Amcor Plc (AMCR) — Q4 2022 Earnings Call Transcript

Thank you, operator, and thank you all for joining Amcor's June quarter earnings call for fiscal '22. Joining the call today is Ron Delia, Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, let me note a few items. On our website amcor.com under the Investors section, you'll find today's press release and presentation, which we will discuss on the call. Please be aware that we will also discuss non-GAAP financial measures, and related reconciliations can be found in the press release and the presentation. Remarks will also include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause future results to be different than current estimates, and reference can be made to Amcor's SEC filings including our statements on Form 10-K and 10-Q for further details. During the question-and-answer session, as the operator mentioned, we request that participants ask their question and then rejoin the queue for any additional questions. With that, over to you, Ron.

Thanks, Tracey, and thanks everyone for joining Michael and myself today to discuss Amcor's financial results for fiscal 2022. We'll begin with some prepared remarks before opening for Q&A. Kicking off with Slide 3, which covers safety, our first and most important value. Throughout fiscal 2022, we continued to make good progress on our long-term objective of eliminating injuries across our global operations. The focus of our teams on implementing additional safety best practices resulted in a further 3% reduction in the number of reported injuries globally, and I'm pleased to report that well over 50% of our sites continue to be injury-free for the past 12 months or more. We pride ourselves on making the well-being of our 44,000 global employees our number one objective, and we'll continue to strive to achieve our goal of no injuries. Turning to our key messages for today on Slide 4. First, FY '22 has been another outstanding year for Amcor. We could not be more pleased with how our teams have demonstrated remarkable perseverance and agility, continually adjusting to challenges in the operating environment from raw material shortages to high inflation, while remaining focused on driving value for our customers and our shareholders. As a result, financial performance was strong with growth across all key metrics. The business finished the year with good momentum, more than offsetting any external headwinds so that Q4 was our strongest quarter of sales and EBIT growth, and full year EPS growth of 11% was at the top end of our guidance range. Second, we expect the business to continue performing well and we anticipate sustaining strong underlying growth in FY '23. Finally, we have a resilient and compelling investment case, which has consistently delivered significant shareholder value through a combination of organic growth, value-creating acquisitions, and cash returns to shareholders. Turning to some financial highlights for the year as outlined on Slide 5. In short, we've added to our track record with another year of sustainable growth in the underlying business. Focusing on the strong June quarter, net sales growth was 13%, which included approximately $1.7 billion of incremental price increases on an annualized basis related to the pass-through of higher raw material costs. Excluding this pass-through, organic sales growth accelerated through the year reaching 6% for the June quarter in both the flexibles and rigid packaging segments, and our strong performance reflects good work by our teams to recover broader and higher levels of general inflation, mostly through the second half of the year. It also reflects favorable volume and mixed benefits. As we have in the past several quarters, we benefited from mid to high single-digit growth in high value priority segments, which confirms that our focus on these faster-growing markets is paying off. This top-line growth converted into adjusted EBIT growth of 9% in the June quarter and it's worth noting that this high single-digit earnings growth was achieved in a quarter which clearly no longer benefited from any synergies, and while we continue to experience significant inflation and an unfavorable price-cost lag related to raw materials. Flexibles delivered outstanding EBIT growth of 11% in the quarter, and in line with our expectations, earnings growth continued to improve in rigid packaging. For the full year, net sales growth was 13% and 4% on an organic basis, which represents our third consecutive year of accelerating top-line growth. Adjusted EBIT of 1.7 billion was 7% higher than the prior year, and adjusted EPS of $0.805 per share was 11% higher than one year ago. Our financial profile remains strong with a return on average funds employed at 16.3%. We also returned more than $1.3 billion of cash to shareholders through share repurchases and a higher annual dividend. Now, before handing over to Michael for more detail on the financial results, let me provide an update on our business in Russia. As previously announced, we've been exploring all strategic options for our Russian business. After a thorough assessment, we've decided to sell our three manufacturing sites in Russia. Until completion, which we expect will occur in the second half of our 2023 fiscal year, we remain committed to supporting our employees and customers, while preserving value for shareholders through an orderly sell process. We're also practically undertaking initiatives to help offset the future impact of the divested earnings, including optimizing our European footprint and adjusting our regional cost base. With that, I'll hand over to Michael who will cover the estimated impact of this sale on fiscal 2023 guidance.

