reason behind that was really — we saw a significant increase in demand, which and basically the capacity is full. The industry capacity is full. So, we didn’t get a chance to build inventory in the quieter months leading up to the summer. What we experienced were increased costs just to manage the supply chain. We had shuttling costs, increased labor, and the like, and that’s ahead of installing new capacity. We would touch on today that we are installing new capacity in particular. So, we would expect, over time, that should start to abate as we get that capacity online.

And is it possible, Michael, to give us a quantitative estimate of what the headwind was in the fourth quarter?

Yeah, it was about a few million in the quarter.

Okay. Okay. Fantastic. Thanks very much.

Thank you. I just had one question. Ron, you made some comments in your prepared remarks about the need for waste management infrastructure investments to pick up, which is very clear. Do you think that Amcor will have to invest in that space? Obviously, you have taken an alliance approach at the moment, but do you think in order to control the development of that infrastructure that you will actually have to invest there?

Thanks, Scott. That’s a good question. The short answer is no; we're going to be active in bringing responsible packaging to life in a number of different ways. We’ll need to be somewhat judicious and focused about where we deploy our shareholder's capital. We think the best use of the capital is in developing packaging that is going to have a better end-of-life profile or uses more recycled material or less material in the first place. That’s where most of our efforts will go. Regarding waste management infrastructure, there are several different routes to fund that, including extended producer responsibility regimes, bottle deposits, etc. If those are properly designed, then we are very supportive of those. That can likely be part of the answer. But I don't envision us putting capital to work in that part of the value chain on any extensive basis, other than maybe just some pilots through a partnership or an alliance.