Amcor Plc (AMCR) — Q2 2023 Earnings Call Transcript

Thank you, operator, and thank you, everyone, for joining Amcor's Fiscal '23 first half 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 Investors section, you'll find today's press release and presentation, which we'll discuss on the call. Please be aware that we'll 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 with several factors that could cause future results to be different than current estimates. Reference can be made to Amcor's SEC filings, including our statements on Form 10-K and 10-Q for further details. Please note that during the question-and-answer session, we request that you limit yourself to a single question and one follow-up and then rejoin the queue if you have additional questions. With that, over to you, Ron.

Thanks, Tracey. And thanks, everyone, for joining Michael and myself today to discuss Amcor's first half financial results for fiscal 2023. We'll begin with some prepared remarks before opening for Q&A. And I'll start with Slide 3, which covers our first and most important value, safety. Safety is deeply embedded in Amcor's culture, and our management teams understand our collective responsibility to provide a safe and healthy working environment. Our dedication to eliminating injuries in the workplace continues to result in industry-leading metrics. In our first half, we improved further and made great progress with a 24% reduction in the number of injuries globally compared to last year. And 65% of our global sites have been injury-free for the past 12 months, with more than 30% injury-free for three years or more. Safety and a culture of caring for our people will always be our highest priority. Turning to our key messages for today on Slide 4. First, the business delivered a strong first half and second quarter despite ongoing challenges in the macroeconomic environment. Our teams are doing an excellent job driving value for customers while managing the many aspects of the business under their control. We've increased our focus on flexing costs as demand evolves, and we're proactively taking actions to drive further efficiency and productivity improvements while recovering general inflation and passing through higher raw material costs. The outcome was strong operating leverage, with an 8% increase in both EBIT and adjusted EPS in the first half on a comparable constant currency basis. Second, although not entirely immune in a weakening demand environment, our business remains resilient. 95% of our portfolio is exposed to consumer staples and health care end markets, which combined with our broad geographic footprint, positions us well through economic cycles. Our volume performance through the first half demonstrates that resilience and compares favorably to the mid-single-digit or higher declines reported by others in our value chain. Third, a solid first half, strong execution, and a resilient portfolio gives us the confidence to reaffirm our guidance ranges for fiscal '23. We're confident in the ability of our teams to continue focusing on the controllables. However, we're also mindful that through the second quarter, the demand environment softened and became increasingly volatile. We expect this will continue in the near term. And as we enter the second half of the fiscal year, we're more cautious in relation to the demand outlook, and we currently expect to be toward the lower end of our EPS guidance range. Finally, we remain focused on executing against our strategy for long-term growth. The business generates significant annual cash flow, which allows us to invest in organic growth opportunities, pursue acquisitions, pay an attractive and growing dividend, and regularly repurchase shares. We're confident in the strength of our underlying business, execution capabilities, and capital allocation framework, all of which support our compelling investment case. Moving to a few financial highlights on Slide 5. First half reported net sales were up 6%, which includes approximately $670 million of price increases related to higher raw material costs. Excluding this impact, organic sales were up 2% on a constant currency basis, and volumes were 1% lower. Both the Flexibles and Rigid segments did an excellent job driving price and mix benefits, including recovering around $160 million of general inflation. We're making good progress on our commercial and strategic agenda with our priority segments continuing to deliver high single-digit organic growth and several of our emerging markets businesses also growing at high single-digit rates in line with long-term trends. Positive price/mix performance more than offset modestly lower overall volumes, which reflected generally softer and more volatile demand, as well as customer destocking in parts of the business. Operating leverage was strong as we continue to increase our focus on costs, and the business delivered an 8% increase in both adjusted EBIT and EPS for the first half. Looking at our December quarter financial performance, reported net sales growth was 4% and 1% on an organic basis. Adjusted EBIT and EPS each grew 7%. So, another solid quarter highlighting the benefits of geographic diversification and exposure to more defensive end markets even as we experienced softer demand. Through the first half, Amcor returned approximately $400 million of cash to shareholders through a combination of dividends and share repurchases. Today, we've increased our planned repurchases for fiscal '23 by up to $100 million. Our overall financial profile remains robust with a return on average funds employed at 17%. We're pleased with our first half and our December quarter financial performance, and I'll now turn it over to Michael to cover more of the specifics.