Thanks, Ron. I'll begin with the flexibles segment on Slide 6. Performance throughout fiscal '22 was excellent across several different dimensions as each one of our businesses responded quickly to the continued evolving market environment, implementing measures to recover higher raw material costs, manage general inflation, improve cost performance and deliver increasing mix benefits. Year-to-date sales of 1.2 billion includes significant recoveries of high raw material costs of 1.1 billion. The overall price-cost impact has remained a manageable headwind through this inflationary cycle given the diversity of raw materials we buy, the multiple reasons in which we consume those materials and the leverage we get from our well-developed and deeply embedded capabilities which have enabled us to implement a range of pricing actions across the business in a timely manner. Excluding this raw material impact, we are very pleased with the organic sales growth which was delivered across all flexibles business units as well as the momentum built through the year as we focused on successful recovery of rising general inflation and optimizing mix benefits. Organic sales growth was 4% for the year and 6% in the June quarter, representing the strongest quarter of growth for the year. The strong mixed benefits in part reflect continued growth in priority segments, including healthcare, pet food, meat, and coffee. We have made deliberate choices to focus on these segments and through the year have seen organic sales growth in the mid to high single-digit range across these categories. More broadly, supply chain disruptions had a dampening effect on growth in certain high-value categories through the year, including in the June quarter. As a result, year-to-date in June quarter, volumes across the flexibles business were in line with last year. Based with these constraints, we proactively took action in parts of the business to redirect constrained materials to their highest value use, further enhancing mix. In terms of earnings, adjusted EBIT growth of 9% on a year-to-date basis and 11% for the June quarter reflects strong price mix benefits and favorable cost performance. Margins also remained strong at 13.6%, despite an adverse impact of 150 basis points from the mathematical consequence of pass-through pricing of higher raw material costs. Turning to rigid packaging on Slide 7, the key messages today is the underlying demand has remained elevated across North and South America through fiscal '22, leading to continued sequential strengthening in our earnings growth in the June quarter in line with our expectations. On a year-to-date basis, reported sales grew by 20%, which includes approximately 16% related to the recovery of higher raw material costs. The 5% organic sales growth was driven by favorable price mix benefits of 2% and volume growth of 3%. In North America, year-to-date beverage volumes were up 1%, hot-fill container volumes increased by 2% for the year against the strong comparative period of double-digit growth and were up 4% in the June quarter, reflecting continued strength in categories like isotonics and juice. By leveraging Amcor's highly differentiated technology, design and PCR handling capabilities, we are well differentiated in adding significant value for our customers in the hot-fill segment, which over a multiyear period has resulted in compound volume growth of around 5%, helping drive consistent mixed benefits. Specialty container volumes continued to improve throughout the year, including in the June quarter, but on a full year basis remained below the prior year which benefited from a strong first half in the home and personal care category. In Latin America, the business delivered double-digit volume growth for the year supported by high volumes in all countries where we operate. The June quarter marks the highest level of volume growth for the business this year led in part by strength in Brazil. Turning to earnings. In line with our expectation, operating conditions and financial performance in the North American business improved through the second half of the year, after being adversely impacted by industry-wide supply chain complexity and disruptions as well as capacity constraints in the first half. As a result, the overall business delivered adjusted EBIT growth of 4% in the second half, with growth improving sequentially and reaching 5% in the June quarter. Moving to the cash and the balance sheet on Slide 8. We continue to generate strong free cash flow even as we step up our capital investments and compensate for additional working capital needs from higher raw material costs and supply constraints. Free cash flow was 1.1 billion, in line with expectations and broadly in line with fiscal 2021. We're pleased with this result given we had an unfavorable working capital impact of higher raw material costs throughout the year and have also proactively increased inventories across the business to help offset some of the volatility created by supply constraints. Our working capital performance remains a top priority, which is even more critical in this inflationary environment. Despite these challenges, we've been able to maintain a 12-month average working capital to sales ratio below 8% and in line with last year. We also see ample opportunity to increase investments in strategic growth projects, which generate strong returns in excess of 20%. This led to a 13% increase in capital investments during the '22 fiscal year. As we've previously communicated, we will continue to step up investments to support future organic growth. We maintain an investment grade credit rating which gives us access to funding through the cycle of competitive rates and approximately 54% of our debt is fixed. Leverage of 2.7x on a trailing 12-month EBITDA basis was in line with our expectations at year-end. The balance sheet is extremely well positioned with only one maturity in the next 18 months being a €300 million bond in March '23. We continue to deliver on our investment case, returning meaningful capital to shareholders during fiscal '22 year through repurchasing 600 million worth of shares and raising our annual dividend per share to $0.48. In total, we are pleased to have returned more than 1.3 billion to shareholders in fiscal '22. Turning now to Amcor's outlook for fiscal 2023 on Slide 9. We expect adjusted EPS of approximately $0.80 to $0.84 per share on a reported basis. This includes growth of 5% to 10% from the underlying business and a benefit of approximately 2% from share repurchases, offset by three non-operating items. The first, the negative impact of approximately 4% from higher interest expense, which is based on the assumption that interest rates increased in line with the current market forward curve expectations. Second, an estimated 2% negative impact from the scale down and planned sale of our three plants in Russia. Third, a 2% negative impact related to a stronger U.S. dollar assuming current exchange rates prevail for the balance of the fiscal year. In terms of cash flow, we expect to continue to generate significant adjusted free cash flow for the year of approximately 1 billion to 1.1 billion, even as we fund a further 15% increase in capital investment to capture organic growth opportunities. While Amcor's cash flows are typically weighted to the second half, in fiscal 2023 the seasonality is likely to be slightly more pronounced as we intend to maintain higher levels of inventory in the near term, before returning to more normalized levels later in the year. As a result, free cash flow in the September '23 quarter is expected to be lower than the first quarter of fiscal '22. Our strong cash generation enables us to continue paying a compelling and growing dividend and allocate approximately 400 million in cash to share repurchases during the 2023 fiscal year. In summary for me today, the business has delivered another strong year of organic growth as we remain focused on executing for our customers, recovering inflation and higher raw material costs and increasing earnings leverage by managing mix. Our continued and consistent performance supports our confidence in delivering another year of underlying growth in fiscal 2023. With that, I'll hand back to Ron.

