Q4 2021 Amcor PLC Earnings Call
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Yes.
Good day, and thank you for standing by and welcome to the EMCORE 2021 full year results. At this time all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.
Is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
Racy Whitehead head of Investor Relations. Please go ahead.
Thank you operator, and thank you everyone for joining amcor full equal full fiscal 2021 joining the call today is one Gilead Chief Executive Officer, and Michael Casamento, Chief Financial Officer at this time, all directly to our website <unk> com under the investors section, where you'll find our press release and puts.
Dentation, which will be discussed on the call. Today, we will also discuss non-GAAP financial measures and related reconciliations can be found in the press release and presentation on our website.
Also I'm reminded that the call today include some forward looking statements, which remains subject to certain risks and uncertainties. Please refer to <unk> SEC filings, including our statements on Form 10-K, and 10-Q to review factors that could cause actual results to differ materially from what we're discussing today dirt.
The question and answer session, we request that participants limit their questions to a maximum of two and then rejoin the queue for any follow up with that I'll turn it over to Ron.
Thanks, Tracey and thanks, everyone for joining us to discuss <unk> fiscal 2021, four year results. Joining me today as Tracey mentioned is Michael Casamento, <unk> Chief Financial Officer.
We will begin with some prepared remarks, and then we'll open the line for Q&A.
We start every meeting at Amcor with safety and will begin there on slide three.
Safety is the first and most important of our values and <unk> had has been on a long term journey towards our goal of no injuries. Our safety performance has shown continual improvement, including in the last 12 months, where our performance has been a real highlight.
Across the EMCORE, we reduced the number of injuries by almost 25% compared to last year all of our businesses reported fewer injuries in over half of our sites have remained injury free for at least 12 months.
Through a year, where the pandemic continued to present operational challenges in many countries are focused on safety was unwavering and we're incredibly grateful that our people continue to be engaged and focused on staying healthy as well as safe.
We're proud of our safety performance, which we believe is the best in our industry and the progress we've made over a number of years, but we're also convinced that our objective of no injuries as absolutely possible and we continue striving towards that goal.
We have four key messages today, which is set out on slide four.
First FY 'twenty, one was an outstanding year for Amcor, a multiple dimension the operating environment remains highly dynamic, but our team stayed fully focused on the key business drivers within our control remains agile as conditions changed and demonstrated exceptional execution and consistency all year.
Financial results exceeded our expectations as the year progressed, we ended the year with momentum and we expect another strong year in fiscal 'twenty, two which is the second key message.
Third our recent performance in many ways as a result of the financial and strategic benefits from our 2019 acquisition of Bemis.
Two years on the integration is now essentially complete the financial benefits are ahead of our expectations and strategically we are better positioned than ever with a stronger foundation for growth into the future.
And lastly, we're capitalizing on that strong base by investing in a number of organic growth initiatives, which will maintain our momentum beyond fiscal 'twenty, two and for the long term.
Turning now to the financial highlights on slide five.
2021 was an exceptional year financially for <unk> with record earnings exceptional margin management, despite steep raw material cost increases and supply constraints and momentum building through the year.
Organic sales growth was 2% and we exited the year in Q4 with sales, 3% higher than the prior year.
EBIT growth was 8% with the flexible and rigid packaging segments, both delivering strong results growing in several higher value end markets and contributing to margin expansion.
In fiscal 'twenty, one and of course, EBIT margins increased 60 basis points to reach 12, 6% for the year, which is a new high and an exceptional achievement in an environment, where raw material price increases and supply disruptions continue to require an intense focus on securing availability as well as managing price recovery.
We estimate Bemis acquisition synergies, we're around $75 million and as we close out the final integration activities, we expect to exceed the original synergy target by at least 10%.
EPS increased 16% for the year and was ahead of guidance, which we're able to continue continuously increase through the year.
And free cash flow of $1.1 billion was at the top of our expected range.
Return on capital or return on average funds employed finished well above 15% at a time when our cost of capital is at an all time low and through the year, we returned $1.1 billion of cash to shareholders through share repurchases and higher dividends.
The key message here is that the fundamentals of our business continue to strengthen our teams around the world have demonstrated unwavering focus on executing against our strategy and as a result, we've delivered another year of outstanding financial performance with momentum continuing to build as we begin fiscal 'twenty two.
I'll turn it over now to Michael to provide some more detail on the financial results and I'll finish up with some comments on growth and sustainability.
Thanks, Ron and good morning, and good evening everyone.
I'll start with a flexible segment on slide six which performed very well delivering record sales EBIT and EBIT margins for the year.
Sales includes recovery of higher raw material costs and as Ron mentioned earlier. These are continuing to move higher during the quarter.
Across the business. Our response is being proactive and we have implemented price increases quickly.
As a result in the June quarter, net sales increased by more than $100 million with annual recovery run rate, reaching more than $500 million as we exited the year.
From an earnings perspective, and consistent with last quarter, the price cost impact as remained manageable given the diversity of materials, we buy and the multiple regions in which we can tune those materials.
This is clearly evident in our margin performance, which continued expanding in Q4 and through the year.
From a volume perspective demand in many of our key high value in market has remained consistently strong including mate coffee and pet food.
However, this is being offset by double digit declines in North America medical volumes and European pharmaceutical volumes, driven by fewer elective surgeries and a lot of prescription trends.
From a geographic perspective volume growth has been relatively broad based with good overall performance in emerging markets.
Volumes in North America, while higher than the prior year, along with Europe. This is ware.
Large parts of our health care business are located and growth in these regions it inclusive of those headwinds.
Adjusted EBIT is growing 9% in constant currency terms, mainly reflecting volume growth exceptional margin management with expansion delivered every quarter at around $65 million of cost synergy benefits related to the Bemis acquisition.
Turning to rigid packaging on slide seven in summary, the businesses continued to deliver outstanding results driven by increasing consumer demand in both north and Latin America.
Sales growth included a 5% increase in volume as well as a 3% price mix benefit, including higher pricing to recover cost inflation in Latin America.
