Q1 2023 Amcor PLC Earnings Call
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Good evening My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Amcor first quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to ask a question.
During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you Tracey Whitehead head of Investor Relations you May begin your conference.
Thank you operator, and thank you everyone for joining <unk> fiscal 2023 first quarter earnings call. Joining today is chief Executive Officer, and Michael Casamento, Chief Financial Officer before I had Joe Let me note a few items on our website <unk> com under the investors section.
Find todays press release and presentation, which we will discuss on this call. Please be aware that we will also discuss non-GAAP financial measures and related reconciliations can be found in that press release and the presentation remarks will also include forward looking statements that are based on management's current views and assumptions the.
Slide in today's presentation lists several factors that could cause future results to be different than current estimates and reference can be made to <unk> SEC filings, including our statements on Form 10-K, and 10-Q for further details.
Please note that during the question and answer session. We request that you limit your question yourself to a single question and one follow up and then rejoin the queue. If you have any additional questions with that over to you Rob.
Okay. Thanks, Tracy thanks, everyone for joining Michael and myself today to discuss <unk> first quarter financial results for fiscal 2023 will begin with some prepared remarks before opening for Q&A.
And I'll start with slide three which covers our first and most important value which is safety.
First quarter showed continued progress on our long term objective of eliminating injuries across our global operations. Our teams are doing a good job proactively identifying and addressing potential risks and the results are evident with a further 31% reduction in the number of reported injuries globally compared to last year.
This good work has also led to a solid increase in the number of our sites that have been injury free for the past 12 months or more which stood at 63% at the end of the quarter.
Our top priority will always be the wellbeing of our 44000 global employees and achieving our goal of zero injuries.
Turning to our key messages for today on slide four first message to leave you with is the business has delivered another strong quarterly result, highlighting the relative stability of our end markets. Our relentless focus on recovering higher raw material costs and staying ahead of inflation and our proactive approach to driving costs out of the business in a volatile and challenging operating.
Environment.
The result was another quarter of strong operating leverage with 10% growth in adjusted earnings per share on a comparable constant currency basis.
Second we are confident in our ability to sustain solid organic earnings growth from the underlying business in fiscal 'twenty three.
We've reaffirmed our guidance ranges for comparable constant currency EPS growth and free cash flow, while updating our reported EPS guidance to reflect further strengthening of the U S. Dollar.
We assume the macroeconomic environment will remain challenging however, our continued focus on sustainability innovation and higher growth higher value add segments combined with our proactive approach to managing costs supports our confidence in delivering against our expectations for the year.
Third our attention to sustainability is unwavering, we understand our role in supporting the circular economy, and we continue to improve the sustainability profile of our products.
And finally, we want to leave you with a good understanding of why we're confident that amcor is strong resilient business will drive long term shareholder value creation.
Yeah.
Moving to some of the first quarter financial highlights on slide five we've had a strong start to the year.
On a constant currency basis net sales growth was 15%, which includes approximately $400 million of price increases related to higher raw material costs.
Excluding this pass through impact organic sales grew 3%.
Both the flexible and rigid segments generated price mix benefits and have done an excellent job recovering general inflation of approximately $75 million as a result of non material costs, increasing at double digit rates.
Overall volumes were marginally lower reflecting somewhat softer in variable customer demand through the quarter.
As I mentioned earlier operating leverage was strong with solid topline growth and proactive delivery of cost efficiencies in both businesses driving EBITDA up 9% and adjusted earnings per share up 10%.
We continue to expect to deliver strong cash returns to shareholders. This fiscal year through approximately $400 million of share repurchases and a growing dividend, which increased to $12 25 per share this quarter.
And our financial profile remains strong with return on average funds employed at 16, 5%.
We're pleased with our first quarter financial performance I will now turn it over to Michael to cover more of the specifics, including our fiscal 'twenty three outlook Michael.
Thanks, Ron and Hello, everyone.
Turning to our flexible segment performance on slide six our flexible business had another excellent quarter with all business units delivering solid organic sales growth while executing.
Executing well on inflation recovery cost initiatives and mixed management.
Net sales were up 6% on a reported basis, which includes recoveries of higher raw material costs of approximately $270 million, representing 10% of quarterly sales growth.
The teams have continued to successfully manage the pass through of higher raw material costs and as expected the related price cost impact on earnings for the quarter was relatively neutral.
Excluding the raw material impact organic revenue growth of 3% was driven by favorable price mix benefits of approximately 4%.
Partly offset by lower volumes.
Some business units experienced slower demand in certain categories. During the quarter. However, our broad market coverage and geographic diversification limited the overall volume impact.
Across our combined priority segments grew high single digits for the quarter with health care, a particular standout delivering strong sales and volume growth across every region.
And our Asian business overall volumes were higher than the prior year, despite lower volumes in China, which was impacted by ongoing COVID-19 related lockdowns.
Adjusted EBIT was up 11% and comparable constant currency terms for the quarter, reflecting overall sales growth price mix benefits and outstanding cost performance.
Including quick actions taken to flex the cost base in regions, where the operating environment has been more challenged.