Okay. Thanks, Michael. Before turning to Q&A, I want to refocus for a minute on the longer-term and our financial performance continues to reflect consistent delivery against our strategy and a resilient investment case which is shown on Slide 10. We enter fiscal '23 with leadership positions in most of our chosen primary packaging segments and with over 95% of our sales for consumer staples and healthcare products. We also have absolute and relative scale advantages in all key regions, and industry-leading commercial and innovation capabilities. With this portfolio, we have a long track record through multiple economic cycles of delivering earnings growth, margin expansion, and significant free cash flow, all while maintaining a strong investment-grade balance sheet. Our cash flow and balance sheet strength is enabling us to step up investments for growth and continue to return additional value to shareholders in the form of a growing dividend and regular share repurchases. The starting point in creating value for shareholders will always be the underlying organic growth of the business. As we've continually strengthened the base business over the last few years with the Bemis acquisition, we've built sustainable organic sales growth momentum. We have multiple drivers of organic growth that have contributed to that momentum and which are shown on Slide 11. We've been focused on these areas for some time and we're investing across each of them. First, Amcor has leading positions in higher growth, higher value priority segments, including healthcare, meat, cheese, premium coffee, pet food, and hot fill containers. Collectively, we generate more than $4 billion in annual sales across these categories. They're growing at mid-single-digit rates and offer significant opportunities for differentiation, contributing to margin expansion. Over time, they'll represent a higher proportion of our sales mix and become an increasingly relevant driver of earnings growth. We also have a leading and well-diversified emerging markets portfolio generating more than $3 billion in revenue, which we expect will also grow in mid-single-digit rates over the long term, as has been the case for many years. Innovation continues to be one of the most critical drivers of differentiation and growth in the packaging industry. Amcor is coming from a position of tremendous strength with deep R&D talent and capabilities. Finally, sustainability is fundamental to everything we do from an innovation perspective and remains at the forefront of discussions with global brand owners. As the sustainability leader in the packaging industry, we continue to be the supplier of choice to help our customers achieve their goals in a meaningful way and at scale. Organic growth has accelerated over the last three years, and as Michael mentioned, we're stepping up CapEx to around 4% to 5% of sales on an ongoing basis to maintain that momentum. In our industry, there's also a rich pipeline of acquisition opportunities available to supplement our organic growth. We have a pragmatic and disciplined approach to M&A, and we've completed around 30 deals in the last 10 years and we continue to be active. Earlier this month, we acquired a world-class flexible packaging plant in the Czech Republic. This plant features state-of-the-art equipment and immediately increases our capacity in Central Europe to satisfy strong demand in priority segments, including coffee and pet food. The acquired land and buildings also provide optionality to scale and potentially consolidate operations in that region while giving us a highly efficient production hub in a strategically attractive lower-cost location. We've also invested in several new opportunities through our open innovation and corporate venturing efforts. These typically start small, but we're very excited to have recently increased our strategic investment in ePac, a fast-growing flexible packaging player leveraging digital technologies to offer smaller production runs and shorter lead times. This increased investment in ePac is an excellent example of our objective to partner with high growth, visionary companies to learn from and leverage new innovations and business models. As you heard from Michael, we have a strong investment grade balance sheet and we expect another year of robust cash flow in fiscal '23, which means we can continue to invest in growth and return a substantial amount of capital to shareholders. We're committed to growing our already compelling dividend every year. Amcor is one of a small number of companies included in the Dividend Aristocrats Index, which recognizes companies with a 25-year or longer history of consecutive dividend increases. Our current yield is especially attractive at approximately 4%. We've also been a regular repurchaser of our own shares, allocating $1.5 billion of cash to share repurchases since 2019. Over that time, we've bought back more than 8% of our outstanding shares, or roughly one-third of the shares that were issued to acquire Bemis three years ago. Looking ahead, we expect our strong cash generation to continue supporting regular share repurchases, including approximately $400 million in fiscal '23. In summary, on Slide 14, Amcor had another strong year in fiscal '22, generating sustainable momentum and delivering earnings growth at the top end of our expected range. We expect to deliver another year of strong growth in the underlying business in FY '23, and we're committed to continuing delivering for shareholders by increasing investments in the business and returning value through a compelling dividend and ongoing share repurchases. With those opening remarks, operator, we can now turn the line over to questions.

