Amcor Plc (AMCR) — Q2 2024 Earnings Call Transcript

Thank you, operator, and thank you everyone, for joining Amcor's fiscal 2024 first half and second quarter earnings call. Joining today is Ron Delia, our Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amcor.com, under the Investors section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we'll also discuss non-GAAP financial measures and related reconciliations that can be found in the press release and the presentation. Remarks will also include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause future results to differ from current estimates, and reference can be made to Amcor's SEC filings, including our statements on Form 10-K and 10-Q for further details. 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 me today to discuss Amcor's second quarter and first half results for fiscal 2024. We'll begin with some prepared remarks before opening for Q&A. As seen on Slide 3, our focus on safety remains unwavering, and our significant commitment to providing a safe and healthy work environment continues to be rewarded. 70% of our sites have been injury-free for the past 12 months or longer, and we've experienced a 17% reduction in injuries compared to the first half of fiscal 2023. Safety is deeply embedded in Amcor's culture and is the number one priority for our global teams. Turning to our key messages on Slide 4. First, our reported earnings per share for the second quarter and first half were modestly better than the expectations we set out in October, and improved working capital performance helped drive a year-over-year increase of more than $100 million in adjusted free cash flow. Second, our financial performance through the half was supported by strong and proactive focus on controlling costs. This helped us offset second quarter volumes that were a couple of percentage points lower than we anticipated. Our teams around the world continue to respond, doing an excellent job proactively taking further cost actions. Third, our first half financial performance puts us on track to deliver against our full year guidance, which we are again reaffirming today. Relative to the first half, we believe Q2 was the low point for earnings growth, and we continue to expect the trajectory of adjusted EPS growth to improve through the second half of fiscal 2024, including delivering mid-single-digit adjusted earnings growth in the fourth quarter. Our confidence is supported by our improved earnings leverage as well as a number of known factors that we'll cover in more detail later that will benefit earnings through the second half of the fiscal year. Additionally, our volume trajectory has improved generally through January, and this underpins our confidence that Q2 marked the low point for volumes. Finally, we remain confident in our long-term growth and value creation strategy and in our ability to deliver a combination of strong earnings growth and a compelling and growing dividend. The strength of our market positions, execution capabilities, and consistent capital allocation framework collectively continue to make a compelling investment case for Amcor. Moving to Slide 5 for a summary of our financial results. Organic sales on a comparable constant currency basis were down 8% for the half and 10% for the quarter. Price/mix benefits were around 1% for the first half and flat in the second quarter, reflecting moderating inflation, which resulted in reduced pricing actions by our teams. Volumes were down 9% for the first half and down 10% for the December quarter. Second quarter volumes were modestly lower than our October expectations, with the main difference being an acceleration of destocking, especially in the month of December. First half and December quarter adjusted EBIT was $709 million and $352 million, respectively, modestly above our expectations. On a comparable constant currency basis, declines of approximately 6% in both periods reflect lower volumes, partly offset by benefits related to decisive and proactive cost actions taken across our businesses in response to evolving market dynamics. In total, our actions reduced costs by more than $200 million in the first half compared to last year, with a reduction of more than $130 million achieved in the second quarter. Adjusted EPS was $0.313 and $0.157 per share respectively, also modestly above our earlier expectations. For both periods, this would count 10% on a comparable basis, reflecting lower adjusted EBIT and the unfavorable impact of higher interest costs. Working capital improvement remains a focus and helped drive free cash flow for the first half, well ahead of the same period last year and in line with our expectations. And we returned approximately $390 million of cash to shareholders in the first half through a combination of share repurchases and a growing dividend, which has increased to $0.125 per share. I'll turn it over now to Michael to provide some further color on the financials and our outlook.