In North America annual beverage volumes were 8% higher than last year and hot fill container volumes were up 13%.
Driven by rising consumer demand through the year, which resulted in capacity shortages and historically low inventory levels across the industry.
Demand was particularly strong in hartsville categories, including sports drinks.
To drink tea and juice.
Year to date specialty container volumes were higher than the prior period with growth in categories, including spirits on the personal care and this was partly offset by lower volumes in the health care segment.
Volumes in Latin America were 5% higher than last year with growth delivered in Brazil, and Argentina in particular.
EBIT growth of eight 8% reflects high volumes and favorable mix across the business and this was partly offset by higher labor and transportation costs in North America.
These high cost of being a direct result of capacity shortages and low inventories throughout our network, which introduced supply chain inefficiencies in the short and the short term ahead of installing additional capacity.
Richard containers continues to be one of the world's preferred packaging formats into recyclable resealable and hygienic and has the lowest carbon footprint.
As Youll see on the slide this preference continues to be reflected over time with format share in a healthy growing market remaining consistent.
Demand for recycled content is also rising rapidly and our use of recycled resin has doubled over the last two years.
Looking forward, we expect this trend to accelerate further and are working with customers on very on a very active pipeline of new product launches incorporating high levels of recycled materials.
Moving to slide eight adjusted free cash flow of $1.1 billion was at the upper end of our expected range for the year and we finished the year strongly.
Compared with last year free cash flow benefited from the high flow through of higher earnings and this was offset by 100 million adverse impact from the timing of U S cash tax payments and allowing working capital benefit.
Working capital has been an area, we've been particularly focused on through the Bemis integration and is a real highlight in total since 2019, approximately $250 million of working capital is being released and this has been a source of funds to Cabo synergy related cash costs.
Capital expenditure increased in the current year as we have stepped up our organic investments investments in high growth segments and geographies.
Looking ahead, we have a broad range of attractive investment opportunities and expect to increase capex by a further 10% to 15% in fiscal 2022.
Our financial profile is solid with leverage of two seven times on a trailing 12 month EBITDA basis, and he's brought in line with our expectations.
With strong annual cash flow and a strong balance sheet, the business has significant capacity and flexibility to invest in organic growth.
Execute M&A as well as return a substantial amount of cash to shareholders and.
In fiscal 'twenty, one total cash returned to shareholders in the form of dividends and share repurchases reached an impressive $1.1 billion.
Turning to slide nine and how that looks for the 2022 fiscal year <unk>.
We expect comparable constant currency EPS growth of 7% to 11% for the full year. This.
This excludes the effect of disposed businesses, which impact comparability and an unfavorable currency currency impact of approximately one cent per share assuming current exchange rates prevail for the remainder of the year.
So on a reported basis. This results in an EPS guidance range of approximately 79 to <unk> 81 per share.
Free cash flow is expected to be one one to $1.2 billion up to 10% higher than fiscal 2021, even as we are accelerating capital investments to support organic growth.
Growing cash flow enables us to continue paying a compelling and growing dividend and allocate cash to share purchases, which we expect will be around $400 million in fiscal 'twenty, two while retaining the flexibility to fund acquisitive growth when Nathan.
So with that I'll hand back to Rob.
Thanks, Michael I'll start with a few points to recap the Bemis acquisition on slide 10.
The all SEC all stock acquisition of Bemis was completed in June 2019, and was the largest in <unk> history. So two years and now our integration efforts are essentially complete and the outcomes are clearly exceeding our original expectations.
Firstly from a financial perspective, the transaction unlock substantial value through the realization of cost and cash flow synergies, which have materially strengthened <unk> financial profile.
More specifically based on our fiscal 'twenty two expectations over the three year period post closing the acquisition, we will have outperformed the original cost synergy synergy target of $180 million by at least 10% and as Michael mentioned, the cash released from working capital over the last two years funded the cash costs to achieve those synergies.
Margins in our flexible segment will be more than 200.200 basis points higher than in fiscal 2019, EPS will be at least 35% higher or at least 21 per share. We will have repurchased approximately 25% of the shares issued to fund the acquisition and the annual cash flow will be close to double <unk> annual cash.
<unk> in the year prior to the acquisition.
Strategically Bemis was a perfect fit for Amcor was a pure play coming into what was already the world's largest global flexible packaging business and.
And putting these two companies together created the only truly global flexible packaging platform able to serve multinational customers around the world with an even stronger value proposition, especially in the most attractive end markets like health care and protein where our participation has meaningfully increased.
And of course now the clearer flexible packaging leader in every major geography, with greater absolute and relative scale advantages and we've strengthened our talent and capabilities, particularly in R&D. So we can support large and small customers with the broadest range of innovative and sustainable packaging solutions.
Today as a result of the Bemis acquisition, we're better positioned than ever with a strong foundation for growth looking forward.
With that stronger foundation, we have a range of organic growth drivers that we're investing behind and on slide 11, we've highlighted a few.
An increasing percentage of our sales are coming from the most attractive higher growth higher value add segments, where we have the best opportunities to differentiate including health care and protein packaging and flexible and our heartfelt product segment and Richards.
Our global Health care business is approaching $2 billion in sales across medical device and pharmaceutical packaging segments that require unique capabilities that are not easy to replicate.
We're investing to add both capacity and capability with current projects underway in Malaysia in Ireland to highlight two examples.
And protein and meat packaging, we have a great opportunity to leverage our capabilities in high barrier films and our growing business in North America to the benefit of our other businesses around the world.
In the hot fill rigid packaging segment, we have extensive intellectual property and product design capabilities, and we know how to partner with customers to help them drive growth through innovation.
The sold out environment, we're in and the growth outlook, we're adding capacity across our North American plant network.
Second organic growth driver, we're highlighting today as our leading emerging markets portfolio with over $3 billion in annual sales and a long history of profitable growth.
Again, we're investing behind the emerging market opportunity, including in the new Greenfield plant in China that we highlighted on our last call.