Good afternoon. In rigids, you saw really good volume growth in North America bev and some of your packaging peers have talked about customers pushing price over volume and maybe reducing some promotional activity. I'm wondering if you could just talk about maybe the outlook for bev volumes in fiscal '23 and the dynamic that you're seeing there. Do you think that you're gaining share or maybe you're kind of overweight in some categories that are winning in the marketplace? Just any kind of further detail there would be very helpful?

Yes. I believe the initial observation is that demand has remained strong. Looking at our business, we had a solid year in 2022 in terms of volume, but what's particularly noteworthy is that our beverage volumes have increased by 6% over the past two years. In the hot fill segment, which is a key area for us, the volume has risen about 14% over the same period, showing growth in both years. We experienced significant growth in fiscal 2021, with somewhat slower growth in 2022 due to tougher comparisons, yet demand has remained high. Long-term, we anticipate low single-digit volume growth across our market sectors. Over the last five to seven years, total beverage growth has averaged around 2%, while the hot fill segment has expanded by about 3% to 4%, and we expect that trend to continue. Reflecting on the last two years, there have certainly been fluctuations, but we are optimistic about our position. We are heavily involved in the sports drink category, which has seen a revival. Additionally, ice teas and certain hot fill juices have also performed well. Therefore, our outlook is for low single-digit growth, with potentially higher performance in hot fill.

Okay, that's very helpful. And then just switching to flexibles. In terms of improving material availability, what inning do you think you're in there or at what point does that maybe run its course? And does the guidance assume maybe kind of a modest mix headwind in '23 as you kind of go back to some maybe lower margin customers? I don't know if that's the right way to think about it, but any color there?

Let me address your two questions. Regarding raw material availability, I would say we are in the middle of the situation. It's been somewhat like a Whac-A-Mole game in terms of the availability challenges we've faced over the last 12 to 15 months. While we continue to experience constraints on some specialty polymers, the commodity raw materials we source have been readily available for quite a while now. The constraints have primarily been related to specialty resins, and at times, we have faced some limitations on aluminum supply, although that seems to be improving. Overall, I would characterize our current status as being in the middle of the situation, and we are hopeful that there is light at the end of the tunnel. With respect to our guidance, we expect ready availability and low single-digit volume growth in flexibles. We hope to see the end of these constraints by the end of the fiscal year. As for the other part of your question regarding mix, we anticipate organic sales growth to remain generally similar. However, as materials become more available, we expect the contribution to that sales growth to level off, with a potential reduction in the bridging impact from mix and a slight increase from volume. It's important to distinguish between the transition from one financial year to the next and our long-term strategic direction, which focuses on improving mix and driving growth in our higher priority segments.

Operator, we will take the next question please.

Thank you. Good day, everybody. I just wanted to follow up on Anthony's question on the elasticity impact. Ron, maybe just a broader portfolio question, just rigids but flexibles as well. Have you seen any sort of impact as it relates to new product introduction activity or anything like that, because clearly a lot of your customers are talking about consumer elasticity taking hold? And then also just to clarify, the 3% price contribution in flexibles, apart from the 11% pass-through impact, what exactly does that encompass? These market-based price increases as you attempt to adjust for higher freight and labor costs or is there something else there? Thanks.

Yes, let me address the first question and then Michael can discuss the second one regarding pricing. We have engaged with our customers, as you would expect, and we maintain close relationships with them across the various markets we serve. Generally, we're hearing consistent feedback from them. They have indicated that, so far, during this inflationary period, the elasticities have been lower than anticipated and below historical levels. However, they also emphasize that there is still some elasticity of demand even in these more defensive markets. There is potential for this elasticity to rise as we navigate through this high inflation phase. The accumulation of inflation could affect consumer behavior. That said, we are confident in our product portfolio. We do not have any exposure to general industrial markets and are primarily focused on consumer staples and healthcare products, which have shown resilience through various economic cycles. Additionally, we have no exposure to durables of any kind. Therefore, we believe we are well-positioned. If you look back over the past 5 to 10 years, our portfolio is now more defensive than ever, with virtually all our focus on more protective segments. Would you like to discuss the price?

