Amcor Plc (AMCR) — Q4 2023 Earnings Call Transcript

Thank you, Mandeep, and thanks everyone for joining Amcor’s fiscal ‘23 earnings call. Joining today is Ron Delia, our Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, let me note the few items. On our website, amcor.com, under the Investors section, you will find today’s press release and presentation, which we will discuss on this call. Please be aware that we will 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. 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 any additional questions. Over to you, Ron.

Thanks Tracey, and thanks everyone for joining Michael and myself today to discuss Amcor’s fiscal 2023 and June quarter results. We’ll begin with some prepared remarks starting as we always do with safety on slide 3. Safety is our most important value at Amcor and throughout fiscal 2023, we again made strong progress on our journey for continuous safety improvement across the Company. 69% of our sites remained injury-free for at least 12 months, and we reduced injuries globally by 31%. While we’re pleased with these results, ultimately, it’s not just the number of injuries we’re focused on, but also the severity of the injuries that do occur. Tragically, in June, a contractor’s employee lost his life at our Pondicherry site in India after falling from a roof. We immediately conducted a detailed investigation and we’re deploying the learnings across all Amcor sites with the goal of eliminating the risk of similar accidents in the future. We’re relentlessly focused on safety globally, and this tragic incident is a stark reminder of the importance of those efforts. Moving to our key messages on slide 4. First, Amcor delivered solid operating performance for the 2023 fiscal year. Adjusted EBIT was up 1% and we returned $1.2 billion to shareholders through share repurchases and our industry-leading dividend. Across the organization, our teams demonstrated agility by taking action to navigate highly challenging and volatile market dynamics characterized by ongoing inflation, softening consumer demand and customer destocking, particularly in the second half of the fiscal year. Our ability to modestly grow adjusted EBIT under these circumstances was the result of proactive and decisive actions to effectively manage the areas under our control, which is our second key message. Our teams did an excellent job prioritizing pricing to recover increases in raw materials and general inflation. And as we entered the 2023 calendar year, we stepped up the intensity of our cost reduction efforts to drive productivity benefits. Additionally, we invested in structural initiatives including strategic plant closures that will deliver meaningful cost savings in fiscal ‘24 and ‘25. Third, as a result of these comprehensive actions, Amcor’s well positioned to return to solid mid-single-digit earnings growth in the second half of fiscal ‘24, which also leaves us well-placed to grow at our long-term trend of high-single-digit rates thereafter. While we expect current market conditions to persist over the near-term for the entire industry, we’ll continue to recover inflation and are confident the benefits from our cost reduction and productivity initiatives will have a sustainable positive impact on earnings leverage. Additionally, we’ll be cycling weaker volume comparatives in the second half, and the headwinds we’ve faced from the sale of our Russian plants and significantly higher interest expense are largely limited to the first half of fiscal ‘24. All these known benefits are largely within our control and underpin our expectation of a return to solid earnings growth in the second half without having to rely on a significant change in the demand environment. And finally, as we and the entire CPG industry continue to navigate a dynamic operating environment, Amcor remains laser-focused on executing against our long-term growth and value-creation strategy. We’re well positioned as a recognized industry leader and we continue to pursue opportunities to invest in our strong underlying business, particularly through innovation and sustainability initiatives in faster growing higher value markets. We’re also actively pursuing value-creating M&A such as a deal announced last week to acquire Phoenix flexible packaging in the high growth Indian market, and we’re committed to returning cash to shareholders through a compelling and growing dividend and share repurchases.

Thanks, Ron and hi everyone. Beginning with the Flexibles segment on slide 7, fiscal ‘23 reported sales were in line with last year, which included recovery of higher raw material costs of approximately $515 million, accounting for 5% sales growth. Excluding the raw material impact and negative currency movements, sales grew 1% for the year, driven by price/mix benefits of 4%, reflecting our ability to continue to price to recover inflation across all Flexibles business groups. This was partly offset by 3% lower volumes. And while volumes in all regions were impacted by slower demand and destocking, particularly in the second half of the year, our strategic focus on higher value priority categories continued to drive solid sales growth for the year. Volumes in the pharmaceutical and pet care categories were especially strong, helping to limit the impact of broad-based lower volumes in other categories. As Ron mentioned, throughout the year, the business did a good job aligning operating costs with challenging market conditions, while pricing to recover inflation. This focus resulted in a 1% in adjusted EBIT for the year on a comparable constant currency basis. Margins remained strong at 12.8%, despite 100 basis-point dilution related to increased sales dollars from passing through higher raw material costs and general inflation. In terms of the fourth quarter, net sales on a comparable constant currency basis were down 5%, with positive price/mix of 2% more than offset by a 7% decline in volumes. This represents an accelerated volume decline compared with the March quarter, and was consistent trend across most regions. The greatest sequential declines continue to be seen in the North America and European markets, where overall June quarter volumes were lower by high single digits, consistent with softer retail scanner data, and with categories such as premium coffee, protein and healthcare also being incrementally impacted by customer destocking. Adjusted EBIT for the quarter of $387 million was 7% lower than the prior year on a comparable constant currency basis, reflecting the impact of lower volumes, unfavorable mix and ongoing inflation, partly offset by benefits from continued pricing and cost actions.