Thanks Ron and hello everyone. Beginning with the Flexibles segment on Slide 6. Year-to-date, net sales on a comparable constant currency basis were 8% lower, which largely reflects weaker volumes. Volumes were down 9%, mainly due to lower market and customer demand and accelerated destocking. In North America, first half net sales declined at high single-digit rates, driven by lower volumes in categories including meat, liquid beverage, and healthcare, which more than offset growth in the condiments, snacks, and confectionery categories. In Europe, net sales declined at low double-digit rates, driven by lower volumes, partly offset by price/mix benefits. Volumes were lower in snacks, coffee, healthcare, and unconverted film and foil. This was partly offset by higher confectionery volumes. Across the Asian region, net sales were modestly higher than the prior year. Volume growth in Thailand, India, and China helped offset lower volumes in the Southeast Asian healthcare business. In Latin America, net sales declined at high single-digit rates, driven by lower volumes mainly in Chile and Mexico, partly offset by growth in Brazil. First half adjusted EBIT was 5% lower than last year on a comparable constant currency basis, as a result of lower volumes, partly offset by favorable price/mix benefits and ongoing actions taken to lower costs, increase productivity, and strengthen operating cost performance. EBIT margin of 12.6% was comparable to the prior year despite a 50 basis point unfavorable comparison related to the sale of our Russian business last year. For the December quarter, reported sales were down 9% on a comparable constant currency basis, and price/mix was relatively neutral compared with last year. Volumes were down 10% in the quarter, reflecting continued soft market and customer demand. Destocking also continued through the quarter, accelerating in the month of December and was particularly impactful in healthcare where volumes were lower than last year by double-digits. In response to market dynamics, the business continued to take decisive cost actions, focusing on operating efficiencies, delivering procurement benefits, limiting discretionary spend, and advancing structural cost reduction initiatives. This resulted in another quarter of strong performance, partly offsetting weaker volumes with adjusted EBIT declining 5% on a comparable constant currency basis. Turning to Rigid Packaging on Slide 7. Year-to-date net sales on a comparable constant currency basis were 8% lower, with price/mix contributing around 1%. Volumes were down 9% for the first half, with lower volumes in North America, partly offset by growth in Latin America. In North America, overall beverage volumes for the first half were 14% lower than last year, including a 13% reduction in hot fill beverage container volumes due to lower consumer and customer demand and added levels of destocking through the first half. In Latin America, volumes grew mid-single-digit rates with new business wins in Brazil, Peru, and Colombia, partly offsetting lower volumes in Mexico. Adjusted EBIT was 9% lower than last year on a comparable basis, reflecting lower volumes, partly offset by price/mix benefits and favorable cost performance. For the December quarter, net sales were also down 10% on a comparable constant currency basis. Price/mix contributed around 2% and volumes were down 12% for the quarter, reflecting lower volumes in North America, partly offset by new business wins, driving mid-single-digit growth in Latin America. Overall, North American beverage volumes were 19% lower for the quarter, reflecting a high single-digit decline from destocking as some of our customers took action to significantly reduce inventories in both hot fill and cold fill categories. Volumes were also impacted in the high single-digit range by incrementally softer consumer and customer demand in Amcor's key end markets. In addition, we had net new business wins in the hot fill category, which partly offset a loss in cold fill as we elected not to retain volumes that fell short of our profitability threshold. Second quarter adjusted EBIT declined by 12%, reflecting lower volumes, partly offset by benefits from continuing to proactively manage costs, including realizing labor savings by taking more plant shutdown days to better align capacity with market dynamics, as well as driving procurement benefits. Moving to cash and the balance sheet on Slide 8. As Ron covered earlier, adjusted free cash flow for the half came in more than $10 million ahead of last year with our teams continuing to make progress against our priority to reduce inventories and driving capital increments across the board. Our financial profile remains solid with leverage at 3.4 times, and broadly in line with the first quarter and where we expected it to be as we cycle through temporary increases in working capital and given trailing 12-month EBITDA now fully reflects the divestiture of our Russian business. Looking ahead, we continue to expect leverage will decrease to approximately 3 times at the end of our fiscal year, supported by seasonally stronger earnings and cash flow in the second half. This brings me to our outlook on Slide 9. As Ron mentioned earlier, we are reaffirming our full year guidance for adjusted EPS of $0.67 to $0.71 per share. We continue to expect the underlying business to contribute organic earnings growth in the low single-digit range, with share repurchases adding a benefit of approximately 2%, and favorable currency translation contributing a benefit of up to 2%. This is offset by a negative impact of approximately 3% related to the sale of our Russian business in December 2022, the impact of which was all in the first half. We also expect a negative impact of approximately 6% from higher interest and tax expense, which takes into account our estimate for full year net interest expense of between $315 million to $330 million, which is modestly lower than where we were forecasting last quarter. Our full year tax rate expectations are unchanged in the range of 18% to 20%. In relation to phasing, we believe that the December quarter marks the low point in terms of Amcor's earnings growth and volume declines. January volumes have improved following heavy customer destocking in December; and while we expect market dynamics to remain volatile in the near-term, our volume trajectory is expected to continue to improve through the balance of the year. We anticipate Q3 volumes will be down in the mid-single-digit range and expect fourth quarter volume declines in the low single-digit range. Taking into account offsetting benefits from cost reduction initiatives and a reduced headwind from higher interest costs compared with last year, we expect third quarter adjusted EPS to be down mid-single-digits on a comparable constant currency basis and for the fourth quarter, we expect adjusted EPS to increase by mid-single-digits over the prior year. And Ron will talk through the factors that support this return to growth shortly. Adjusted free cash flow continues to trend better than last year as we expected, and we are again reaffirming our guidance range of $850 million to $950 million for our fiscal 2024 full year, which will be up to $100 million higher compared with last year. Our plan to repurchase at least $70 million of Amcor shares in 2024 is unchanged, and we continue to pursue value-creating M&A opportunities. With that, I’ll hand back to Ron.