Thanks, Ron, and beginning with the Flexibles segment on Slide 6. The business performed well in the face of challenging macroeconomic conditions, executing to recover higher raw material costs, manage general inflation, improved cost performance, and deliver solid mix benefits. Reported first half sales grew 5%, which included recovery of higher raw material costs of approximately $460 million, representing 9% of growth. Our teams continue to do an excellent job passing on increases in commodity costs. As expected, the related price cost impact on earnings for the second quarter was modestly positive after being neutral in Q1. Excluding the raw material impact and negative currency movements, sales grew 3% for both the first half and December quarter, driven by favorable price mix benefits of 4%, partly offset by modestly lower volumes. As Ron mentioned, sales across our higher-value priority segments, which include health care, pet care, and protein, remained strong, collectively growing at high single-digit rates through the first half and contributing to positive price/mix. We also continued to see strong growth in our businesses in India and Southeast Asia, particularly in health care and media end markets. This helped limit the impact of lower volumes in some business units across categories, including coffee, dairy, condiments, confectionery, and home and personal care, where we have seen varying degrees of customer destocking or lower demand. Volumes were lower in China due to COVID-related lockdowns and in Latin America, where inflationary pressures unfavorably impacted demand in several countries. In terms of earnings for Flexibles, we again demonstrated strong operating leverage. Adjusted EBIT grew 8% for the half, reflecting ongoing price/mix benefits and favorable cost performance. Margins remained strong at 12.6% despite the 120-basis-point dilution related to increased sales dollars associated with passing through higher raw material costs. Turning to Rigid Packaging on Slide 7. The business built on its first quarter performance with another quarter of solid earnings growth. First half sales increased by 12% on a reported basis, which included approximately $210 million or 13% of sales related to the pass-through of higher raw material costs. Organic sales declined by 1% for the half, reflecting 2% lower volumes, partly offset by a 1% price/mix benefit. Looking at the December quarter, overall volumes declined by 5%, with the beverage business in North America and Latin America impacted by lower consumer demand and customer destocking. In North America, first half beverage volumes were down 5%. This included hot fill container volumes, which increased 2% in the half but were down 2% in the December quarter, which was in line with market. Cold fills were lower in the half and quarter due to a combination of lower consumer demand and customer destocking. In Latin America, volumes were marginally higher for the first half with growth in Mexico and Argentina offset by lower volumes in Brazil. Consistent with what we saw in the Flexibles segment, the December quarter was unfavorably impacted by softer consumer demand in the region. The Specialty Containers business delivered good performance with solid volume growth from health care, dairy, and nutrition end markets. Overall adjusted EBIT for the Rigid segment in the first half increased 7% on a comparable constant currency basis with our teams being able to adjust to evolving market conditions and improve operating cost performance. Moving to cash on the balance sheet on Slide 8, we had a strong sequential improvement in adjusted free cash flow, which came in at $338 million for the December quarter, in line with last year. For the half year, cash outflow of $61 million was lower than last year, largely reflecting the unfavorable impact on the working capital cycle related to higher levels of inventory and higher raw material costs. These impacts also make our cash flow seasonality, which is typically weighted to the second half of the year, more pronounced for fiscal '23. Our financial profile remains strong with leverage at 2.8 times on a trailing 12-month EBITDA basis. This is in line with our expectations for this time of year given the seasonality of cash flows and the receipt of proceeds from the Russia business sale. We repurchased $40 million worth of shares in the December quarter and expect to repurchase up to $500 million in total through the 2023 fiscal year. Prior to turning to our outlook, I wanted to provide a few more comments about the completed sale of our Russian business. We received sale proceeds of $365 million, in addition to $65 million of cash that was repatriated upon completion. In terms of the use of total proceeds received, we expect to do three things. First, we will invest approximately $120 million in a range of cost-saving initiatives across the business to partly offset divested earnings. This is in addition to approximately $50 million in cash that we allocated back in August for similar initiatives. Second, we plan to allocate up to $100 million for additional share repurchases. Finally, the balance is expected to be used to reduce net debt in proportion with divested EBITDA, maintaining our leverage ratio.