Turning to Rigid Packaging on slide 8. Fiscal ‘23 reported net sales were 4% higher than the same period last year, including approximately $260 million or 8% of sales related to the pass-through of viral material costs. Organic sales declined 3%, reflecting 4% lower volumes, partly offset by a price/mix benefit of 1%. In North America, overall beverage volumes for the year were down 6%. Hot fill volumes were in line with the prior year as new business wins in key category offset unfavorable consumer demand and customer destocking. In specialty containers, volumes were lower than last year, with growth in the healthcare, dairy and nutrition categories offset by weaker volumes in food, home and personal care. And in Latin America, volumes were down low-single-digits versus last year, which reflects challenging macroeconomic conditions across the region. Fiscal ‘23 adjusted EBIT was down 7%, as strong earnings growth in the first half was more than offset by challenging market conditions that accelerated through the second half of the year. Adjusted EBIT margin of 7.5% includes an adverse impact of approximately 80 basis points from the increased sales dollars related to passing through higher raw material costs and general inflation.

Looking at the June quarter, comparable constant currency net sales were down 4%. Price/mix benefits of 2% were more than offset by a 6% volume decline, as lower consumer demand and customer destocking continued to impact the business, particularly in North America. On a comparable currency basis, adjusted EBIT for the quarter of $73 million was down $22 million against the strong comparative period. As Ron mentioned earlier, the June quarter is typically the seasonally strongest of the year, and together with volatility in customer order patterns, this limits the ability to fully flex costs. In an environment where production volumes are weaker, fixed cost absorption is also significantly lower, and the combination of these factors amplifies the impact on earnings. The team continued to manage the cost under their control well with additional headcount reductions and more plant shutdown days, and we continue to focus on cost actions as we manage through this cycle of softer demand and destocking. Looking ahead to the September quarter, we do not anticipate market challenges to materially improve, which will have an unfavorable impact on earnings compared with the same quarter last year. Our financial profile and investment grade balance sheet remain strong. Leverage of 3 times on a trailing 12-month EBITDA basis is modestly up from last year, but is aligned with our expectations given the softer demand and broad-based destocking through the supply chain. Adjusted free cash flow of $848 million was in line with our updated outlook, though below last year. This reduction mostly reflects lower accounts payable balances as we moderated our purchasing activities, partly to reduce inventories but also in response to the soft demand environment. This is a timing impact which we expect will abate as we progress through fiscal ‘24. And whilst we have made good progress bringing down our inventory balances, with the reduction of more than $400 million from the peak levels in November ‘22, we will continue to focus on reducing overall working capital to support an increase in cash flow. For the ‘24 fiscal year, we expect adjusted EPS of approximately $0.67 to $0.71 per share. This includes expectations that organic growth from the underlying business will be in the plus or minus low-single-digit range, as volumes are expected to remain weak, particularly in the first half. Share repurchases will result in a benefit of approximately 2%, and currency translation is expected to add a further benefit of 2%, assuming current exchange rates prevail for the balance of the fiscal year. This is expected to be offset by a negative impact of approximately 3% related to the sale of our three plants in Russia in December 2022, and a negative impact of approximately 6% from higher interest and tax expense. As U.S. dollar and euro interest rates have continued to rise, we expect interest expense for fiscal ‘24 to be in the range of $320 million to $340 million. In terms of cash flow, we expect to generate significant adjusted free cash flow in the range of $850 million to $950 million in fiscal ‘24, which represents growth of up to a $100 million over fiscal 2023. We have planned to repurchase at least $70 million of Amcor shares in ‘24, and we have been active on the acquisition front and we’ll continue to pursue M&A opportunities. And as always, we’ll evaluate our uses of cash as we progress through the year. For fiscal ‘24, it’s important to call out that phasing of comparable earnings growth is not expected to align with historical trends. We do not expect the challenging market dynamics we’ve seen in the last two quarters to meaningfully improve in the near-term. And in the first half, we assume mid to high single-digit volume declines. Given this demand outlook and the unfavorable impact related to higher interest expense, which is expected to moderate in the second half, we anticipate adjusted EPS in the first half of fiscal ‘24 to be down in the high-single-digit to low-double-digit range on a comparable constant currency basis when compared to the prior year. While it’s more difficult to predict consumer demand, we do expect customer inventories will have largely normalized by the time we enter the second half of the fiscal year. Additionally, we have a number of tailwinds in the second half, all of which are within our control, including the benefit of approximately $35 million from structural cost-saving initiatives building through the year, increased earnings leverage resulting from ongoing benefits from price and cost actions, a reduced interest headwind, and favorable prior year volume comparatives. The combination of these known factors supports our expectation that adjusted EPS grows mid-single digits in the second half of fiscal ‘24 on a comparable constant currency basis. It also gives us confidence in resuming our long-term trend of high-single-digit earnings growth shortly thereafter. It’s also important to highlight here that we do not need to see a significant change in the demand environment to return to solid earnings growth in the second half and beyond.

