Q1 2022 Amcor PLC Earnings Call
Yeah.
Ladies and gentlemen, this is the operator today's conference call is scheduled to begin shortly please continue to standby. Thank you for patients.
Once again this is the operator today's conference call is scheduled to begin shortly please continue to standby. Thank you for patients.
[music].
Good day, and thank you for standing by and welcome to the Amcor first quarter 2022 results.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and if he would like to ask a question.
Press Star one and if you require any further assistance during the call you May press Star zero without further Ado I would like to welcome your host for today Ms. Tracey Whitehead head.
<unk> of Investor Relations the floor is yours.
Thank you operator, and welcome everyone to <unk>.
Yeah.
Joining me today is one to reentry.
And Mark can talk them into Chief Financial Officer.
Our directly to our website amcor.
You'll find our press release and presentation.
Can you just touch on the curve.
Thank you Scott.
19.
Absolutely.
Yeah.
Also let me remind you that the call today include forward looking statements, which remain central to.
Uncertainty.
Okay.
Keith.
Including our.
Hum.
You should review the factors that could cause actual results to differ from the brakes and chassis today.
During the question and answer session once again to be replaced.
The limitation.
C suite, and then rejoin the queue for any problems.
Me neither.
Yeah.
Okay. Thanks to everyone for joining us to discuss <unk> fiscal 2022 first quarter results.
Joining me today is Michael Casamento, <unk>, Chief Financial Officer, and we'll begin with some brief prepared remarks, and then open the line for Q&A.
We start with safety because it's the first and most important of our values and our highest priority for every one of our 46000 people around the world and then of course, it's been on a long term journey towards our goal of no injuries and our safety performance remains a real highlight.
Across the group, we reduced the number of injuries by 16% compared to the prior year and 62% of our sites have remained injury free for at least 12 months.
As we continue to make strong progress it reinforces our conviction that an objective of no injuries as absolutely possible and we continue striving towards that goal.
We have four key messages today, let's sit here on slide four.
First amcor is navigating well through challenging external conditions that we highlighted in August and.
And like the rest of our industry, including our customers and suppliers, we're experiencing unprecedented complexity across the supply chain, but we're performing well and we remain on track to deliver on our expectations for the year.
We're able to say that confidently because we're leveraging our scale and global reach we're relying on the capabilities and experience of our management teams and we're maintaining an unwavering focus on the right priorities in particular security of supply for our customers recover recovery of higher input costs and managing the sales mix.
The second message today is at EMCORE delivered a solid first quarter, while cell sales were tempered by supply chain challenges in some parts of the business. We delivered another solid quarter of double digit earnings growth, which was in line with our expectations.
Third we're reaffirming fiscal 'twenty two guidance and we remain on track to meet the fiscal 'twenty two earnings growth and cash flow objectives that we provided in August and.
And finally, we've built a strong foundation over the last several years and today <unk> is better positioned strategically than ever.
In addition to delivering against short term priorities, we remain focused on our long term strategy and track record of growth and value creation.
Turning to the financial highlights on slide five excuse me the business delivered a solid start to the fiscal year are.
Our 10% reported net sales growth includes approximately $285 million of price increases related to the pass through of higher raw material costs.
We're incredibly proud of the way our teams have continued to successfully steer us through this environment of ongoing inflation achieving significant recovery over the last several quarters and will continue to manage this dynamic going forward.
Excluding this pass through impact organic sales grew 1% in this environment, we're maintaining focus on our long term strategy of optimizing mix and it's clear that volume performance in both segments would have been higher in an unconstrained environment.
Overall, EBIT increased 7% and comparable constant currency terms, which was right in line with expectations.
Flexible segment had a strong quarter generating earnings growth of 8% driven by favorable mix and outstanding management of costs.
In rigid packaging business in North America experienced a particularly challenging environment, including elevated demand combined with full capacity utilization and constraints of critical inputs, which resulted in operating inefficiencies and higher costs.
Net income and EPS were both up at double digit rates, increasing like increasing by 10% and 12% respectively.
And our financial profile remains strong we increased cash returns to shareholders during the quarter, including repurchases of $64 million of shares and the board declared an increased quarterly dividend of <unk> 12 per share.
So the key message here is that the business remains focused and continues to execute well and with that I'll hand over to Michael.
Thanks, Ron and Hello, everyone turning to slide six.
Our flexible business performed very well during the period delivering growth in high value end markets executing well to recover inflation and demonstrating strong cost performance.
Reported sales growth of 10% includes recovery of Harvard high raw material costs, which increased during the quarter.
Actions, we have taken to pass through those.
Hi cost drove sales up by approximately $210 million, which on an annual basis. He has well over $800 million and represented growth of 9% in the quarter compared with last year.
The overall price cost impact was unfavorable but has remained manageable given the diversity of materials will buy the multiple regions in which we consume those materials and the implementation of inflation driven pricing actions.
This is once again evident in our margins, which remained at a level equal to the prior year.
Despite the impact of higher raw material costs and related pricing recovery.
Excluding this raw material impact organic revenue growth of 1% was driven by favorable price mix of approximately 2%.
Consistent with our long term strategy the businesses remain focused on mix with continued growth in high value end markets, including pet food premium coffee and medical.
This growth more than offset the sales impact of lower volumes in segments, such as home and personal care and across southeast Asia.
In addition to shortages of certain raw materials, including aluminum and especially resins had a dampening effect on volume performance in some categories, including health care and protein related products.
Adjusted EBIT was up 8% and comparable constant currency terms for the quarter and reflects a favorable mix strong productivity and cost improvements.
Turning to the rigid packaging business on slide seven we.
We delivered reported sales growth of 13%, reflecting the pass through of higher raw material costs.
Comparable constant currency sales growth of 1% was driven by higher overall volumes.
In North America beverage volumes were marginally ahead of the same period last year.
Huntsville beverage container volumes were 1% lower against a strong comparative period of double digit growth.
And high demand and juice categories was offset by lower sports drinks volumes.
Specialty container volumes were lower against the prior year, which benefited from strong volumes in the home and personal care category.
In Latin America double double digit volume growth reflects strong performance in Argentina, Brazil, and Colombia and earnings were higher in the region.