Yes, sure. In terms of the pricing, so as you've seen from the results, our teams have been out there working really hard to get not only the raw material increases back in the year, and when you see it, we put through about 1.5 billion in raw material-related price increases through the year, so about 12% of revenue. That kind of counted at a 25% increase generally across the board in raw materials. But in addition to that, clearly we've seen pretty significant increases in inflation across things like energy and freight, and to a lesser extent some labor. And so clearly, our teams have been out in the marketplace recovering those non-raw material-related items as well and working really hard to do that. If you think about energy and freight as a component of Amcor's cost of goods, they're a smaller component, around about 3% of our cost of goods. During the year, we've seen somewhere between 15% to 20% increases in those items. That equates to around 100 million, 110 million. And then if you take labor and a few other things into account, the overall inflation for the year was somewhere around the $150 million mark. If you look at our price increases across the board, we had about a 1% price increase in non-raw material added, so 1% in sales growth. That's a pretty similar amount to the inflation that we saw.

Thank you.

Thanks for taking my question. Just one on Slide 9. The sort of 5% to 10% organic growth I guess based on organic volume growth of 1% to 2%, can you just sort of step me through that leverage? Are you expecting price increases to more than offset cost inflation? I'm sure there's a bit of mix in there. But it's just good leverage there from volume to EPS?

Yes. Look, I would describe it as basically the components that you just outlined. So we start with expectation of low single-digit volume growth. We start with the expectation that that volume growth will be more heavily weighted towards the more differentiated higher-value segments that we've called out. We would expect to continue to get inflation recovery. We would expect to continue to drive cost productivity in the business. So those building blocks probably haven't changed much. In certain years, we've had acquisition synergies to contribute. We don't have that obviously in '23. But those are the building blocks.

But just on the restructuring costs taken below the line throughout the year, there was another 11 million in the fourth quarter. I note there was no Bemis synergies in that period as well. Can you help us understand what are some examples of things that contribute to that 11 million in the June quarter and if we should expect some of that to continue into FY '23?

Yes, thanks, Brook. It's Michael. That was just the end of the program, so there are some remaining costs related mainly to footprint items, impairments, and other factors. This pertains specifically to the Bemis program, which is now completed. You should not expect any further costs associated with that program moving forward, as we wrapped it up this year.

Thank you. Just making sure you can hear me.

Yes, sir.

Thank you. My first question is for Michael regarding the cash flow guidance. I was hoping that raw materials inventory wouldn't negatively impact cash flow in fiscal year 2023. Since the cash flow guidance isn't ahead of fiscal year 2022, it seems like there might be some drag. Could you explain that? My second question is for Ron about the recent appointment of a Head of Global Sales. Can you discuss the priorities for harmonizing high-margin categories and your presence in Europe and the U.S.?

Yes, I can start with the cash flow. We are anticipating another strong year of cash flow in the range of 1 billion to 1.1 billion. Several factors contribute to this. We expect higher EBITDA within that cash flow from a working capital perspective. In FY '22, we experienced a cash outflow of about 150 million due to rising raw material prices and increased inventory in response to market volatility. However, we do not foresee any additional outflow from that issue. At the same time, we expect increased sales and further pass-through, which may impact working capital, though we will maintain a working capital to sales ratio below 8, consistent with our performance over the past few years. We do not expect significant inventory issues. The impact will also depend on raw material pricing and the overall market supply chain, but we are aiming for a neutral working capital impact. We will be increasing our CapEx, with a planned 15% rise included in our guidance. Additionally, we will face higher interest costs that we did not incur this year. Taking all these factors into account, we are looking forward to another strong year in the 1 billion to 1.1 billion range.

Sure, okay. Do you want to take the first one?

Certainly. I will begin with the cash flow. We are anticipating another strong year of cash flow in the range of 1 billion to 1.1 billion. Several factors contribute to this expectation. We expect to see higher EBITDA within that cash flow and while we experienced a cash outflow of around 150 million in FY '22 due to rising raw material prices and increased inventory from market volatility, we do not foresee a similar outflow this year. Concurrently, we expect increased sales and more pass-through, which will have some effect on working capital. However, we plan to maintain a working capital to sales ratio below 8, consistent with previous years, so there should be no significant inventory impact. The situation will also depend on raw material pricing and the market supply chain dynamics, but we are generally aiming for a neutral working capital impact. Additionally, we will be increasing our capital expenditures, anticipating a 15% rise included in our guidance, and we will also face higher interest expenses, which were not a factor this year. Considering all these elements, we are looking forward to another strong year in the 1 billion to 1.1 billion range.

Sure, okay. You asked about the Head of Global Sales and Marketing, which is a role that we've had but we've elevated. We run the business in a very decentralized way through the business groups. We have a small number of resources in this center that drive leverage across the portfolio in areas that we think are the highest impact. Sales and marketing has been one of those for some time. We've had that role in this center. What's new is that we've elevated it. It's now a direct report to me. It sits on the leadership table. A few things that I'm expecting to get out of it. First and foremost, as we pivot increasingly towards generating higher levels of organic growth and top line growth, we just want the voice of the customer even more prominent around the leadership table. This person will help us do that. Clearly, we have some global customer relationships that have always required a degree of coordination. So she will pick that up as well. Our commercial capabilities, which is an initiative called Value Plus that we've had in place for 15 years or so, it's a commercial excellence program inside the company. Think of it as sort of Six Sigma for the commercial side of the business. She will also take the lead in driving continuous improvement in that program as well. That's the rationale for the elevation and increase in prominence of what's always been a very important role for us.