Thanks, Michael. Turning to our long-term commentary. Slide 12 highlights our strategic areas for investment where we see faster growing higher value opportunities to drive sustainable growth. On prior calls, we’ve covered opportunities in healthcare and in M&A. And today I’ll take a few minutes to talk about protein and the opportunities we see to deliver strong growth in the high-value protein category. Moving to slide 13, the protein category for Amcor includes packaging solutions for processed and fresh beef, pork, poultry, and seafood. And we like this category because it’s a large addressable market, which historically has grown globally at attractive rates, driven mainly by an increasing percentage of the world’s population able to afford to add protein to their diet. We also like the fact that there are many ways to differentiate and add value for customers, since protein packaging requires specialized, more sophisticated and increasingly more sustainable solutions to preserve and protect these premium products. Amcor’s unique product offerings have enabled us to successfully grow our participation in the meat category over several years. Annual revenue from the sale of processed and fresh meat packaging now exceeds $1 billion. While inflationary impacts are currently creating challenging market conditions, looking forward, there are several reasons we believe Amcor can drive growth at a mid-single-digit CAGR over the medium term with margins accretive to our overall average. First, Amcor is well-positioned with a comprehensive product portfolio for processed and fresh meat applications, underpinning our development of better products, our strong capabilities, and significant investments in innovation, sustainability, and technical service. These are critical in an industry that relies on durable, high barrier solutions to preserve shelf life while providing convenience for the consumer in environmentally friendly formats. Second, we have a strong presence in North America, but our global scale and reach enables us to leverage our R&D network and installed capacity to transfer technical and process knowledge across regions as we actively pursue global growth opportunities. And third, there’s a unique go-to-market model in some parts of the world where equipment purchases drive the subsequent sales of packaging films and technical services. Our recent acquisition of Moda positions us well because we’re now able to provide a wholly-owned turnkey equipment solution aligned with this model, where efficiency and the ability to automate are some of the highest priorities for customers. With the recent investments to enhance our offering and go-to-market strategy, we’re well-positioned to grow in this high-value market, and we’re excited with the many opportunities to firmly establish Amcor as a preferred provider of fresh and processed meat packaging solutions globally. I just want to spend a minute on sustainability on slide 14. We continue to make excellent progress supporting the development of circular systems through the three pillars of our responsible packaging strategy, package design, waste management infrastructure and consumer participation. And we’ve made significant advancements on the innovation and design front by developing more sustainable packaging solutions and increasing our use of recycled materials. We’ll provide a more detailed update in our sustainability report, which is expected to be published in October. And we’ve continued to collaborate with other industry leaders in various ways across the value chain to help support the development of the infrastructure required for a circular economy. For example, in May, Amcor, Delterra, P&G and Mars formed a strategic partnership to help reduce plastic waste in the Global South by providing access to waste management and recycling systems and by enhancing consumer education. We’re also partnering with Licella and Mondelēz to help promote a circular economy by bringing on stream one of Australia’s first chemical recycling facilities. This is an exciting development in a market where Amcor’s portfolio of recycle-ready flexible packaging solutions is already well above 90% and will provide local access to food-grade recycled material. So closing on slide 15, our teams are doing a good job navigating challenging industry dynamics by continuing to recover inflation and proactively taking actions to align costs with market conditions. We’re confident in our long-term growth strategy. We have good visibility to factors well within our control that will see us returning to earnings growth aligned with our historic performance and our shareholder value creation model. And operator, with those opening comments, we’re now ready to open the line for questions.

Hey guys. Good day. You mentioned that volumes for the first half of fiscal year ‘24 will be down mid- to high- single digits on a year-over-year basis. I think Michael mentioned that. But what are you assuming at this point for fiscal year ‘24 in context of the 3% decline that you reported in fiscal year ‘23?