And third innovation and new product development will increasingly contribute to organic growth going forward and we've been investing in this area as well to extend our global innovation Center network into Europe, and China through the recently announced partnership with Michigan State University School of packaging and with our entry into the corporate venturing space earlier this year.
And finally, the number one organic growth driver for amcor going forward, which cuts across the other three and really everything else, we do will be the increasing need for more sustainable packaging.
And we know there will always be a role for packaging for essential food and health care products and so the ability to provide that packaging. So that it meets all consumer needs and as more sustainable creates a unique opportunity for growth.
Slide 12 highlights sustainability, a bit more and as we take stock at the end of one financial year and start a new one we're particularly pleased with the progress we're making to accelerate response accelerate responsible packaging through advances in package design waste management infrastructure and consumer participation.
Examples of recent progress on package design demonstrates the breadth of our product range across substrates with packaging that uses less material overall and more recycled content eliminates problematic materials and has a better end of life profile.
In terms of materials, our use of recycled resin in rigid packaging has almost doubled over the last two years and we expect to almost double again over the next 12 months to 18 months.
We've also announced our new <unk> platform, which eliminates PVC and has the potential to transform the sustainability profile of healthcare packaging in particular.
To improve end of life outcomes, we've commercialized several new recycle ready product platforms, including the polymer based and light and and prima and the paper based matrix product ranges and we've entered into a new partnership to extend our offering of compostable solutions.
Demand is growing for these.
New products, and we will be scaling up to capture the growth opportunity.
Making progress on waste management infrastructure and consumer participation will be equally important and both require close collaboration with others across the value chain.
We stepped up that collaboration over the past year through our partnership network, where EMCORE is increasingly relied upon to shape and established packaging design standards around the world, which can then inform infrastructure investment in consumer education to help keep packaging out of the environment.
I'll talk more about our sustainability agenda following the publication of our annual sustainable sustainability report later this year.
Slide 13 is a slide we shared late last year at our Investor Investor briefing, but it remains relevant today and we believe the EMCORE investment case is as strong now as ever and we set out the reasons why on the slide.
Several of the points have already been made but in simple terms, we generated significant and growing free cash flow every year in fiscal 'twenty two that free cash flow will be up to one 2 billion.
And that cash flow will comfortably support reinvestment in the business as well as M&A and regular share repurchases, which in turn drive strong EPS growth and in addition, we will continue to pay an attractive and growing dividend.
We also believe that momentum matters and momentum has been building and EMCORE, which is clear from our recent performance and outlook comments and the expectations, we have for our fiscal 2022 year.
And finally on slide 14, a quick recap of our key messages from today.
<unk> had an outstanding year in FY 'twenty, one we believe momentum is building and we expect another strong year in FY 'twenty two.
<unk> integration is essentially complete and we've summarized the outcomes today, which have exceeded our expectations and finally, we now look forward to capitalizing on a range of organic growth drivers and we're investing in the business to make that happen.
With that operator, we'll conclude our opening remarks, and we'd like to open the line for questions.
Thank you.
In the interest of time, we would like to remind participants to limit their questions to two and to rejoin the queue for any follow ups.
Our first question coming from the line of Anthony Pettinari with Citi. Your line is open.
Good evening.
For the <unk> 'twenty 'twenty two guidance is there anything that you would say about the cadence of earnings growth, whether you would expect that to be more second half weighted or first half weighted given you have a few moving pieces with <unk>.
Cost inflation and some volume comps that are maybe a bit unusual.
Look at that we've given we gave the full year guidance say for you in that.
7% to 11%.
Typically.
And this is why did kind of 45% first half 55% second half.
We haven't we haven't given particular guidance by quarter.
I think that range.
We are expecting to be within that as we as we head to the year and through the.
Okay.
And then.
Obviously have a large global footprint is it possible to say how the delta variant has impacted demand if at all.
Ross the regions that you operate in and is there anything sort of anticipated in fiscal 'twenty two guidance from that perspective.
Yeah, Anthony first of all it's all incorporated in our guidance our outlook on the top line as a starting point for the outlook and the forecast for the coming year, It's really early to say I think.
We would say that consumption in our demand other than in healthcare has more or less normalized over the last several months notwithstanding the pickup in positive test results that are coming from the Delta variant. So at this stage, we haven't really seen any kind of.
Dislocation, resulting from Covid in the near term here.
Okay. That's helpful I'll turn it over.
We have our next question coming from the line of Ghansham Panjabi with Baird. Your line is open.
Hi, Good evening this is actually Matt Krueger sitting for Ghansham.
I guess just wanted to start out with given several moving pieces, including some some unusual volume pumps and things like that.
Can you outline what youre budgeting volume growth by segment and by region might look like for fiscal 'twenty two.
And then just given that we're halfway through August already can you can you talk about how some of the some of those sales in key segments or end markets have trended to kickoff the year here.
Typically we would expect low single digit growth on the topline and that's what that is.
What you saw around this year and if you look at the history, that's typically what we see.
So I think as we can give you any more detail on that I think it's the low single digit is way we would point to.
I think also if you look back over time, we've typically grown kind of mid to high single digits in emerging markets and kind of low single digits in developed markets, which is consistent with consumption patterns in those different parts of the world and then from an end market perspective.
We're pleased with the performance in some of the higher value add segments, we're really pushing.
Typically a protein pet food coffee, the things, where there's more differentiation healthcare would typically be at the top of that list obviously.
Whether in a bit of a.
A bit of a blip because of COVID-19 at the moment, but that's kind of how we think about getting to that low single digit expectation overtime on the topline.
Great. That's helpful. And then just wanted to shift over to the raw material environment.
Can you talk a bit about what type of headwind you experience from higher raw material costs and potentially raw material shortages during the latest quarter and full year of 2021, along with how those raw material trends are likely to impact your business as we move into 2022 any detail on.
If you had issues procuring materials.
If there were any downtime taken because of lack of supply would be helpful as well.