In constant currency terms segment earnings were adversely impacted by inefficiencies and higher costs in North America, resulting from unprecedented and industry wide supply chain complexity and disruptions.
Overall demand remained elevated and increasingly volatile in the beverage segment.
At the same time the business continued to operate at full capacity and we historically low levels of inventory.
This coupled with further inflation in shortages for key inputs, including P. T in certain specialty reasons rhythms.
<unk> operating efficiencies and higher costs in order to service customer demand.
While we expect these dynamics to persist in the second quarter, we anticipate current challenges will improve through the second half of fiscal 2022.
Yeah.
Moving to cash on the balance sheet on slide eight as a reminder, our cash flow is seasonally weaker in the first half of the fiscal year and for the current quarter adjusted free cash outflow of 242 million compares with an outflow of $119 million last year.
The increased outflow, mainly reflects higher use of cash related to working capital with the adverse impact related to timing of higher raw material costs cycling through the business.
We continue to mine are strong we continue to maintain a strong focus on working capital performance and our rolling 12 months average working capital sales ratio at the end of September remains below 8%.
As planned capital expenditure is tracking higher than last year as we have stepped up organic investments in key high growth segments and geographies.
And <unk> financial profile remains solid with leverage at two nine times on a 12 on a trailing 12 month EBITDA basis, which is inline with our expectations for this time of year.
And cash returned to returns to shareholders in the first quarter were higher than the prior year, which reflects $64 million of share repurchases mentioned earlier and an increase in dividend per share.
Taking us to the outlook on slide nine our.
Our solid first quarter of double digit EPS growth in line with our expectations enables us to reaffirm the 2022 guidance we outlined in August.
We continue to expect adjusted EPS growth of 7% to 11% on a comparable constant currency basis.
Which represents an EPS guidance range of approximately 79 to 81 per share on a reported basis, assuming current exchange rates prevail for the balance of the year.
Free cash flow is expected to be one one to $1 2 billion and the growing cash flow enables us to continue to pay a compelling growing dividend and allocate cash to share repurchases, which we expect will be around $400 million in fiscal 'twenty, two while retaining the flexibility to fund acquisitive growth when needed.
So with that I'll hand back to Ron.
Okay. Thanks, Michael before closing and turn it over to Q&A I'd like to spend a few minutes on the longer term starting on slide 10, which summarizes the investment case for amcor.
Over the last several years, we've continued to execute against our strategy strengthen our capabilities and establish a stronger foundation for growth and value creation and as a result, we believe amcor is better positioned strategically in our investment case is as strong as ever in.
In simple terms that investment case starts with our market positions. We are the global leader in most of our chosen segments with relative and absolute scale advantages in every region and significant exposure to attractive high value end markets across food beverage and health care.
We have a proven track record of consistent earnings growth and margin expansion and we generate significant free cash flow every year, including between the $1, one and $1 2 billion in this 2022 fiscal year with.
With a strong balance sheet that cash flow provide substantial capacity to invest in the long term potential of our business and also to deliver a significant and growing amount of cash to shareholders.
We use our shareholder value creation framework, which is shown here on slide 11 to describe how we allocate cash flow every year and how that translates into value for shareholders through.
Through the combination of reinvestment in the base business M&A and share repurchases, we expect to generate 5% to 10% constant currency EPS growth each year.
Our dividend has historically yielded around 4% and continues to be especially compelling in such a low interest rate environment.
So through economic and commodity cycles, the outcome about allocating capital in this way has resulted in average value creation through combined EPS growth and dividend yield of about 13, 5% each year in line with the 10% to 15% you see here on this slide and we're very well positioned to continue that trend.
The strategic choices, we've made guide how we prioritize investments back into the business and we're investing now in several areas that will continue to drive long term organic growth and those are highlighted on slide 12.
First our business mix is increasingly oriented towards the most attractive segments, which offer greater potential for differentiation and growth like healthcare pet food premium coffee and hot fill beverages.
Our results. This quarter provides strong evidence of how the considered choices. We make every day lead to these attractive segments, representing an increasing percentage of our sales mix, which contributes to consistent margin expansion overtime, even while navigating complex environments like the one we're in now.
Second we continue to invest to expand our leading emerging market positions, we had another quarter of double digit growth in both China and India. For example, and we're actively investing in these markets, where we expect to see demand remain a tailwind for the foreseeable future.
And third we remain uniquely positioned to launch a steady stream of innovative new packaging solutions, we're investing in our innovation capabilities and network of global innovation centers. So we can capitalize on what we believe is our greatest opportunity for growth and differentiation and that is the demand for more sustainable packaging.
Slide 13 highlights what we see as the three requirements for responsible packaging and we are seeing clear progress on each of the three package design waste management infrastructure and consumer participation.
In the past we've highlighted examples of groundbreaking new product platforms, like and light and prima and am Sky, but were also actively collaborating with others to develop solutions that address infrastructure and consumer participation.
Most of these initiatives start small, but all have the benefit of demonstrating working models that can be scaled and leveraged across markets and customers.
In Colombia as an example, we partnered with one of our key customers and others across the value chain to achieve a fully circular bottle to bottle solution for amber colored beverage containers, where the color is critical for this particular brand.
In Australia, we've enabled an iconic brand to transition confectionary packaging to a structure, which incorporates 30% chemically recycled material and.
And finally, an example, which is already functioning at scale globally. We've worked with the global market leader for single serve premium coffee to increase the use of recycled aluminum, which is now at 80% for our core product line.
In the next few weeks, we'll be releasing our 2021 sustainability report, which will describe our sustainability strategy and agenda more fully and we will provide more data in case studies to illustrate the strong progress we've made over the last 12 months.
And finally on slide 14, a summary for today.
EMCORE delivered a solid first quarter results in line with expectations as we navigated well through a challenging external environment. This.
This leaves us on track to meet our 2022 fiscal year guidance and looking further ahead, we are better positioned strategically than ever before with a strong foundation for continued growth and value creation. So with that operator, we'll close our opening remarks and opening and open the line for questions.
Thank you Sir.
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 comes from the line of Ghansham Panjabi.
Baird. Please ask your question.
Thank you good day everybody.