Thank you, Michael. And in previous quarters, we've highlighted multiple drivers of organic growth, which you see on Slide 10, including priority segments, emerging markets, and innovation. Before we open the line to questions, I want to just take a few minutes to talk about one of our most important priority segments, which is health care. An overview of our global health care packaging business is shown on Slide 11. With more than $1.8 billion in annual sales in fiscal '22, our portfolio covers both Flexible and Rigid Packaging formats and is evenly split between medical device and pharmaceutical packaging. This is a truly global business with global customers and globally recognized products and technology platforms, and it's one where we have scale in every region, including in emerging markets. This is not an easy market to enter because health care packaging is also highly complex with many functional demands, quality standards, and regulatory requirements. This complexity provides ample opportunities to differentiate and add value through our industry-leading product innovation, material science, and global regulatory capabilities and makes health care a strong contributor to Amcor's growth profile from both a volume and mix standpoint. It also supports strong collaboration with customers, leading to a book of business that tends to be more consistent over the medium to longer term. Moving to Slide 12, globally, health care packaging is a substantial market with significant headroom and growing at mid-single-digit rates over time, and we're investing to capture more of that growth. In the December quarter, we localized thermoforming production in Europe at our medical packaging site in Sligo, Ireland. This is an exciting project that leverages the experience and technical know-how of our sites in Minnesota and Puerto Rico. As a result, our European business and customer base will now benefit from local access to a broader range of specialized health care packaging solutions. In another organic growth example, we opened a world-class dedicated health care greenfield plant in Singapore at the end of calendar 2021, enhancing our ability to serve the rapidly growing Asian market. M&A also plays a role in supplementing organic growth in this segment. A few weeks ago, when we announced the acquisition of Shanghai-based MDK, a leading provider of medical device packaging in the China market, this is a great acquisition that enhances our leading position in the broader Asia Pacific medical packaging market by adding product capabilities and a complementary customer base. Drilling down a little more on sustainability and moving on to Slide 13. Across all substrates and end markets, the sustainability of packaging solutions continues to be a critical consideration for customers, consumers, and regulators. Our collective objective is to create a truly circular economy for the packaging industry. And the solution is responsible packaging, including package design, infrastructure development, and consumer participation. In terms of package design, Amcor is well positioned as a leader in the industry. Today, nearly 100% of our rigid packaging and specialty cartons products and more than 80% of our flexibles products are designed to be recycled or have a recycle-ready alternative. This matters because as deadlines to meet previously established goals rapidly approach, customers are increasingly adopting more sustainable solutions. As an example, this quarter, Mars adopted AmFiber performance paper for part of their confectionery range in the Australian market, and Ferrero Rocher launched an AmFiber pilot in the European market. These two companies joined Nestle, who initiated a global transition to paper-based packaging for one of their core brands in 2022 and are now adding a pilot for the KitKat brand. We've also seen important progress in the development of the infrastructure and technology required to produce recycled materials. While the use of food-grade recycled PET is growing rapidly, including in our rigid packaging business, the ability to produce recycled content for and from flexible packaging will be a critical ingredient to creating circularity. Significant strides are being made in advanced recycling technologies, which enable the use of recycled content and flexible packaging applications where mechanically recycled material may present regulatory or technical challenges. To meet ongoing demand for more recycled material and to support infrastructure and technology development, Amcor continues to increase our long-term off-take commitments. In December, we announced a five-year extension of our partnership with ExxonMobil to purchase certified circular polyethylene, giving us line of sight to significant quantities of recycled material that can be used in health care and food-grade packaging applications. We also recently announced a partnership with Licella to further explore an investment in one of Australia's first advanced recycling facilities. These agreements provide another point of differentiation and value, which can be applied across all end markets for customers like Mondelez, who've incorporated 30% advanced recycled material into their packaging for the Cadbury Dairy Milk brand in the U.K. and Australia. These capabilities also position Amcor to meet the sustainability goals we share with our customers and to contribute to a truly circular economy for the packaging industry. Turning to Slide 14, the opportunities and investments I've outlined today in our health care business, our innovation across a range of substrates, and our increasing access to advanced recycled materials are just a few examples of the initiatives we have underway, giving us confidence that we have built and continue to build a strong foundation for growth and value creation. We don't expect to be immune to macroeconomic challenges, but we believe we're well positioned with a resilient portfolio and multiple drivers of growth, including cost productivity. Additionally, our consistently strong cash flow provides the ability to reinvest in the business, pursue acquisitions, repurchase shares, and grow the dividend, all of which positions us well to generate strong and consistent value for shareholders over the long term. In summary, on Slide 15, we've delivered a strong first half in a macroeconomic environment that remains challenging. We're more cautious on the demand environment entering the second half, but our portfolio leaves us well positioned. Most importantly, we remain focused on executing against our strategies for long-term growth. Operator, with those opening remarks, we're now ready to open the call to questions.