Yes. So look, we’re setting the business up to assume that the current market conditions essentially continue through the first half. So, we’re expecting first half to look a bit like the fourth quarter with volumes down mid to high single digits. That’s continued softening of demand and continued destocking pretty broadly across the geographies and segments that we participate in. But the second half, we’re expecting more normal rates of volumes, more like flat to up low single digits. And that’s really just assumes no more destocking and the fact that we’ll be cycling easier comps. So, we’re not baking in any big improvement in demand. And so all up, that would see volumes for the full year down sort of flat to down mid-single digits. That’s the sort of midpoint of our guidance range would see us down kind of low single digits for the full 12 months.

Got it. That’s helpful. And then in terms of the destocking, maybe you can just give us some insight as to the micro nuances between the major regions you have exposure to. And the categories that first started to see destocking, are you starting to see any sort of green shoots, if you will?

Yes. The destocking has been quite widespread, and we have been experiencing it for a couple of quarters now. The earliest signs of excess inventory occurred in categories most severely affected by supply chain challenges over the past 12 to 18 months. We have noticed destocking in the meat sector and particularly in the premium coffee market. More recently, in the fourth quarter, we observed some destocking in the medical packaging sector. Additionally, in North America, we have seen significant destocking in the beverage segment of our Rigid Packaging business during a seasonal peak time. While we cannot predict the future, we expect that the destocking will mostly be resolved by the end of this calendar year, and it should have a lesser impact as we move into 2024. Our volumes for the quarter decreased by 7%, with approximately two-thirds of that decline attributed to market and customer performance, while the remaining one-third is due to destocking. As we progress and destocking diminishes throughout the rest of this year, we anticipate it will pose less of a negative hindrance to our growth rates going forward.

Hi, everyone. I hope you’re all doing well. Thank you for the information. My first question is a quick one about net interest. I understand that higher global rates and foreign exchange are contributing factors. However, the increase from the fourth quarter rate of $70 million, which translates to a $280 million run rate, to what you’re suggesting might be $320 million to $340 million for fiscal 2024 seems quite significant. Can you provide any specific details about what is driving this increase, Michael?

Yes, sure. Look, I think overall, interest rates have continued to rise from this time last year, all through the year. So, we will be lapping higher rates as we exit. Using Q4 as a proxy is not the best quarter to use as a property for interest because that’s our highest cash flow quarter, obviously. So, our interest expense is lower in that quarter, typically in comparison to the rest of the quarters as the cash flow comes through. So, that’s really what we see. We are lapping some higher interest just by the way the rates increased as the year progressed. And there may be one or two further rate increases that we’ve factored into the range. So that’s where we get to that $320 million to $340 range.

Understood. That’s helpful, Michael. And Ron, regarding demand and the consumer, Amcor produces high-value, high-quality packaging which could be seen as affordable luxuries, such as premium coffee, protein, and premium pet products. We've discussed this before, but do you think there could be a greater negative impact on your customers and, consequently, on you, given the inflationary environment we’ve been experiencing? Why or why not? Are you noticing any indications from your customers asking for cost reductions to enhance their competitiveness at retail and increase their volume? Thank you.

Yes. Look, George, I think that we still believe the portfolio is really defensive and the categories are, for the most part, consumer staples. Now there are subsegments within segments where things might be a little bit more discretionary because of the premium attached to things like single-serve coffee systems or some of the premium pet food. But overall, across the portfolio, we still believe these categories are defensive. They’ve proven that out over a number of economic cycles. But I think that we’ve got a dislocation here that we haven’t seen in 40 years around inflation. And we convince ourselves of the defensiveness of the portfolio at large by looking at the scanner data, and it’s very broad-based, the weakness, in particular in Europe and in North America in the food business, where you see mid-single-digit declines. And I think generally speaking, others who’ve reported publicly have experienced the same sort of volume effects that we have. So I think, yes, we do aspire to play at the high end of the market, and many of our products are at the premium end. But generally, we’re in stable segments that will grow consistently through economic cycles.

Just one on the buyback. Obviously, there’s $70 million left on the existing program. But what’s the thinking about potentially a new program at some point through FY24? Is that the priority once you get through the $70 million, or are you leaving some cash flow there for M&A, or is the priority to sort of pay down some debt and reduce that leverage ratio? Thanks.