I guess first off you know maybe you can update your view update us with your views on volumes for fiscal year 'twenty two.
Quarter was obviously flat.
You have tough comps as you know.
As well as the year unfolds.
Curious as to how you think the rest of the quarters will evolve and I guess I'm asking because a lot of your customers are going to be.
Passing on pretty significant price increases to consumers.
Under your 'twenty two onwards, and there is some level of elasticity in those categories at least historically, so I'm just curious as to what you have baked in for volumes.
Yes, it's a good question Ghansham.
Guidance that we just put out remember, it's only 90 days because we're coming through the first quarter. So our guidance is is just from August and factors in.
Pretty much the volume growth that you would expect from us on in any given year, we're sort of low single digits little slower this first quarter, but predominantly because of some of the constraints. We had in the supply chain. We would expect through the rest of the year those will abate over time and as it relates to the pricing we haven't historically seen a lot of elasticity in the demand for the products.
We are providing packaging for considering that it was these are defensive consumer staples on the food side.
The more premium products have been pretty resilient to price there's been a lot of price taken already in <unk>.
Many of those segments and then obviously on the health care side. It's.
Probably even less so.
Got it and then in terms of the raw material shortages, you sided just give us a bit more color in terms of which specific raw materials.
You had some constraints and if I if I read that correctly. How are you managing also with labor issues in the U S and in Europe, a lot of your peers have called that out.
And do you see any residual impact in the second quarter as well. Thank you.
Yeah Labor has not been a major issue for us certainly not from an inflationary perspective, there are times when labor is hard to come by that's definitely true.
But more for us it's been a it's been a supply.
Situation on the raw material side, that's been limiting and it's predominantly been in some specialty resins that affect the flexible business and also the specialty container part of rigid plastics. These are.
Resins that are not used in large quantities, but provide some particular feature barrier or otherwise that have been on particularly short supply and have put us on allocation and we intend to put customers on allocation in several segments across the business, including medical where we had a rebound in <unk>.
Some growth, but not as much as we could have had.
So specialty resins as one area.
In <unk>, which is the predominant raw material in our rigid packaging business we've been.
Searching for resin for much of the quarter in fact, probably be back into the fourth quarter of.
The last fiscal year as a number of our suppliers have had disruptions of a variety of different sorts of never count on force majeure.
And then even for some of the aluminum grades that we use in pharmaceutical packaging, we've had limitations and so again, we've had customers on allocation.
The pharma space as well so that's.
That's where we're seeing it now I think there's reasons to believe that there is.
Relief in sight, many of those specialty resins, where we're starting to get some increased allocations PT over the next quarter or two should start to normalize as well, but certainly in the first quarter provided a bit of a headwind.
Very good thanks, so much.
Your next question comes from the line of Anthony Pettinari from Citi. Please ask your question.
Good evening.
Ron you saw Europe flexible volumes down year over year and I'm, just wondering was that driven by a tough comp or maybe some broader consumer weakness in the region. I'm. Just wondering if you could provide any more color on what youre seeing in Europe, yes.
Yes look Anthony Thats, driven fully by limitations on raw materials, and us having to make choices and so really the story in the flexible segment overall and especially in Europe has been around proactively managing the mix and making choices to allocate materials that are on limited limited supply to the highest margin uses.
We saw that have an impact as I just described for ghansham in some of the more attractive spaces that we're in including pharma.
And some of the protein segments as well and we've just had to make some choices on what to do with the material that was in scarce supply. So that's the predominant driver there.
Okay, that's very helpful.
And then we've heard about some virgin resin taxes being considered in Europe.
During the quarter, France issued some restrictions on plastic packaging for some fruits and vegetables do you see any commercial impact from those taxes and maybe that restriction specifically I'm. Just wondering if you could talk a little bit about the regulatory environment in Europe, and maybe more broadly how you're positioned with ESG.
Yeah look as it relates to the resin taxes Virgin resin.
Reductions et cetera, I think these these are these dynamics, which are evolving and pretty.
Rapid and a pretty rapid way pretty pretty dynamic environment. They just create opportunities and in many cases. There is an offer there is an opportunity for us to help take cost out of the customers supply chain inclusive of some of these potential taxes by taking weight out of the package or innovating around some of the materials of concern.
So from an innovation perspective.
This is generally favorable for amcor I think.
And generally speaking as it relates to package design.
Regulations, we continue to have a seat at the table as those are debated and discussed both both as an individual company and also through the industry associations that.
We're participating in.
Okay. That's very helpful I'll turn it over.
The next question comes from the line of George Staphos Bank of America. Your line is open.
Yes, Hi, this is cash and carry on behalf of George Staphos here just.
Going back to your comments on the beverage business given the low levels of inventory. There can you just give us a sense as to when you might be able to have a better ability to rebuild inventories.
Will that be kind of the supply chain bottlenecks are resolved and additionally is there a need to take downtime in that business given you've been running full out.
Yeah look thanks for the question, let me, let me just step back and describe the situation in rigid packaging at large and firstly I would point out. This is a north American set of circumstances, a Latin American business has performed quite well with strong volume growth and higher earnings in North America, We've got a unique set of circumstances. So firstly.
Demand has remained elevated for quite some time, particularly in the beverage space.
That has led to a depletion of inventories we've been running with historically low inventory is pretty much for the whole calendar year, and we're running flat out at pretty much full capacity utilization.
On top of which then we've had some supply disruptions as I just alluded to on the PT side, which is the primary input.
So all of those things conspiring at once.
Led to some inefficiencies and therefore higher cost in the business now as we look forward.
We see these these conditions abating certainly through the second half I think we're going to where much of that continuing through Q2, but in the second half. We believe these will ease and that's for a few reasons. Firstly, we've got more capacity coming on stream and we've had capacity coming on through this calendar year as well, but it's been consumed.
Through the year, but there's more coming on stream as we can.
Called out in previous calls.
Secondly, we will start to build inventory now through the fiscal second quarter of the calendar fourth quarter that tends to be the low season, where inventories get built and we will be building through this quarter.
And then thirdly on the raw materials side.
Some of the dislocations there are easing so the allocation levels.
We are living with from a PT perspective are starting to increase.