Ron, a lot of CPG companies and packagers have talked about a drop in December volumes, but kind of a meaningful improvement and maybe a strong start in January. Just wondering, have you seen this? Or did you see kind of December weakness continue into January? I'm just trying to square what sounds like maybe a weaker view on fiscal second half demand. And then maybe specifically, you talked about restocking and lower demand for Rigids. I'm just wondering where you think restocking stands now.

Thanks for the questions, Anthony. Let me provide some context on the volume trends during the second quarter. In October and November, the performance varied by business and geography, but overall, our volumes were flat in those months. In December, we experienced a noticeable decline, with group volumes down in the mid-single digits. This decline is attributed to weakened demand and destocking across several segments, as evidenced by customers taking more and longer shutdowns than usual. Moving into January, we saw some improvement, though it was mixed, and I'm hesitant to label it as a definitive trend. My outlook remains cautious due to the ongoing volatility in demand, which has fluctuated significantly from month to month and week to week. While we did see some positive signs in January, we are still wary about demand. Specifically regarding Rigids and destocking, there has clearly been some destocking in the beverage segment, particularly in North America and to a lesser extent in Latin America. Additionally, demand has generally softened. According to scanner data, the North American beverage market was down in mid-single digits for the quarter, and our exposure to the convenience channel, which performed worse than the broader market, impacted our volume in Rigids. Overall, the volume performance in Rigids reflects a softer market, some destocking, and improvements from business gains, especially in hot fill. That's how we view the volume situation.

Okay. That's very helpful. And then just in the release, I think you talked about maintaining the full year EPS and free cash flow guidance. In your comments, you said you could be at the lower end. Without putting too fine a point on it, is there any reason not to sort of formally lower the guidance range? Or are there maybe circumstances that could get you maybe to the higher end of the guide? Is it just completely dependent on volumes? Or is there any way that we should think about getting to maybe the higher end or the lower end of the guide?

Yes. The main reason for not adjusting the guidance is that we have half a year to consider, with two quarters remaining and a relatively wide range still maintained. The crucial factor will be the volumes in the second half. We are confident in our business's execution capabilities and our ongoing cost management, which was a significant positive in the first half, and we expect this to continue. Volumes will be the key variable. Low single-digit volume growth, quicker decreases in raw material costs, or a weaker U.S. dollar could push us toward the high end of our range. Conversely, those factors could also lead us to the low end. At this stage, we have a broader than usual outlook for demand and volume scenarios. We anticipate volumes could fluctuate from slight growth to low single-digit declines, which is atypical for us. For these reasons, we are exercising caution. However, with two quarters left and strong cost control expected to persist, we believe it is wise to keep the guidance range as it is now.

Just in terms of price and mix, so that's been a benefit for you over a long period of time. We saw that continue in this half with a 4% benefit in flexibles and presumably health care, which you called out there, Ron, as sort of a key part of that. The question is sort of how you see that price mix profiling through the second half. I mean would it be fair to say that you're expecting slightly less price and mix benefit in the second half relative to the first?

Yes, John, I can assist with that. You're correct. The teams have effectively managed pricing and have been proactive in addressing inflation and recovering costs. During the period, we've managed to recover around $160 million in cost inflation. Additionally, we experienced strong mix benefits, especially from the robust performance in health care, which saw double-digit growth—above average for that sector and a rebound compared to last year. Looking ahead to the second half, we expect continued price and mix benefits, but inflation persists, and we need to recover that. On the health care front, you may not observe the same level of growth, meaning the mix benefit will also be lower. Although we anticipate some level of benefit, it will likely be less than what we achieved in the first half.

My question for the call is about cost savings. Ron, you mentioned aggressive actions. I can't recall your exact wording, but to offset some of the headwinds you're experiencing, could you elaborate on what those actions are? Can you quantify them in relation to the volume weakness you're encountering or the need to counterbalance the dilution from Russia? Additionally, how can cost savings contribute to mitigating the dilution from Russia in both calendar '23 and fiscal '24, at least during the first half of the upcoming year?