Thanks, Michael. Prior to opening the call to questions, I want to provide additional insights into our outlook for the balance of the year as well as a reminder of the key components comprising our longer-term model for driving shareholder value. Looking first at the balance of fiscal 2024. As I referenced earlier and as highlighted on Slide 10, there are a number of key factors already known to us that give us confidence our earnings trajectory will improve through the second half of the fiscal year. First, the earnings headwind related to the sale of our business in Russia is now fully behind us, eliminating an unfavorable comparative that impacted reported earnings throughout calendar 2023. Second, while second half interest expense is expected to be higher than last year, the magnitude of the headwind from the rapid rate increases over the past 18 months begins to abate as we move through the balance of the year. Third, we have benefits from structural cost savings of $35 million in the second half with an additional $15 million to benefit fiscal 2025. These savings are primarily related to plant closures as we optimize our global footprint. And fourth, earnings leverage has improved due to our commitment to take proactive actions to align our cost structure with evolving market dynamics. This includes eliminating shifts to take out labor, reducing overtime, driving procurement, and maintaining tight control of discretionary spend. In total, over the last 12 months, we reduced headcount by more than 2,000 full-time employees or approximately 5% of our workforce, with more than 1,000 of these reductions taken out in the first half of fiscal 2024. From an earnings perspective, operating costs were lower by more than $200 million in the first half of fiscal 2024 compared with the prior period, and more than $100 million of this cost reduction was delivered in the second quarter, which is almost double the approximately $70 million delivered in the first quarter. The result has been and will continue to be improved earnings leverage, which we've achieved this financial year-to-date despite significantly lower volumes. As Michael mentioned, we are off to a better start in January and are confident Q2 marks the low point for earnings growth and volume declines, and with our overall trajectory expected to improve as we move to the balance of the year. To sum up, we're confident the positive earnings impact from multiple known factors will drive improved momentum in the second half of fiscal 2024, including delivering mid-single-digit earnings growth in our fiscal fourth quarter. Importantly, we're not assuming an improving consumer demand environment, and we'll continue to be proactive in taking actions to ensure our cost base and pricing strategies reflect market conditions. Moving to Slide 11. As we look beyond the second half of this fiscal year, these known factors will serve as important building blocks supporting a return to delivering against our shareholder value creation model, through a combination of strong earnings growth and a compelling and growing dividend, currently yielding 5%. The starting point in creating value will always be growing the business, and over the last 10 years, we've averaged 8% growth in adjusted earnings per share. As you can see on this slide, we have multiple drivers of margin-accretive growth, each with significant opportunity over the longer term. We will also continue to enhance our ability to grow in these areas through stepping up CapEx over a multiyear period and executing on strategic M&A. As volumes normalize and improve, these generally faster-growing and higher-value growth areas will represent a larger proportion of sales, becoming increasingly stronger contributors to earnings. And when we return to a more normalized volume growth environment, this combination of improved mix and the proactive steps we've taken to optimize our cost base positions Amcor well to again deliver strong earnings growth in line with our long track record. To close on Slide 12, we're executing well to deliver against the earnings and cash flow expectations we set coming into fiscal 2024. Our teams are being proactive as market dynamics evolve and focusing on the controllables to take additional cost out where appropriate. We have line of sight to mid-single-digit earnings growth in Q4, and our commitment to our longer-term growth and value creation strategy positions us well to deliver on our shareholder value creation model when the volume environment normalizes. Operator, with those opening remarks, we're now ready to turn the line over to questions.