Hi, everyone. Good day. Hope you can hear me okay?

Yes.

Thanks for all the details. My question is going to be on Russia, Ron and Mike. I wanted to understand the guidance for next year; you've mentioned it would be about a 2% effect, considering that you assume the business winds down and is sold by mid fiscal '23. Does that mean then that in fiscal '24, there will be a residual comparison? There will be the other half that you're comparing against in fiscal '23 from having the business in your result? More broadly, you mentioned footprint alignment, cost reduction. Can you talk to us about how you are going to best try to fill some of the earnings that will be leaving? How much will acquisitions play in that effort for the company? Thank you. And good luck with the new year.

Yes. Thanks, George. I'll take it. Michael can tag on here at the end. We've decided to sell these three plants, which have historically produced around 4% to 5% of our EBIT. The planning assumption and the assumption that's embedded in our guidance for the year is that we complete that sale process at some point in the second half of the year. Between now and then, we're scaling back the operations, which is all consistent with what we had said back in March and I think on our call in May. The difference between roughly a 2% headwind in FY '23 and whether or not there's any residual impact in '24, look, we're pedaling really hard to offset the gap. We don't expect any meaningful residual impact in FY '24. Clearly, we're losing 4% to 5% of earnings. We'll take a hard look at the cost base in that part of the business. We'll be rightsizing the cost base in that part of the company, looking at footprint as well. We expect to mitigate the remaining impact to the extent there is any.

Thank you, everyone. My first question is about the growth you've achieved in the quarter and your perspectives for fiscal '23, particularly from a regional standpoint. I would like to understand what you're observing in Europe and Asia. Given the recent lockdowns in China, which could be disruptive, how do you see the situation in Europe, especially considering the expectations of weaker economic growth and the effects of energy and power prices? How do these factors influence your assessment of costs and consumer demand? At a high level, Ron has mentioned a low single-digit volume growth outlook as an initial assumption for fiscal '23, and I'm looking to gain more insight into that.

Okay. I'll handle that part, and Michael you can come back and talk about the energy point. Yes, the starting point is the assumption of low single-digit growth. If we look backwards a bit in '22, because I expect that we will have similar dynamics at work in '23, generally speaking across the developed markets, we had sort of flat to low single-digit volume growth in North America. Europe was a little bit softer because we had even more acute supply shortages of certain raw materials, and we prioritized some higher-value segments and customers. But in the emerging markets in '22, we had mid-single-digit growth. That's been sort of a long-term trend. So that's the way we would expect FY '23 to evolve as well. You asked specifically about China. China has been volatile. It's been a really consistent grower for us for a long time. We had good growth across FY '23 as well. But clearly, in the fourth quarter, in particular, with some of the lockdowns, we had some very strong months and we had some very soft months. I would expect those ups and downs to persist into the start of '23 at least as things normalize. Generally speaking, I guess the next level of detail beneath the low single-digit growth across the portfolio would be kind of lower single digits in the developed markets, Europe and North America, mid single digits in the emerging markets of Asia and Latin America. I would point out as well, just because of some of the comments you made in asking the question, this has been a very resilient business through a number of economic cycles. I can't emphasize that enough. The portfolio has not been as defensive as it is now. We really have no general industrial and durables exposure. Michael, do you want to talk about energy costs?

Yes. In terms of energy, as I said earlier, we've certainly seen inflation in our energy costs around the globe and in Europe, and that actually accelerated in the second half. But we've been out there recovering it. We're certainly anticipating there's going to be more inflation to come. The teams are out there covering it. The level is dependent on where things get to in that marketplace. Obviously, we've factored that into the guidance range and the range of outcomes in that guidance range. So overall, we're expecting inflation to continue and the teams are out there recovering it.

Alright. Thank you. I appreciate the color.

Thanks, Adam.

Good evening, Michael, and good evening, Ron. Just a question on the CapEx outlook. Obviously, the third quarter update, you upgraded the CapEx to sales guidance to be between 4% and 5% of revenue. Today, you've mentioned that there's a 15% increase in the CapEx guidance. Can you just give us some indication as to where that CapEx is being allocated? Is it going to allow Amcor to compete more in the sustainability and recycled materials space, or are we looking at kind of business as usual investment back into the business? I'm just wondering how it sets you up strategically moving forward.