Thanks, George. Let me address the question, and Michael will cover it in two parts. We've been actively pursuing cost savings in the first half due to lower volumes and the impacts from our exit in Russia. We took proactive and aggressive steps on costs early on. To put it in perspective, we achieved strong operating leverage with 2% organic sales growth despite nearly flat to a 1% decline in volumes, resulting in 8% EBIT growth. This EBIT growth was primarily driven by cost reductions, which we managed through flexible labor strategies, reducing shifts, cutting overtime, and implementing a significant headcount reduction. Additionally, we took decisive actions in procurement and trimmed discretionary spending. These measures were initiated early due to the volatility we observed and insights gained from customer discussions regarding demand. We plan to continue these initiatives into the second half, supporting the outlook we have reiterated today. Regarding Russia, we had a business comprising three plants that contributed about 2% to 3% of our sales and 4% to 5% of our EBIT, equating to roughly $80 million to $90 million of EBIT, which we have successfully divested. The sale yielded proceeds that surpassed our expectations, generating a solid profit. We believe reinvesting this cash back into the business and implementing structural cost cuts will help mitigate the impact of the divested EBIT. Michael, perhaps you can elaborate on the financial plans we have moving forward.

Sure. Thanks, Ron. In line with that, we announced today that we will use part of the proceeds to help offset the earnings we've divested. We shared that around $120 million will be invested in cost-saving initiatives such as footprint and SG&A, in addition to the $50 million that was allocated back in August for similar purposes. In total, we plan to invest approximately $170 million in cost-cutting initiatives over the next 12 to 18 months, expecting around a 30% return at full run rate. However, these initiatives are just beginning, and we’ll start implementing them this financial year, meaning there will be no impact on the guidance range for FY '23. We do expect benefits from this initiative in FY '24 and into FY '25. It's important to note that in the first half of FY '24, we will face a headwind, as these programs will have a greater impact in the latter part of the year. With the $170 million investment and a 30% return, we anticipate a potential $50 million impact to offset the earnings lost in Russia, with around two-thirds of that expected to be realized in FY '24. Throughout FY '24, we believe we can significantly minimize the headwind from the lost earnings in Russia during the first half, and we aim to achieve the full benefit as we move into FY '25.

I might as well just continue on that last comment. Can you just talk about some of the specifics about how to achieve that 30% return, $50 million savings from those Russia cost-saving actions? What are you guys doing there?

Yes. As Michael alluded to, Larry, we're going to close some plants. As we think about it and take some overheads out, if we think about this environment that we're in with the demand backdrop being as uncertain as it is and the fact that we're also already increasing our CapEx to pursue growth, particularly in our priority segments, we feel like that's pretty well entrenched. The fastest way to generate earnings to offset the divested earnings is through cost reduction, and cost reduction in a structural sense, which means optimizing the footprint. It’s a business that we've got 220 plants around the world. There are always opportunities to optimize further, and so that's largely what we'll do. We'll also reduce overheads in parts of the business as well to right-size the cost structure.

We began the buyback in the second quarter, investing $40 million. In the first half, we also focused on cash flows and engaged in some M&A activities, including acquiring a plant in the Czech Republic and increasing our investment in the APAC region. We managed our cash flow while starting to release inventory that had built up due to supply chain constraints over the previous year. By the end of the second quarter, we began to see that inventory come down, which allowed us to initiate the buyback. Looking ahead to the second half, we anticipate stronger cash flow, particularly as we work through the inventory and working capital impacts. Additionally, from the sale in Russia, we are allocating $100 million to the buyback. Ultimately, it was about timing the cash flow and managing it effectively so we can complete the buyback in the second half, as we've done before. We are confident that we can achieve the $500 million target.

I want to revisit Anthony's question regarding the caution that Ron mentioned. Can you clarify whether this caution relates to any particular region, such as Europe, the U.S., or Latin America, or is it a general issue? I'm trying to understand if the moderation of volumes we are observing is simply a result of catching up after a year of depleted inventories, and if we are now moving towards a normalization phase and the necessary adjustments that come with it.

I don't think we have a clear answer to your question. Our caution stems from the volatility we've observed in global demand patterns. Specifically, in the second quarter, the situation varied between segments in North America and Europe. Some regions experienced even more volatility throughout the quarter, notably in Latin America, where we noticed some destocking along with softer demand due to a declining macroeconomic situation in various countries. We also observed a significant decrease in demand in China during the second quarter, largely due to COVID lockdowns, which are now behind us. We anticipate a rebound in business, but the strength of that recovery is uncertain. It’s challenging to determine how much the volume changes in the quarter and into January are due to consumer resistance to price increases versus how much is a result of destocking. Overall, there has been volatility in the business, leading us to maintain a cautious stance.