Hey guys, good day. I guess, first off on the volume declines across the portfolio, which looks like it's about six quarters of negative year-over-year volumes at this point. Obviously, you're not the only ones, but there's been quite a bit of chatter on your customer set all the way down to retailers about increased promotional spending. Just curious as to whether you're starting to see direct signs of that at the point? And if so, which categories, food, beverage, consumer staples, et cetera?

Yes, look, Ghansham, thanks for the question. Maybe I'll just mention the volume declines at a high level first and then come back to your question about signs of promotions or more aggressive commercial activity on the part of the customers. Firstly, I think where there's overlap, we're not really seeing any differences compared to others. So, that would be the first thing I would say. I think our 10% total decline in the quarter is about 2% worse than we expected going into the quarter. So, we weren't actually expecting a much different outcome. Things did track according to those original expectations in October and November, where we were kind of declining high single-digits. December, we saw a really accelerated destocking, which accounted for the incremental softness in which we more than offset to deliver the profit. So, that's kind of the starting point. Now, January, as we've alluded to, was much better. We've seen improvement in most of our businesses versus H1. And it really underpins our view that Q2 was the low point, and it really underpins our Q3 and Q4 expectations. And maybe just to continue and round it out a bit in terms of unpacking the decline roughly by driver, roughly half of our 10% decline, sort of mid-single-digits was related to market impacts. This is a combination of consumer demand, customer, and segment mix. And roughly half or another mid-single-digit contribution was from destocking, and that's pretty much the same in both the Flexibles and Rigid Packaging segments. By geography, emerging markets are broadly flat. Asia is up modestly, Latin America is down modestly. But the developed markets is where we've been especially soft with Europe a little bit weaker than North America. And another way to think about it, just to sort of close off here is of the 10% decline in the quarter, more than 50% of that decline comes from our global healthcare business and our North American beverage business, both of which have experienced the most significant destocking. So, we've had a concentration of impact from those two parts of the business. On the other hand, there are categories growing in some regions, confectionery in North America and Europe; condiments and cheese and coffee in North America and Latin America; beverage in Latin America. So, there are places where the business is growing. Now, to your point, specifically about signs of promotional activity or changing pricing strategies, there is a lot of talk about that. As you rightly pointed out, we hear that from a lot of customers, both publicly and privately, and we're seeing a little bit of that start to take place in the marketplace. But to be honest, we haven't seen that as any kind of a tailwind yet for our volume performance. And our outlook doesn't infer, it doesn't imply, or it doesn't assume that we're going to see any benefit from the market in the second half either. And so we'll sort of wait and see on whether or not the pendulum swings a bit between price and volume.

Okay, terrific. And just for my follow-up on that, on the healthcare destocking, is that just a function of having been destocked? Are you seeing it now versus a little bit later than the other categories? Or is there something unique to the timeline associated with the healthcare destocking?

Yes, I think it's somewhat unique. The markets have been soft, but the weakness in healthcare is primarily due to destocking, which has been significant in both medical device packaging and pharmaceutical packaging. This trend has been widespread and consistent globally within the healthcare sector. It's really a multiyear situation. Healthcare has been one of our most stable businesses for a long time, and we would expect a return to that consistency. However, over the past few years, dating back to COVID, we experienced constrained demand, followed by a surge of demand during the reopening, combined with severe supply chain issues and shortages of raw materials such as specialty foils, resins, and papers. After our fiscal 2022, customers built up inventories to secure their supply for fiscal 2023. This resulted in extraordinary volume in fiscal 2023 as customers strengthened and de-risked their supply chains. Now, customers are holding significant inventories of various products, including medical gloves, device packaging, and pharmaceutical packaging. We have begun to notice destocking, which initially started in Q1, was highlighted last quarter, and accelerated notably in Q2. We expect this trend to continue through Q3 and possibly into Q4. It appears we are at a later stage in this issue compared to other categories, where there are signs that destocking may have eased and we are approaching the end of that phase. In healthcare, however, this situation seems to be more prolonged.