Yes, sure I'll take the financial pay scales. So the first thing is as you noted <unk> and standard in the industry, we pass through raw material <unk>.
Listening to customers and on a contractual basis. So it's a timing issue more than anything on that front.
The other point about amcor, obviously, we have a broad and diverse range of raw materials and consumption around the globe. So you've got to take that into account as you look at our numbers through the year and then of course, we built capabilities.
Many years of getting that getting that raw material pass through so from where we sit today, we're really pleased with how we how we dealt with some of the spikes in 'twenty one.
As we said in the remarks, we recovered over $100 million in flexible in Q4.
Loan and exited the year on an annualized basis that was about $500 million in those prices so more to come.
The price lag cost was manageable as it was in Q3, so we haven't called that out specifically.
And really the evidence around that is through our margin. So you can see that our margins continue to expand in Q4 and in fact expanded in every quarter throughout the year. So so when we put all that together, we're really pleased with the way we've gotten to on that front.
And our teams are really really well.
We build capability in that space to make sure that we get that pass through.
Efficiently and then on the as far as the outlook in terms of the commodities as Michael said, we're pretty diversified so it's always a little bit of a mixed bag, but generally speaking, we see things moderating and possibly.
The increases abating over the next quarter or two.
As you pointed out Matt the supply avail.
Available or the availability of certain materials is probably the bigger issue potentially at the moment, we have not taken any downtime to answer your question, specifically, but there are certain materials, particularly some of the specialty grades that.
Our insured supply unmet.
We're on allocation.
And thats been quite disruptive and it consumes a lot of management time, just to ensure that we're getting access and I think we've done a good job of that by virtue of our scale and relationships, we have and the breadth of the supply base, we have but that is as big an issue as the price inflation.
Great. That's helpful. That's it for me thanks.
Thanks.
Yes.
We have our next question coming from the line of Salvator Tiano with Seaport Research. Your line is open.
Yes, Hi, Ron and Michael Thanks for taking my questions.
So the first thing I wanted to understand how bp's as we think about that 7% to 11% EPS growth for next year.
What are the key drivers of that besides the buybacks and the synergies.
How should we think about it by segment and if it's more price cost recover agreed in a volume driven and things like that.
So let me I can saw the flame Salvatore that I mean, if you think about the growth of 7% to 11%.
See around mid single digits from an organic standpoint.
The first point.
And then you've still got some benefits from the buyback to come through as well, it's more organic so there's probably 1% to 2% and thats going to come through.
And then obviously, we've got some synergies left to go which would be low single digit so that kind of explains to you that.
The makeup of the of the guidance and I'm trying to get to the upper end, we would see some better revenue and the top line, perhaps a stronger recovery in health care.
And that's the opposite in terms of the lower end of the range might be some further raw material headwinds.
Could drive the lower end of the range, but thats really the makeup of the components in that guidance.
Okay great.
I am not sure thing.
But do you have any outlook with regard to some other items components of your EPS or free cash flow guidance like interest expands CBS working capital expectations and also.
Cash flows.
But if you exclude from Europe just that.
Free cash flow guidance.
So yes. So we've said the adjusted cash flow is going to be one one to $1.2 billion again, a range there which.
We've seen depending on the earnings will really impact that.
Working capital.
Potentially it could move around depending on headwinds from raw materials, but that a key items there.
We haven't called out specifically interest and tax.
You can expect that that would be similar to where we are this year. If there was something unusual to call out there and we call. It <unk>, obviously, we're going to have higher earnings the tax absolute will be higher but.
Otherwise within that range.
And then we're looking to invest more on the Capex front as I spoke to in my notes and that's really to support organic growth into the future.
Several opportunities that we've got on hand today.
Hey.
Okay, great. Thank you very much.
Our next question comment from the line of Kyle White.
With Deutsche Bank. Your line is open.
Hey, Thanks for taking the question wanted to focus on rigid packaging for my first question. The Hot food Hot fill volumes continued to see nice growth here.
Can you provide a bit more details on what exactly is driving this is it still at home consumption with some of the large multi packs growing or is it really just being driven by kind of the new product introductions and innovation that youre seeing.
Market.
It's a good question because it's across the categories. So hot fill containers typically used in ready to drink teas or certain premium segments of the juice market and of course, isotonic sports shrinks and those categories collectively all growing pretty rapidly and most of the participants and brand owners in those categories are enjoying that growth.
It pretty much is the combination of the drivers you mentioned there is.
I think increased distribution and availability and multi pack formats.
There is probably a bit more at home consumption, but theres also a lot of new product launches and a lot of rejuvenation of legacy brands and also just extensions or introductions of new ones. So there's a lot happening in that space.
A lot is oriented towards healthier and better for you type.
The line extensions or new products and so there's just a lot of a lot of activity there and that's the segment where.
There really is only one packaging format.
It's a PD.
Set of segments that resale ability light weight on the go consumption in all kind of fits together with the value proposition of the plastic containers. So it's all coming together the volume growth has been strong we've seen strong volume growth in the past, we sort of expect at some point you get back towards mid single digits, but for now the industry is enjoying strong growth and essentially sold out environment.
Got it that's helpful and then on flexible and health care packaging, just giving me notes a higher value.
Product for you or mix for you.
What's kind of the update there are you seeing a recovery.
End market or has it been kind of stalled now recently would come to uptick some COVID-19 cases, and hospitalization rates that we're seeing.
I think it seems to have stabilized a bit I'm not sure we're ready to call. It let's say that it's turned the corner these are segments and the predominant.
Sub segments would be medical device packaging and pharma packaging and we're more weighted towards pharmaceuticals in Europe, and a little bit more weighted towards medical in North America and these segments would be growing typically at mid single digits and have for <unk>.
Several decades.
And they offer great differentiation and therefore good margins.
I'm not sure we're ready to say that we've turned the corner, we see evidence that things may be stabilizing a bit notwithstanding.
Our recent spiking cases, I'm not sure hospitalizations have followed suit. So I think we would hope that as we work our way through the fiscal year.