Yes. Look, the interest rates where they are for us, the buyback still makes sense. It's EPS accretive. We have strong cash flows, and we will regularly do buybacks, and we'll continue to do that where the interest rates are. It still makes sense from that perspective.

Just interested in the impact of destocking. I know it’s quite difficult to quantify. But can you estimate how much it contributed to the volume softness in both Flexibles and Rigids? Are you seeing any green shoots at this point in terms of the destocking cycle coming to an end? And just wondering what you're assuming in terms of destocking in your guidance.

Look, Daniel, it's a difficult one to estimate. I mean I think you'd have to triangulate a few different data points. If you look at the scanner data and look at the results of other public companies that have reported, volumes were down considerably. In light of those comparisons, our volume performance was actually good. But when we know anecdotally in certain segments, particularly in coffee, single-serve coffee in Europe, some of the dairy segments in the U.S. meat in Europe, we know in some of those places, including Beverage and the Rigid Packaging segment, that there was excess inventory in the system. We know that because customers took shutdowns in a way that they haven't in the past, meaning longer shutdowns. It would be very hard to parse out the volume performance of the half. The volumes were down 1%. I think that probably compares favorably to the other external markers out there, but it would be really hard to parse that 1% in terms of what was destocking versus what is just a softening consumer environment given the price increases that have been put through in pretty much all segments and all regions.

I want to revisit the question about the mix. Ron, you mentioned earlier that health care has been a significant growth driver, but it's starting to moderate as we enter the second half of the year. Can you provide more details about that, particularly regarding the cautious volume outlook? When do you expect the health care business to stabilize, and how should we anticipate the impacts in fiscal '24 as you start to compare against the previous growth?

Health care has been a strong growth area for us over the years, with both medical packaging and pharmaceutical packaging experiencing mid-single-digit growth globally, and even higher in emerging markets. This trend has been consistent for a long time. We saw exceptional growth in the first half, following a solid fiscal '22. There are several factors driving this growth; our strong market position and the significant innovation we are bringing to the market, which we are actively investing in. It's important to note that some pent-up demand exists due to supply chain constraints that have affected the health care segment more acutely. As these constraints unwind, we are meeting some of that pent-up demand. Additionally, the pharmaceutical sector has faced a considerably large cold and flu season, contributing to double-digit growth globally in both the medical device and pharmaceutical segments during the first half. We believe that while the business will continue to grow at healthy rates, it will likely revert to long-term trends in the mid-single-digit range as we move into fiscal '24.

Ron, would you mind just talking about how the latest round of general price increases have been received by customers just given that lower demand outlook, particularly with those December volumes taking a notable turn down? I'd imagine it's getting even harder to recover inflation on costs, but I also note your comment on managing manufacturing capacity. So just interested in any views on pricing.

Yes. We've been working on this for some time now. In the last quarter, we implemented about $670 million in price increases to offset higher raw material costs, plus another $160 million to address general inflation. It’s certainly becoming more challenging, but we are managing to pass these costs through and are seeing a recovery, which is evident in the margins. The margins have grown, even when accounting for the impact of rising raw material prices affecting the top line. This should provide some assurance that we are successfully recovering. However, that doesn’t mean the discussions with consumers are becoming any easier. They may be starting to show signs of fatigue. If they haven't already, we expect elasticities to increase. That’s the feedback we are receiving from most of our brand owners. Nevertheless, we are currently on track for recovery and anticipate fully recovering our inflation-related costs in the second half.

I appreciate you taking the question. Just first one, just on the $120 million in cost takeout in SSG&A removal. Ron, can you comment on what regions you're looking at and whether there are any particular end markets that you're looking to restructure? And just quickly, on your Asian business, especially with China eliminating its color restrictions, have you seen any type of improvement recently in the volumes there? And was that a fact that you considered in your recent MDK acquisition?

