Amcor Plc (AMCR) — Q1 2023 Earnings Call Transcript

Thank you, operator, and thank you everyone for joining Amcor's fiscal 2023 first quarter earnings call. Joining 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 Investor section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we'll also discuss non-GAAP financial measures and related reconciliations can be found in that 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 SEC filing, including our statements on Form 10-K and 10-Q for further details. Please note that during the question-and-answer session, we request that you limit your question to a single question and one follow up, and then rejoin the queue if you have any additional questions. With that, over to you, Ron.

Okay, thanks, Tracey. Thanks everyone for joining Michael and myself today to discuss Amcor's first quarter financial results for fiscal 2023. We'll begin with some prepared remarks before opening for Q&A, and I'll start with Slide three, which covers our first and most important value, which is safety. The first quarter showed continued progress on our long term objective of eliminating injuries across our global operations. Our teams are doing a good job proactively identifying and addressing potential risks, and the results are evident with a further 31% reduction in the number of reported injuries globally compared to last year. This good work has also led to a solid increase in the number of our sites that have been injury-free for the past 12 months or more, which stood at 63% at the end of the quarter. Our top priority will always be the well-being of our 44,000 global employees and achieving our goal of zero injuries. Turning to our key messages for today on Slide four, first message to leave you with is the business has delivered another strong quarterly result highlighting the relative stability of our end markets, our relentless focus on recovering higher raw material costs and staying ahead of inflation, and our proactive approach to driving costs out of the business in a volatile and challenging operating environment. The result was another quarter of strong operating leverage with 10% growth and adjusted earnings per share on a comparable constant currency basis. Second, we're confident in our ability to sustain solid organic earnings growth from the underlying business in fiscal '23. We've reaffirmed our guidance ranges for comparable constant currency EPS growth and free cash flow while updating our reported EPS guidance to reflect further strengthening of the US dollar. We assume the macroeconomic environment will remain challenging; however, our continued focus on sustainability, innovation and higher growth, higher value add segments combined with our proactive approach to managing costs, supports our confidence in delivering against our expectations for the year. Third, our attention to sustainability is unwavering. We understand our role in supporting the circular economy and we continue to improve the sustainability profile of our products. And finally, we want to leave you with a good understanding of why we're confident that Amcor's strong resilient business will drive long-term shareholder value creation. Moving to some of the first quarter financial highlights on Slide five. We've had a strong start to the year. On a constant currency basis, net sales growth was 15%, which includes approximately $400 million of price increases related to higher raw material costs. Excluding this pass through impact, organic sales grew 3%, both the flexibles and rigid segments generated price mix benefits and have done an excellent job recovering general inflation of approximately $75 million as a result of non-material costs increasing at double-digit rates. Overall volumes were marginally lower, reflecting somewhat softer and variable customer demand through the quarter. As I mentioned earlier, operating leverage was strong with solid top line growth and proactive delivery of cost efficiencies in both businesses, driving EBIT up 9% and adjusted earnings per share up 10%. We continue to expect to deliver strong cash returns to shareholders this fiscal year through approximately $400 million of share repurchases and a growing dividend, which increased to $0.1225 per share this quarter. And our financial profile remains strong with return on average funds employed at 16.5%. We're pleased with our first quarter financial performance and we'll now turn over to Michael to cover more of the specifics, including our fiscal '23 outlook.