Adjusted EBIT margin of 12, 7% was comparable to last year, notwithstanding the 130 basis point dilution related to increased sales dollars associated with passing through higher raw material costs.
Turning to rigid packaging on slide seven.
The key takeaway for Richards as the business delivered another quarter of solid sales and earnings growth.
Reported sales were up 19%, which included the pass through of higher raw material cost of approximately $130 million or 17% of styles.
Excluding these pass through organic sales growth of 3% was driven by price mix benefits of 2% and volume growth of 1%.
In North America, we had positive product mix in the beverage business with hot fill volumes up 6%, reflecting growth across a range of categories, including sports drinks juices and ready to drink teas.
I mean overall standpoint beverage volumes were lower than last year, reflecting a decrease in lower value called fill and pray for volumes.
And especially container business volumes increased mid single digits led by strength in health care.
Dairy and nutrition markets.
And in Latin America volumes were up high single digits with strong performance in key countries, such as Argentina, Brazil and Mexico.
Adjusted EBIT increased 7% on a comparable constant currency basis, driven by higher overall volumes strong inflation recovery and continued solid operating and cost performance.
EBIT margins were 7% and over the past several quarters have been negatively impacted by approximately 250 basis points due to a sharp increase in resin pricing vein posture, the SaaS line and significantly increasing sales dollars as a result.
In terms of the balance sheet on slide eight we continue to maintain a strong investment grade credit rating, which provides us with flexibility to invest for growth and access to lower cost debt markets across key currencies.
Leverage at the end of the quarter was three times and right in line with our expectations for this time of year, given the seasonality of cash flow.
And as we highlighted in August free cash flow was lower than the same quarter last year as we expected.
Cash flow is typically weighted to the second half of the year and in fiscal 2023 of the seasonality will be more pronounced given high raw material costs and the decision to increase inventory levels through last year to offset some of the volatility created by supply constraints.
We have reaffirmed our full year cash flow guidance range, which I'll come back to shortly.
Notwithstanding the temporary increase in inventory levels, we remain highly focused on working capital performance, which is particularly critical in this inflationary environment and we've maintained our 12 month average working capital sales ratio at 8%.
In August we announced an incremental investment in APAC and the purchase of a flexible plant in the Czech Republic and fund advisors is investments in the September quarter for a total of around $100 million.
And while we did not repurchase any shares during Q1, we continue to expect.
To allocate approximately $400 million towards share repurchases in fiscal 'twenty three.
Turning now to <unk> outlook for fiscal 'twenty three on slide nine.
While we expect market conditions to remain challenging through 2023, we have had a strong start to the year and taking into account the relative stability of our end market exposures and our strong track record of consistent execution, we remain confident in our ability to deliver against the outlook. We provided in August .
We have reaffirmed our expectations for organic growth of 5% to 10% from the underlying business and a benefit of approximately 2% from share repurchases.
While continuing to expect an impact from the following three non operating items.
Firstly, a negative impact of approximately 4% from higher interest expense after tax.
Forward curve expectations have continued to move higher in interest expense is now expected to be in the range of 240 to 260.
Net of our expectations for a slightly lower effective tax rate, we continue to expect a 4% headwind to EPS as we noted in August .
Secondly, an estimated 2% negative impact from the scaled down and style of our three plants in Russia, which we continue to expect in the second half of the fiscal year.
And third a negative currency translation impact of 5%, which is higher than the 2% we anticipated back in August due to the continued strengthening of the U S dollar.
As a result of this U S. Dollar strengthening we are updating our expectations for adjusted EPS on a reported basis to be 77 to <unk> 81 per share.
In terms of cash flow, we continue to expect the seasonally stronger second half and we have reaffirmed our adjusted free cash flow expectations.
So a range of approximately one to $1 1 billion. However, the stronger U S. Dollar pushes out current expectation towards the lower end of the range.
So in summary for me today, the business has delivered another strong quarter of organic sales and earnings growth as we remain focused on executing for our customers managing margins and taking decisive actions to rapidly recover inflation, while flexing our cost base.
Our our ability to successfully balance these priorities supports our confidence in delivering another year of solid underlying growth despite persistent market challenges.
I'll hand back to Robert.
Thanks, Michael before we open the call to questions I'd like to cover some of the drivers that inform how we think about our growth over the longer term and are relevant for our fiscal 'twenty three outlook as well.
For several periods, we've highlighted multiple commercially oriented drivers that have enabled us to deliver solid and sustainable organic earnings growth over the last three years. These drivers include opportunities in priority segments emerging markets and innovation and they have not changed.
And when combined with our ability to deliver continual cost improvements by leveraging our scale advantages and capabilities. These drivers give us the confidence we will continue to consistently deliver solid organic earnings growth from the underlying business even in the face of continued challenging and evolving macroeconomic conditions.
Our focus on priority segments, including protein healthcare premium coffee pet food and heartfelt beverages will continue to be a driver of growth and mix benefits with more than $4 billion in collective annual sales, we have leading positions in each of these large addressable markets that had been growing at higher than market rates for.
Historically and over time, we expect they'll continue to grow at mid single digit rates with higher than average margins.
As Michael mentioned healthcare was a particular standout in the first quarter with strong growth across all regions.