Good day Ron, good day Michael. Just a quick one on the cost savings. So, in the face of the volume declines that you did see throughout the first half and particularly that last quarter, and do take your comments on January and thereafter. But I just want to get a sense as to what the outlook looks like for cost savings going forward? And how you're still going to manage that declining volume environment with margin growth? What you have tabled thus far, but is there anything over and above that, that you can achieve?

Sure, I’ll address that. Regarding cost reductions, we are implementing two key strategies. First, we are responding to the decline in underlying demand by proactively managing our costs with a strong focus on improving productivity and cutting discretionary spending. In the first half of the year, we reduced costs by over $200 million, with around $70 million cut in the first quarter and approximately $130 million in the second quarter. We are achieving these savings by adjusting our cost structure to align with the current demand environment, which includes eliminating entire shifts, reducing labor, cutting overtime, and enhancing procurement efficiency amid lower demand. We expect to maintain this approach as we adapt to fluctuating volumes, but as demand recovers, some costs may return as we adjust our shift patterns. However, this won't be a straightforward process. We anticipate better cost leverage in the second half as we apply the efficiencies we've developed during this period of reduced costs. Secondly, we are also making structural cost reductions. We are progressing with initiatives aimed at cutting costs that we previously outlined, mainly involving plant closures linked to the divested Russia operations. We plan to close up to 10 plants globally across both segments; to date, we have announced seven closures and two restructures, with two to three plants already shut down. We see initial benefits from this program and are on track to achieve a $35 million benefit in the second half, along with an additional $15 million in FY 2025. Overall, our cost reduction strategy is twofold, encompassing both structural adjustments and ongoing operational efficiencies.

Thanks, Michael.

Yes, hi. This is actually sitting in for George. He had a conflict this evening. So, just going off that, are you able to comment at all on how much of that temporary cost saving might ultimately end up being permanent and structural costs that are taken out of the business?

It's challenging to pinpoint exactly what the permanent savings will be, but in terms of procurement, there will definitely be ongoing savings. The reduction in operating costs we have achieved will be lasting, and the structural program will also contribute to cost savings in the long run. The flexibility of our cost base will depend on volume changes. We believe we are operating more efficiently now. We have proactively reduced labor compared to last year, cutting nearly 2,000 positions, with about 1,000 of those since June, which represents around 5% of our workforce. As volumes return, we may need to reinstate some positions, but this will not happen in a linear fashion. We plan to manage this closely and feel confident in our current efficiency. Moving forward, we anticipate continued leverage, which will be beneficial to our long-term margins, typically yielding 20 to 30 basis points of improvement annually. We expect this trend to continue in the long run.

Okay, got it. And I appreciate all the color on that and on the volumes. But I guess you said volumes kind of came in lower than you were anticipating. So, what ultimately gives you comfort in the guidance for the year? Is it really that cost-out component and some of the other factors you talked to?

Yes. There are a few factors. Firstly, regarding volumes, we do not expect any rebound in consumer demand or significant market improvements. However, we believe that the destocking will slow down as we progress through the half. A portion of the destocking observed in December was due to year-end optimization, which is not likely to happen again. We anticipate continued destocking in healthcare and North American beverage, but in other categories, we are starting to see signs that destocking is slowing down. January showed much better performance, particularly in volume compared to the first half, which gives us confidence in our volume growth assumptions for the remainder of the year. In terms of profit, as Michael mentioned, we will continue to benefit from several known factors. This includes improved operating leverage from cost reductions in our business, meaning that as volumes recover, we won’t necessarily increase our costs at the same rate. Additionally, we expect momentum from structural cost improvements, which will continue to develop in the second half due to benefits from plant closures and similar actions. Overall, there are several factors that provide confidence in the positive trajectory of earnings through the second half, though none of these rely on significant improvements at the consumer level.