Thanks, Ron, and hello everyone. Turning to our flexible segment performance on Slide six, our flexibles business had another excellent quarter with all business units delivering solid organic sales growth while executing well on inflation recovery, cost initiatives and mix management. Net sales were up 6% on a reported basis, which includes recoveries of higher raw material costs of approximately $270 million, representing 10% of quarterly sales growth. The teams have continued to successfully manage the pass through of higher raw material costs, and as expected, the related price cost impact on earnings for the quarter was relatively neutral. Excluding the raw material impact, organic revenue growth of 3% was driven by favorable price mix benefits of approximately 4%, partly offset by lower volumes. Some business units experience lower demand in certain categories during the quarter. However, our broad market coverage and geographic diversification limited the overall volume impact. Sales across our combined priority segments grew high single digits for the quarter with healthcare a particular standout delivering strong sales and volume growth across every region. In our Asian business, overall volumes were higher than the prior year, despite lower volumes in China, which was impacted by ongoing COVID related lockdowns. Adjusted EBIT was up 11% in comparable constant currency terms for the quarter, reflecting overall sales growth, price mix benefits and outstanding cost performance, including quick actions taken to flex the cost base in regions where the operating environment has been more challenged. Adjusted EBIT margin of 12.7% was comparable to last year notwithstanding the 130 basis point dilution related to increased sales dollars associated with passing through high raw material costs. Turning to rigid packaging on Slide seven, the key takeaway for rigids is the business delivered another quarter of solid sales and earnings growth. Reported sales were up 19%, which included the pass through of high raw material costs of approximately $130 million or 17% of sales. Excluding this pass through, organic sales growth of 3% was driven by price mix benefits of 2% and volume growth of 1%. In North America, we had positive product mix in the beverage business with hot fill volumes up 6% reflecting growth across a range of categories, including sports drinks, juices, and ready-to-drink teas. From an overall standpoint, beverage volumes were lower than last year, reflecting a decrease in lower value cold fill and preform volumes. In the specialty container business volumes increased mid-single digits led by strength in healthcare, dairy, and nutrition markets, and in Latin America, volumes were up high single digits with strong performance in key countries such as Argentina, Brazil and Mexico. Adjusted EBIT increased 7% on a comparable constant currency basis, driven by higher overall volumes, strong inflation recovery and continued solid operating and cost performance. EBIT margins were 7%, and over the past several quarters have been negatively impacted by approximately 250 basis points due to a sharp increase in resin pricing being passed through the sales line and significantly increasing sales dollars as a result. In terms of the balance sheet, on Slide eight, we continue to maintain a strong investment grade credit rating, which provides us with flexibility to invest for growth and access to lower cost debt markets across key currencies. Leverage at the end of the quarter was three times and right in line with our expectations for this time of year, given the seasonality of cash flow. As we highlighted in August, free cash flow was lower than the same quarter last year as we expected. Our cash flow is typically weighted for the second half of the year, and in fiscal 2023, this seasonality will be more pronounced given high raw material costs and the decision to increase inventory levels through last year to offset some of the volatility created by supply constraints. We have reaffirmed our four year cash flow guidance with cranes, which I'll come back to shortly. Notwithstanding the temporary increase in inventory levels, we remain highly focused on working capital performance, which is particularly critical in this inflationary environment, and we've maintained our 12 month average working capital sales ratio at 8%. In August, we announced an incremental investment in ePAC and the purchase of a flexibles plant in the Czech Republic and funded both of those investments in the September quarter for a total of around a $100 million US dollars. And while we did not repurchase any shares during Q1, we continue to expect to allocate approximately $400 million towards share purchases in fiscal '23. Turning now to Amcor's outlook for fiscal '23 on Slide nine, while we expect market conditions to remain challenging through 2023, we have had a strong start to the year and taking into account the relative stability of our end market exposures and our strong track record of consistent execution, we remain confident in our ability to deliver against the outlook we provided in August. We have reaffirmed our expectations for organic growth of 5% to 10% from the underlying business and a benefit of approximately 2% from share purchases while continuing to expect an impact from the following three non-operating items. Firstly, a negative impact of approximately 4% from higher interest expense after tax, forward curve expectations have continued to move higher, and interest expense is now expected to be in the range of $240 million to $260 million. Net of our expectations for a slightly lower effective tax rate, we continue to expect a 4% headwind to EPS as we noted in August. Second, an estimated 2% negative impact from the scale down and scale of our three plants in Russia, which we continue to expect in the second half of the fiscal year and third, a negative currency translation impact of 5%, which is higher than the 2% we anticipated back in August due to the continued strengthening of the US dollar. As a result of this US dollar strengthening, we are updating our expectations for adjusted EPS on a reported basis to be $0.77 to $0.81 per share. In terms of cash flow, we continue to expect the seasonally stronger second half, and we have reaffirmed our adjusted free cash flow expectations to a range of approximately $1 billion to $1.1 billion. However, the stronger US dollar pushes our current expectation toward the lower end of the range. So in summary, for me today, the business has delivered another strong quarter of organic sales and earnings growth as we remain focused on executing for our customers, managing margins and taking decisive actions to rapidly recover inflation while flexing our cost base. Our ability to successfully balance these priorities supports our confidence in delivering another year of solid underlying growth despite persistent market challenges. And with that, I'll hand back to Ron.