And some of the capacity upstream with the PT resin suppliers is starting to come back to more normal levels. So we do see reasons to be optimistic, particularly around the second half, but we're going to wear these conditions now for the next few months for sure.
Great Great. Thank you and then just going back to the volume discussion as well I guess, just as we look at.
Your medical exposure.
And.
Kevin Noncritical Doctor visits are down.
Darrin Covid can you give us a sense as to when you might expect to see more normal demand and volume patterns.
That end market.
Yeah look I think let me comment on healthcare more generally and health care for US is broadly speaking medical device packaging, which you alluded to and then pharmaceutical packaging as well.
And both of those segments have been impacted through Covid and have had demand at much lower levels than we would historically see we would typically see mid single digit growth each year in both of those segments and it's these are two attractive segments.
High margins high levels of differentiation and lots of innovation. So they are about as good a good of places you can play in flexible packaging.
Medical is has started to come back a bit demand conditions improved in the first quarter, we did see a bit of an uptick in some of the elective procedures that you referred to which drive consumption of medical device packaging. So we saw some improvement through the quarter, but again, we are limited with some of the specialty resins that go into those products.
And we ended up having having to put some customers on allocation and not capturing the full rebound in demand. We would only anticipate demand to continue to build and get back to more normalized levels and some of the raw material challenges.
Although we know we're not out of the woods yet on at least a couple of particular resins on the pharmaceutical side we've.
We've seen a very very modest improve.
Improvement in demand not to the same extent as medical and in particular in that business in Europe.
Predominantly foil based set of products, we've had some limitations on foil supply as well.
Which have held us back, but we would expect that over time as COVID-19 recedes, a bit and people get back to normal.
Normal behavioral patterns that pharmaceutical pharmaceutical consumption will return back to the levels. It was pre pandemic as well so we're pretty bullish on these two segments long term and Theres just some I guess another couple of periods here as we get back to normal.
The next question comes from the line of John Purtell from Macquarie. Please ask your question.
Good evening, Ron and Michael how are you.
Hey, John.
Just had a couple of questions.
Well just in terms of raw materials, obviously, you had a much bigger.
So the impact on your sales line.
You're right in terms of pass through.
You haven't called out any material impacts on earnings from raw mats at least on the flexible side can.
Can you just provide a bit.
Color around how how you sort of manage raw materials I've rolled through the quarter and any sort of nuances day to call out.
Yes, so John it's Marc I can take that one yes.
Yes, so look we continue to see raw materials increase in the quarter.
Through the basket of currencies that we have kind of mid single digit, which was which was probably a slightly slower increase than we've seen in the first six months of the calendar year, but albeit continued to increase.
And as Ron mentioned in the early comments you know what the teams have been really focused not only on securing supply for us and making sure. We've got as much as we can to service customers, but also getting that raw material recovery.
Through the marketplace.
Plays its way, we got to in the quarter.
You might recall at the end of Q4 last year, we had $100 million roughly flow through the sales line. This quarter, all up around $290 million with 210 of that and flexible so some pretty significant recovery.
We did we did see.
Some headwind, particularly in flexible.
From that so.
But it was manageable and.
Outside of that.
You saw that in our margins were up year on year.
<unk> margins actually will maintain at 13%. So we were pretty pleased with that result.
You take the raw material recovery.
Out of the mix margins in effect would've been about 100 basis points higher so closer to 40%.
Without that raw raw material recovery posture. So.
We were pretty pleased with where we when we got to in the quarter.
We'd expect that there is still further further recovery to come obviously and.
In Q2.
We are contemplating still some lag in that price cost recovery as we as we went through the the next quarter.
The indices are.
Quite mixed.
I mean, <unk>, suggesting that raw materials are.
Perhaps tailing off a little and if rates stay paint and other areas.
In geographies around the world still looking at some increases so a little bit of a mixed position there as well John but that's all factored into our guidance range that we put out there for the full year.
Got it thank you.
Just a second question.
He might have touched on this earlier, but just can you remind us of the timing of North American capacity expansion and also more generally what do you see as the potential pool necessarily the capacity expansion side on the flexible side I know you sort of flagged flagged a couple there in the last sort of year, but particularly given that.
You're seeing pretty robust growth in emerging market in Asia for example.
Yeah look on the PT side in North America, which supports the rigid packaging segment and the beverage sub segment within that we've been adding capacity through the year end.
We're going to continue to add capacity through the first part of calendar 'twenty. Two so that we hit the high season next year, the high beverage season being fiscal fourth quarter for a second calendar quarter.
With.
Materially more structural capacity than we had over the past 12 months. So that's been a ongoing journey. We've got some capacity that's come on stream.
<unk> coming on stream this quarter and will continue in the next couple of quarters.
As it relates to flexible as we have flagged a number of investments, including our new plant in China, which is midway through its construction.
South of China in the Guangdong Province.
Which is going to add capacity for the healthcare business, there as well as.
Some of the other segments that we service in that area.
We've been expanding and adding capacity on some of the sustainability platforms or more sustainable platforms that we've flagged. So we've talked about <unk> in the past and and prima we're putting capital to work in both of those.
For both of those products as two examples so I'd say the flexible capacity is.
Is targeted at those areas, where we have the most differentiation predominantly in emerging markets and also the more sustainable structures.
Got it thank you.
The next question comes from the line of Keith Chau of MST. Please state your question.
Okay.
Hi, Ron Hi, Michael.
My first question is just around the supply chain issues.
The complexities within that North American supply chain, you talked to.
Potentially some of the recent issues easing still having an issue in the next quarter, but certainly easing going into the second half.
Just wondering.
What indications youre seeing from both suppliers and customers as it relates to supply chain complexity that things will ease with talking about raw materials.
From the supply side, but can you talk about how your customers are responding to some of the supply chain complexities as well.
Yes, well they have the same issues as you can imagine and in some cases their businesses might be more labor intensive or energy intensive and then they've got more acute.
Impacts from those areas.
And that has a ripple effect back up the chain.
The customers are not running their plants.
We are limited in how much material, we can ship I think that particularly in North America Labor has been a has been an issue.
Yes.
A lot of theories as to why that is but of our customers.
Amcor or do whatever we can to keep our plants fully staffed transport at times has been a constraint as well.