That's an area that builds momentum through the <unk>.
Through the four quarters of FY 'twenty two.
Got it appreciate the details and good luck in the next fiscal year.
Thanks.
We have our next question coming from the line of Andrew Scott with Morgan Stanley. Your line is open.
Thank you Ron just wanted to sort of step back and ask a bit of a bigger picture question.
Great job offsetting raw materials in this period, just wanted to sort of understand how you see that.
That ability bank changed the Bemis acquisition, obviously might need if you like the thousand pound gorilla brought that scaling your purchasing.
Is that just fundamentally change your ability to manage your resin and other input costs.
It's an interesting question.
There's a couple of things that have changed I mean, what bemis would've brought is just greater diversification in the bi so we've got bigger obviously, but and that helps.
The relationships, we have with the big suppliers are not unlike the relationships, we have with big multinational customers it definitely matters to be big on a global basis.
And Theres a lot of discussion about these regional markets are global markets I think ultimately we have some big global relationships and it's helpful. So bemis broad scale. It brought further diversification in the spend.
And Thats I am sure it helped but I think the other thing Andrew and you've covered us for a long time I think the experience curve. We continue to go down and we've kind of learned over the years and I've been around long enough to have been through probably three of these peaks in the last 10 years and I think with every cyclical peak like the one we've been going through we get better and better in terms of the inter.
<unk> processes and capabilities to first of all measure what's happening and then take action in.
And mitigate it so it's probably a combination of bemis and may be just getting further down the experience curve thats kind of help us through this cycle.
This cycle.
Understood and I have covered you for a while and I know this is.
That you probably get sick of but to what extent should we view the comments around the buyback is a reflection on.
Maybe a lack of attractive opportunities in the acquisition market at the moment.
Look I don't think you should see it as an either or I think what youre seeing with this result, we've been talking about the cash that the business spits out for a long time and this is going into our fiscal year with line of sight to excess cash flow, even after continuing to fund the dividend and continue and actually fund more capex is.
Michael pointed to Capex will pick up again in FY 'twenty to even after those two Alan.
Allocations of cash the business will generate.
Essential amount left over.
And we go into the year.
With an expectation that we will at least buy back shares.
And if there is an acquisition that popped up we would not hesitate for a second.
Either suspend the buyback or two.
Find the funding, which we would comfortably be able to do so it's I think it's an and Andrew it's not an or.
Very helpful. Thank you.
Thanks.
We have our next question comes from the line of Adam Samuelson with Goldman Sachs. Your line is open.
Hi, Thank you good evening and good morning, everyone.
So maybe following up on that last question and your response, Ron just thinking on the M&A front.
You think about the kind of growth potential beyond fiscal 'twenty, two obviously theres some more bemis synergy is that you.
We're capturing an annualized <unk> as you roll into your fiscal 'twenty two outlook.
The size and scale of that being this opportunity was fairly unique and probably not going to be easy to replicate and so I'm just trying to think about the ability or the confidence that you have to drive.
Inorganic growth and especially <unk>.
That is to buy the businesses, but to extract value from them at scale moving forward.
It might be harder to find.
Businesses of Bemis sites moving forward.
Yes.
Really good question at this point in time, because we were.
Absolutely resolute and focused on making the Bemis deal is a success and we.
We noticed a little bit to do but it's essentially complete which is why we provided a bit of a wrap up today.
You are right from a pure play perspective, theres not another six months to $7 billion deal out there that's obvious and we don't feel compelled to move outside of our product segment mix. Because we just think there's ample growth in the segments that we're in so if we kind of constrain things or put some boundaries around the.
The opportunity set does not limit us in any way I mean generally speaking if you go back over the last 10 years or so.
Companies have been pretty acquisitive.
We're probably up to around 30 deals and we've had a good track record of bringing synergies out.
On the cost side in particular, getting some product benefits as well. So we'll continue to do that I mean, I think there is no shortage of <unk>.
Medium size.
Deals in the packaging space as you can see every week there is another deal announced.
And the good thing about being acquisitive and being big is that we are in the deal flow. So.
Almost never a deal happening.
Not put in front of us and we leased get the option to take a look or or not and that will be part of the formula going forward. So the $400 million that we are allocating this year to buybacks I mean, we'd have an equal amount each year that we'd be thinking about deploying.
And ongoing.
For bolt on M&A and then obviously if something bigger comes up then we would love to have a crack at that time.
Okay, and then maybe maybe just following on the discussion on growth investments.
Finally, we incurred incremental color on some of the capacity adds.
Within the growth Capex, I think I heard a $500 million number referenced earlier, so $100.150 million or so of growth capital and just where that's being directed and more broadly as we think about some other responsible packaging invest kind of opportunities.
Opportunities you're pursuing those might be great.
Greater use of capital moving forward, yes, no. It's a good question I mean, we're going to be stepping up will be about 4% of sales, which we think is a reasonable number to expect us to deploy each year, we've been a little bit lower than that because we've been focused on integrating bemis, obviously, but we'll be at about 4% that means another bit of a step up next year, which is incorporated into.
The free cash flow guidance that Michael described.
Look anecdotally some of the places that we're deploying cash I highlighted a few.
We're putting some capacity in the hospital space in North America.
Great use of capital, particularly when its onsite co located within our customer premises.
Good.
It gets in terms of organic investments.
We're investing in the medical space medical device packaging in Malaysia and in Ireland.
We've got some capacity, we're going to put in Malaysia for a certain product category that we typically export out of North America, or Europe, and we're going to localize that which opens up.
Just a whole another set of growth options for us.
And in Ireland, we're going to get into.
Our product line in medical that we hadn't been in before.
And then from a sustainability perspective, we made a number of announcements over the last six to 12 months of new products that we've talked about a couple of platforms like <unk>, which is a recyclable, we're ready to be recycled retort pouch, which is unique in.
And the demand has just been outstanding.