Okay, thanks, Michael. Before we open the call to questions, I'd like to cover some of the drivers that inform how we think about our growth over the longer term and are relevant for our fiscal 23 outlook as well. For several periods, we've highlighted multiple commercially oriented drivers that have enabled us to deliver solid and sustainable organic earnings growth over the last three years. These drivers include opportunities and priority segments, emerging markets and innovation, and they've not changed, and when combined with our ability to deliver continual cost improvements by leveraging our scale advantages and capabilities, these drivers give us the confidence we'll continue to consistently deliver solid organic earnings growth from the underlying business, even in the face of continued challenging and evolving macroeconomic conditions. Our focus on priority segments, including protein, healthcare, premium coffee, pet food, and hot fill beverages will continue to be a driver of growth and mixed benefits with more than $4 billion in collective annual sales, we have leading positions in each of these large addressable markets that have been growing at higher than market rates for us historically. And over time, we expect they'll continue to grow at mid-single-digit rates with higher than average margins. As Michael mentioned, healthcare was a particular standout in the first quarter with strong growth across all regions. Emerging markets also continue to be a focus for Amcor. We have a large scale diversified emerging markets portfolio, which generates annual sales of more than $3 billion, and this is another source of organic growth. And over the long term, we expect these markets collectively to continue to grow at mid-single-digit rates. In the last quarter, several emerging market countries delivered double digit earnings growth, including India, Brazil, and Mexico. Innovation provides a third opportunity for us to drive growth and value, particularly as customers and consumers focus on the critical need for more sustainable high performance packaging solutions. Amcor has industry-leading R&D in material science capabilities and expertise, and when coupled with our unmatched scale and geographic reach, these capabilities provide unique ongoing opportunities to develop differentiated products to meet the needs of our customers. For example, we're winning new business by taking fresh protein packaging solutions initially developed by the legacy beams business into the Asia-Pacific market, including modified atmosphere packaging solutions in China and the Ecotype high barrier recyclable films in Australia. A cross-functional and import team came together to partner with Pfizer to develop packaging for the first commercial batches of packs, Levi in the US market. Leveraging technology developed by our teams in Europe and our global footprint, we were able to start production of living and base material at the same time in five Amcor sites across five countries in order to fully meet Pfizer's requirements in one-third of the standard lead time. Looking ahead, the strategic choices we've made to focus on these organic growth drivers will guide how we prioritize investments back into the business. We see a wide range of attractive growth opportunities across each of these areas, and we're actively investing to sustain the organic growth momentum we've built over several years before closing with a few words on sustainability. Sustainability is fundamental to everything we do and is deeply embedded in Amcor's strategy and risk management framework and the basic start within our own operations. Our 2022 sustainability report will be released in a few weeks and will highlight some of the important progress we've made through the year. This includes reaching a cumulative reduction in greenhouse gas emissions intensity of 35% since the launch of our Bio Action program in 2008. A critical journey will continue through our commitment to achieve net zero emissions by 2050. In addition to carbon-related objectives, we maintain robust targets for reducing water and waste and achieved significant milestones during the year. A few weeks ago, we also released our first TCFD report highlighting the important work we're doing to help ensure we make the right decisions on climate and packaging sustainability. Turning to Slide 12. We continue to make progress supporting the development of circular systems through the three pillars of our responsible packaging strategy, innovation, infrastructure, and consumer participation. Today, nearly a hundred percent of our rigid and specialty car and packaging portfolios are fully recyclable and in our flexible packaging segment, 83% of our product portfolio is designed to be recycled or has a recycle-ready option available for trial. In fiscal '22, we used more than 130,000 metric tons of PCR, up 30% from the prior year, representing 6% of our total reuse. We're now building on our objectives with a new commitment that 30% of our total revenue use will be recycled material by 2030. In one example, to bring this focus on recycled content to life, we've worked closely with Mondelez on the recent launch of packaging for several Cadbury Dairy Milk products incorporating 30% food-grade recycled content in both the UK and Australia. This is an important example of how a combination of strong relationships, differentiated capabilities, and a global footprint can translate into volume growth and mixed benefits. For Amcor, we've also continued to collaborate with others to support the development of recycling infrastructure. On October 12th, Amcor was the only packaging company to join 11 brand owners in the Consumer Goods Forum to publicly signal a commitment towards further increasing the use of recycled materials in packaging. Together we express our common interest in purchasing commercial volumes of chemically recycled plastic and our support for the development of credible, safe, and environmentally sound chemical recycling infrastructure. Our sustainability journey is ongoing and our long term strategy is helping to create a responsible packaging industry for the benefit of Amcor and its customers, but crucially for the environment as well. Turning to Slide 13, we've built a strong foundation to deliver growth and value creation, and we've consistently executed well against our strategy. We don't expect to be immune to economic challenges and uncertainties, but we believe we're relatively well positioned with a defensive consumer staples and healthcare-focused portfolio in multiple drivers of growth and cost productivity. Our consistently strong cash flow provides the ability to reinvest in the business, to pursue acquisitions or repurchase shares, and to grow the dividend and positions us well to generate strong and consistent value for shareholders over the long term. In summary, on Slide 14, despite a continued challenging economic backdrop, we've had a strong start to the financial year. Our consistent execution has enabled us to deliver solid sales growth and excellent operating leverage, resulting in double-digit organic EPS growth. We're confident in our ability to deliver against our outlook for EPS growth and free cash flow, which we've reaffirmed today, and we're executing well to deliver long-term value for shareholders, including by making further progress against our sustainability agenda. And operator, we're ready to open the call for questions.