Thank you for the question, Brook. Over the past few years, we have repurchased over $1 billion in shares. Additionally, we are re-engaging in mergers and acquisitions, having completed three deals this year and recently announcing another one. We plan to finish the $70 million buyback this year. Our capital allocation strategy focuses on reinvesting in the business through increased capital expenditures for organic growth, which we have been enhancing over time. We intend to maintain a similar level of capital expenditures heading into 2024, considering market demand. Next year, we will continue to pay dividends and aim for growth. We also have $300 million to $400 million available, ideally allocated for M&A or additional buybacks. Looking back over the last couple of years, we have balanced our capital allocation between buybacks and M&A, with $70 million earmarked for 2024. As always, we will monitor cash flow throughout the year and update you if there are any changes.

And just a question on espresso. Your customer there seems pretty keen to move product into, I guess, fiber compostable pods. Could you just confirm if you have the capability and products to perhaps offer that format as well, given, I guess, you’ve got already a lot of capital put into those plants that are co-located, I believe. And if that’s the way that that customer goes, can you sort of participate and offer a different format? Thanks.

Yes. Look, we have a broad offering of fiber-based options for a number of different categories. And so, I think we’re going to be well covered as products move between substrates, whether it’s aluminum or plastic or plastic to fiber or whichever direction the segment evolves. But I would say that that is a niche at the moment. It’s about expanding the pie. Not every consumer will be willing or capable or interested in composting. And we know as well as our customer that the sustainability profile of the aluminum capsule is as attractive as any. It’s a product, it’s a capsule that can be made with 100% recycled aluminum and can be recycled over and over again. And there’s been a lot of investment in the recycling loop for that particular format. So, we’re not concerned about the long-term viability of that format.

Can I ask a question about the destocking you're referring to? My understanding is that in addition to destocking and consumer weakness, we are also experiencing a shift in consumer preferences from more premium products to more store-brand products. Is this affecting the demand for packaging as well as the price or margin you earn from premium products compared to those in the store-brand category?

Thank you for the question. The situation in North America is different from Europe. In Europe, private label products have gained a few percentage points in market share and are now slightly ahead of the share they had in 2019. However, in North America, we have not yet returned to the share levels of private label seen in 2019. As sales shift between private label and branded products, we are well positioned to handle it. We have a good presence in the store brand segment, so these share changes are unlikely to significantly affect our volumes. The packaging remains essentially the same, which is a key aspect of the private label strategy. Therefore, from a margin or differentiation standpoint, we are relatively indifferent.

Okay. Great. And just coming back to the previous question on sustainability of packaging, there seems to also be move to potentially be sort of fiber-based and alternative packaging for beverages. What work are you doing around that, please?

Yes. We have a pretty extensive platform that we call AmFiber, which is fiber-based packaging for a range of product categories, we see the opportunity, particularly in the confectionery space to move from plastic-based products to fiber-based products, culinary, some formats like spices and food additives. So, our work on the fiber side is pretty extensive. There’s a little less activity in the beverage space, to be quite honest. But generally speaking, AmFiber is a big platform for us, and we’re optimistic about the growth outlook.

Yes. Thank you. Good evening, everyone. I guess, the first question is I think about the quarter and then moving into ‘24. I just wanted to ask a question on mix. And I look at it in the Flexibles segment, mix is still a 2% positive contributor in the quarter, less than it had been earlier in the year, but still positive year-on-year, although I look at kind of some of the parts of Flexibles that I’ve historically thought had contributed to that mix in terms of healthcare and protein and pad and premium coffee. And those all were down kind of consistent with the overall segment volumetrically. So, just help us maybe dissect kind of what’s happening in mix and kind of where you see that trending through fiscal ‘24?

We encountered an unfavorable mix in both segments during the fourth quarter, as you noted. Some categories that typically contribute positively to the mix were weaker, particularly pet care and medical. You mentioned price and mix together; it's important to consider that we are still facing relatively high inflation levels and have been actively adjusting prices to address this. For the fiscal year, we increased prices by approximately $1.1 billion due to raw materials and general inflation, with about $300 million to $340 million of that attributed to general inflation. Thus, you see a combination of price and mix effects, where positive price impacts are countered by negative volume.

That's really helpful. I would like to follow up on your focus regarding proteins and the investments in equipment. Considering the large incumbents in the market, particularly in the fresh meat sector, what do you believe the business requires to scale and achieve more significant growth in that area, especially given that there is a competitor with a substantial market position?