Morning guys. Thanks for taking the question. But you talked about some of your volumes coming in modestly below expectations and just thinking about your balance sheet, I'm not saying it's going to happen, but just trying to get a feel for what kind of fourth quarter volumes lead you outside of your range at the full year, assuming all other things equal?

Sam, are you still there?

Yes. Can you hear me?

Yes. You broke up there for a second. You broke up right at an important part of your question, which is about fourth quarter volumes.

Yes. Just trying to get a feel of what kind of fourth quarter volumes there would lead you outside in your range at the full year, assuming all other things equal.

We are confident in the cash flow trajectory of the business for the second half. We expect to be deleveraging from here, aiming for approximately three times by the end of June. We feel comfortable with this approach. Regarding volumes, we anticipate a mid-single-digit decline in the third quarter and a low single-digit decline in the fourth quarter, with some variability around those figures. The effect on EBITDA and leverage is quite broad. Therefore, we do not expect volumes to hinder our goal of reaching approximately three turns by the end of June.

Thank you for that. Building on what you mentioned, looking ahead, cash flow tends to be lower in the first half due to seasonality. If you do reach the expected 3 turns as per your guidance, should we anticipate being outside your range again in the first half of 2025? Is this the new standard moving forward?

To address your question, we are currently at a significant point due to two key factors affecting our leverage. At 3.4 times, we are right where we expected to be at this moment of the year. This figure has been influenced by the divestment of our Russia business, which means we have fully accounted for 12 months of earnings from that sector. Moving forward, we will no longer have that factor impacting us and will transition to a more typical earnings growth trajectory, contributing approximately 0.2 turns of leverage. Additionally, we have been maintaining elevated working capital levels for the past 12 to 18 months, and we are starting to address that. Over the last year, we have effectively reduced our inventory by around $500 million, which has positively impacted our cash flow, making us $100 million ahead of last year in the first half. However, we are still affected in some ways, as we are not fully realizing the benefits of that inventory reduction due to significantly lower payables. It is estimated that we have about $200 million left to optimize in terms of cash flow related to working capital. Our goal is to maintain a working capital to sales ratio between 8% to 9%, while currently, we are at 9.8% on a trailing 12-month basis. Given these circumstances, the leverage at this point in the year would usually be closer to the 3 times range. Typically, in the second half, seasonality contributes a reduction of about 0.25 turns, which would place us back in the range of 2.5 to 3 times. Looking ahead, we anticipate that this will represent a more normalized situation, but we are currently navigating a unique phase and expect to see improvement from here.

Yes, thank you. Good morning everyone, or evening I should say.

Hey Adam.

Hey. So, I guess the first question just going on the volume side and just thinking about some of the end markets. And Ron, you gave some good color in the prepared remarks. One of the areas where Amcor has been investing more aggressively has been in the protein space. Can you talk about kind of incremental business wins that you're actually achieving there relative to maybe some end markets that are still pretty challenged on the red meat side, certainly in North America? And how much you can kind of grow in spite of that and take market share in that opportunity?

Well, yes, it's a good question. And you're right, the market is challenged. And so if we think about meat across the Flexibles businesses, it's been a mixed story. We've had meat declining in North America through the half. There's soft market, there's destocking in the meat space as well. But we've seen that stabilize more recently. That would be one of those categories where we're not calling an end to the destocking cycle, but we certainly see signs that it's stabilizing a bit. Similarly, in Europe, we've seen a bit of a stabilization in meat volumes in the last couple of months. And in Latin America, we started to see some growth as well. So, I think meat, as a general category globally, is coming out the other end of the packaging cycle, at least for us, or at least there's some green shoots that give us some reasons for optimism would be the first point. Certainly, as we exited January as well, that would be the case. The second part of your question is a bigger picture question, and I think it's going to be a little bit longer dated, which is around our aspirations to win share in this space. You're aware that we made an equipment — a purchase of a machinery company less than 12 months ago, which should be a part of that total system solution that we're going to market with. And we're optimistic that we've got the right consumables, the right film structures, and the right technical service staff to support the equipment offering. And we think over time, that's going to be a combination and we'll take share not just in North America but around the world. There's not any evidence I can point to yet of that, Adam, because the near-term dynamics are well and truly overcompensating for any modest share pickup that we might be enjoying.