The product is sold out before it's even barely been launched and so we're going to add capacity in Europe for that so those are just some examples but that all fits within that roughly 4% of sales number that's embedded in our free cash flow guidance.
Alright, great I appreciate the color I'll pass them. Thank you.
Thanks.
Our next question comes from the line of George Staphos. Your line is open.
Thanks very much.
Congratulations on the end of the year and I appreciate the rundown in the presentation today, Ron I Wonder if segue off that last question.
And maybe go to slide 12, if we can.
If you could for us.
Okay quantify or categorize the packages like am light like the PVC film free films, how much revenue do you think youre doing right now in terms of the.
Possible packaging products suite that you are offering your customers right now.
And what do you think thats growing at if you could put any numbers around that and Relatedly is this scenario that could get.
The answer will be yes, obviously, but we really think there's an opportunity for acquisitions too.
Improve your performance here, where you really don't need acquisitions, you've got the best technology in the market. So couple of questions to start.
Yes, let me just going into the second part first I mean, we do believe we have the best technology in the marketplace. We also our humble enough to realize we don't have all the good ideas out there and so if there is an acquisition that would add to our product portfolio. We would absolutely do it and it's one of the reasons why we're going to be much more active in the corporate venturing space.
It's another it's also one of the drivers of the investment with Michigan State. So we're going to do much more in term in terms of external sourcing of let's call. It good ideas and innovation to supplement what we do believe is industry, leading R&D. So that I'd say watch this space.
As far as the sales into we might describe as more sustainable packaging.
If we think about it through the lens of whats recyclable would just take that lens and we're not for a second suggesting that thats. The only answer here, but that tends to be the most readily available end of life solution. We've got three broad segments, two of which are fully recyclable, so pretty much everything that we produce and sell in rigid packaging is recyclable everything we make in the carton.
Segment is recyclable.
That leaves the flexible segment and in that space right.
Right now of the sales in the flexible packaging SEC.
<unk> about 60.
60% of what we're selling today is considered designed to be recycled.
There's probably another 75% of our sales that could be so theres, 10% to 15% that could convert.
Requires customers to adopt a different structure.
And then you have <unk>.
Additional platforms like <unk>, and like matrix, and like and Prima, which help move those numbers up.
In steps.
None of them are going to move that needle on those metrics in a material way in any given year, but over time the percentage of our flexible that is recyclable will start to increase as those products get take up.
I'll stop there, but we're also acknowledging that is not the end of the story, we've got to have the waste management infrastructure and the consumer has to participate as well too, but as far as the package design.
That's about where we're at.
Ron I appreciate that and then coming back to the fourth quarter and I recognize obviously amcor likes to focus on the year to date results and the year results and you had good performance it looked like and flexible there was a deceleration and actually a decline.
Call. It in the low single digit range and flexible so is that just purely health care and the continued weak.
End markets for you this year did anything else.
Go down for you at the end of the year as we are exiting as we're exiting and going into fiscal 'twenty two thanks, and good luck in the quarter.
Yes, Thanks, George No I mean, it's basically the same story that we've had and flexible as all year is health care health care is the sizeable business. If you just think about it is in between one five and $2 billion in sales.
And within that flexible portfolio and you think about that.
The Big North American medical business, and European pharmaceutical business being down double digits.
A couple of percentage points off of what you would expect from a growth perspective, right. They should be growing mid single digits and they were down double digits. So that takes some meaningful bite out of the overall segment growth.
Thank you Ron.
Thanks George.
We have our next question coming from the line of Richard Johnson with Jefferies. Your line is open.
Yes.
Thank you very much good morning, everybody first question I just wanted to ask about organic growth in the flexible division.
Look at this over the last two years in absolute dollar change all the growth comes from the Costco efficiency lines. The in fact, the mix of volume and price is negative. So that's obviously very impressive. So I really my question is how sustainable is that how can you continue to drive organic growth simply through cost out or other efficiencies.
And should we be worried about the fact that the mix of volume and price continues to be negative.
Yes look I mean, Richard you followed the company for a long time.
Top line sales is growing kind of low single digits actually about 2% for a long period of time flexible as would normally be in that space. I think the last couple of years is a tough read through if youre talking about the long term.
Trajectory of the business.
That being said with that level of growth, we have been expanding margins for I don't know over over a decade and the flexible margins now being up over 14% from where they were 10 years ago or so it probably six or seven I think gives us some comfort that at that level of realm.
The relatively modest topline growth, which mirrors the end markets that we supply will continue to grow profit and expand margins.
Okay. Thank you and then secondly could you just run through the <unk>.
<unk> to the cotton business in 'twenty, one and particularly by region incident did not get an understanding of what volumes are today. Thanks.
Yes look the carton business, which is about 8% 9% of sales had a very good year.
Business.
Good year on profit the profit was up.
Great job managing costs and actually the volume performance is probably a little bit ahead of long term trend that business from a volume perspective is likely to be flat to declining low single digits last year was it was close to flat on a volume perspective too.
By region, we start to get into some smaller parts of the business, but the bigger parts of that.
Europe and the Americas.
Would mirror the trends that I just described.
Got it thanks very much.
We have our next question coming from the line of Jon <unk> with Macquarie. Your line is open.
Hello, Good evening revenue model.
Hi, John.
Just had a couple of questions.
First one Ron just in relation to Capex.
Some of those increments.
Can you remind us what your return targets are on that incremental a little of that growth <unk> had.
Return targets in the past somehow although shy.
Perhaps or not.
And the second question for Michael just in terms of that free cash flow of $1 one bill.
Was the what was the drag if any from raw materials and higher inventory.
It will impact on that thank you.
Yes, I'll take that.
Returns on Capex, you really haven't changed the model there I mean, it's a cash investment we expect 20% return on those so as a minimum.
That's typically what we look towards.
Real change there over the term.
In respect to working capital.
Yes look we saw some higher inventory during the period end.
And some higher receivables as we started to flush that through the system and then the offset was the payables. So.
From a year end perspective, it wasn't a meaningful impact.