Thank you, operator. Good day everybody. I guess first off, Ron, many consumers' staple customers of yours are aggressively raising prices and, you know, as a consequence of reporting weaker volumes along with de-stocking, which I assume is part of the reason your volumes were sluggish in both segments for the developed markets. How do you sort of see that dynamic evolving as we cycle more fully into your fiscal year '23? I guess what are customers sharing with you in terms of their own outlook at this point for next year?

Yeah, look, thanks. It's a tough environment out there as you alluded to. You know, we had flat volumes basically across the business and relative to many who've reported, that actually feels like outperformance, believe it or not. Things definitely slowed down through the quarter. Certainly, through this September, the month of September, things got a bit softer in Europe and North America in particular. I think it's a function of the two things you mentioned. One is obviously there is a bit of inventory built up in the supply chain in certain segments, and I think we'll see that come out relatively quickly given that this is fast-moving consumer goods that we're talking about. So we don't expect that any inventory impacts on volumes will be long lasting, but I do believe there is some extra inventory in the supply chain. And then secondly, the cumulative effective inflation on the consumer, which eventually will lead to some elasticity. I think you're hearing that from brand owners; we're hearing indirectly from them, and I think they're publicly commenting on elasticity maybe being less than expected, but still, there is elasticity in many of the categories that we're supplying into. So look, we have a pretty modest expectation for volumes from here for the rest of the fiscal year. Michael will talk more about that, I'm sure, but, you know, our guidance includes a range of outcomes, and a part of that range is where we end up on volumes.

Okay, terrific. And then in previous quarters you've called out limitations on certain resins as it relates to availability and all sorts of disruptions and force. Can you just give us an update on that dynamic and some of the volume you've given up in the past as you internalize production and focused on higher mix? Is there an opportunity now to go and recapture that share for the rest of your fiscal year?

Yeah, well, look, as far as availability goes, the raw material availability picture has improved. I wouldn't say that we're completely supplied, but certainly the constraints that we faced through much of fiscal '22 have abated. We're down to a much shorter list of constrained raw materials. It probably held back sales more modestly in the first quarter than it impacted us in fiscal '22. But certainly the situation is improving as far as recovery of lost sales. I think in these segments, it's very difficult to expect lost sales to be reclaimed from one period to the next. Again, these fast-moving consumer goods. And, you know, if you miss a sale in one period, it's unlikely the consumer goes back and double purchases in a future quarter. So I think we've got to look forward at this stage.

Thanks very much. Hi everybody. Good day. Thanks for the details. You know, Ron, sticking with this topic that Ghansham teed up, can you talk about to the extent possible, what your customers were saying, where they're seeing the most negative effect from inflation on demand? And in particular, what are you seeing in the protein markets lately? You talk broadly as you normally do in terms of being a priority area. What are you seeing real time in terms of that market in the first quarter?

Yeah, look, I think from the first part of your question about where the demand is the most elastic, where are we seeing it often the most, I would answer the question more geographically than at the segment level. I think firstly I would say our healthcare volumes globally have been very, very strong. So that's the other side of the discussion is that healthcare has remained very robust, particularly pharmaceutical packaging, and that's been true everywhere. I think as it relates to food, beverage packaging, home and personal care to some extent. Where we've seen the most softness has been in the developed markets in Western Europe and in North America. Presumably, you know, that's where the inflation is biting the most. I mean, we've got actually at the moment, more modest inflation in some of the emerging market countries we're participating in. So really where we've seen the most softness and the increasing softness has been in North America and western Europe. And then I guess I would also add China to that list, but we believe that the China softness is primarily a result of the COVID related lockdowns. We believe that based on the patterns across the global footprint or the national footprint we have in China. So I'd answer your question that from a geographical perspective, more than a segment perspective, and then as it relates to protein, protein is a high-priority segment for us. Without question, it's an attractive segment for a lot of reasons, with a lot of innovation in that space, particularly around the films and materials. And we had a flattish quarter globally across the protein space, so that's not what you'd expect, and it's not what we've experienced over the last several years. We would expect mid-single-digit to mid to high single-digit growth in that segment, and we were more or less flat for the quarter.