Emerging markets also continue to be a focus for amcor, we've a large scale diversified emerging markets portfolio, which generates annual sales of more than $3 billion and this is another source of organic growth and over the long term. We expect these markets collectively will continue to grow at mid single digit rates in.
In the last quarter, several emerging market countries delivered double digit earnings growth, including India, Brazil and Mexico.
Innovation provides a third opportunity for us to drive growth and value, particularly as customers and consumers focused on the critical need for more sustainable high performance packaging solutions.
Amcor has industry, leading R&D in materials science capabilities and expertise.
And when coupled with our unmatched scale and geographic reach these capabilities provide unique ongoing opportunities to develop differentiated products to meet the needs of our customers.
For example, we're winning new business by taking fresh protein packaging solutions initially developed by the legacy Bemis business into the Asia Pacific market.
Including modified atmosphere packaging solutions in China, and the eco tight high barrier recyclable films in Australia.
And a cross functional amcor team came together to partner with Pfizer to develop packaging for their first commercial batches of <unk> in the U S market.
Leveraging technology developed by our teams in Europe , and our global footprint, we were able to start production of living and base material at the same time and five amcor sites across five countries in order to fully meet pfizer's requirements in one third of the standard lead time.
Looking ahead, the strategic choices, we've made to focus on these organic growth drivers will guide, how we prioritize investments back into the business.
We see it a wide range of attractive growth opportunities across each of these areas and we're actively investing to sustain the organic growth momentum we've built over several years.
Before closing a few words on sustainability.
Sustainability is fundamental to everything we do and is deeply embedded in <unk> strategy and risk management framework and the basic start within our own operations.
Our 2022 sustainability report will be released in a few weeks and will highlight some of the important progress. We've made through the year. This includes reaching a cumulative reduction in greenhouse gas emissions intensity of 35% since the launch of <unk> by our action program in 2008.
Critical journey will continue through our commitment to achieve net zero emissions by 2050.
In addition to carbon related objectives, we maintain robust targets for reducing water and waste and achieved significant milestones during the year.
A few weeks ago. We also released our first <unk> report highlighting the important work we're doing to help ensure we make the right decisions on climate and packaging sustainability.
Turning to slide 12, we continue to make progress supporting the development of circular systems through the three pillars of our responsible packaging strategy innovation infrastructure and consumer participation.
Today, nearly a 100% of our rigid and specialty carton packaging portfolios are fully recyclable.
And in our flexible packaging segment, 83% of our product portfolio is designed to be recycled or has a recycle already option available for trial.
In fiscal 'twenty, two we used more than 130000 metric tons of PCR up 30% from the prior year and representing 6% of our total resin usage and we're now building and increasing on our objectives with a new commitment at 30% of our total revenues will be recycled material by 2030.
In one example to bring this focus on recycled content to life. We've worked closely with monitor leaves on the recent launch of packaging for several Cadbury dairy milk products incorporate incorporating 30% food grade recycled content in both the UK and Australia.
This is an important example of how our combination of strong relationships differentiated capabilities and our global footprint can translate into volume growth and mixed benefits framework.
We've also continued to collaborate with others to support the development of recycling infrastructure.
On October 12th Amcor was the only packaging company to join 11 brand owners in the consumer goods forum to publicly signal our commitment towards further increasing the use of recycled materials and packaging.
Together, we express our common interest in purchasing commercial volumes of chemically recycled plastic and our support for the development of credible safe and environmentally sound chemical recycling infrastructure.
Our sustainability journey is ongoing and our long term strategy is helping to create a responsible packaging industry for the benefit of amcor and its customers, but crucially for the environment as well.
Turning to slide 13, we've built a strong foundation to deliver growth and value creation, and we've consistently executed well against our strategy.
We don't expect to be immune to economic challenges and uncertainties, but we believe we're relatively well positioned with a defensive consumer staples and healthcare focused portfolio and multiple drivers of growth and cost productivity.
And our consistently strong cash flow provides the ability to reinvest in the business to pursue acquisitions or repurchase shares and to grow the dividend and positions us well to generate strong and consistent value for shareholders over the long term.
In summary on slide 14, despite a continued challenging economic backdrop, we've had a strong start to the financial year. Our consistent execution has enabled us to deliver solid sales growth and excellent operating leverage resulting in double digit organic EPS growth.
We're confident in our ability to deliver against our outlook for EPS growth and free cash flow, which we have reaffirmed today and we're executing well to deliver long term value for shareholders, including by making further progress against our sustainability agenda and operator, we're ready to open the call for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad in the interest of time, we ask that you. Please limit yourself to one question and then rejoin the queue for any follow up questions.
Our first question comes from the line of Dan Champagne Jabby from Baird. Your line is open.
Thank you operator, good day everybody.
I guess first off Brian many consumer staples customers of yours are aggressively raising prices in <unk>.
Consequently reporting weaker volumes, along with Destocking, which I assume is part of the reason your volumes were sluggish in both segments for the developed markets. How do you sort of see that dynamic evolving as we cycled more fully through to your fiscal year 'twenty three.