Maybe I'll address the second question first, and then Michael can come back on the $120 million. Look, it's relatively recent that China has reopened and then we went into the Chinese New Year in January. We do expect that business to bounce back. More importantly, the China business has done an outstanding job managing costs. Despite the volume declines that accompanied the COVID lockdowns, the business grew earnings in the first half, which was just an outstanding outcome. It's been a business for us that has grown at least mid- to high single digits over many years. What's really important in China is to be focused in our participation strategies. Health care is a place we want to participate, and we want to go deeper in China. We're doing that both organically and through what we can through M&A, and the MDK acquisition that we announced last month is a good example of that. It's a small business, one plant outside of Shanghai, and it complements very well another medical packaging plant that we have near Shanghai as well. It brings us some complementary products that we didn't have local production of in China, and it also expands our book of business with a new set of customers. We're pretty excited about that, and we think that's all part of the long-term secular growth that we've experienced and will continue to experience in China. On the $120 million, do you want to comment on where we are at that?

Look at $120 million, I mean we see opportunities across the business. As Ron mentioned, there's under 220 plants around the globe. It’s going to be focused on taking some plants out of the network and as well as SG&A opportunities to rightsize the business. There is some focus in Europe. But generally speaking, we'll see opportunities across the globe. So that’s to come.

Michael, just a question for you. I was just wondering if you could talk through some of the fixed variable cost structures across both of the divisions. Noting you did talk about some plants downtime, which is a little bit higher than expected. Can you just talk about how that's flowed through to some of the cost benefits in the half whether that will occur into the second half of the year if the volume environment remains weak?

Yes, you need to view this in terms of our cost of goods and how that breaks down, with a focus on reducing some of those costs. Approximately 60% to 70% of our cost of goods sold is related to raw materials, while labor accounts for around 10% to 15%, along with other expenses like energy and freight. Our main effort has been in managing labor during the period by adjusting downtime to align with customer needs and reducing overtime. In fact, we've effectively managed to recover from inflation, discussing the $160 million impact. Throughout this period, we successfully reduced some costs, although we haven't disclosed the exact figures. As mentioned earlier, we also reduced a few hundred positions in direct labor and adjusted our costs in accordance with demand.

Just curious, given the kind of customer elasticity that you've talked about, have you seen any shift in your customers' go-to-market strategies on pricing as volumes have started to decelerate? Any sign of increased promo activity that could drive volumes? I understand it might be hard to give a general statement given your diversification within Flexibles. So I guess I'm most interested in hot fill and cold fill beverages within rigid packaging, but any details would be appreciated.

Yes, it's a good question. We have seen some shifts in the consumer and some of that driven by actions that the brand owners have taken. In the beverage space, particularly in North America, when the consumer is under pressure, they tend to revert to multipacks and smaller unit sizes. If they're going to buy a soft drink, they're likely to buy it in a pack of 12, where the unit price is lower than buying it through the convenience store in the cold chain. We have seen some of that. That's probably contributed to the softness, particularly on the cold fill side. I think we've seen other examples in other segments in Europe in the coffee segment. We've definitely seen soft volumes in the more premium end than the single-serve system sales, and we've seen higher sales in the segments that are multi-serve. So think about capsules in a system versus ground coffee or instant coffee. The instant coffee is what's being pushed at the moment. We are seeing a little bit of that behavior. It's maybe just a different degree of emphasis across their product mix as they help the consumer through a high inflationary environment.

I have a question about the outlook on volumes and the demand environment. Can you provide insights into what the order cycle looks like, especially for FMCG products, and share any comments from customers regarding their expectations? How much visibility do you have on that order cycle? Since your products go into production facilities and then sit on shelves before being sold, do you have good visibility into what customers are anticipating? Can you offer insights into the rest of the third quarter or even the fourth quarter at this point?

The business is exposed really to consumer staples and fast-moving consumer goods and health care. Typically, we’ll have visibility a few months out. Obviously, we have long planning discussions with our customers over a longer period of time. But as you get near and near those discussions get more and more granular and you get a greater degree of accuracy as you get closer, so I would say our degree of forecast visibility extends a few months. That's about the extent of it. Right now, those forecasts are moving around quite a bit and have been now for the last few months. The volatility has increased and the variability in forecast has increased. I think on the positive side, to the extent that there is any destocking that's gone on in our value chains, we expect that to work itself through reasonably quickly. And in a matter of a quarter or two, we should be through whatever destocking needs to occur.

Ron, I just got a question on strategy. Your shareholder value accretion model has sort of been at the forefront of your strategy, very much the foundation of your strategy for a very long time now. I'm conscious of the fact, though, that TSRs really struggle to keep pace with the value-add in recent years. My question is around the sort of long-term numbers because you're about to lose the big benefit of Alcan in your 10-year numbers. I was just wondering how we should think about that, how you think about it, and whether the model is still appropriate.