Yes. The guidance remains consistent. If you calculate it, we're gradually reaching the 4% to 5% of sales range, which indicates that for a few years, we expect larger increases around the 15% you mentioned. Generally speaking, it's business as usual in that we aren't investing capital outside our core operations. We're not significantly investing in recycling infrastructure, which is a separate matter. However, we believe we can help develop infrastructure in other ways. From this viewpoint, it can be seen as business as usual. What excites us is the potential for strong organic growth in some key segments we’ve discussed and in our innovation platforms that promote sustainability, allowing us to invest more capital for greater growth. For instance, we have recently opened a new healthcare packaging facility in Singapore, expanded a medical packaging plant in Ireland, and invested in Switzerland for Nespresso capsule production. We continue to support our sustainable innovation initiatives, such as the AmLite platform, a recyclable material suitable for human and pet food pouches. These are examples of where we are directing our capital.

Good day, Ron and Michael? How are you?

Good, John. How are you doing?

Very well, thank you. Just in terms of price and cost spread and how we should think about that, are you expecting a meaningful positive price/cost spread in '23? We know that you won't have the benefit or incremental benefit of Bemis synergies for the year ahead. Is that sort of price/cost spread, are you starting to see that come through in a positive way now or is it more a second-half weighting, assuming it does?

Yes. Hi, John. It's Michael. I can take that one for you. Throughout this year, we've seen pretty volatile and persistent increases in raw material mixed across the globe. Remember, we buy a broad basket of raw materials and geographies, and they move at different times in different ways. What we did see through the year was a recovery of that. But for the entire year, it was a headwind, a manageable headwind. I'd say it eased as we got into the second half and in Q4 certainly was a marginal headwind. Where raw materials are today and what we see moving forward, there are still movements upwards. Aluminum is probably one that's come down, but the marketplace is still, across the globe, volatile. What we've included in guidance for now is that we think in the first quarter, things are going to be relatively stable based on what we see today, and we could start to see some marginal tailwinds as we get to December. What happens in the second half, we'll see. It's all going to depend on where the raw materials move. But that's all been factored into our guidance, the guidance range that we've put out there in that 5% to 10% underlying business. If raw materials come down fast, that's one of the elements that could get us to the higher end of the range, and if they continue to escalate, then as you know, we recover it but there is always a lag in that. That could lead us to the bottom end of the range. Where we sit today, it's fairly neutral in Q1, perhaps some slight tailwind as we head into Q2.

Thank you.

Thanks very much. Ron, can I just quickly ask you a question on rigid plastics? Your major competitor in hot fill reported volume growth for the June quarter, which was slightly higher than yours. The reason they gave for their growth was market share gain in sports drinks. Given how consolidated that category is between the two of you, I just wanted to clarify whether you'd lost any share in that particular area? Secondly, a quick issue for Michael, if I might. Michael, can you remind me how you account for interest hedging gains and losses? Thanks.

Yes. In the hot fill market, I mentioned earlier that over the past two years, hot fill volumes have increased by 14%. In all the categories we are involved in, there hasn't been similar growth. Our market share has significantly improved over the last two to three years. Michael, regarding the interest?

Yes. On the interest rate swaps, Richard, yes, they're part of the interest expense. They run through that line.

Thanks very much.

Thanks for taking the question. Ron, a little bit more longer-term question here. Just curious how we should think about the shareholder growth algorithm over the long term? You're still targeting a 10% to 15% shareholder return. I guess why shouldn't it be higher, given the increase to CapEx and organic investments, especially towards some of these higher value end markets that you're targeting? Obviously, you're increasing CapEx now. It takes time to get those returns. But do you see runway for this algorithm increasing, especially as you include M&A to it?

It's a good question. The short answer is that there is a path to achieving that at some point. However, as you've noticed, we need some time to start seeing returns from the capital we're investing. Additionally, the composition of that algorithm will change a bit over time. We've been focused on generating organic growth through margin expansion and cost efficiency over the years. While we've been quite active in acquisitions, we've done less recently. In the future, you'll notice that organic growth will increasingly come from top-line improvements and enhanced commercial productivity. We also plan to return to a more aggressive acquisition strategy like we had before the last few years. We are confident in the current algorithm but see potential for positive changes in its composition as we progress. This is why we are investing in some of the growth projects I mentioned earlier.

Good morning, everyone. I guess we've noticed in terms of resin prices, it's pulled back quite meaningfully in recent months. Can you talk us through your thoughts on the dynamics that's driving this and new PE capacity coming on board potentially providing a more medium-term tailwind?