What our customers sharing with you in terms of their own outlook at this point for next year.
Yes look thanks, I mean, it's a tough environment out there as you alluded to.
Flat volumes basically across the business and relative to many who have reported that actually feels like outperformance believe it or not.
Things definitely slowed down through the quarter.
Certainly through this September the month of September things got cut a bit softer in Europe , and North America in particular.
I think it's a function of the two things you mentioned one is obviously there is a bit of inventory built up in the supply chain in certain segments and I think we'll see that come out relatively quickly given that this is fast moving consumer goods.
That we're talking about so we don't expect that any inventory impacts on volumes will be long lasting but I do believe there is some extra inventory in the supply chain and then secondly, the cumulative effect of inflation on our consumer which eventually will lead to some.
Some elasticity and I think youre hearing that from brand owners. We are hearing directly from them and I think they are publicly commenting on elasticities, maybe being less than expected, but still.
There is elasticity.
And many of the categories that we're supplying into so look we have a pretty.
Modest expectation for volumes from here for the rest of the fiscal year Mike.
Michael will talk more about that I'm sure, but our guidance includes a range of outcomes in a part of that range is where we ended up on volumes.
Okay terrific and then in previous quarters, you've called out limitations on certain resins as it relates to availability and all sorts of disruptions enforced matures can you just give us an update on that dynamic.
Some of the volume of given up in the past as you internalize production and focus on higher mix.
Is there an opportunity now to go and recapture that share for for the rest of your fiscal year.
Well look I think.
As far as availability goes raw material availability picture has improved.
Wouldn't say that it's.
It's completely.
Yes.
We're completely supplied but certainly the constraints that we face through much of fiscal 'twenty two how many of those have abated, we're down to a much shorter list of constrained raw materials.
It probably held back sales more modestly in the first quarter.
Then it impacted us in fiscal 'twenty, two but certainly the situation is improving as far as recovery of lost sales I think in these segments, it's very difficult to expect loss sales to be reclaimed from one period to the next again these fast moving consumer goods.
If a sale is missed in one period, it's unlikely the consumer goes back and double double purchases in the future.
Quarter, So I think.
We've got to look forward at this stage.
Your next question comes from the line of George Staphos from Bank of America. Your line is open thanks, very much hi, everybody. Good day, thanks for the detail.
Ron sticking with this topic that ghansham.
Can you talk about to the extent possible what your customers are saying where they're seeing.
Most negative effect from inflation on demand and in particular, what are you seeing in the protein markets lately. You talk you talk broadly as you normally do in terms of being a priority area. What are you seeing real time in terms of that market in the first quarter.
Yes look I think from the first part of your question about where is the demand I guess, the most elastic where we're seeing it's often the most I would answer the question more geographically.
Then at the segment level I think.
Firstly, I would say our healthcare volumes globally have been very very strong. So that's the other side of the discussion is that health care is we remain very robust, particularly pharmaceutical packaging.
And that's been true everywhere I think as it relates to food <unk> beverage packaging home and personal care to some extent.
We've seen the most softness has been in the developed markets in Western Europe and in North America.
Presumably that's where the inflation is biting the most we've got.
Actually at the moment more modest inflation in some of the emerging market countries. We're participating in so really where we've seen the most softness and the increasing softness has been in North America and Western Europe , and then I guess I would also add China too.
To that list, but we believe that the China softness is primarily a result of the Covid related Lockdowns, we believe that based on the patterns across the global footprint, where the national footprint, we have in China. So I'd answer the question.
From a geographical perspective more than a segment.
Perspective, and then as it relates to protein protein is a high priority segment for US without question. It's an attractive segment for a lot of reasons a lot of innovation in that space.
In particular around the films and materials.
And we had a flattish quarter.
Globally across the protein space. So that's not what you would expect and it's not what we've experienced over the last several years, we would expect mid single digit mid to high single digit growth in that segment, and we were more more or less flat for the quarter.
Thanks, Ron and my follow on just as we peer into the beverage business.
You saw very good trends in your higher margin areas, which it would be sort of counterintuitive with the consumer being pinched by inflation relative to what would be the lower margin areas, which were actually weaker if you could talk to that that'd be great. Thanks, and good luck in the quarter yes.
Yes, Thanks, George that's a good observation and it's a good insight.
With your insight there that generally speaking.
The heartfelt space.
Is a space, where there are more premium beverages being sold a lot of that goes through the convenience channel I think what we're seeing there to some extent is.
Function of our customer mix, it's a function of new product introductions, and some segments actually held up pretty well through the quarter as whole segments ready to drink teas.
Sports drinks to some extent some of the hot fill juices.
But I also think it's 90 days and I think in a 90 day period, you have distortions related to inventories and different customer performance. So I am not sure I would.
Read too much into that other than our hot fill volumes have continued to grow at attractive rates and it's one of the reasons, we've prioritized that segment.
Your next question comes from the line of Jacob <unk> from Jarden, Australia. Your line is open.
Hi, Ron Hi, Michael Michael can I, just get you to give us a sense where that inventory is at at the moment.
A units and value perspective, just noting obviously it continues to build alongside the inflation just wanted to get a sense of how quaint net might be given the volume outlook that you just spike in Q.