But theres, probably still a little bit of that to flow through the system and it's more timing timing issue than anything but in the cash flow.
That we saw at the year end, we were pretty pleased with where we ended it was a strong performance.
We had a good finishing the year and that's really on the back of.
Our continued focus on working capital and particularly around things like data as an <unk>, we hadn't really good performance there across the board just general inventory management has been strong and we continue to manage.
With our suppliers as well so overall really place on the working capital front.
Got it thanks a lot.
Yeah.
We have our next question coming from the line of Analogize Shah with BMO capital markets. Your line is open.
Hi, there.
I wanted to ask about your sourcing of recycled resin.
Any sort of thing enough to double your usage and then I think you said you are going to double it again over the next 18 months and we hear from other companies, it's actually quite difficult to source the amount of recycled resin that they would like to.
What do you think the EMCORE is doing differently.
Well listen, it's becoming more and more important obviously to our to our customers a lot of what we use and maybe just to dimension. The numbers. So cross amcor rigid packaging would be the place where we're using the most recycled resin we exited.
FY 'twenty one.
Converting about 10% recycled resin out of the total that we convert and that number is growing in absolute tonnes. As you referred to but also it's growing as a percentage of the resin that we convert.
In that space, where clearly the biggest buyer out there and so we've been actively sourcing.
Both from.
New entrants into the recycled resin space as well as some of the Virgin resin providers that have gotten into PCR.
So it's a pretty broad book that were buying across.
And then in flexible it is a little bit more challenging when youre trying to source polyolefin and that's still.
Pretty nascent.
A lot of the material that we're using for food pack.
For flexible packaging is coming from food grade.
Milligan water jugs and things and those are in scarce supply that will that will change over time chemical recycling will be a contributor over time.
We're active in more.
More than a half a dozen different pilots and feasibility projects on chemical recycling around the world that will be part of the mix too so.
I would say watch this space, but so far we've been able to satisfy our demand.
Great. That's very helpful. Thank you.
And then my other question can you talk about exceeding with synergy target by at least 10% maybe you could just give a little more detail on where youre doing better than anticipated just so we could get a little more granularity around that at least 10% number.
Yes, so the original number was $180 million.
And thats the number that we're going to be by about 10% or at least 10%. We talked at the time of the deal about three big sources first G&A overhead reductions.
We estimated that would be about 40%.
That's more or less track and maybe a little bit probably a little bit ahead of that number but it's been in that ballpark procurement, we said would be another 40%.
More or less.
In line and then footprint at the time of the deal we thought might be 20%, we've found more footprint opportunities than we probably anticipated and so more of the outperformance proportionately will come from footprint, which means plant closures.
So if you stand back from it it's mostly.
The footprint plant closure side, and a little bit on G&A, which is the source of the outperformance.
Great. Thank you very much.
Thanks.
We have our next question coming from the line of Larry <unk> with Credit Suisse. Your line is open.
Alright, thanks, everybody good day.
A couple of questions obviously so.
My first question is yes.
I can do by way of example, the question is what are the top three.
<unk> to create organic.
Earnings over the next say three years call it FY 'twenty five.
Here's an example of what.
Asking for.
Asia, you guys might be.
<unk> skewing in terms of your overall market share in medical and pharma packaging relative to your market share in other parts of the world.
So when you look at the size of the Asian market.
Sure.
Is that in medical packaging is that initiatives amcor might undertake and how would they do it.
To grow out its earnings over the next three years you might not look at a geography, you might look at it maybe.
Pet food across the world. So can you dimensionalize those top three initiatives.
Trying to look past.
Short term earnings.
Yes, it's a good question I mean, you picked on one.
I'm not sure it makes the top three I'm going to elevate up in the top three but on the medical point in Asia, specifically, absolutely I mean.
We're actually doing that now and that's the investment in Malaysia that I referred to we're putting.
Capacity in that part of the world that is.
Enables us to be much more nimble and responsive to the local market demand which is substantial.
Absolutely it's part of it I mean, if I, if I, if I zoom out and I tried to think thematic Lee.
One thing that comes to mind is.
Yes.
Broadening our participation in some of the higher value add segments that were deepen in one region. So pet food coffee protein. These are segments that we have really strong positions in but it is an uneven so we might be particularly strong in Europe and one in a little bit weaker in North America, and so evening out that participation is.
<unk> is going to be a big source of organic growth.
As a as a region as a whole I would say Asia, particularly China, and India, and I would probably elevated up from medical and just say generally in the places we're choosing to play in those Asian.
High growth Asian, and emerging markets that would that would make the list.
And then I, probably wouldn't rule out rigid packaging in North America, particularly as we continue to expand the healthcare sorry, the Huntsville franchise that we have and grow in the specialty container space, where there is technology and differentiation, but also share opportunities.
So.
It's a good question Larry I will give you those three is certainly amongst the top.
Four five okay.
Okay, I look forward to scoping those out maybe near future and my second question pertains to alliance to end plastic waste.
Yes, excuse of criticism, but it feels like a bit of greenwashing here.
<unk> taken this executive committee.
And when you get on the website for align St plastic waste first of all there is no set of accounts and each supposedly an organization, that's well capitalized, but when you look at the projects.
I think there was a project in India, where they.
Put a.
Some sort of filter in a river, which ended up getting stolen.
There is a couple of projects won in India, and Africa, where it's highly manual intense it doesn't require a lot of capital.
Collecting.
Waste.
This is an organization that's backed by billions and.
The project team very small I'm, just wondering where you want to take that organization because as you say, we need to waste management infrastructure, particularly in emerging markets.
And I've always had hope that that was going to be the organization that would drive it.
Listen Larry I think it's an interesting observation I mean, I would say that that of all the different partnerships and organizations that were part of has catalyzed the most actual funding bio.
By a long shot and so I take onboard some of those projects that have been launched are smaller I think to contextualize. It also we have to keep in mind. This is a new organization essentially it was started a couple of years ago and then as soon as it stepped up with full time management, the pandemic kind of has slowed things down but.