Yes, that's clear. Most of our markets are quite competitive, including this one. Our starting point needed to be a complete system offering, which we previously lacked. The Moda acquisition enables us to provide primary packaging equipment, technical services, and parts. This, combined with our perceived industry-leading film technology, positions us well in the market. The films used in the protein sector are among the most challenging we produce, given the functional requirements for meat packaging. There's a necessary barrier for preserving shelf life, along with a need for functional resistance, as these packages must move quickly through packaging lines. We believe our advanced film technology, paired with a complete solution of equipment and aftermarket service, rounds out our offering. We're very enthusiastic about this market, which we can leverage globally and aligns with visible revenue synergies from the Bemis acquisition done years ago. Each segment remains competitive and we must actively work to earn business. However, we are optimistic about our prospects.

I wanted to follow up on some earlier comments regarding volume growth expectations for the second half of 2024. To clarify, are you saying that if volume growth begins to recover, you would anticipate an increase to mid-single to high single digits in the second half?

Yes. We’re not banking on a much improved demand picture. We think it’s more prudent for us to set the business up to assume that volumes are going to be challenged through the year. So for the first half of the year, we’re expecting volumes to continue to be down mid single digits, mid to high single digits. Second half of the year, we would expect volumes to be flat to maybe up low single digits. And we believe that’s possible without much of an improvement in the underlying demand profile because we are pretty confident that we’ll be through the other end of the destocking cycle by the time we get to calendar year 2024. So yes, there’s no expectation of a dramatic improvement in the overall demand environment that’s baked into our guidance. We expect the volume trajectory to be fairly similar. Rigid will navigate another seasonally strong quarter, but we don't anticipate the business to fully rebound in demand during the fiscal first quarter. We foresee ongoing softness and continued destocking, particularly in the North American beverage sector. Looking at a 12-month timeline, we expect the volume trajectory to remain consistent across both segments. This aspect significantly influences our guidance range; if the volume situation improves, it could push us toward the upper end of that range or exceed it. However, we are not planning the business around that possibility. We are implementing the necessary cost measures and will act cautiously before predicting a return of demand.

First one, maybe to Mike. Just in regards to your FY24 guidance. Can you talk us through your assumptions and maybe expectations on price/mix and any input cost tailwinds?

Sure. Regarding the raw material side, in Q4 we observed that raw materials decreased across the board in the mid-single-digit range following a stable Q3. We experienced a slight tailwind in Q4 as we worked through higher inventories and lower purchases. Looking ahead to the first quarter, we anticipate a stable environment for raw materials, potentially slightly decreasing, which would provide a modest tailwind. We'll have to see how raw materials evolve moving forward. Concerning price and mix, we will continue to adjust pricing to account for inflation. While we anticipate ongoing inflation, it may occur at slightly lower levels than previously seen. We expect to implement price adjustments to balance this along with managing costs. Initially, we foresee a negative mix, similar to what we experienced in Q4, particularly with areas like healthcare, pet food, and coffee as we cycle through previous strong performances in those categories.

Ron, one of the things we’re hearing quite consistently now from a lot of your major customers is some very significant SKU rationalization programs that they’re having. In particular, I believe I’m right in saying that Unilever taking the SKU is down by 25%, which is a huge number. I was just interested in getting your opinion on what that means, if anything, for yourselves.

Yes. Look, it’s maybe not as pervasive as it might seem from some of the public comments. But to the extent that SKUs can get rationalized, it’s generally a good thing for us. There’s two things going on. There is a bit of SKU rationalization. The other thing that’s happening is the continued evolution towards more sustainable formats and more sustainable SKUs. And I think SKUs have proliferated across all the categories that we service. You think about the variety of the store shelves certainly here in the U.S., it’s really been explosive growth over a long period of time and the number of SKUs that are available. So, anything that simplifies the business and takes out unnecessary or non-value-adding complexity is generally a good thing. And then at the same time, helping that process along by introducing more sustainable formats is also advantageous to us, too. So I think we’re in lockstep with the customers that you probably have in mind, and on that journey or both of those journeys at the same time.

That’s helpful. Thanks. And then just finally, you referred to your volume pressure’s being more skewed to developed rather than emerging markets, which, of course, is pretty understandable. I was just interested if we get a bit more detail on where you sit in EM because others and there are reports that there’s been significant down-trading in emerging markets as well away from multinationals to local brands in particular, and then obviously for many large packaging company or global packaging companies, that might be unhelpful. So, I’m just trying to get a sense of why you may have outperformed in EM relative to others? Thanks.

Yes. Look, it’s a good question. It feels more like the underperformance in the DMs relative to the EMs is the thing that’s not easy to understand. I mean we saw volume declines in Europe and North America, kind of high single digits in the fourth quarter, again, entirely consistent with what others have reported and the scanner data, et cetera. But the EM business has held up, but we had volumes in Asia, in the emerging part of Asia, basically flat in the quarter. Latin America was down mid-single digits. So both of those regions had better volume performance than the two big developed markets. Look, I don’t know. I think we have a pretty compelling value proposition in emerging markets generally as an innovation leader and a sustainability leader. And then our participation in our customer mix generally looks like the market. So, if I take a business like China, we actually have more of our sales to local customers than to multinationals. And basically, that reflects the market shares of those respective customer groups. So, I think we’re well balanced for the differential growth rates that you’re referring to.