Yes.
As we said I think we were expecting when we have been holding high inventory levels of building iron levels really as.
Our contingency against the supply constraints that we've been experiencing for the last 12 months.
And we got it back.
Back in August that we didn't expect that.
To come out of the system in Q1, which you did it and we still we saw.
Cash outflow as a result of that as.
As we look forward we.
We would expect into Q2 things are going to stabilize.
And then as we head into <unk>, we should start to see inventories come off.
Out of the system.
And it's a combination of both.
Volumes and value.
Say the split if I look year over year, it's probably yes.
At 40% relates to volume and 60 percentage is relating to the higher prices year on year. So.
As we as we look forward to the end of June part of our cash flow guidance.
Includes a pretty neutral position in terms of working capital.
Year over year, so we're expecting working capital to be relatively flat versus the prior year, where we had an outflow of $150 million and that's largely on the back of that that reversal in the inventory side and that helping us guide to that one to $1 1 billion in cash flow.
Thank you Beth.
Your next question comes from the line of Keith Chau from MST Marquee. Your line is open.
Go ahead gentlemen, thanks for taking my question.
Just one.
Even for Roto, Michael could you be EBIT more explicit about.
The goal materials benefit that you may receive given youre coming off of price cost neutral scenario in the first quarter. Just wondering if you can help us quantify what the potential benefit to.
To date for the remainder of the year end.
Given that could be potential benefits does that imply that.
Volume outlook is probably more for more softness than again, if you could be more explicit as to what the volume direction is.
And quantum for the full year, what your expectations on that would be fantastic. Thank you.
Yes, Keith.
Touch on volume and then Michael can talk about the raw materials side I think data.
To be very plain spoken about it we do expect soft volumes the rest of the year I mean, I think thats.
That's the cautious more conservative approach to take I think you can tell by the operating leverage we got in the first quarter, we've been really proactive in getting after cost.
In our cost performance in the operations in both segments was really strong in the first quarter and will continue to be strong and thats, because we expect a pretty soft volume environment.
I think it's very consistent with.
What everyone else in our in our value chain is.
<unk> is experiencing as well, but maybe on the on the raw material side. So on the raw material side as you know throughout FY 'twenty, two we pretty much all over the last two years pretty much had a management manageable headwind on the price cost lag in recovering raw material as we exited.
Slide 22, we were getting to a more neutral position and in Q1, we were relatively neutral as we as we called out as we look forward into Q2.
We are expecting a modest tailwind.
<unk> materials.
As you know, we buy a basket of raw materials across the globe and so they can move at different times, but based on what we see today, we would expect.
Yes, there is some tailwind in Q2 and as we look into the.
Further adding to the year, it's really volatile environment and difficult to say, but.
In terms of our guidance of 5% to 10% underlying underlying performance.
That takes into account a range of factors around the raw material pricing so.
To get to the upper end that would may raw materials come off faster than we get when we get a.
How big of a tailwind as we head into the second half.
At the lower end of the range, obviously raw material Spike again.
We'll see we'll see how things turn out as we head into into Q3.
And Michael can I just quickly follow on.
With that so you've got inventory.
From a volume perspectives.
Quite significantly hearts of 40% of the total uplift if you're winding back those inventories going into the balance of the year, what type of operating inefficiencies, but we'd likely to see given your better Pedro basically efficiency benefits as you've ramped up inventories.
Should we expect a margin impact since you've won vectors in Egypt.
Yes.
A lot of the inventory is raw material event.
Material Kate.
So in that respect I mean, it's going to flow through to get passed through to the customer.
Understood. Thanks, very much time to time.
Our next question comes from the line of Kyle White from Deutsche Bank. Your line is open.
Hey, good morning, Thanks for taking the question I wanted to go to the beverage volumes down 3% in North America.
A little bit difficult to say, but do you think thats a function of some of the destocking that we've been talking about or is that more of a longer lasting.
Weakness with customers choosing value over volume and the inflationary pressures impacting consumer demand.
Oh look it'd be really hard to read anything into the last 90 days.
That's long term to be honest, Kyle I think theres been so much volatility in the volumes through the quarter were quite volatile.
And so I think there's a bit of destocking in there I think I am sure it when the dust settles we'll see.
Some some.
Shift towards towards volume over value or door towards big Big packs, I mean, I think thats likely if we hit a real soft economic patch, but I think in the first 90 days, it's a function of inventories in the chain, it's customer mix. It's.
It's a number of different factors.
Got it and then you touched on it a little bit earlier, but I think the volume challenges in the passenger and good space. It's understood, but can you touch on what Youre seeing in the health care space, more specifically and how that trended through the quarter and.
Do you anticipate any challenges to volumes here from some of the economic challenges as well as the inflationary environment we have.
Yes look I think health care is a real powerhouse for us in the quarter and was very consistent through the quarter. So we had high single digit volume growth across the global health care business.
And that was that was consistent by month and it was consistent by region and we would expect that to continue I think.
You might recall that this segment is that mid single digit grower for us over a long period of time.