Thanks, Ron. And my follow on, just as we peer into the beverage business you saw very, very good business trends in your higher margin areas, which would be sort of counterintuitive with a consumer being pinched by inflation relative to the lower margin areas, which were actually weaker? Yeah, if you could talk to that, that'd be great. Thanks, and good luck in the quarter.

Yeah, thanks, George. No, it's a good observation and it's a good insight. I would agree with your insight there that generally speaking the hot fill space is a space where there are more premium beverages being sold. A lot of that goes through the convenience channel. I think what we're seeing there, to some extent is function of our customer mix. It's a function of new product introductions. Some segments actually held up pretty well through the quarter, such as ready-to-drink teas and sports drinks to some extent some of the hot filled juices. But I also think it’s 90 days, and I think in a 90-day period, you have distortions that relate to inventories and different customer performance. So I'm not sure I would read too much into that, other than our hot fill volumes have continued to grow at attractive rates. And it's one of the reasons we've prioritized that segment.

Hi Ron. Hi Michael. Michael, can I just get you to give us a sense of where that inventory is at the moment in both a units and value perspective? Just noting, obviously it continues to build alongside the inflation. Just want to get a sense of how clean that might be given the volume outlook that we've just spoken to.

Yeah, that from Doug, as we said, I think we were expecting, or we have been holding higher inventory levels or building higher inventory levels as a contingency against the supply constraints that we've been experiencing for the last 12 months. And we guided back in August that we didn't expect that to come out of the system in Q1, which it didn't, and we saw cash outflow as a result of that. As we look forward, we'd expect, into Q2, things are going to stabilize. And then as we head into H2, we should start to see inventories come off out of the system. And it's a combination of both volumes and value. I'd say the split, if I look year over year, it's probably 40% relates to volume and 60% is relating to the higher prices year on year. So you know, as we look forward to the end of June, part of our cash flow guidance includes a pretty neutral position in terms of working capital year over year. So we're expecting working capital to be relatively flat versus the prior year where we had an outflow of 150 million. And that's largely on the back of that reversal in the inventory assisting us in guiding to that 1 to 1.1 billion in cash.

Good gentlemen thanks for taking my question. The first one even for Ronald or Michael, could you be a bit more explicit about the raw materials benefit that you may receive given you're coming off a price cost like neutral scenario in the first quarter? Just wondering if you could help us quantify what the potential benefit could be for the remainder of the year. And, you know, given there could be potential benefits, does that imply the volume outlook is probably more for more softness, and again if you could be more explicit as to what the volume direction is and quantum for the full year, what your expectations are, that would be fantastic. Thank you.

Yeah, Keith, I'll touch on volume and then Michael can talk about the raw material side. To be very plain spoken about it, we do expect soft volumes for the rest of the year. I mean, I think that's the cautious, more conservative approach to take. I think you can tell by the operating leverage we got in the first quarter, we've been really proactive at getting after costs. You know, cost performance in the operations in both segments was really strong in the first quarter, and we will continue to be strong, and that's because we expect a pretty soft volume environment, which I think is very consistent with what everyone else in our value chain is experiencing as well, but maybe on the raw material side?

Yeah, no, it's on the raw material side cases. As you know, throughout FY 22, we've pretty much over the last two years really, we've pretty much had a manage a manageable headwind on the price cost lag in recovering raw material. As we exited FY '22, we were getting to a more neutral position, and in Q1 we were relatively neutral. As we called out, as we look forward into Q2, we are expecting a modest tailwind on raw materials and, you know, as you know, we buy a basket of raw materials across the globe, and, and so they can move at different times, but based on what we see today, we'd expect some tailwind in Q2. As we look into, further out into the year, it's a really volatile environment and difficult to say, but in terms of our guidance, the 5% to 10% underlying performance you know, that takes into account a range of factors around the raw material pricing. So, to get to the upper end, that would mean raw materials come off faster and we get a bigger tailwind as we head into the second half; you know, at the lower end of the range, obviously raw material spikes again. But we'll see how things turn out as we head into, into Q3.

Michael, can I just quickly follow on with that? So you've got inventories from a volume perspective quite significantly high. So 40% of the total uplift, if you're winding back those inventories going into the balance of the year, what type of operating inefficiencies are we likely to see given you've had a period of actually efficiency benefit as you've ramped up inventory? So are we, should we expect a margin impact as you wind back those?