Okay, I appreciate that color. And if I can ask just a quick follow-up. You do have a business and presence in Argentina, both for Flexibles and Rigid on the beverage side. I think you strip out all the inflation accounting for the devaluation, but you talked about the volume environment in Argentina and how you're thinking about that over the next couple of quarters given what I would imagine it's a pretty challenged consumer environment?

Yes, look, Michael can talk about maybe the accounting that you referenced. But from just a business perspective, the first thing I would say is we've been in Argentina for the mid-90s, over 30 years. It's a business that's about 2% of sales and about 2% of EBIT. And we have five plants there, actually across the two segments as you alluded to. And having been there for 30-odd years, we've been there through multiple economic cycles and crises, I guess. And the business is relatively local. And we have maintained total control over the business. So, it's still a business that's functioning more or less normally. But in terms of how we manage it, we continue to drive localization. It's essentially a local business. Already, there's no exports, but to the extent there's anything imported by way of raw materials, we're continuing to drive more localization of the key inputs. Most importantly, probably, we continue to price ahead of inflation. It's always been a hallmark of that business in that country and continues to be. And then we continue to focus on cost, because our expectations are that demand will continue to slow as consumers adjust to the new macroeconomic realities in that country. So, that's a little bit about the business and how we manage it. Michael, do you want to talk a bit about the accounting?

Yes. Just regarding the accounting you mentioned, Argentina has been classified as a hyperinflation economy since 2018. Therefore, since that time, if there has been a devaluation affecting our monetary assets, which is being assessed at NSI, we have been adjusting accordingly. This quarter, there was a change in government, and in December, we observed a 55% devaluation. This resulted in a $34 million impact on the P&L for the quarter in the SI category, which reflects the effect on our monetary assets. This followed Q1, where there was a 20% devaluation. So, that's how we approach the accounting—it has remained consistent since we adopted this method in 2018.

Thanks very much. Ron, I just wanted to ask a question about Rigid Packaging and how you're thinking about the business now strategically. I was just trying to remember whether I've seen volume declines in the December quarter in the past, anything like that we saw in the December quarter, particularly in hot fill, and that's even if you adjust out destocking. So, just interested to get your view on how you think the business is placed at the moment?

Well, Richard, you may not recall seeing volume declines at that level because you haven't experienced them. That's just the reality. This has been a solid business for a long time, but it has faced volume challenges from the same factors affecting the rest of the company, albeit with greater impacts. We observed market influences that we attribute to a high single-digit decline in volumes, which includes consumer demand dropping low to mid-single digits in some key segments, with some customers lagging behind the market. This culminated in a significant high single-digit impact on volumes for both North American beverage overall and specifically for hot fill. Additionally, a major factor this quarter was destocking, driven by opposing factors. Traditionally, we would see some inventory build-up during what is our fiscal second and third quarters leading up to the peak beverage season in North America, but that's not the case this year. Instead of building inventory, some large customers have set aggressive targets for reducing their inventory. This led to a considerable acceleration in inventory reductions in December, contributing to a high single-digit impact on North American beverage and a high teens impact in hot fill. While we noticed modest improvement in January, we expect continued destocking impacts into the third quarter. This situation is unprecedented. However, we remain confident in the business, which is well-positioned in the market. It operates in a well-structured environment, boasts world-leading technology, and has a reasonably optimized footprint. We are downsizing a few smaller plants as part of our restructuring but overall it is well optimized and needs to weather this storm. It's important to remember that outside of the beverage sector, we also have a sizable specialty container business that resembles a Flexibles business due to its end market exposure, and that area has growth potential. Furthermore, our operations in Latin America continue to perform well, showing volume growth and new business opportunities in both the first half and the second quarter. Overall, we have a diverse portfolio, with our North American beverage business receiving the bulk of attention, but we shouldn't lose sight of the other components as well.