We had a little bit of a rough patch during COVID-19. When there are less elective procedures and medical procedures less prescriptions written et cetera, I think we're sort of back to roughly where we were pre COVID-19.
And we would expect that business to continue to grow we've put some investments into place, which we've yet to really see the benefits of it but that will also help propel the volumes going forward, we've got a new health care plant in Southeast Asia, We've got to.
Extension of our facility in Ireland.
Film assets, we've put into that business and we expect that those will help power the business going forward.
Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.
Hi, Thanks, good evening everyone.
I guess I wanted to ask.
It's clear in the 5% to 10% organic EBIT growth.
For fiscal 'twenty, three what are the assumed volumes.
In that in that range.
And I guess associated with that.
The strong mix.
And non resin price that you generated in the flexible business.
In the quarter.
Yes.
You see that level of mix potentially persisting through the year.
Especially as raw material availability starts to improve which I believe had constrained or had been created a mixed benefit for you because youre prioritizing certain market segments last year. Thank you.
Yeah. Thanks, Adam for the question look in terms of our guidance. Obviously, we've got a range of outcomes in the five to 10 in the base assumption is that volumes are.
Got it.
In a fairly modest we're not expecting.
Any any major volume growth clearly in the first quarter, we were flat.
Market conditions are pretty tight so in tough out there. So yes. The way we are focused obviously is.
Continuing to drive the.
The business to recover inflation in the raw material costs and actively taking cost out of the business, which also supported the result in the quarter as well as strong mix through continued innovation and had mixed management driving the focus segments and alike. So.
In that in that 5% to 10% clearly there is a range of outcomes. If we do better on the volume side and some of the focus segments than we will.
Actually had better mix and and at the higher end of the range.
If you say more recessionary impacts and soft consumer demand and that could drive us to the lower end of the range, obviously raw material prices touched on earlier.
Can impact as well so.
Inflation is the other big one we did well in the quarter to recover inflation through price and mix.
We are expecting more inflation as we head through the year and expects to recover that but thats another factor that could drive.
A range of outcomes in that guidance.
Alright, I'll pass it on thank you.
Your next question comes from the line of Daniel Chiang from CLSA. Your line is open.
Good morning, all.
So just a question on the Russians.
Prices can you talk us through how it's progressing.
Noticed that some of your peers have achieved a better outcome than expected.
Well look we're trying to we're trying to exit in an orderly way just for context, we have three factories in Russia collectively they've generated about 2% to 3% of sales over the last several years about 4% to 5% of EBIT.
We announced in August that we are pursuing the sale of those three factories.
We said at the time were going to pursue an orderly exit.
Meaning that we're going to look to preserve value for shareholders as well so we're running a.
What.
To the extent you could call it a typical.
M&A process in that environment, that's what we're doing.
And there's been there's been a reasonable degree of interest. So we're still optimistic the process will run its course.
Complete sometime in the second half of this fiscal year.
Great Ron and the proceeds would just go to debt repayment I'm presuming.
Yes look I think we will.
Deal with that when the time comes I mean, we are repurchasing shares. This year, we've spent about $100 million in the first quarter on acquisitions, we'll continue to look for further acquisitions. So I think we will see where we get to but as there as a general rule. We're not of the view that paying down debt is going to be a very value, creating use of cash right at the moment, even with interest rates.
Elevated from where they were a year ago.
Your next question comes from the line of Anthony Pettinari from Citi. Your line is open.
Good afternoon.
Just following up on Hey, just following up on Dan's question can you talk about.
The ability and willingness to pursue M&A in fiscal 'twenty three.
And what's probably going to be a tougher macro environment you had a peer then announced a large acquisition today.
Then in that context, maybe you could talk a little bit more about APAC.
Yes, well look I would say the ability and the willingness or bolt high.
But.
It takes two to tango in an M&A situation.
We are actively pursuing deals I mean, that's part of our Formula and has been for a long time, we think there are good bolt on opportunities across our portfolio.
I think what I would say is you can safely assume that anything that's in the market in the packaging space or at least in our segments.
We're having to look at in a close look at.
So the appetite there the willingness is there the balance sheet and cash flow are there we're pretty clear on our strategy in terms of the segments, we want to grow in the geographies, we want to grow and so we'd like to try to be active in some respects.
A tough macroeconomic backdrop might not be the worst context, the worst setting for us. If you go back over a number of years, we've tended to be more active when asset prices were.
More modest or at least more in line with long term.
Trends and we're going to remain disciplined in.
And and actually hope Thats the case in this cycle.
APAC just quickly on APAC.
More of a corporate venturing type investments so we've got a minority stake.
To put some more money into it but it's still a minority position.
In a startup.
Relative new startup called APAC, which has been around about five or six years. It's a digitally enabled flexible packaging company they essentially rely on digital printing.
The whole process is digitized.
And it's a really exciting opportunity, it's a business that's targeting.
Small and actually micro customers.
With quick lead times.
And very responsive service model and has been growing really almost by triple digits over the last five or six years. So we're pretty excited about that business.
Okay. That's very helpful I'll turn it over.
Thank you.
Your next question comes from the line of Richard Johnson from Jefferies. Your line is open.