Well, a lot of the inventory is raw material inventory.

Yeah, it's raw, it's raw material, Keith. So, in that respect, I mean, it's going to flow through get passed through to the customer.

Hey, good morning. Thanks for taking the question. I wanted to go to the beverage volumes down 3% in North America. I know it may be a little bit difficult to say, but do you think that's a function of some of the de-stocking that we've been talking about, or is that more longer-lasting volume weakness with customers choosing value over volume and the inflationary pressures impacting consumer demand?

Oh, look, it'd be really hard to read anything into the last 90 days. That's long term to be honest, Kyle. I think there's been so much volatility and the volumes through the quarter were quite volatile. So I think there's a bit of de-stocking in there, I'm sure when the dust settles, we'll see some shift towards, towards volume over value or toward big packs. I mean, I think that's likely if we hit a real soft economic patch, but I think in the first 90 days it's a function of inventories in the chain, it's customer mix. It's a number of different factors.

Got it. And then you touched on it a little bit earlier, but I think the volume challenge in the fast-moving good space is understood. But can you touch on what you're seeing in the healthcare space more specifically and how that trended through the quarter? And do you anticipate any challenges to volumes here from some of the economic challenges as well as the inflationary environment we have?

I believe healthcare was a significant contributor for us this quarter, showing consistent performance throughout. We experienced high single-digit volume growth across our global healthcare business, with consistency in both monthly trends and regional performance, which we expect to sustain. Historically, this segment has grown at a mid-single-digit rate over the long term. We faced some difficulties during COVID due to a decrease in elective procedures and prescriptions, but we're now back to approximately pre-COVID levels, and we anticipate continued growth in this area. We've made some investments that have yet to yield benefits but will assist in boosting volumes moving forward. We've established a new healthcare facility in Southeast Asia, expanded a site in Ireland, and invested in various film assets for this business. We expect these initiatives to drive future growth.

Yeah, thanks. Good evening everyone. I guess I wanted to ask, just to be clear, in the five to 10% organic EBIT growth in for fiscal 23, what are the assumed volumes in that range and, and I guess associated with that the strong mix and non-resin price that you generated in the flexibles business in the quarter. Just do you see that level of mix potentially persisting through the year especially as raw material availability starts to improve, which I believe had constrained or had created a mixed benefit for you because you were prioritizing certain market segments last year? Thank you.

Yes. Thanks, Adam, for the question. Look, in terms of our guidance, obviously, we've got a range of outcomes in the 5% to 10%. I mean the base assumption is that volumes are going to be fairly modest. We're not expecting any major volume growth. Clearly, in the first quarter, we were flat and market conditions are pretty tight and tough out there. So where we are focused, obviously, is continuing to drive the business to recover inflation and the raw material costs, and actively taking cost out of the business, which also supported the result in the quarter as well as strong mix through continued innovation and mix management driving the focus segments and the like. So in that 5% to 10%, clearly there's a range of outcomes. If we do better on the volume side in some of the focus segments, then we'll potentially have better mix and end at the higher end of the range; if you see more recessionary impacts and softer consumer demand, that could drive us to the lower end of the range. Obviously, raw material prices, as I touched on earlier, can impact as well. So inflation is the other big one. We did well in the quarter to recover inflation through price and mix. And we are expecting more inflation as we head through the year and expect to recover that. But that's another factor that could drive a range of outcomes in that guidance.

So just a question on the Russian process. Can you talk us through how it's progressing? I noticed that some of your peers have achieved a better outcome than expected.

We're trying to exit in an orderly manner. For context, we have three factories in Russia that have accounted for about 2% or 3% of sales and around 4% to 5% of EBIT over the past few years. In August, we announced our intention to sell these three factories and stated that we aim for an orderly exit to preserve value for shareholders. We're following what could be considered a typical M&A process in that environment, and there has been a reasonable level of interest. We're optimistic that this process will conclude sometime in the second half of this fiscal year.

Great, Ron. And the proceeds would just go to debt repayment, I'm presuming?

Yes. Look, I think we'll deal with that when the time comes. I mean we are repurchasing shares this year. We've spent about $100 million in the first quarter on acquisitions. We'll continue to look for further acquisitions. So I think we'll see where we get to. But as a general rule, we're not of the view that paying down debt is going to be a very value-creating use of cash right at the moment, even with interest rates elevated from where they were a year ago.