I just had a couple of questions. Just first one for Michael, just in terms of interest expense. What percentage is fixed and floating now? And are you looking to fix more to essentially kind of lock in your interest expense?

Yes, John. Traditionally, we’ve maintained a 50-50 mix of fixed and floating rates, but more recently, we've shifted to a 70-30 mix. This adjustment should help reduce some of the volatility we're experiencing. Currently, we're operating within that 70-30 range for fixed and floating rates.

See that is pretty stable. And just a second question, Ron, on acquisitions. Are you seeing more opportunities now that fit your criteria? And obviously, valuations are generally coming down. And will you sort of naturally play at the smaller to medium end? Obviously, we saw Constantia recently sold to private equity.

Yes. Look, we have been more active. So we’ve done four deals in the last 12 months. They’re all of the small variety and single plant deals. So, the first comment I would make is, yes, there are more things that seem to be coming to market. I mean we went through a period of pretty pronounced market dislocation through COVID and then the supply chain constraints and now some softer volumes, but I think sellers are more likely to bring things to market now than they would have been, let’s say, two years ago. So the pipeline is relatively robust, and we’ve been able to convert four small deals in the last 12 months. The second part of your question about the size really just reflects the nature of the participants in our space. There’s just by number, and I hold a lot more smaller single plant businesses than there are large multibillion-dollar businesses like the one that you mentioned. So I think just generally, you’re going to see us execute more smaller deals. It doesn’t mean for a second that we would not love to deploy bigger amounts of capital. So, we would be on the lookout for medium and larger sized deals as well. I just think by the law of numbers, will suggest that most of the deals will be the smaller variety.

Question about just the cost-out program, how much flexibility you might have around that just in terms of whether that destocking trend continues a little bit longer than, I guess, what you’ve currently forecast, how much flexibility you might have just to sort of go a little bit harder around the cost base?

Yes. Look, we’re getting after it pretty good would be the first thing I would say. So we’re going after it reasonably hard. You have to remember also that the business has been optimized through the last several years, I mean, through the Bemis integration, we took a number of plants out of the network. A couple of years before that, we took a few out of the rigids network as well. So the business is reasonably well optimized. But that being said, there’s more opportunity. And we’ve announced 3.5 plant closures already. There’ll be more. The common with demand remains depressed, then there is the opportunity to do a little bit more, although I would also point out that the ultimate path to value creation for the Company is to grow, and we want to make sure that we’ve got the productive assets available when demand normalizes. We don’t see any of the demand challenges that we’re experiencing right at the moment, we don’t see a secular. We believe this is a cycle, and we believe it’s an inflation induced cycle and that volumes will return. And I mean, certainly, the destocking impact will abate. But we do preserve the flexibility here if we need to go after it harder on the cost side, we certainly will do that.

Thank you. Historically, you have managed cost inflation effectively. However, in the current environment characterized by significant destocking and decreased demand, can you provide an update on your progress in recovering from general cost inflation? Additionally, could you comment on the recent trends related to that inflation?

Yes. I believe we are starting to see inflation moderate. While prices may not be decreasing, the rate of increase has certainly declined across most cost categories. Labor costs continue to rise in the mid-single digits, and energy costs remain higher than they were a couple of years ago. We have observed some declines in freight costs from their peaks. This situation is still a reality. On a positive note, we have been successful in adjusting prices to recover costs. Last year, inflation impacts totaled over $300 million, which we offset through pricing adjustments. We expect to maintain this approach as we move into fiscal 2024. We have also reset prices with new contracts, as approximately two-thirds to three-quarters of our business is contracted, with an average duration of 2 to 4 years. This means each year we have the chance to adjust pricing in response to current inflation conditions. While inflation remains a factor, I feel optimistic that we are emerging from this inflationary cycle.

I was just wondering if you could give us maybe a little bit more color firstly on how your inventory and working capital management is progressing heading into ‘24.