But we would expect that with investments that are being made not by amcor necessarily throughout the value chain and the supporting.
Industries adjacent to it.
Essentially will subside I mean, I don't think that.
Yeah.
We're going to adapt we're going to certainly adapt our supply chain to such a pronounced shortages I'm just not sure that's where this is all going ahead.
Nowadays.
Any indications from your customers Robbins supplies at VA ratios will ease by the second half.
Yeah look in many cases, our customers are adding capacity.
And the businesses that are more seasonal theyre also taking shutdowns in building inventories.
We're allowing inventories to two to build so if we think about our issues and our constraints. They have been more on the upstream side than on the downstream side.
Demand will continue to normalize to the extent that it's been volatile we would expect it to continue to normalize and on the upstream side.
For the reasons I outlined, particularly in PT, we would expect more availability of material.
Flexible is a little bit mixed and it's a bit of a story of individual materials as I said, but there's more.
Reasons for optimism than concern as it relates to flexible going forward as some of these materials ramp up.
And returned to more normal production levels.
Indeed, okay. Thank you and then the second question just relates to.
Your customer relationships I mean, obviously given these issues you've had to put some customers on allocation.
Do you expect it to be any issues with customer relationships going forward or any degree of permanency.
Given some of these allocation issues that the business is seeing at the moment.
What feedback have you had with customers in that respect.
Well look the worst thing for everybody is when we have to put customers on allocation, but I would say that there is just as many examples of us being able to use our scale and.
And reach and capabilities to help customers out of a buying I mean, we've got examples in back in the beverage business, where some of the resin as told by the customers. They have been unable to secure enough supply were net bigger buyer than any one customer and we've been able to get resin to keep some of those beverage customers supplied.
We've got a couple of other examples and flexible in the medical space, we've taken share at a customer in the medical device area by being able to supply material that our competitors cannot supply. So I think that no one likes to be on allocation and certainly thats, not where we want to be but I think that the benefits we've been able to deliver.
For our customer base because of some of the things that make us unique.
Outweighed any of the any of the.
The constraints and the allocation impacts.
So it sounds like Ron that amcor, even though.
To fund the Cecity put customers on allocation may in fact be doing better than competitors.
I think in some cases that would be true, where we're competing head to head and using the exact same materials then I think.
We would expect we have an advantage there.
Okay. Thank you can I ask a quick question to Michael.
Michael your corporate costs with.
10 million lower than the.
The PCP and 15 million lower than the June quarter can you just give us an understanding of why that's the case and with respect to the free cash flow guidance for the year.
Given.
The start to the year can you give us a sense of what the seasonality of cash flows from looked like and what the risk side.
And whether you'd need to see raw materials prices come down to be able to get to that one one to $1 $2 billion guidance number. Thank you.
Sure. So on the corporate cost side, yes, there is definitely some phasing element in there most of it in the prior year in Q1, we had.
We had an insurance claim we had to provide for in Q1 last year and Thats really the key difference in the corporate cost we would expect by the half.
The phasing that more normalizes to be more in line with the corporate cost.
Position at the half last year so thats.
That's kind of the impact on that front and Copa <unk> generally the first half is lighter than the second half just as we sure up provisions and accruals and things like employee incentives any out of that I tend to happen in the second half as we as we progress through the year. So that's really.
The key difference there from the June quarter.
In relation to the cash flow and the seasonality yeah, I mean, our cash flow is seasonally stronger in the second half.
Definitely and that's really on the back of several areas firstly.
Second half earnings typically stronger and in particular Q4.
So our Q4 earnings our biggest quarter for the year end.
Typically they are a $100 million more than any other quarter in EBITDA, so youre getting stronger cash flows there.
From a from a working capital standpoint, we tend to win.
We tend to build working capital as we head through the year getting into the.
The summit period in northern Hemisphere.
And then you start to see some release of that as we head into the Q4 period.
We.
Clearly have.
Strong focus on working capital as we close out the year and we have some commercial terms that are favorable and in the in the back half of the year. So when you put all that together we consistently delivered.
Our strong cash flow in the second half.
And Thats pretty much where we are today is right in line with where we expected debate.
On the working capital front.
We had some some headwind from the raw material pass through as that gets through the cycling of the business, but that's more of a timing timing situation than anything and we would expect that to improve as we head through the year. So.
From where we sit here today, the $1 1 billion to $1 2 billion outlook, we feel.
Really confident in and.
And we're in the normal cycle of the business cash flow seasonality.
The next question comes from the line of Kyle White of Deutsche Bank. Please ask your question.
Hey, Thanks for taking the question.
Can you just talk about some of the moving parts with your outlook and I realize it's still early days in terms of the fiscal year, but since you first gave it last quarter cost inflation has gone up supply chain issues have really ramped up what would you say is going better than initial expectations to offset some of these headwinds or in order to maintain the outlook.
Yes, I can take that one I mean, when we when we issued the outlook that full year guidance, we did that back in August and at that time.
Sure.
We would we had contemplated a range of external factors.
Including the continuing raw material inflation and general inflation, we're already experiencing supply chain.
Supply chain constraints and raw material <unk> at that time.
And the demand was volatile so.
That was some of that was already factored into the into the guidance that we put out there back in August as we said Q1 actually was pretty well right in line with where we expect it to be.
At the end of Q1, some puts and takes in the result, but generally the double digit EPS growth was right, where we expected to be in.
That gave us the confidence to reaffirm the guidance today around that 7% to 11% comparable constant currency growth.
And Thats, just taking into into account that range of factors that we've talked about so.
To be at the upper end of that range.
We would expect.
It seems like a quicker recovery in the health care and.
Medical and pharmaceutical business that we've touched on during the call.
Perhaps a quicker recovery in the raw material pricing or.
Abatement sooner than we're anticipating.
And perhaps less prolonged supply constraints, so that will get us to the upper end in <unk>.
And the opposite is true for the lower end.
If we see prolonged supply constraints further into the second half.
Then we anticipate then that could get us to the lower end as to if raw materials continue to increase so.
That's all factored into our guidance that we gave back in August and as I said, we are on track at the end of Q1, which gave us the confidence to reaffirm.