Thanks, very much just a question on Russia, if I may please I noticed you've got a 90 odd million restructuring program related to the sale of the three plants, just intuitively that feels like a very high number and I was just wondering if you could help me understand what's behind it.
Obviously that was just the impairment.
We took back in.
At June 30 year end when we when we noted the asset as held for sale that we had to impair the asset too.
An estimated book value market value and so that was the adjustment for that one.
Yeah, but if you breakdown that 200, Michael you didn't talk about $62 million any restructuring cost was a further 32 guidance yet.
Are there any of that because I'm trying to understand what that is.
Right, yes, well part of that was the.
He got to cause the Ukraine.
Cause that pace out and then.
To relocate part of the business out of Russia, right size the footprint in Europe and also.
Yes.
SG&A restructuring as well too.
Help to mitigate the lost earnings from the Russian business, which.
We feel that we are.
We're taking a lot of action in that front to help recover some of that 4% to 5% in EBIT that.
I ended up losing hundreds of dollars of asylum.
That's helpful.
On the line just on the interest charge very helpful guidance, you've given thank you I'm just trying to get a sense of what that number would be on a constant FX basis.
It's pretty similar Richard.
It's not a material movement on that front.
And your next question comes from the line of Mark Wilde from BMO. Your line is open.
Alright.
Thanks, Michael along the same lines, what's the what's your breakout just fixed and floating on the debt.
Yes, it looks of fixed and floating pace.
At the end of September was 50, 50 fixed and flooding.
Since that time, we have taken some.
Uh huh.
Fixed rate swaps, and so where today, we stand around about 65% fixed versus 35% floating.
Okay, Alright, and then Ron I'm, just curious what would you say the three biggest challenges are for you at the moment.
I think.
Making sure that the teams stay focused on trying to drive growth in the segments that were nominated as areas, we want to grow and at the same time being out there and really aggressively focusing on recovering inflation.
I think that's the key I think.
There's one other one I'll come to but I think generally speaking we're trying to do two things at the same time, which you could consider to be contradictory, we're trying to grow the business and generate momentum on the top line and we feel like we've never had more tools at our disposal to do that.
And we're investing more capex in more R&D et cetera, et cetera, but at the same time, we've got to be out front of inflation and so just trying to manage that message internally in managing the balance between those two things is a real challenge and then the second thing is just there's just been a lot of exogenous factors out.
Out in the operating environment over the last several years, starting with the pandemic and then the supply chain disruptions.
And then in the parts of the business impacted by the Russia, Ukraine conflict. There has been a lot of different exogenous factors out there and so just want to make sure people have energy and they're renewed and they're pumped up and fired up to come to work every day I think that's not an insignificant challenge when theres. So many different things being thrown at them that really have nothing to do with the base business.
Selling packaging.
And your next question comes from the line of Larry Gambler from Credit Suisse. Your line is open.
Hi, guys. Thanks for taking my questions.
Just in terms of your cash flow guidance.
Do you need to take further price increases from here too.
Expand net tailwind of.
Price cost lag.
Larry.
Obviously, youre cycling through a kind of 12 month period. So we.
There will be still some third.
Increasing pricing on the raw materials side.
We'll see how that plays out into the second half, but I would be still be expecting some further increase as we roll through the year.
That's further price increases that you guys take as opposed to cost increases just to be clear yes.
Yes.
Yes, yes, okay.
<unk>.
I don't know Michael Ron If you could just talk to the pet food category maybe.
In.
Europe and U S.
How that played out over the last quarter and maybe recent trends.
Yes look it's been a solid segue.
Segment for us in terms of growth and margin as the pet food segment generally has.
Premium is there a humanized you here the two words.
Used to describe that segment.
Transitioned over on many number of years from primarily drive pet food and bulk too.
Essentially almost single serve pet food and smaller pouches and we benefited a lot from the increased packaging intensity in that segment is increasing sustainability requirements. So thats sort of packaging and one of our innovation platforms.
<unk> has directed squarely at that segment and partnership with some of our big customers. So, it's a pretty exciting space and Theres a lot of innovation.
<unk>.
Brought to the market both by the brand owners and by Us as a packaging supplier.
And it's been a mid single digit sort of growth segment for us. The first first quarter quite frankly was flat.
Pretty much flat globally.
The Russian.
Eastern European sales were soft.
Had some growth offsetting that elsewhere. So off we were more or less flat for the quarter, but we don't see any any.
Signs are cause for concern of around the secular trends that have made it's such an attractive segment going going going forward.
Your next question comes from the line of Nathan Reilly from UBS. Your line is open.
Hey, Ron a quick one.
Anything any manufacturing efficiencies in the plants to see raw material availability to improve.
Some of those supply chain challenges start to stabilize also I appreciate the color on leave US just in terms of cost and availability.
Idea of how Thats will walk you through your organic growth guidance.
Yeah look it's a good question, we're really pleased with the plant performance. So firstly in terms of the availability of the inputs.
As I noted earlier, the raw material availability has improved.
There are still some some specialty materials that are in short supply and I think that's going to continue for a while but many of the constraints and bottlenecks were dealing with over the last.