Yes, I can address that. Last year, we were focused on building our inventory due to supply constraints in the market, which led us to invest about $3 billion over the past two years to compensate for rising raw material costs and inflation. These factors have influenced our working capital. Since November, we've successfully reduced our inventory levels, taking nearly $400 million out, with $200 million of that reduction occurring in Q4 alone. However, we haven't fully realized the benefits of this reduction in cash flow, as we've also experienced a significant decrease in our payables position, which has dropped by about $500 million. Consequently, while our inventory decreased by around $200 million over the year, our overall working capital showed a cash outflow of approximately $230 million, mainly due to the impact of payables. In response to lower demand signals, we have started reducing our purchasing and further decreasing inventory. As we look ahead, we still have work to do on inventory management, and we expect payables will start to normalize as we navigate the current softer demand. For FY24, we do not expect a cash outflow to the extent we saw in FY23, and we aim to reach a more neutral working capital position by the end of the year. Currently, our working capital sales ratio stands at about 9.5%, compared to our typical range of 8% to 9%, indicating there is room for improvement in the coming years.

And guys, just in terms of how much of that is sort of baked into your free cash flow guidance for next year, am I right in seeing that as sort of a buffer on the downside, or is that potentially already baked into what you’ve come out with today as guidance?

Yes. So the cash flow guidance for ‘24 is $850 million to $950 million. So, it’s a $100 million range, which is really the working capital range in there. So, at the midpoint, probably still going to see a little bit of cash outflow, but we’ve obviously got some opportunity to do better than that, and that’s really the working capital is the key factor there.

Hopefully mine are quite quick questions. I was wondering if you could comment on what you’ve seen in terms of the changes of your customers in terms of their price expectations around responsible, sustainable packaging, please, and the willingness to pay a premium, I guess, over the virgin products? How that’s changed over the last 12 months, that’s what I’m asking. Sorry.

Yes. Look, I don’t know that it’s changed much. I mean I think customers understand that there’s more value to be ascribed to a product that’s got a better sustainability profile. And I think consumers understand that as well. It’s another element of functionality that is now expected in consumer products. And that is the environmental profile is at least neutral, if not positive, overall. And there’s value associated with that. And so, most of these products do have a premium. There’s also the scale curve that we need to work through. We’re introducing new products and like any new product with less volume and less scale benefits typically tends to start out at a higher price point. It will evolve over time. But I think as brand owners look to meet their own commitments and you take the full range of different costs, including regulatory costs into consideration, the more sustainable products offer higher value and therefore, they tend to carry a bit higher price, particularly at the outset.

Okay. Great. Thank you. And then secondly, I just wanted to ask a bit more about the Licella plant in Australia. And just for a bit more detail, am I right, firstly, that you’ve invested directly in Licella, then can you just give us a few stage gates or timings around when that plant will come into operation? And I guess, thirdly, just discuss in the U.S. market where we’ve got a lot of advanced recycling facilities being built or already built. They tend to be linked with one of the major petrochemical companies. How do you think about the risk around using effectively the solution with a start-up, please?

Yes, there's a lot to discuss, and this is an exciting project. I'm pleased you asked. Firstly, I want to clarify that our investment is modest, amounting to several million dollars in the single digits of millions. We are co-investing with Mondelēz and supporting Licella as the technology provider for this plant, which will be built in the western suburbs of Melbourne and Altona. We are quite enthusiastic about this initiative because it will introduce chemically recycled materials to the Australian market through local production. This is particularly important since the REDcycle program has established a method for collecting soft plastics in Australia, and this plant will serve as a crucial outlet for those recycled materials. Additionally, brand owners in Australia are pushing for more sustainable packaging, which includes the use of recycled content. Regarding the project timeline, it is a significant undertaking, and while the site has been selected, there’s a possibility that the plant could be operational by the end of calendar year 2024; however, it's realistically an 18- to 24-month project.

Ron, I was asking earlier, just are you seeing any signs from your customers at all as they’re trying to find ways to stimulate growth? Maybe they’re considering more promotional activity at the request of their customers that they’re now coming back to their packaging suppliers and looking for your and other companies’ support perhaps with givebacks cost reductions, productivity, what’s happening there, if anything, on that front? Thanks. And good luck in the quarter.

Thank you, George. While others have mentioned the possibility of increased promotional activity, we haven't observed anything significant. There is a slight uptick in promotions within the beverage sector during the summer, but overall, the promotional activity is not widespread enough to materially affect our volume outlook. It would be advantageous if it occurred, but we are not relying on increased promotions to drive higher volumes for Amcor. If it does happen, it would be a positive development. Regarding pricing dynamics, as discussed earlier, we still need to recover from ongoing inflation, which, although moderating, remains a challenge we must address through our cost base. We are actively working on this. Thanks, operator, and thanks for everyone’s interest in Amcor and for joining our call today. We appreciate it, and we’ll speak to you at the end of the first quarter. And we’ll end the call there. Thank you.