Just following up on Dan's question, can you talk about your ability and willingness to pursue M&A in fiscal '23 in what's probably going to be a tougher macro environment? You had a peer that announced a large acquisition today. And then in that context, maybe you could talk a little bit more about ePAC.

Yes. I would say both our ability and willingness to pursue M&A are strong. However, M&A always requires collaboration. We are actively seeking deals, which has been part of our strategy for a long time. We see potential bolt-on opportunities within our portfolio. You can assume that we are closely examining anything available in the packaging sector or at least within our segments. Our appetite and willingness are present, and our balance sheet and cash flow support this. We have a clear strategy for the segments and geographies we want to expand into, and we aim to remain active. Interestingly, a challenging macroeconomic environment could work to our advantage. Historically, we have been more active when asset prices are more reasonable or aligned with long-term trends. We plan to stay disciplined and hope that this cycle follows a similar pattern. Regarding ePAC, it's more of a corporate venturing investment. We hold a minority stake and have invested additional funds, but it's still just a minority position in a relatively new startup called ePAC, which has been around for about five or six years. This company specializes in digitally enabled flexible packaging and relies on digital printing, making the entire process digitized. It targets small and micro customers with quick lead times and an efficient service model. The business has experienced almost triple-digit growth over the past five or six years, which is quite exciting for us.

Just a question on Russia, if I may, please. I noticed you've got a $90-odd million restructuring program related to the sale of the three plants. Just intuitively, that feels like a very high number. And I was just wondering if you could help me understand what's behind it.

Richard, that was the impairment we recorded at June 30 year-end when we classified the asset as held for sale. We needed to adjust the asset's value to reflect an estimated book value in line with market value. That was the adjustment made for that situation.

Yes. But if you break down that $200 million, Michael, you talk about $62 million and restructuring costs was a further $30 million to go this year. So it's really that bit I'm trying to understand what that is.

We need to finalize our operations in Ukraine and relocate part of our business out of Russia. We are also working on resizing our presence in Europe and restructuring our SG&A to offset the lost earnings from the Russian operations. We are taking significant steps to recover some of the 4% to 5% in EBIT that we anticipate losing during the sale process. And while you're on the line, just on the interest charge, very helpful guidance you've given. I was just trying to get a sense of what that number would be on a constant FX basis.

Michael, along the same lines, what's your breakout just fixed and floating on the debt?

Yes. At the end of September, we had an equal split of 50% fixed and 50% floating. Since then, we have engaged in some fixed-rate swaps, and currently, we are at approximately 65% fixed and 35% floating.

I believe it's crucial for our teams to remain focused on driving growth in the areas we've identified, while also aggressively addressing inflation. This presents a dual challenge. We are working to grow the business and gain momentum in revenue, and we feel we have more resources than ever to achieve this, as we are increasing our capital expenditures and research and development investments. Simultaneously, we must stay ahead of inflation, and managing this balance internally is a significant challenge. Additionally, there have been numerous external factors affecting our operating environment over the past few years, beginning with the pandemic, followed by supply chain issues and the impacts of the Russia-Ukraine conflict. These external challenges require us to ensure that our team remains energized and motivated to come to work daily, which is not a trivial task given the many pressures they face that are unrelated to our core business of selling packaging.

Just in terms of your cash flow guidance, do you need to take further price increases from here to expand that tailwind of price cost lag?

Look, Larry, we're obviously going through a 12-month period. Therefore, we should anticipate some additional increases in raw material pricing. We'll see how that develops in the second half, but I still expect further increases as we move through the year.

That's further price increases that you guys take as opposed to cost increases, just to be clear.

Yes.

Yes, our pet food segment has shown solid growth and margin improvements, as it has increasingly transitioned towards premium and humanized products. Over the years, we have moved from primarily dry pet food and bulk options to mostly single-serve formats in smaller pouches. This shift has helped us capitalize on increased packaging intensity and the growing sustainability demands for such packaging. Our AmLite innovation platform targets this segment in collaboration with major customers. It's an exciting area with a lot of innovation from both brand owners and us as a packaging supplier. We have seen mid-single-digit growth in this segment, although the first quarter was essentially flat globally. Sales in Eastern Europe, including Russia, were weak, but other areas showed some growth, leaving us roughly flat for the quarter. However, we remain optimistic about the long-term trends that make this segment attractive moving forward.

Ron, a quick one. Just are you achieving any manufacturing efficiencies in the plants, just as raw material availability starts to improve some of those supply chain challenges start to stabilize? I'd also appreciate a bit of color on labor just in terms of cost and availability and just an idea of how that's all washing through your organic growth guidance.