Yes. Look, it's a good question, Richard. We certainly believe the model is still appropriate. If you go back and look over a 10-year period post the Alcan acquisition, which is about 13 years ago now. The last 10 years, we've been well above from an intrinsic perspective, well above the 5% to 10% to 15% sort of shareholder value creation model that we talk about. We still believe the business will generate low single-digit top line growth. It will convert that with operating leverage like we've seen in the first half. With the excess cash flows of the business, we're going to continue to acquire or buy back shares and continue to grow our dividends. All up, we think the model still makes sense. It's held us in good stead, and we'll continue to do so going forward.

So below the leverage, we took a $215 million gain, obviously, on the sale transaction. There were some costs just in relation to transferring a business. Some of the Ukraine costs still to just transfer equipment, et cetera, in that. As we look forward, you'll see the restructuring costs start to come through that will run through that line. Generally, the costs in relation to Russia are finished, yes.

Just on CapEx. It looks like a larger CapEx quarter. The December quarter looks like it's about $94 million. Can you just remind us, I guess, what the expectations are for the full year? I think at the last result, it was $550 million to $600 million of CapEx was the expectation. So just an update on that one would be great and any reasons for the lighter investment period in the December quarter?

In terms of the half, we're around $250 million, which includes some foreign exchange impact compared to the previous year. We're approximately 3% to 4% ahead of last year. For the full year, we're maintaining our estimate of $550 million to $600 million, and we expect to be about 5% to 10% ahead of last year. We remain focused on investing in key segments and innovation platforms, and our outlook for capital expenditures has not changed significantly. It may be slightly lower than what we anticipated three months ago, but it's still quite similar.

Yes. Well, look, I mean we are substrate agnostic. That's been true of the Company throughout its history. In fact, about 25% of what we do is either fiber or aluminum. But as far as M&A goes, no change, I mean we think there are going to be good bolt-on opportunities across the portfolio. I think you see some examples this year with this health care acquisition in China MDK. Michael referred earlier to a plant we bought in the Czech Republic earlier in the year to bolster our Eastern European footprint. We think there'll be deals like that. Those are the deals that are out there because many of the companies in our space are small, and so we've got to be comfortable bolting on small businesses to our footprint. That will be part of the mix. Where we can supplement the portfolio, we would like to do that too. Certainly, in the priority segments that we've nominated, we'd like to continue to grow, health care being the one we've talked more about today. In Rigids, obviously, the hot fill space is one that we have a strong position in. Outside of beverage, there are opportunities for us to continue to grow as well. So, there are a number of areas where we think the portfolio could be bolstered, but they'll be bolt-on opportunities across the Flexibles and Rigids segment. So, no change to note.

Just wondering if you are able to give any insight into what the interest rate impacts could be in FY '24? Also, with tax, I note that there was a lower rate in the period, but wondering what we should expect for the balance of FY '23 and what we should consider to be a more normalized rate.

This year, when considering interest and tax together, we anticipate a headwind of approximately 4%. The tax rate is projected to be between 18% and 19%, which is influenced by our earnings mix, especially since our interest expenses are in countries with higher tax rates. However, the overall increase in interest rates counters this effect, so we maintain a 4% expectation for the year. We haven't provided guidance for fiscal year 2024 at this point. In the first half of the year, depending on how interest rates fluctuate, there may be some challenges, but we're still evaluating that. We'll provide further updates as we have more information.

Just a quick follow-up. Michael, just on the raw material side, you obviously saw a modest benefit there in the second quarter. It looks like the raw material indices have retraced a fair way. So the question is what have you baked into guidance because it looks like there should be a pretty material raw material benefit in that second half.

Yes. You're correct. As we mentioned, we began to notice some modest benefits in the second quarter from the decline in raw material costs. We're still managing higher inventories, so these are gradually moving through the system, which will continue to affect us in the third quarter as we reduce them. Currently, we expect raw material prices to remain stable across a diverse range of materials and geographies. With this stable outlook, we anticipate some modest advantages from raw materials in the third quarter. However, the overall impact will ultimately depend on the raw material prices and how swiftly we can clear the inventory, which is also tied to demand conditions.

Okay. Look, we would just like to thank everybody for their interest in Amcor, operator. We feel like we've had a very strong first half and we're looking forward to closing off another strong year for the Company for fiscal '23. So, we'll close the call there. Thanks very much.