Yes. Look, as Michael alluded to, the basket of resins that we buy have moved in different directions and at different paces. Overall, we actually saw resins across our global basket go up a bit in the fourth quarter. But there are definite signs that things will ease. In the medium term, and even maybe a bit sooner, in certain regions of the world, there is more capacity coming on stream in some commodities, and that will certainly take some of the heat out of the pricing. Remember that supply and demand is one element. The underlying feedstock prices are also playing a role as well, so oil and natural gas which have come off a little bit, and I'm talking very recently now. It's really those two things that drive the prices in the polymers that we consume. For the last period of time here in this more recent inflationary cycle, we've had pressure from both. I'm confident that in the near term or certainly in the medium term, both of those factors abate and we start to see some meaningful softening and more sustained softening across the basket of raw materials that we're buying.

Thank you, Ron. If there is a chance for a follow-up, I just wanted to ask about potential M&A. Are you seeing more opportunities at potentially more attractive valuations, given the higher rate environment?

Not yet, but you would have to believe that as rates go up, as the high yield market maybe gets a little tighter and a little more constrained, there will be maybe less competition for deals. That would be the theme you would expect to emerge. It's a bit early in the interest rate cycle and it's a bit early generally in the asset pricing cycle for us to have seen that yet. But we're in a great position because we know exactly where we want to go strategically. We know exactly the segments that we'd like to acquire to advance our strategy. We've got a great financial position to work from with a really strong balance sheet and lots of cash flow. We'll certainly be in the deal flow to the extent assets do come to market.

Thanks. Good evening, Ron. Good evening, Michael.

Hi, Mark.

Just curious about just any inventory destocking behavior that you're seeing? We've heard a lot of conversation about this with different retailers, but I think there have also been questions about whether upstream from them, whether some of the CPGs have taken on a little extra inventory over the last couple of years and whether they might be starting to bleed a little bit of that back out now? Just any thoughts around that, Ron?

Yes. Look, it's always difficult for us to have great visibility into where things stand from an inventory perspective down the value chain. I guess this is really anecdotal. I'd probably suggest that there is probably more inventory than there needs to be in some parts of the chain, as it's been particularly acute in any part of our business and really held things back. But with limited visibility, you could say there's a little bit more inventory than there needs to be in certain segments. But take that for what it's worth, which is just a bit anecdotal.

Okay. And then if I could just follow on real quickly. Can you just update us on sort of where volume is at in both kind of healthcare and medical devices, because you did mention some incremental healthcare and device investments? I know earlier in the pandemic that some of those volumes were weak. I'm just curious about where you stand right now.

Yes, that's a good question. I'm glad you asked. Healthcare volumes generally, medical device packaging and pharmaceutical packaging have bounced back very strongly. We had good mid to high single-digit growth across both of those segments through FY '22. Pharma was a little bit slower to rebound. The medical device packaging volumes for us now are back to where we were pre-pandemic. That segment has grown in sort of the mid-single digits for many, many years. It's a good margin business and innovation-intensive, et cetera. We expect that to continue. But we're back to where we were in 2019.

Hi, Ron. Thanks for taking the follow on. I want to come back to acquisitions. Recognizing you're going to be very disciplined, as always, about the businesses that you look at. You mentioned that sustainability is core to everything that you do at Amcor clearly. How important will it be for the acquisitions that you look at to either give you a new technology, a new ability to promote sustainability and otherwise help your customers' products become more sustainable? Or it's important but really what you're looking at are the financial metrics, the improvement in return funds employed and so on. How would you have us think about how you're evaluating that? If you could talk a little bit about the Czech facility and just provide a bit more color on that, that would be great? Again, thanks and good luck in the year.

Yes, thanks. It's a great question, George. I would say the two factors that you outlined are inextricably linked. As you think about doing an acquisition, especially anything of meaningful scale, you'd be thinking more beyond the first couple of years of ownership. You'd be thinking about the sustainable growth in a business that you'd be acquiring. You'd be thinking about the sustainable competitive advantage. All of those things in our universe are going to be linked to sustainability. It's inconceivable that we would acquire something that didn't further enhance our sustainability credentials in our product portfolio. That being said, we like our product portfolio as it relates to sustainability. We think that we've got the key to more sustainable products with the staple of product segments that we're in today. We don't see any real need to step out, but anything that we look at will be accretive to the sustainability profile of our product portfolio. For no other reason than, it will lead to better financial outcomes over time and higher returns ultimately. Just really quickly to close off on the Czech plant, we bought a plant which is relatively new, and it was opened right at the outset of the pandemic so it's very low utilization, giving us instant capacity in Central Europe, and it has assets that are easily directed towards some of our priority segments, including coffee and pet care. We're essentially buying a plant more so than a business. We closed on that in early August, and we'll be working over the next couple of years to fill up that site. If things go well, then we've got optionality to expand the site as well. Pretty excited about that little bolt-on in that part of the world.

Okay. Thank you, operator. Thanks everybody for joining the call today and your interest in Amcor. We've had a strong year in '22 and we're expecting another strong year in '23 and expecting that the resilient investment case we've built up over the years will be especially compelling in this environment. So thanks again, and we'll close the call there.