Yes. Look, it's a good question. We're really pleased with the plant performance. So firstly, in terms of the availability of the imports, as I noted earlier, the raw material availability has improved. There are still some specialty materials that are in short supply, and I think that's going to continue for a while. But many of the constraints and bottlenecks we were dealing with over the last 12 to 18 months have abated. So that situation has improved. And generally speaking, the labor availability has improved across the network. Certainly, this time last year or even the earlier part of calendar '22, we had some real labor challenges, especially in North America and in Europe as COVID spikes rolled through those regions. That seems to be behind us at the moment. And we've not had real labor constraints for some time. So I think from a factor availability or input availability, the plants have been able to run more unencumbered. Then I think as far as the productivity and the efficiencies, we're really pleased. We think that's one of the highlights of the first quarter. If you look at our 9% EBIT growth, we'd say probably about a third of that came from price and mix but two-thirds of it came from the cost performance in the plants. And so that's where we got the operating leverage to turn really flat volumes, actually modestly down volumes into 10% EPS growth. So we're pretty pleased with the way the plants are performing. And it's important because we're going to need them going forward.

Just to follow up on an earlier comment about the restructuring in Europe. Can you confirm if the plan is indeed to close plants in Europe going forward? Or is the provision taken three months ago more related to the closure of Russia, and you are not actually planning to close plants in Europe?

Yes. To provide some context, the Russian business accounts for approximately 4% to 5% of our global EBIT, and its impact is more significant within Europe. Therefore, we will be selling that business and will lose those earnings. We have a responsibility to safeguard our income statement and generate profits wherever possible. As a result, we will be reducing costs and adjusting the segments of the business that were most impacted. Some of these cost reductions, as Michael mentioned, are associated with the process of winding down operations in Ukraine and relocating certain business functions from our Russian facilities to other plants within our European network. This is a portion of how those costs will be managed. Additionally, there will be some overhead cuts due to downsizing the business, and while a plant closure may occur, we have not yet reached a decision on that matter.

Okay, great. And I guess the free cash flow guidance this year is unchanged. But what's the expectation at this point for the cash significant items that of course sort of falls outside of that $1 billion to $1.1 billion guidance range?

Yes. Look, it's a relatively smaller amount, maybe $20 million to $30 million. It's not significant.

I want to follow up on a couple of recent questions. You mentioned that protein volumes were flat for the quarter, pet foods were also flat, and coffee saw a slight decline. I understand it's just one quarter, but was the flat performance primarily due to de-stocking? I also know you haven't indicated a notable COVID benefit in recent years, but we've seen strong volumes in coffee and pet food over the past couple of years. Is there some cycling effect from that? I'm trying to gain a better understanding.

It's really difficult to determine. The only area where it seems there may be more inventory and perhaps a slight increase in hindsight is in the coffee segment. Our coffee business focuses mainly on single-serve systems. This is more of an intuition rather than a conclusion based on facts, but it seems that increased at-home consumption, with more people staying home, would have led to higher sales of single-serve coffee and related products. Therefore, we might be witnessing a slight decline from that trend. However, the more significant point is that in the long run, these segments benefit from strong trends towards increased packaging that offers consumers the convenience and functionality they expect. As a result, we remain optimistic about these segments for the medium to long term. And look, in terms of the final question, sorry, I'm going to ask probably 2-in-1 here. But in terms of if we do see consumers trade down, Amcor's exposure to big brands versus home brands. Historically, you've had a pretty balanced exposure. So you pick up some home brand spend if that indeed does transition. And so the second part is we've talked obviously a lot about sustainability products in recent years. Are we now at a point where you're starting to see those new products really move the needle and make a material contribution to price and mix? Yes. Look, on the private label versus branded mix, our mix kind of looks like the market. I think you have to get to the segment level. And certain segments have much higher penetration of private label than others and our mix kind of reflects that. And so I would say there's not a whole lot there in terms of what the impact will be as consumers shift potentially to private label from branded goods. On the sustainability platforms, look, we are starting to see some traction. The sales are in the tens of millions of dollars now, which is growing off a low base. So this is sales of the platforms that we talked about before, the AmPrima and AmFiber and AmLite and Sky. So we're starting to get there. I think it's just all part of the formula of continually driving mix benefits and margin expansion off of the organic volumes of the business.

Okay. Thanks, operator. Thanks very much for your interest in Amcor today. We feel like we had a good strong start to the fiscal year. And we're maintaining our expectations for the performance of the base business for the rest of fiscal '23. And we look forward to continue to provide updates along the way. Thanks very much. And with that, operator, we'll end the call.