Got it that makes sense and apologies to go back to rigid packaging, but just trying to understand earnings down 15% year over year, despite volumes being up.
Can you touch on the supply chain issues quite a bit but is it possible to breakout how much of the earnings decline was driven by cost inflation that is expected to kind of stay throughout the year versus the supply chain headwinds that you expect to kind of get better just trying to understand kind of the earnings cadence throughout the year for that for that segment.
Look to keep it really simple the earnings impact in the segment is really around the inefficiencies much more so than inflation I mean, there are clearly inflationary pressures, but those will get recovered over time through pricing and the inefficiencies will sort themselves out as we've discussed so it's probably 7% to eight <unk>.
<unk> the supply chain constraints in 20, or 30% just the lag in passing through pricing to cover to cover the inflationary factor.
Factors as well.
Perfect sounds good I'll turn it over.
The next question comes from the line of not just Shah from BMO.
<unk> capital management.
Your line is open.
Hi, everyone.
I just wanted to ask about that North American music business as well do you think youre getting some benefit there from the tight markets for glass bottles and aluminum beverage cans.
Typically the substrates are not interchangeable and we don't really see customers going back and forth. The different package formats have different places through different distribution channels and so we really don't see a whole lot of shifting.
We have picked up some volume.
In a more permanent sense, we've gained some share at the expense of glass.
A good example, there is a picture.
And one of our slides have a big piece of business that we've won.
And that business has gone from traditionally glass containers to PT containers for a couple of reasons and it all it's all about the environmental footprint of the package.
And they have gone all the way to 100% recycled material.
The spec and I think we won that business because of our ability to source that material and process it efficiently.
That's more of a.
A share shift that's related to a value proposition that's just different.
And provide some benefits to the consumer and to the customer in this case that the legacy container just couldnt.
More typical of what we would see then any kind of periodic shifts between one substrate or the next.
Okay. Thank you and then now with economies reopening.
How do you sort of estimate the shift the shift.
More eating away from home how do you think that's going to impact Amcor I mean, it seems your medical portfolio benefited some other businesses will also benefit but you'll also have some businesses that talent.
Would you estimate the net impact of that overall.
I mean look.
Over the last several quarters, when we've tried to parse out the impact of COVID-19 or the impacts of Covid.
We really don't believe that it's had a material effect on our sales I mean, we've had some segments that.
It had been very depressed health care would be one others that had a little bit higher growth.
So if we go back over the last 15 to 18 months Theres not much difference between the growth rates that we've experienced in the growth rates that we would expect to experience going forward is kind of low single digits.
This is also not a business that has a lot of exposure to foodservice.
Our away from home consumption. So we benefited from that portfolio mix when foodservice was shot and on the other hand, we're not going to benefit from a big rebound because we're not.
Not very levered to that channel.
Okay, great. Thank you very much.
You are next Larry <unk> from Credit Suisse. Please ask your question.
Hi, Thanks for taking my questions.
Ron I would like to continue my questioning from the last quarter I feel like I'm, having correspondence by snail mail.
I asked you about.
I asked you about your major growth initiatives, you pointed to your five focus areas with protein.
It is number one in your mind and then we talked about the harmonization of.
Protein sales between North America and Europe.
So I've been looking at that but still learning and I'm just wondering.
So can I just ask the list.
Short list of questions relating to that initiative.
One is.
As you expand your protein business in Europe.
Do you have that managed by a single person in our area is that an initiative that's encapsulated.
From a managerial point of view.
Second are there particular sub segments, you're targeting there.
I am learning at proximity to customers is important for that business. So do you need new plants.
And are there any products like <unk>.
Sort of based film that I'm not sure if you have or need.
And how many years is it going to take to achieve the harmonization of sales between North America and Europe. So list of questions there but.
As I said I want to delve into this growth.
Opportunity. So if you can help me out yes. Okay look it is one of the biggest growth opportunities. We have so I'm glad you asked the questions I might just start by talking about the <unk>.
Roche globally.
Firstly, why we like this space and then our approach globally. The reason we like this space is because.
There is a lot of technology and a lot of materials science required to packaged protein.
In a way that provides barrier protection and shelf life and also.
<unk> provides the consumer within aesthetically pleasing option and something that stands out on the shelf. So theres a number of things required here in some of these films.
Nine 911 layers of different materials.
I'll be providing some sort of functionality and playing some sort of role. So this is a material science based.
Segment for the most part.
That's common across the segments in some segments. There are some other things required.
As well, including.
The right product format, whether it's bags of roll stock and sometimes a machinery.
<unk> as well to supplement it so that's why we like the space. There's a lot to do there and there's a lot of value to be created for our customers as they provide value to their consumers.
And it's also not a space that everybody can plan because of the technology requirements and so there's a couple of global players or players that compete in around the globe in this area, but there is not a very long list. So that's why we like it now as far as how we are managing it internally our businesses generally decentralized and a lot of the action happens on the ground in the different regions.
But in this space there is global coordination occurring in a couple of ways Firstly the product development agenda.
As global already so we're not developing one products for a certain application in North America, and then doing something different in Europe. There is a global product development roadmap to support the protein space.
And secondly, as it relates to capital as.
As we think about deploying capital in this space, we're going to do that in a coordinated way as well and so we have a global capital plan to support the protein space.
And maybe just the last point on as it.
It's to capital because you asked about plants.
There's not any need that we can see for new factories per se that material. We will ship proximity is always important to certain extent, but these are high value products. So we don't anticipate new new plants necessarily but we will be expanding our capacity in the conversion assets.
Did I did I cover that.
Sure.
Last one is used to do you think closing the gap between Europe, and North American sort of sales is that obviously can be many years is that a 10 year processors three year process.
What do you sort of.
Look the markets are different in structure, there's more national is a collection of national markets in Europe versus a bit more of a homogeneous backdrop in North America, so that creates a little bit more complexity, which means things evolve generally more slowly.
On that continent.
I think there is.
Medium term growth opportunities protein would fall into the medium term bucket and what does that mean.
So the three to four year range and some of that is because the qualification periods are fairly lengthy some of it is because in certain sub segments Theres a system. So that's required which creates a bit more lead time.