Yes, good evening. Thanks for taking my question. Can you just confirm what the level of volume growth or decline was in January? And then as a follow-up to that, is there not a risk here that you sort of extrapolate January volumes for the rest of the quarter when perhaps there was a benefit in January because Costco has effectively delayed orders in December and pushed it into January? Therefore, January might not be a good indicator for the rest of the quarter? That's the question. Thanks.

We won't provide a specific number for January, only that it showed improvement over December, although not uniformly across all areas of our business. Some segments of our business did experience modest growth. That's about all I can say regarding January's performance. I understand your concern about whether we're being unduly optimistic based on just one month's results. It is indeed only one month, and we're mindful of that. We anticipate ongoing destocking effects in the global healthcare sector and in North American beverages, regardless of January's performance, which we expect will continue into Q3 and possibly into Q4. We're not counting on any consumer improvement, so I believe we're being fairly conservative and not drawing too many conclusions from a single month. Nonetheless, it indicates, as we anticipated, that the low point for us in terms of volume and earnings growth was the second quarter.

Hi Ron, hi Michael. I just want to build on Brook's question there, though. Obviously, December was significantly weak. So, January improvement might not necessarily move you guys back to increase. So, I just want to square some of the commentary still where you're saying that you'll see a mid-single-digit volume decline in the third quarter and then low single-digit in the fourth quarter. Can you just help us? The commentary around the January improvement, is that relative to the negative or the decline that you saw through the month of December specifically?

Yes, it's relative to the performance in the whole first half and in the second quarter and in December. So, when we're talking about improvements in January in most parts of the business, that's relative to the first half. That's the first part. I think the other thing to keep in mind is as we work our way through the balance of the fiscal year, a couple of things will also underpin those growth assumptions that we've outlined. One is that we do expect outside of healthcare and North American beverage, we do expect the year-end destocking that we saw in December to not repeat. And some continued abatement or continued destocking runoff or reduction in much of the rest of the business. That's the first thing. And the second thing is, particularly as we get to the fourth quarter, the prior period comp gets a little bit easier. Our volume challenges really started in the last fiscal year. And so as we get to Q4 this year, we've got the benefit of a comparative period which wasn't so strong.

Hi there, gents. Just an extension of Daniel's question on destocking and part of my ignorance, but how can you actually tell what is destocking and what is underlying volume trend? Can you specifically quantify that with data that you're seeing internally? Or is it based on discussions you're having with customers a bit of an approximation internally? Can you just give me a sense of how you work out what is underlying consumer weakness? What is destocking? What is cyclical? What is structural?

Yes. Look, it's part art and part science. So, firstly, there's a lot of discussions with customers, and remember in some parts of the business, we're even co-located with customers. So, there's a high degree of customer intimacy across the business. And the starting point is the discussions and the joint planning dialogue that we have with our customers around the world. So, that's arguably the most important input. But then we also try to triangulate with data. And what do we look at? We look at things like in categories where there is scanner data, which is not the case across our portfolio, certainly not in healthcare. But in food and home and personal care and places where there's good retail scanner data, we take a close look at that. We also look at the scanner results for individual customers, individual companies, and try to determine if there's any difference between the overall market performance and the performance of our specific customers. And then we look at our volumes and try to triangulate between those three data points to see what's the difference. If there's sell-through or not and whether or not we're seeing an inventory drawdown or buildup. So, it's like it's an approximation, but it's a reasonably informed approximation, both with input from the customer directly as well as data and quantitative inputs.

Okay, thanks Ron. That's great color. And then just a quick follow-up on the point in January, and I appreciate it's only a month. But when you talked about an improvement, are you talking about a positive growth comp in January or less bad January versus the last six months? Thank you.

Yes. Look, we're talking about it relative to the first half. So, it's a little bit of both. But generally speaking, we're talking about the comparison to the first half. And so we're not talking about — we had some parts of the business that grew, but we're not talking about general growth across the board. What we're talking about is a general improvement relative to the first half and certainly the second quarter.

Thanks operator, and thanks everyone for joining the call today. We're, as you can hopefully pick up, pretty optimistic about our second half. We believe that the second quarter was the low point for us in terms of volumes and earnings growth, and the business will build momentum from here. So, thank you for your interest in Amcor, and we'll speak to you next quarter.