There is more capital that's been committed by the Executive Committee and the board of that organization and anything else that were associated with its real money I mean, we write the check.
That scares me is theres, just no cell counts that you've seen anywhere.
Well like any NGO, Larry sometimes at where industry Association, that's not always this transparent but.
The money that the participants are putting into that organization will crystallize and will catalyze action and there's good examples I mean, the project stop in Indonesia is a good is a good pilot there's one in the U S.
Called first star.
Which is small and I think.
The initiative gained steam we'll have bigger.
Bolder projects to point to but for the early days I'm pretty pleased with the way it's distributing.
<unk>.
Okay. Good.
<unk>.
Thanks for that Brian.
Okay. Thanks, Larry.
Our next question coming from the line of Nathan Reilly with UBS. Your line is open.
Yeah, Hey, Ron it's pretty clear what you're signaling the completion of the Bemis integration, which I guess gives you the bandwidth to pursue some of those smaller bolt on M&A opportunities, but just given we haven't seen you too active in that space of the last few years can you just remind us of your bolt on M&A investment criteria.
Just in terms of return metrics, but also why you'd be comfortable taking leverage to and also where are you seeing the most attractive M&A opportunities right now.
Yeah, I would say across our portfolio, there's going to be bolt on opportunities and pretty much throughout the business. If I had to put a priority list together I would say.
Flexible to reinforce some of the higher value end market segments that we're participating in or.
Or in Asia.
Would be would be near the top of the list I think in rigid packaging the specialty space in North America outside of beverage would.
Would be high on the list so that would be from a product.
Perspective.
Returns are always going to be important accompanies now generating a 15% return on capital. So we need to be there or thereabouts as we think about investments.
I mean from a leverage perspective, I wouldn't give you a number other than to say, we're going to be an investment grade.
Company always have been and are committed to that but within that we haven't.
Ample capacity, if you think about the EBITDA now of the business.
Of over $2 billion.
One turn.
Wood.
It makes for a lot of firepower for M&A. So there's no constraint there.
Excellent. Thank you.
Thanks.
Our next question coming from the line as Keith Chau with MST. Your line is open.
Good evening, Ron and Michael So just a couple of follow up questions on the adjusted free cash flow guidance. So I'll take your point around a step up in capex, but obviously the offsetting effect of <unk> 21 was that timing of the tax payment so Michael perhaps if.
Well I don't want to steer you in a direction, but certainly feels like.
The low end of that range.
It's probably unlikely and potentially getting more towards the top end. So I'm just wondering if you can prove.
Bought us with a bit more detail on where you think at this point in time you'd be sitting within that range notwithstanding some of the moving parts.
Yes.
As I said Bryan Bryan just Erinn, it's originally wide range of $1 one to $1.2 billion. Obviously affected in that is is the earnings guidance range. So we've given a range of 7% to 11% so depending on where we end up in that range will drive the cash flow as well.
And the other key component is really the working capital movement as I said earlier, we've had some raw material increases which.
Which we managed pretty well into into the end of FY 'twenty one.
That can be a factor as we head into 'twenty two there can be some movement there to the other to the upside or the downside.
So thats really whats in the range.
That said, we've managed working capital really well.
Over the last two you take the and taking cash out on that front.
As we move forward, we inked and that's going to be pretty stable. So I mean, then that drive us within that range.
Do you think Michael you can continue to improve that average working capital to sales ratio absent any other movements in raw material costs.
You've done a particularly good job, particularly in FY 'twenty.
Any more opportunity to come from that.
So typically we would see the working capital if you go back before the Bemis acquisition, the working capital content within that 8% to 9% range and for US we feel that thats pretty comfortable and when we when we did the acquisition it jumped up to $10 seven and then we got it down to nine five and went down at night.
So I think we feel pretty comfortable that way we are today.
So you shouldn't expect too much more to come out of the working capital to be relatively stable.
Okay. Thank you and then just a second question and forgive me if I missed this one but I think.
We have a library and transport costs.
Called out for the rigid packaging business.
Part due to the volumes growth that you're seeing within that business in North America.
And an expectation for those labor and transportation costs to ease in the coming periods.
And what's the reason behind that was really.
We saw significant increases in demand.
And basically the capacity is full on in the industry capacity useful so we didn't get a chance and opportunity to build inventory in the acquired a months leading up to the summer and so.
What we experienced was increased cost just to manage the supply chain. So we had shuttling costs increased labor and the like.
And Thats ahead of installing new capacity. So we've touched on today that we are installing new capacity in that hot fill space, particularly.
So we would expect over time that should start to abate as we as we get that capacity come online.
And is it possible mark what they give us.
A quantitative estimate of what that headwind was in the fourth.
Adam It was about it was a few million dollars in the quarter. Okay. Okay fantastic thanks very much.
We have our next question coming from the line of Cath, while we have no more equity research. Your line is open.
Hi, Thank you just had one question. So wrong you made some comments in your prepared remarks about the need for waste management infrastructure investment to pick up which is.
Great very clear.
Do you think that EMCORE will have to invest in the space, obviously, you're taking an alliance approach at the moment do you think in order to to control.
The development of that infrastructure that you will actually have to invest in and Keith.
Yeah. Thanks, Scott It's a good question I mean, the short answer is no.
Going to be active in bringing responsible packaging to life in a number of different ways, but we'll also be and will have to be somewhat judicious and focused and disciplined about where we deploy our shareholders' capital and we think the best use of the capital.
As in developing packaging that is going to have a better end of life profile. We're uses more recycled material over less material in the first place that's where most of our efforts will go.
As far as waste management infrastructure.
A number of different things and means to fund that including extended producer responsibility regimes.
Deposits and things like that and when those are properly designed and we're very supportive of those and that can likely be part of the answer, but I don't envision us putting capital to work in that part of the value chain in any extensive basis other than maybe just some pilots through a partnership or an alliance.
Okay, great. Thank you that's all I had.
Thanks.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Thank you. Thank you.
Okay.
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