And then Theres, just pounding the pavement and getting out in front of customers. So I would say, it's more of a medium term, it's not necessarily this year, saying, although this segment is growing for us and has actually right through the pandemic, we've had mid single digit growth in protein.
Around the world and some quarters higher than that so it is growing but before you see a step change will take a few years.
Okay, Great and your growth comment just now as it pertained to this most recent quarter.
Yeah. Thanks, Yes, sure housing growth as well, yes, no absolutely we were held back a little bit in this quarter by some of those barrier materials that you mentioned, but we are continuing to grow.
Okay. Thanks, Ron.
The next question comes from the line of Adam Samuelson of Goldman Sachs. Please ask your question.
Yes. Thank you good evening everyone.
A lot of ground has been covered.
You can just help quantify where supply chain disruptions in logistics issues and material shortages did cause some lost sales that you can quantify what you think the revenue impact of that was in the.
In the fiscal first quarter.
Yes, it's a good question.
The best we can do is give you an estimate we'd say it was a couple of percentage points overall and basically kept us from getting to the.
The growth rates that we would expect in this business, which is low single digits.
In flexible as best we can estimate it probably was 1% to 2% and again that's in some of the segments, we've already talked about including medical where we did have good growth, but not as much as we would've liked including protein and meat.
Back to Larry's question.
To name two and certainly in pharma and then in rigid packaging, it's almost hard to quantify but there would have been at least 2% to 3% as we could estimate.
And that probably doesn't take into account the full demand in beverage in the beverage space in liquid refreshment beverages packaged in PT containers has continued to.
Just grow very very well and so that 2% to 3% is probably understating with the real demand is thats, probably a constrained view of demand as our customers would express it. So I think put all that together, Adam and we would say, it's probably about 2% low single digits, which is where the business typically typically is from a topline perspective.
Alright, that's helpful. And then there was an illusion in the press release to lower sales in Southeast Asia.
Presuming that was related to some of the incremental COVID-19 lockdowns that was happening there, but what was the.
Impacts of that.
On the business are in flexible specifically.
Yes, that's exactly the <unk>.
Driver that you just mentioned persistent lockdowns and stops and starts through that region, Indonesia, and Thailand in particular.
Over the quarter.
It's an important business for us it's a growing business in most of our big global customers are there, but it's not a it is.
A very large driver and I would say it would be behind the list of of the raw material limitations and also just some home personal care comps that were tough to cycles. So.
I think that will normalize as well that that region has a lot of intrinsic growth.
And has demonstrated that over the years.
Okay, Alright that color is really helpful. I'll pass it on thank you.
Thanks.
The next question comes from the line of Jacob Cook harness from Jade in Australia. Your line is open.
Good evening, Ron Navy, Michael just wanted to follow up on the patent issue for the rigid business can you just let us know the phasing of those supply issues as they relate to the end of the fourth quarter of fiscal 'twenty, one and maybe how they are accentuated in the first quarter of fiscal 'twenty two please.
Yes look Jacob they go back probably to the start of the calendar year and this is on the input side. This is on the upstream side. So first of all demand is high up through the value chain, including on the resin producers.
We had winter storms here in North America in I think in.
Fury.
Each led to some plant outages and some plant damage in some of the shutdowns go back all the way to that period of time.
We were wearing some of that through the end of the third quarter and fourth quarter of fiscal year last year and Thats continued we've had.
A couple of suppliers with real issues one in particular in North America related to that winter storm and then taking some preventative downtime during hurricane season.
Litany of issues, leading to us being at less than 100% allocation.
And we also had another supplier that we source from in South America, and we also time source.
Up in North America to supplement.
Who had a plant going fire in Brazil, and take that plant down for quite some period of time that actually happened in this most recent quarter. So in one way shape or form we've had supply disruptions on the resin side from earlier early in this calendar year.
Okay, and then if we think about the dynamics then clearly by the time you comp the elevated activity by the second half.
Clearer runway for you are you seeing higher commitments from your supplies moving into the second half or even in the back end of the second quarter.
Yes, we are seeing a gradual increase in the output from upstream.
Across the supply base and I would say, it's gradual we're not off allocation, we're still not we're still unable to source all of the resin that we would like to source and we know that our customers when they total resin or by directly we know that they also cannot get all of the rest of them that they would like.
That's continued but it does seem to be easing and because we can point to the underlying drivers of the constraints. You can you can get some clarity on when that will start to come back on as these plants get.
Get fixed up and come back to 100%.
I appreciate the time thank you.
Thanks.
The next question comes from the line of Richard Johnson of Jefferies. Your line is open.
Thanks, very much runoff just wondering if you could talk a little bit.
The challenges that are posed by a customer consolidation and what reminded me of this was decided after you've used a body armor in the in the presentation and I know in the past when challenger brands, which has always been a source of good growth for you has been absorbed by the majors the price volume issue with the price volume scales.
It doesn't help you so I'll just sort of wondering how to think about that.
Yes look we have broad exposure as you would know across the beverage space and we've got.
Good track record of growing with some of the upstart brands as you pointed out it's not so much the ups starts but also the regional players that <unk>.
Generally good growth in pockets of the U S in particular, but maybe arent national.
We've been through it all goes in cycles these brands need bottles they need innovation.
And help with their branding so.
There's always moving parts in terms of the participation in the ownership structure, but at the end of the day the market demand.
For the PT format, and increasing innovations at lighter weights is still there.
Great. That's helpful. Thanks, and then just one for Michael.
Can you help me understand the adjustments you've made for property and other losses, obviously, you disclosed that it's a plant that was burned down in South Africa.
I'm just trying to understand the number looks very high those trading losses I'm just trying to understand what it is the $28 million.
Yes.
So yes, Richard can help me with that one so the plant actually in South Africa was put down to the ground. So we had a a full write off there.
And that included inventory in.
Impairment of all the assets at the site.
As well as some some.
<unk> requirements that we have to make in that in that marketplace.
That was really the cost with that obviously against that we put.
Some insurance recovery to date, so we've provided for some insurance recovery and we.
We continue to work with our insurers to get the balance of <unk>.
Further recovery against that that loss so.
Youll see that progress over time as we get.
More indications of the level of recovery, but.
Unfortunately, we lost.