12 months to 18 months have abated, so that situation has improved and generally speaking the labor availability has improved.
Across the network and certainly this time last year or even the earlier part of calendar 'twenty. Two we had some real labor challenges, especially in North America and in Europe , as Covid spikes rolled through those regions.
That seems to be behind us at the moment and we have not had real labor constraints for some time, so I think from a factor.
Availability or input availability the plants have been able to run more.
Unencumbered and then I think as far as the productivity and the efficiencies. We're really pleased we think that's one of the highlights of the first quarter. If you look at our 9% EBIT growth.
We'd say probably about a third of that came from price and mix, but two thirds of it came from the cost performance in the plants.
And so that's where we got the operating leverage to turn really flat volumes actually modestly down.
Volumes into 10% EPS growth. So we're pretty pleased with the way the plants are performing and it's important because we're going to need them going forward.
Okay. Thanks for that.
Thank you.
Your next question comes from the line of Brook Campbell Crawford from bearing Joey Your line is open.
Yes, thanks for asking the question just to follow up on an earlier comment around the restructuring in Europe .
Well just to confirm is the plan actually to close.
Closed plants and in Europe going forward or is it is this provision that was taken I guess.
Three months ago.
Or relating to.
The closure of Russia, and you are not actually planning to close.
<unk> in Europe .
Yes.
Just to put some context in that as I said, the Russian business is about 45% of global EBIT within Europe . It's obviously, a much higher percentage. So we've got an obligate we're going to sell that business and we're going to lose those earnings. We've got an obligation to try to protect the income statement and generate profit where we can and so we're going to do we're going to take some cost out we are going.
<unk> the part of the business that we.
Was most of that directly affected so some of that cost is related as Michael said to just the transition of of winding down operations in the Ukraine.
Migrating certain business out of the Russian plant that can be repatriated into other plants in the European network that will that's part of where that cost is going there'll be some overhead reductions because we'll be operating a smaller business and there may be a plant closure or to be determined, but we haven't come to that conclusion yet.
Okay, great great. Thanks, and I guess, the free cash flow guidance this year and so on.
Change, but whats the expectations at this point for that cash significant items that of course sort of falls outside of that one to one point.
Dollar guidance range.
Yeah look it's a.
A relatively smaller amount 90 $20 million to $30 million.
Significant.
And your next question comes from the line of John Purtell from Macquarie. Your line is open.
Good afternoon, Ron and Michael how are you.
Hey, John .
Just picking up on a couple of duration question coming back to.
You mentioned sort of protein volumes were flat in the quarter in IP.
Pet foods flat as well and coffee was back a little bit I appreciate it John Tony a quarter, but it was that sort of destocking driving that sort of flatness or is there I know you sort of haven't seen we haven't called out.
So no material COVID-19 benefit overall in recent years, but we have seen obviously strong coffee and pet food volumes all over the last couple of years. So it was a little bit of a cycling uptake there from that just trying to sort of understand that a bit more.
It's really hard to say the only segment where you.
I feel like there's more inventory and maybe.
Got a little bit of a bump in hindsight was the coffee space, we do primarily our coffee business now is primarily single serve and systems coffee systems.
Which.
This is more intuitive.
Our hypothesis then than it is borne out by facts, but intuitively more at home consumption more and more people at home would have driven more at home consumption of single serve coffee and coffee system.
Sales pods and the like.
And so we may be seeing a little bit of the unwind of that but I think the more important thing is that long term. These segments that secular tailwind that that relate to greater packaging intensity to provide the consumer the convenience and functionality that are used to and so we continue to be bullish on these segments over.
Over the medium to longer term.
Thanks, Ron and look.
In terms of the final question, sorry, I'm going to ask probably two in one here.
In terms of if we do see consumers trade down ankles exposure to big brands versus <unk> brands, I mean, historically, you've had a pretty balanced exposure.
Pick up some high brand spend if that indeed does transition and sorry. The second part is we've talked obviously a lot about sustainability products in recent years.
Are we now at a point, where you're starting to see those new products really moves the needle and Mike and material contribution to price and mix.
Yes look on the private label versus branded mix, our mix kind of looks like the market. I think you have to get to the segment level and in certain segments have much higher penetration of private label than than others in our mix kind of reflects that.
And so I would say, there's not a whole lot there there in terms of.
What the impact will be as consumers shift potentially.
Private label from branded goods on our sustainability platforms look we are starting to see some.
Some traction the sales.
Are in the tens of millions of dollars now.
Which is growing off a low base. So this is sales of of the platforms that we've talked about before that.
And prima NIM and fiber and light and Sky. So we're starting to get there I think it's just all part of the all part of the formula of continually driving mix.
Benefits and margin expansion after the after the.
Organic volumes of the business.
Yeah.
Ladies and gentlemen, this concludes our question and answer session I will now turn the call back over to Ron Dahlia for some closing remarks.
Okay. Thanks, operator, thanks very much for your interest in <unk> today, we feel like we had a good strong start to the fiscal year and were.
Maintaining our expectations for the performance of the base business for the rest of fiscal 'twenty three and.
We look forward to continuing to provide updates along the way thanks, very much and with that operator, one the call there.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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