We lost the plant in the riots in thanks Leo.
We had no COVID-19 because he can hit so that was a key a key item for us.
Got it thanks, and then just quickly cash tax looks very low in the quarter is that just a timing issue.
Yes.
Recall last year, we had the cares act delay that we had a delay from the prior year, where we pay the tax in the first quarter last year. So.
That's really the movement year on year.
Perfect. That's super helpful. Thanks, very much.
The next question comes from the line of Salvator Tiano from Seaport Research. Please ask your question.
Yes, hi, thanks for taking my questions. So firstly on sustainability a couple of clarifications. Firstly before there was a question about jewelry some new restrictions.
Thanks for the duration is about the future, but in the hearing now.
They did start acting in June or July major markets, including France, and Germany bonding and number of single use plastics are restricting them essentially putting in effect the directly from 2018. So did you see any.
And the volume impact from these movements and related needs sustainability before you mentioned propane do you like the the complexity of our material science and <unk>.
<unk> fields, the multi layer different types of materials, but isn't this exactly what youre trying to change and simplify to make action films more sustainable to get away from the structure.
Yes, exactly sound like Thats, a good question and you mentioned in response to Larry's question, it's not so much the number of layers. It's the composition of the layers and we've got a number of innovations that are going to help us compete on the on the basis of <unk>.
Better products in the protein space, we launched one last year called eco tight which is.
Recycle ready PVC free shrink back so it becomes recyclable not because it eliminates multiple layers in fact on the contrary we continue to have multiple layers, but they will all be of the same chemistry, so theyre consistent with existing recycling streams. So that is a really important part of the protein opportunity for us is to innovate.
Against the sustainability requirements.
We're now out there as compared to some of the legacy structures that hadn't had those features in mind. So that's that one on the first point look any of these single use plastic bans.
That had been put in place around the world don't affect us because they are predominantly focused on foodservice items.
Shopping carrier bags.
Not the primary packaging that we're making for our consumer food and health care products.
Okay Perfect and my second question is just trying to understand.
<unk>.
The demand profile in beverage.
So, Germany, if I remember correctly <unk> has been driving the growth last year, but now it was actually dialed in North America, So, presumably presumably cultural was up.
What is driving this change in the trend was it just the restrictions and the type of resins, you would need it.
Or was it a different demand pattern here, yes.
Yeah, no absolutely. It's just the limitations in the supply chain. So the heartfelt business is growing kind of low to mid single digits for a long time.
It can be a little bit lumpy.
<unk>, but it's been a consistent grower over more than a decade.
We would be the leader in that space by a long margin, we've got a lot of patents and a.
A lot of intellectual property in that space.
This period volumes were down I think 1% more or less flat.
Bear in mind last year in the in the comparable quarter, we had very very strong growth.
And we have over the last several years our volumes in that business and heartfelt are.
Almost 25% higher than they were three years ago.
So there's just a bit of a timing issue with the last 90 days, but that will continue to grow.
Grow well for us going forward.
Great. Thank you very much.
Our last question comes from the line of Andrew Scott from Morgan Stanley. Please ask your question.
Hi, Ron Thanks for taking the question.
Just wanted to step back a bit of a bigger picture question for as long as I can remember we've talked about.
Moderate mechanism for cost recovery in PHA in a slow one way.
Lag in flexible if we're all for it.
You've done the damage to your credit 1000 pound gorilla.
As you said I think that's the case question no one buys better than you.
Is there a chance given the supply chain backdrop everyone's feeling it is there a chance as the industry leader to really lead the industry and change the way that you write your contracts in the flexible business and take out some of that lag.
Lag in making that much more direct mechanism if you like.
It's a really good question and I think look the short answer is as an industry leader. We have we certainly have a role to play I think out of necessity. The lags are shortening.
Yes.
Thank you.
We've got contracts in and structural mechanisms. We have also had to put surcharges out in certain places.
We've also had to add.
Riders or surcharges for certain cost items that maybe traditionally have been covered so absolutely.
Don't know that and flexible as you get to a monthly price.
Price change, it's a little bit complicated to even assess that at that.
Cadence, but certainly we're getting closer to quarterly on average.
And we're going to continue to put prices up as Michael said, we're just on about 200 million for the quarter in flexible as alone almost 300 million for the quarter overall.
Run rate of a $1 billion in price and we're going to continue to put price up as the inflationary costs persist.
And Thats all part of just.
Maintaining our margins and maintaining the discipline that we've that you should come to expect from us.
Okay understood and just a quick one just interested.
The period have you seen the recycled resin crossed the hive, obviously it doesn't necessarily have the same.
Input pressures.
I imagine it's tracked similarly, as it say that premium sort of blow out or is it coming in a little bit versus the the main commodity RASM.
Firstly I would say that we're continuing to increase the amount of recycled resin that we're processing. So in rigid packaging. We ended last fiscal year at about 10% of the resin. We converted was was recycled.
At the end of the first quarter were closer to 13%. So that's a reasonable increase in a 90 day period.
The pricing premium has actually expanded.
It's somewhere between 30% and 50% depending on.
The week in the month and it's probably at the higher end of that range.
Range now.
I think that it's in some ways linked to Virgin, but I think it's almost decoupled from that Andrew I think it's more of the supply versus the demand for recycled content and as it relates to rigid containers, which can be made from 100% recycled material demand continues to strengthen as brand owners look to feature of that as part of their marketing and I mentioned one.
The examples earlier, where we took a bunch of share out of our glass format straight to recycle PT and a lot of that was on the basis of the brand owner marketing. The container is made with 100% recycled material.
Got it that's very helpful. Thank you.
Ladies and gentlemen, this is all the time, we have for question and answer session.
We will now conclude the question and answer session I will now turn the call over back to Mr. Van <unk> for closing remarks.
Thanks, operator, and thanks for everyone on the call today, just to quickly summarize we navigating well in the environment that has created a lot of challenges first quarter in line with our expectations and we are reaffirming guidance for the full year and we continue to be excited about the future for growth and value creation from EMCORE. So.
Thanks, very much and we'll talk to you next quarter.
Thank you again for participating this concludes today's conference call you may now disconnect.
[music].
Okay.
Sure.